Pentair Reports Second Quarter 2014 Results

On a GAAP basis, the company reported EPS of $0.82 compared to EPS of $0.75 in the second quarter of 2013. Adjusted EPS and operating income exclude repositioning costs, acquisition and redomicile-related expenses, gain/loss on sale of a business and certain tax items.

Second quarter 2014 adjusted operating income was $283 million, up 5 percent compared to adjusted operating income for second quarter 2013, and adjusted operating margins were 14.8 percent, an expansion of 110 basis points when compared to adjusted 2013 operating margins. On a GAAP basis, the company reported operating income of $228 million.

Free cash flow in the quarter was $384 million and $358 million for the first half of 2014. The company expects to deliver full year free cash flow greater than 110 percent of net income.

Pentair paid dividends of $0.25 per share in each of the first and second quarters of 2014. Pentair had previously announced on May 20, 2014 the approval by its shareholders of an ordinary cash dividend of $1.20 per share in four equal quarterly installments of $0.30 in each of the third and fourth quarter of 2014 and the first and second quarter of 2015. Pentair has increased its dividend for 38 consecutive years.

On July 28, 2014, Pentair s Board of Directors approved a decision to exit its Water Transport business.

Excluding Water Transport, second quarter sales were $1.8 billion, up 2 percent compared to the same period last year, second quarter 2014 adjusted operating income was $279 million, up 13 percent compared to adjusted operating income for second quarter 2013, and adjusted operating margins were 15.2 percent, an expansion of 150 basis points when compared to adjusted 2013 operating margins.

"Our second quarter met our expectations with many of our end markets recovering, albeit at a more moderate rate than anticipated," said Randall J. Hogan, Pentair Chairman and Chief Executive Officer.

Second Quarter Business Highlights

Unless otherwise indicated, all comparisons are year-over-year against 2013 adjusted results. See attached reconciliations of these Non-GAAP measures.

Valves & Controls delivered second quarter 2014 sales of $634 million, up 2 percent versus the prior year quarter. Backlog increased 2 percent to $1.4 billion compared to first quarter 2014.

• Sales in the Energy vertical, which accounted for roughly 60 percent of Valves & Controls revenue in the quarter, were flat. Sales to the oil & gas industry were up 2 percent while sales to the power industry increased 1 percent. Sales to the mining industry decreased 8 percent.
• Sales in the Industrial vertical, which accounted for approximately 40 percent of Valves & Controls revenue in the quarter, increased 6 percent.

Valves & Controls delivered second quarter adjusted operating income of $89 million, up 7 percent compared to $84 million in the same quarter last year. Second quarter adjusted operating margins increased 60 basis points to 14.1 percent. Price and productivity more than offset inflation during the quarter. Including repositioning and other charges, Valves & Controls reported a GAAP operating income of $72 million in the second quarter.

Flow Technologies, excluding its Water Transport business, delivered second quarter 2014 sales of $300 million, down 2 percent versus the prior year quarter.

• Sales in the Residential & Commercial vertical, which accounted for roughly 50 percent of Flow Technologies revenue in the quarter, decreased 1 percent.
• Sales in the Food & Beverage vertical, which accounted for nearly 20 percent of Flow Technologies revenue in the quarter, increased 2 percent.
• Sales in the Industrial vertical, which accounted for approximately 15 percent of Flow Technologies revenue in the quarter, grew 6 percent.
• Sales in the Infrastructure vertical, which accounted for nearly 15 percent of Flow Technologies revenue in the quarter, decreased 11 percent.

Flow Technologies delivered second quarter adjusted operating income of $42 million, up 1 percent compared to $41 million in the same quarter last year. Second quarter 2014 adjusted operating margins increased 40 basis points to 13.9 percent. Price and productivity more than offset inflation during the quarter. Including Water Transport, repositioning and other charges, Flow Technologies reported a GAAP operating income of $35 million in the second quarter.

Technical Solutions delivered second quarter 2014 sales of $409 million, up 3 percent versus the prior year quarter.

• Sales in the Industrial vertical, which accounted for roughly 45 percent of Technical Solutions revenue in the quarter, decreased 1 percent.
• Sales in the Energy vertical, which accounted for approximately 20 percent of Technical Solutions revenue in the quarter, declined 11 percent.
• Sales in the Infrastructure vertical, which accounted for nearly 20 percent of Technical Solutions revenue in the quarter, increased 33 percent.
• Sales in the Residential & Commercial vertical, which accounted for approximately 15 percent of Technical Solutions revenue in the quarter, grew 15 percent.

Technical Solutions delivered second quarter adjusted operating income of $77 million, up 10 percent compared to $70 million in the same quarter last year. Second quarter 2014 adjusted operating margins increased 120 basis points to 18.8 percent. Price and productivity gains more than offset material and labor inflation. Including repositioning and other charges, Technical Solutions reported a GAAP operating income of $74 million in the second quarter.

Outlook

Unless otherwise indicated, the company s 2014 outlook, 2015 EPS target, and comparisons to prior years are on an adjusted basis and exclude the Water Transport business.

The company is updating its full year 2014 adjusted EPS to a range of $3.65 - $3.70, which represents an increase of approximately 20 percent from 2013 adjusted EPS of $3.05. The company anticipates full year 2014 sales of $7.15 billion, or up approximately 2 percent over 2013 sales. The company expects to generate free cash flow in excess of 110 percent of net income in 2014.

The company is also updating its 2015 target to $4.50 from $5.00 reflecting the exclusion of its Water Transport business, ongoing Energy CapEx deferrals, and lingering economic headwinds.

"Our 2014 expectations have been adjusted to reflect the exit of our Water Transport business, a more muted market outlook, and continued strong delivery of synergies and productivity," said Hogan. "Our 2015 target continues to demonstrate strong earnings growth and our portfolio remains well positioned to deliver more consistent, predictable growth."

In addition, the company introduced third quarter 2014 adjusted EPS guidance of $0.93 - $0.95, up approximately 15 percent versus the same quarter last year s adjusted EPS. The company expects third quarter revenue to be approximately $1.76 billion, which would be up approximately 3 percent compared to third quarter 2013 revenue.