Pentair Reports Second Quarter 2015 Results

On a GAAP basis, the company reported EPS of $0.84 compared to EPS of $0.81 in the second quarter of 2014.

"We had a solid quarter, but we are not satisfied with our results," said Randall J. Hogan, Pentair Chairman and Chief Executive Officer. "Many of our served markets, especially those in energy and industrial, remain challenged and we do not expect them to recover in the second half of the year. We will continue to aggressively manage our cost structure and drive productivity to work through our near-term challenges. We are also continuing to invest in our high-performing Technical Solutions and Water Quality Systems segments where we see strategic organic and inorganic growth opportunities. We are confident these actions will position Pentair s portfolio for long-term growth and value creation."

Second quarter 2015 adjusted operating income was $245 million, down 12 percent compared to the same period last year, and adjusted operating margins were 14.7 percent, a decline of 50 basis points when compared to adjusted second quarter 2014 operating margins.

Free cash flow in the quarter was $310 million and was $151 million for the first six months of 2015. The company expects to deliver full year free cash flow greater than 120 percent of net income.

Pentair paid dividends of $0.32 per share in the second quarter of 2015. Pentair previously announced on December 10, 2014 that its Board of Directors approved a 16 percent increase in the company s regular annual cash dividend rate for 2015 to $1.28 from $1.10. 2015 marks the 39th consecutive year that Pentair has increased its dividend.

Second Quarter Business Highlights

All references to changes in core sales exclude the impact of currency translation.

Valves & Controls delivered second quarter 2015 sales of $496 million, down 21 percent versus the prior year quarter. Core sales declined 11 percent year over year for the second quarter and negative FX translation was 10 percent. Backlog decreased 14 percent to $1.2 billion compared to second quarter 2014.

• Core sales in the Energy vertical, which accounted for approximately 60 percent of Valves & Controls revenue in the quarter, decreased 10 percent. Core sales to the oil & gas industry were down 5 percent while core sales to the power industry decreased 8 percent. Core sales to the mining industry decreased 34 percent.
• Core sales in the Industrial vertical, which accounted for approximately 40 percent of Valves & Controls revenue in the quarter, decreased 14 percent.

Valves & Controls delivered second quarter segment income of $51 million, down 42 percent compared to $88 million in the same quarter last year. Second quarter segment margins decreased 360 basis points to 10.3 percent.

Flow & Filtration Solutions second quarter sales were $375 million, down 12 percent versus the prior year quarter. Core sales declined 5 percent in the second quarter and negative FX translation was 7 percent.

• Core sales in the Residential & Commercial vertical, which accounted for approximately 35 percent of Flow & Filtration Solutions revenue in the quarter, decreased 10 percent.
• Core sales in the Food & Beverage vertical, which accounted for approximately 30 percent of Flow & Filtration Solutions revenue in the quarter, increased 2 percent.
• Core sales in the Infrastructure vertical, which accounted for approximately 15 percent of Flow & Filtration Solutions revenue in the quarter, decreased 5 percent.
• Core sales in the Industrial vertical, which accounted for approximately 15 percent of Flow & Filtration Solutions revenue in the quarter, decreased 4 percent.

Flow & Filtration Solutions second quarter segment income of $50 million represented an 8 percent decrease as compared to $54 million in the same period last year. Segment margins increased by 60 basis points to 13.3 percent.

Water Quality Systems delivered second quarter 2015 sales of $388 million, up 3 percent versus the prior year quarter. Core sales grew 6 percent in the second quarter and negative FX translation was 3 percent.

• Core sales in the Residential & Commercial vertical, which accounted for approximately 85 percent of Water Quality Systems revenue in the quarter, increased 5 percent.
• Core sales in the Food & Beverage vertical, which accounted for approximately 15 percent of Water Quality Systems revenue in the quarter, increased 10 percent.

Water Quality Systems delivered second quarter segment income of $86 million, which represented a 5 percent increase compared to $82 million in the same quarter last year. Second quarter 2015 segment margins increased 40 basis points to 22.1 percent.

Technical Solutions delivered second quarter 2015 sales of $407 million, flat versus the prior year quarter. Core sales grew 6 percent in the second quarter and negative FX translation was 6 percent.

• Core sales in the Industrial vertical, which accounted for approximately 45 percent of Technical Solutions revenue in the quarter, were up 4 percent.
• Core sales in the Energy vertical, which accounted for approximately 25 percent of Technical Solutions revenue in the quarter, increased 17 percent.
• Core sales in the Residential & Commercial vertical, which accounted for approximately 15 percent of Technical Solutions revenue in the quarter, increased 10 percent.
• Core sales in the Infrastructure vertical, which accounted for approximately 15 percent of Technical Solutions revenue in the quarter, decreased 5 percent.

Technical Solutions delivered second quarter segment income of $81 million, up 5 percent compared to $77 million in the same quarter last year. Second quarter 2015 segment margins increased 110 basis points to 19.9 percent.

Ooutlook

The company updated its full year 2015 adjusted EPS guidance to a range of $3.80 - $3.90, which excludes approximately $0.45 per share of non-cash amortization. The prior 2015 adjusted EPS guidance of $3.80 included non-cash amortization. On a comparable basis to the company s updated guidance, 2014 adjusted EPS was $4.23 excluding $0.45 of non-cash amortization. The company anticipates full year 2015 sales of $6.4 billion, or down approximately 8 to 9 percent over 2014 sales on a reported basis and down 2 to 3 percent on a core basis. The company expects to generate free cash flow in excess of 120 percent of net income in 2015.

Going forward, Pentair will exclude non-cash amortization from adjusted EPS guidance to better reflect the company s performance. The company introduced third quarter 2015 adjusted EPS guidance of $0.94 - $0.97, which excludes $0.12 of non-cash amortization, and down approximately 14 percent versus the same quarter last year s adjusted EPS. The company expects third quarter revenue to be approximately $1.6 billion, which would be down approximately 8 to 9 percent on a reported basis and down 2 to 3 percent on a core basis compared to third quarter 2014 revenue.