Pentair Reports First Quarter 2013 Results

Adjusted first quarter 2013 earnings per diluted share ("EPS") were $0.58, up 7 percent from adjusted pro forma EPS of $0.54 in the first quarter of last year. On a GAAP basis, the company reported EPS of $0.25 compared to EPS of $0.62 in the first quarter last year. Adjusted EPS and operating income exclude acquisition-related expenses, repositioning costs, gain on sale of business, and certain tax items.

First quarter 2013 adjusted operating income was $179 million, up 4 percent compared to adjusted pro forma operating income for first quarter 2012, and adjusted operating margins were 10.1 percent, an expansion of 40 basis points when compared to adjusted pro forma 2012 operating margins. On a GAAP basis, the company reported operating income of $74 million.

Free cash flow in the quarter was a usage of $29 million, reflecting normal seasonality and timing of cash flows. The company expects to deliver full year free cash flow greater than 100 percent of net income.

The quarterly dividend effective for the first and second quarters of 2013 is $0.23 per share per quarter. The company is seeking authorization from its shareholders at its 2013 annual general meeting of shareholders to increase the dividend to $0.25 per share per quarter for each of the third and fourth quarters of 2013 and the first and second quarters of 2014. If approved by shareholders, the 2013 dividend increase will mark the 37th consecutive year in which Pentair has increased its dividend.

"We continue to see signs of a North American residential recovery and global energy remains strong, while infrastructure and industrial markets continue to be mixed," said Randall J. Hogan, Pentair chairman and chief executive officer. "Despite these varied market conditions, Pentair delivered another quarter of strong operating performance led by pricing and productivity, which demonstrates the power of the Pentair Integrated Management System, in addition to the benefits of integration and standardization synergies which are beginning to read through."

Water & Fluid Solutions first quarter sales grew to $782 million, up 5 percent versus the prior year quarter, excluding a 1 percent unfavorable impact from foreign exchange. In fast growth regions, Water & Fluid Solutions sales grew 18 percent driven by strength in Latin America and the Middle East.

• Residential & Commercial sales, which accounted for roughly 45 percent of Water & Fluid Solution revenue, grew 10 percent. The North American residential business continued to show signs of a recovery, which more than offset ongoing declines in western Europe.
• Infrastructure sales, which includes the former Flow Control WES business, and which accounted for roughly 20 percent of Water & Fluid Solutions revenue, were down 12 percent. North America backlog grew once again, but Europe remains challenged.
• Food & Beverage sales, which accounted for nearly 20 percent of Water & Fluid Solutions revenue, grew 17 percent. Agriculture once again showed strong double-digit gains and Beverage projects that were delayed last quarter were shipped.

Water & Fluid Solutions first quarter adjusted operating income of $83 million represented a 14 percent increase as compared to $73 million in the same period last year. Adjusted operating margins increased by 90 basis points to 10.6 percent. Price and productivity more than offset inflation in the quarter. Including repositioning and other charges, Water & Fluid Solutions reported a GAAP operating income of $75 million.

Valves & Controls delivered first quarter 2013 sales of $586 million, down 3 percent versus the prior year quarter excluding a 1 percent unfavorable impact from foreign exchange. Backlog increased 1 percent to $1.4 billion compared to fourth quarter 2012.

• Energy sales, which accounted for roughly 60 percent of Valves & Controls revenue, declined 3 percent. Sales to the oil & gas and mining industries both grew 2 percent while sales to the power industry declined 6 percent.
• Industrial sales, which accounted for roughly 40 percent of Valves & Controls revenue, declined 9 percent on continued weakness in Asia.

Valves & Controls delivered first quarter adjusted operating income of $59 million, down 2 percent compared to $61 million in the same quarter last year. First quarter 2013 adjusted operating margins increased 10 basis points to 10.1 percent. Price and productivity more than offset inflation during the quarter. Including inventory step-up and customer backlog, repositioning and other charges, Valves & Controls reported a GAAP operating loss of $19 million in the first quarter.

Technical Solutions delivered first quarter 2013 sales of $410 million, down 2 percent versus the prior year quarter excluding a 1 percent unfavorable impact of foreign exchange.

• Industrial sales, which accounted for roughly 45 percent of Technical Solutions revenue, declined 3 percent.
• Energy sales, which accounted for roughly 25 percent of Technical Solutions revenue, grew 3 percent.
• Residential & Commercial sales, which accounted for roughly 10 percent of Technical Solutions revenue, grew 3 percent.

Technical Solutions delivered first quarter adjusted operating income of $70 million, up 13 percent compared to $62 million in the same quarter last year. First quarter 2013 adjusted operating margins increased 230 basis points to 17.0 percent. Pricing and productivity gains driven by a better mix of standard products more than offset material and labor inflation. Including inventory step-up and customer backlog, repositioning and other charges, Technical Solutions first quarter reported GAAP operating income was $53 million.

Outlook

Pentair continues to expect full year 2013 adjusted EPS to be between $3.10 and $3.30, which represents an increase of approximately 22 to 30 percent from 2012 adjusted pro forma EPS of $2.54. The company anticipates full year 2013 sales to approximate $7.6 billion, or up approximately 3 to 5 percent over 2012 adjusted pro forma sales. The company expects to generate free cash flow in excess of 100 percent of net income once again.

"As the company enters its seasonally strongest quarters, we are seeing signs of top line acceleration," further commented Hogan. "Based on our early success in integration and standardization, we have raised our targets on 2013 synergies, and margins in our core business should continue to expand."

Pentair is initiating second quarter 2013 adjusted EPS guidance of $0.88 to $0.91. This compares to second quarter 2012 adjusted pro forma EPS of $0.77 and reported GAAP EPS of $0.72. The company expects second quarter 2013 revenue to be approximately $1.9 billion, which is up slightly compared to second quarter 2012 adjusted pro forma revenue and up significantly versus historical second quarter 2012 revenue of $942 million. Synergies driven by repositioning actions and functional standardization efforts are on track to deliver $100 million for the full year of 2013 and are expected to ramp to $35 million by fourth quarter 2013.