Pentair Reports Third Quarter 2015 Results

On a GAAP basis, the company reported EPS of $0.63 compared to EPS of $1.00 in the third quarter of 2014.

"Our third quarter results were in line with our previously communicated expectations as three of our four segments delivered solid margin improvement," said Randall J. Hogan, Pentair Chairman and Chief Executive Officer. "Our sales into the Residential & Commercial and Food & Beverage verticals remained healthy as we continued to face ongoing challenges in the Energy and Industrial verticals. We continue to drive productivity and adjust our cost structure aggressively as we manage these ongoing challenges, particularly within our Valves & Controls business. We are pleased to have closed the acquisition of Erico during the quarter and our integration efforts are underway. We are focused on delivering strong cash flow and reducing our balance sheet leverage. We remain committed to delivering long-term shareholder value."

Third quarter 2015 adjusted operating income was $249 million, down 16 percent compared to the same period last year, and adjusted operating margins were 16.1 percent, a decline of 70 basis points when compared to adjusted third quarter 2014 operating margins.

Free cash flow in the quarter was $176 million and was $327 million for the first nine months of 2015. The company expects to deliver full year free cash flow equal to approximately 100 percent of adjusted net income.

Pentair paid dividends of $0.32 per share in the third 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.

Third Quarter Business Highlights

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

delivered third quarter 2015 sales of $441 million, down 28 percent versus the prior year quarter. Core sales declined 18 percent year over year for the third quarter and FX translation was negative 10 percent. Backlog including FX decreased 3 percent sequentially to $1.2 billion.

• Core sales in the Energy vertical, which accounted for approximately 60 percent of Valves & Controls revenue in the quarter, decreased 17 percent. Core sales to the oil & gas industry were down 17 percent while core sales to the power industry decreased 18 percent. Core sales to the mining industry decreased 30 percent.
• Core sales in the Industrial vertical, which accounted for approximately 40 percent of Valves & Controls revenue in the quarter, decreased 18 percent.

Valves & Controls delivered third quarter segment income of $56 million, down 48 percent compared to $108 million in the same quarter last year. Third quarter segment margins decreased 510 basis points to 12.6 percent.

Flow & Filtration Solutions third quarter sales were $363 million, down 8 percent versus the prior year quarter. Core sales declined 1 percent in the third quarter and FX translation was negative 7 percent.

• Core sales in the Residential & Commercial vertical, which accounted for approximately 35 percent of Flow & Filtration Solutions revenue in the quarter, decreased 5 percent.
• Core sales in the Food & Beverage vertical, which accounted for approximately 30 percent of Flow & Filtration Solutions revenue in the quarter, increased 11 percent.
• Core sales in the Infrastructure vertical, which accounted for approximately 15 percent of Flow & Filtration Solutions revenue in the quarter, increased 6 percent.
• Core sales in the Industrial vertical, which accounted for approximately 15 percent of Flow & Filtration Solutions revenue in the quarter, decreased 19 percent.

Flow & Filtration Solutions third quarter segment income of $53 million was flat as compared to the same period last year. Segment margins increased by 100 basis points to 14.6 percent.

Water Quality Systems delivered third quarter 2015 sales of $322 million, down 1 percent versus the prior year quarter. Core sales grew 3 percent in the third quarter and FX translation was negative 4 percent.

• Core sales in the Residential & Commercial vertical, which accounted for approximately 85 percent of Water Quality Systems revenue in the quarter, increased 4 percent.
• Core sales in the Food & Beverage vertical, which accounted for approximately 15 percent of Water Quality Systems revenue in the quarter was flat.

Water Quality Systems delivered third quarter segment income of $61 million, which represented an 8 percent increase compared to $56 million in the same quarter last year. Third quarter 2015 segment margins increased 150 basis points to 18.8 percent.

Technical Solutions delivered third quarter 2015 sales of $432 million, down 1 percent versus the prior year quarter. Core sales grew 2 percent, acquisitions contributed an additional 3 percent in the third quarter, and FX translation was negative 6 percent.

• Core sales in the Industrial vertical, which accounted for approximately 45 percent of Technical Solutions revenue in the quarter, decreased 1 percent.
• Core sales in the Energy vertical, which accounted for approximately 25 percent of Technical Solutions revenue in the quarter, increased 9 percent.
• Core sales in the Residential & Commercial vertical, which accounted for approximately 20 percent of Technical Solutions revenue in the quarter, increased 9 percent.
• Core sales in the Infrastructure vertical, which accounted for approximately 10 percent of Technical Solutions revenue in the quarter, decreased 17 percent.

Technical Solutions delivered third quarter segment income of $101 million, flat compared to $101 million in the same quarter last year. Third quarter 2015 segment margins increased 30 basis points to 23.4 percent.

Outlook

The company updated its full year 2015 adjusted EPS guidance to a range of $3.84 - $3.86, which excludes approximately $0.50 per share of non-cash intangible amortization. The prior 2015 adjusted EPS guidance of $3.80 - $3.90 excluded non-cash intangible amortization. On a comparable basis to the company s updated guidance, 2014 adjusted EPS was $4.23 excluding $0.45 of non-cash intangible amortization. The company anticipates full year 2015 sales of $6.4 billion, or down approximately 9 percent compared to 2014 sales on a reported basis and down 4 percent on a core basis. The company expects to generate free cash flow equal to approximately 100 percent of adjusted net income in 2015.

Pentair excludes non-cash intangible amortization from adjusted EPS guidance to better reflect the company s performance. The company introduced fourth quarter 2015 adjusted EPS guidance of $1.03 - $1.05, which excludes $0.17 of non-cash intangible amortization, and down approximately 10 to 12 percent versus the same quarter last year s adjusted EPS. The company expects fourth quarter revenue to be approximately $1.7 billion, which would be down approximately 3 percent on a reported basis and down 5 percent on a core basis excluding FX translation and acquisitions compared to fourth quarter 2014 revenue.