Pentair Delivers EPS Growth
Pentair announced its third quarter 2005 results, highlighting a 44 percent year-over-year increase in earnings per share (EPS) from continuing operations on a sales gain of 18 percent. Sales growth on a pro forma basis, assuming WICOR had been acquired at the beginning of the third quarter of 2004, and excluding favorable foreign currency exchange, was approximately seven percent.
According to Pentair Chairman and Chief Executive Officer, Randall J. Hogan, "Pentair made excellent progress on several fronts in the third quarter. We delivered seven percent pro forma sales growth, achieved our 15th consecutive quarter of sequential margin improvement in Enclosures, increased Water Group margins 60 basis points, and captured water business net integration synergies of $11 million. Our net integration synergy savings on a year-to-date basis are approximately $26 million, with our current full year estimate of $37 million compared to our goal of $30 million. Strong sales in pool and enclosure markets and continued success in implementing our Pentair Integrated Management System (PIMS), helped offset manufacturing move-related expenses, lower growth in retail pump and residential filtration markets, and inflationary pressures.
Third Quarter 2005 Financial Comments
Operating income totaled $80.8 million, 26 percent greater than the $64.1 million reported in the same period last year. Operating margins of 11.3 percent in the third quarter reflected a gain of 80 basis points over the year-earlier level of 10.5 percent. EPS from continuing operations of $0.46 was 44 percent higher than third quarter 2004 EPS from continuing operations of $0.32.
Third quarter 2005 EPS included a $1.0 million favorable tax accrual adjustment related to the recently filed 2004 Federal tax return. The overall effective tax rate of 32.3 percent was due to this one-time item and adjusting the year-to-date tax run rate from 35.5 percent to 35.0 percent. These adjustments combined added $0.02 to earnings in the third quarter.
Net sales totaled $716.3 million, up 18 percent from $607.8 million in the same period a year ago. Sales growth on a pro forma basis, assuming WICOR had been acquired at the beginning of the third quarter of 2004, and excluding favorable foreign currency exchange, was approximately seven percent.
Cash flow totaled $76.0 million, bringing free cash flow for the first nine months of 2005 to $95.2 million. Pentair has revised its free cash flow expectations for 2005 to a range of between $170 million and $190 million due primarily to higher than previously anticipated working capital related to increases in safety stocks of certain critical materials, such as resins and motors. In addition, Pentair is experiencing higher inventories on products sourced out of Asia. Pentair expects these conditions will be mitigated throughout 2006 as the supply chain is optimized.
Water Group Third Quarter Comments
- Sales of $515.9 million were up 21 percent over the same period last year, and were up approximately five percent on a pro forma basis, assuming WICOR had been acquired at the beginning of the third quarter of 2004.
- Pool equipment sales grew in the high teens as favorable weather conditions combined with successful fall stocking programs.
- Specialty pump sales were up in the high single digits, spurred by strong municipal, industrial, and agriculture equipment demand, and by pricing actions.
- European water sales rebounded, driven by successful share gains in pump, and strong penetration of the food and beverage markets with filtration products.
- New products were significant in driving sales and included new transfer, split-case, and solids handling pumps; and new pool lighting products, and control systems.
- Operating income totaled $60.3 million, up 27 percent compared to the same period last year, driven by pricing and synergy savings.
- Margins expanded to 11.7 percent, a gain of 60 basis points over the same period last year.
- The integration of the water businesses continued on-track with $26 million in net savings realized during the first nine months of 2005 against a total year goal of $30 million.
- Of the three ongoing plant shutdowns in the quarter, two were completed and one is still in progress. Two low-cost country plants were ramping up to accommodate the product relocated as a result of the shutdowns. The shutdown still in process was delayed to ensure that our processes were stable at the new location, which manufactures water storage tanks. We are now gaining NSF approval for the tank products, and are on-track to complete the move in February.
- Inflationary pressures increased during the third quarter, with raw material and energy costs rising and closing the margin gap between price and inflation.
Enclosures Group Third Quarter Comments
- Sales of $200.4 million grew 11 percent over the same period last year. Favorable foreign currency exchange accounted for less than one percent of the growth.
- The Group continued to grow in North America, with strong sales in the industrial, commercial, medical and networking markets. Sales in China more than doubled compared to the same period in 2004. Enclosures' growth in Europe remained weak in a tough market environment.
- Enclosures rolled out a number of new products targeting growth in specific end markets. New cable management and data interface products were introduced to drive growth in the networking market, while two new cabinets were targeted toward high thermal load applications. The previously announced Varistar cabinet line also continues to ramp quickly and customer interest is strong.
- Operating income set a new third quarter record of $28.5 million, up 23 percent compared to the same period last year, driven by volume, supply savings, productivity improvements, and pricing.
- Margins reached 14.2 percent, expanding by 140 basis points over the third quarter 2004, and delivering the Enclosures Group's 15th consecutive quarter of sequential margin improvement.
- Raw material costs increased about six percent in the quarter, and were offset by actions in both pricing and productivity. Steel costs are expected to moderate through the balance of the year, although higher transportation and energy costs are anticipated.
Source: Pentair plc.