Pentair Reports Second Quarter 2013 Results

On a GAAP basis, the company reported EPS of $0.75 compared to EPS of $0.72 in the second quarter of 2012. Adjusted EPS and operating income exclude acquisition-related expenses, repositioning costs, gain on sale of business, certain tax items, and interest expense.

Second quarter 2013 adjusted operating income was $268 million, up 13 percent compared to adjusted pro forma operating income for second quarter 2012, and adjusted operating margins were 13.7 percent, an expansion of 120 basis points when compared to adjusted pro forma 2012 operating margins. On a GAAP basis, the company reported operating income of $226 million.

Free cash flow in the quarter was $331 million and $302 million for the first half of 2013. The company expects to deliver full year free cash flow greater than 100 percent of net income.

Pentair paid dividends of $0.23 per share in each of the first and second quarters of 2013. Pentair had previously announced on April 29, 2013 the approval by its shareholders of an ordinary cash dividend of $1.00 per share to be paid out of Pentair s capital contribution reserve in four equal quarterly installments of $0.25 in each of the third and fourth quarters of 2013 and the first and second quarters of 2014. Pentair has increased its dividend for 37 consecutive years.

"Our strong second quarter performance highlighted the diversity of the Pentair portfolio as a North American residential recovery and strength in the food and beverage and energy verticals helped to offset challenges in the infrastructure and industrial verticals," said Randall J. Hogan, Pentair Chairman and Chief Executive Officer. "Our robust margin expansion demonstrated both productivity and delivering on our integration and standardization synergies."

Second Quarter Business Highlights

Unless otherwise indicated, all comparisons are year-over-year against 2012 adjusted results on a pro forma basis for the Flow Control acquisition. See attached reconciliations of these Non-GAAP measures.

Water & Fluid Solutions second quarter sales grew to $950 million, up 8 percent versus the prior year quarter.

• Sales in the Residential & Commercial vertical, which accounted for roughly 45 percent of Water & Fluid Solutions revenue in the quarter, grew 8 percent. The North American residential recovery continued and helped offset ongoing weakness in Europe.
• Sales in the Infrastructure vertical, which accounted for nearly 25 percent of Water & Fluid Solutions revenue in the quarter, were up 2 percent. Sales in North America were strong and backlogs remain steady while Europe remains challenging.
• Sales in the Food & Beverage vertical, which accounted for roughly 20 percent of Water & Fluid Solutions revenue in the quarter, grew 25 percent. Sales to agriculture, beverage, and food service were all strong in the quarter.

Water & Fluid Solutions second quarter adjusted operating income of $143 million represented an 18 percent increase as compared to $121 million in the same period last year. Adjusted operating margins increased by 120 basis points to 15.0 percent. Price and productivity more than offset inflation in the quarter. Including inventory step-up and customer backlog, repositioning and other charges, Water & Fluid Solutions reported a GAAP operating income of $136 million.

Valves & Controls delivered second quarter 2013 sales of $620 million, up 4 percent versus the prior year quarter. Backlog was flat at $1.4 billion compared to first quarter 2013.

• Sales in the Energy vertical, which accounted for roughly 60 percent of Valves & Controls revenue in the quarter, grew 8 percent. Sales to the oil & gas industry grew 12 percent while sales to the mining industry grew 13 percent. Sales to the power industry were flat.
• Sales in the Industrial vertical, which accounted for nearly 35 percent of Valves & Controls revenue in the quarter, declined 2 percent.

Valves & Controls delivered second quarter adjusted operating income of $84 million, up 18 percent compared to $71 million in the same quarter last year. Second quarter 2013 adjusted operating margins increased 160 basis points to 13.5 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 income of $57 million in the second quarter.

Technical Solutions delivered second quarter 2013 sales of $397 million, down 4 percent versus the prior year quarter.

• Sales in the Industrial vertical, which accounted for roughly 50 percent of Technical Solutions revenue in the quarter, declined 2 percent.
• Sales in the Energy vertical, which accounted for nearly 25 percent of Technical Solutions revenue in the quarter, declined 9 percent.
• Sales in the Residential & Commercial vertical, which accounted for roughly 15 percent of Technical Solutions revenue in the quarter, grew 9 percent.

Technical Solutions delivered second quarter adjusted operating income of $70 million, up 9 percent compared to $65 million in the same quarter last year. Second quarter 2013 adjusted operating margins increased 200 basis points to 17.6 percent. Pricing and productivity gains driven by a better mix of standard products offset material and labor inflation. Including repositioning and other charges, Technical Solutions second quarter reported GAAP operating income was $65 million.

Outlook

The company is updating its full year 2013 adjusted EPS outlook to a range of $3.15 - $3.25 from a range of $3.10 - $3.30. This represents an increase of 24 to 28 percent over 2012 adjusted pro forma EPS of $2.54. The company anticipates full year 2013 sales of $7.5 billion, or up approximately 2 to 3 percent over 2012 adjusted pro forma sales. The company expects to generate free cash flow in excess of 100 percent of net income in 2013.

"Pentair s proven operational track record was demonstrated in the first half as productivity in the core business remained strong and we continue to see more opportunities in the Flow Control integration as evidenced by our raising the synergy targets again," said Hogan. "Despite the economic challenges that are weighing on the top line, we continue to execute on the areas within our control and are on track to deliver strong double-digit adjusted EPS growth for the full year."

In addition, the company is introducing third quarter 2013 EPS guidance of $0.83 - $0.87, up 20 to 26 percent versus the same quarter last year s pro forma adjusted EPS. The company expects third quarter revenue to be approximately $1.9 billion, which is up slightly compared to third quarter 2012 adjusted pro forma revenue. Synergies driven by repositioning actions and functional standardization efforts are on track to deliver $105 million for the full year of 2013 and are expected to ramp to $35 million by fourth quarter 2013.