Pentair Reports Third Quarter 2013 Results

Adjusted third quarter 2013 earnings per diluted share ("EPS") were $0.86, up 25 percent from adjusted pro forma EPS of $0.69 in the third quarter of last year. On a GAAP basis, the company reported EPS of $0.85 compared to EPS of $0.31 in the third quarter of 2012. Adjusted EPS and operating income exclude acquisition-related expenses, repositioning costs, and certain tax items.

Third quarter 2013 adjusted operating income was $249 million, up 15 percent compared to adjusted pro forma operating income for third quarter 2012, and adjusted operating margins were 13.6 percent, an expansion of 210 basis points when compared to adjusted pro forma 2012 operating margins. On a GAAP basis, the company reported operating income of $240 million.

Free cash flow was $206 million for the quarter and $507 million for the first nine months of 2013. The company expects to deliver full year free cash flow greater than 100 percent of net income.

Pentair paid dividends of $0.25 per share in the third quarter 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.

"We continued to see strength in the North American residential recovery and our global food and beverage markets, which were offset by a much weaker than expected Australian economy," said Randall J. Hogan, Pentair Chairman and Chief Executive Officer. "Although the top line fell modestly short of our expectations, our robust margin expansion again demonstrated the power of the Pentair Integrated Management System (PIMS) working and delivering ahead of schedule on our integration and standardization synergies."

Third 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 third quarter sales were $814 million, up 1 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 12 percent.
• Sales in the Infrastructure vertical, which accounted for nearly 25 percent of Water & Fluid Solutions revenue in the quarter, were down 22 percent.
• Sales in the Food & Beverage vertical, which accounted for roughly 20 percent of Water & Fluid Solutions revenue in the quarter, grew 20 percent.

Water & Fluid Solutions third quarter adjusted operating income of $109 million represented a 28 percent increase as compared to $86 million in the same period last year. Adjusted operating margins increased by 280 basis points to 13.4 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 $106 million.

Valves & Controls delivered third quarter 2013 sales of $612 million, down 1 percent versus the prior year quarter. Backlog declined 1 percent to $1.4 billion compared to second quarter 2013.

• Sales in the Energy vertical, which accounted for roughly 60 percent of Valves & Controls revenue in the quarter, declined 5 percent. Sales to the oil & gas industry were flat while sales to the mining industry grew 2 percent. Sales to the power industry decreased 10 percent.
• Sales in the Industrial vertical, which accounted for nearly 35 percent of Valves & Controls revenue in the quarter, grew 5 percent.

Valves & Controls delivered third quarter adjusted operating income of $80 million, up 15 percent compared to $70 million in the same quarter last year. Third quarter 2013 adjusted operating margins increased 190 basis points to 13.1 percent. Price and productivity more than offset inflation during the quarter. Including repositioning and other charges, Valves & Controls reported a GAAP operating income of $77 million in the third quarter.

Technical Solutions delivered third quarter 2013 sales of $406 million, down 8 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 6 percent.
• Sales in the Energy vertical, which accounted for nearly 25 percent of Technical Solutions revenue in the quarter, declined 25 percent.
• Sales in the Residential & Commercial vertical, which accounted for roughly 15 percent of Technical Solutions revenue in the quarter, grew 6 percent.

Technical Solutions delivered third quarter adjusted operating income of $84 million, up 4 percent compared to $80 million in the same quarter last year. Third quarter 2013 adjusted operating margins increased 240 basis points to 20.6 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 third quarter reported GAAP operating income was $82 million.

Outlook

The company updated its full year 2013 adjusted EPS outlook to a range of $3.19 - $3.21 from a range of $3.15 - $3.25. This represents an increase of 26 percent over 2012 adjusted pro forma EPS of $2.54. The company anticipates full year 2013 sales of $7.4 billion, or up approximately 1 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.

"The adoption of PIMS in the Flow Control businesses has gone better than we anticipated and our core productivity continues to drive strong margin expansion," said Hogan. "Although the top line still has challenges, we are beginning to see signs of stabilization in Europe and in key Industrial channels. 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 introduced fourth quarter 2013 adjusted EPS guidance of $0.83 - $0.85, up approximately 60 percent versus the same quarter last year s pro forma adjusted EPS. The company expects fourth quarter revenue to be approximately $1.8 billion, which is up slightly compared to fourth quarter 2012 adjusted pro forma revenue. The company believes synergies driven by repositioning actions and functional standardization efforts are on track to deliver $120 million for the full year of 2013 and are expected to ramp to $42 million for fourth quarter 2013.