Pentair’s Third Quarter 2006
Pentair announced its third quarter 2006 results, highlighting earnings per share (EPS) from continuing operations of $0.33 on sales of $778 million, a total sales increase of nine percent over the same period last year.
The results reflected strong performance in Technical Products and in the industrial and commercial pump and filtration markets. Accelerating growth in the Asian and European markets also contributed to the Company's sales performance.
Pentair Chairman and Chief Executive Officer, Randall J. Hogan, said: "The majority of our businesses performed well with continued excellent results from our Technical Products and Pump businesses. Sales in commercial and industrial markets have remained robust and investments are beginning to pay off in international sales growth. In addition, our Filtration business achieved the strongest sales growthwe have seen in two years.
"As anticipated, however, this performance was offset by the impact of the softening pool equipment and spa and bath markets on the performance of our Pool and Spa business. On September 26, 2006, Pentair revised its earnings guidance for the third and fourth quarters of 2006 in recognition of the weaker pool markets and included a third quarter charge of $17 million, or ($0.11) EPS. The charge related to increased reserves for accounts receivable, inventory, and warranty in Pentair's Pool and Spa business and some severance costs in the Water Group and at Corporate.
"Excluding the Pool and Spa business, the Water Group's sales grew nearly five percent in the quarter. However, as expected and reflected in our revised guidance, third quarter sales in Pool and Spa were about two percent lower than a year ago, driven by the slowing housing market, which affects both new pool construction and spa and bath markets.
"While the downturn in our pool and spa markets is challenging in the near term, we have taken actions that we expect will drive improved performance in this uncertain environment, including actions to reduce costs and accelerate growth in other Water markets, particularly municipal, foodservice, commercial, and international markets.
"As previously announced, we expect fourth quarter sales in Pool and Spa to be down significantly as pool distribution customers continue to adjust inventory levels. We believe this inventory drawdown will be essentially complete by the end of the fourth quarter and, thereafter, we should track more closely to end-market demand, which includes both replacement and new pool-related sales.
"We are reiterating our full-year 2006 EPS guidance from continuing operations of between $1.72 and $1.76. In addition, we are initiating EPS guidance for full-year 2007 in a range between $2.00 and $2.15, indicating an increase of between 14 percent and 25 percent over 2006 EPS. The low end of the 2007 guidance assumes a sustained weakness in housing markets that would affect both our pump and pool businesses, while the high end of the range represents some moderation of housing markets and continued strength in other markets."
Third Quarter 2006 Financial Comments
Operating income for the third quarter totaled $60.3 million, 22 percent below the $76.9 million reported in the same period last year. Operating margins of 7.7 percent in the third quarter were down from those of a year ago as higher Technical Products Group margins were offset by the impact of softer pool and spa markets and one-time costs in the Water Group. Third quarter 2006 EPS from continuing operations of $0.33 was lower than the $0.43 in the same period last year. Earnings per share of $0.33 included $0.03 of favorable prior year tax settlements - versus $0.01 of favorable tax settlements in the same quarter last year - and was in-line with our EPS guidance of $0.30 to $0.32. Earnings also included one-time costs of $17 million, or ($0.11) EPS, related to severance costs in the Water Group and at Corporate, and increased reserves for accounts receivable, inventory, and warranty in the Pool and Spa business.
Pentair's resolution of prior year tax items also resulted in $1.4 million of net income from discontinued operations or approximately one cent per share.
Pentair's third quarter 2006 net sales totaled $778.0 million, up nine percent from $716.3 million in the same period a year ago. Organic sales - removing the effects of acquisitions and excluding favorable foreign currency exchange - grew approximately three percent, or approximately four percent also excluding the decline of our Pool and Spa business.
Cash flow totaled $66 million, bringing YTD free cash flow to $93 million. This compares favorably to YTD free cash flow through the third quarter of 2005 of $87 million.
Water Group Third Quarter Comments
Water Group sales grew three percent over the same period last year to $531.7 million. The impact of foreign currency exchange was negligible.
Pump sales were up in the third quarter, driven by strong double-digit commercial and export sales and mid-single-digit applied wastewater and residential sales.
Pool sales were down in the low single-digits including the decreases in inventory levels of pool distribution customers. The pool equipment market was estimated to be flat, with growth in replacement product offsetting declines in new pool construction.
Filtration sales were up, driven by commercial and industrial markets that more than offset declines in RV and marine markets.
Sales in Europe were up, driven by pump and filtration, while sales gains in Asia resulted from continued strong pressure vessel demand and improved performance in Australia and New Zealand.
Global sales of Codeline pressure vessels continued very strong in the quarter, driven principally by desalination-related demand in North America, Europe and the Middle East, as well as a large OEM project.
Operating income for the Group totaled $36.2 million, down 39 percent from the same period last year. Return on sales was 6.8 percent, down 460 basis points compared to last year. The decline was attributed to one-time costs for increased reserves and severance totaling $15 million; lower unit volume in Pool and Spa; and ongoing investment spending.
Both the Pump and Asia businesses improved return on sales year-over-year, driven by improved productivity, pricing, and growth.
Recent price actions more than offset inflationary pressures for key commodities such as resins, copper and brass.
The Faradyne pump motor joint venture continues to progress well. Motor shipments to Pentair began in the third quarter, and four-inch Faradyne-motor-equipped submersible pumps began shipping to Pentair customers in September.
Technical Products Group Third Quarter Comments
Sales of $246.3 million for the quarter increased 23 percent over the same quarter last year. Excluding the impact of the acquired Thermal Management businesses and favorable foreign currency exchange, organic growth was approximately four percent.
Excluding acquisitions, sales in North American markets were flat. Continued robust sales to commercial and industrial markets were offset by declines in sales to telecom and data, primarily due to OEM projects that reached end-of-life or were transitioned to our Asian operations.
The newly acquired McLean Thermal Management business set sales records for the third quarter.
In Europe, sales grew in the low teens. Excluding the impact of favorable foreign currency exchange, growth was in the high single digits. Markets in Europe overall remain robust, particularly in test and measurement and telecom markets. Several new European customers also bolstered growth.
Continued strong growth in Asia benefited from key OEM programs in China, continued ATCA sales in Japan, as well as sales of Schroff components into semiconductor markets.
Volume, supply management savings, cost reductions, and improved productivity resulted in operating income of $37.1 million, a 33 percent gain over year-ago levels.
The Group met its 15 percent operating margin goal for the second consecutive quarter and achieved its 16th consecutive quarter of year-over-year margin expansion.
Margins in Europe improved as a result of volume and supply management savings.
Margins in Asia reached new highs on the strength of OEM programs in China and continued strong performance in Japan.
Horizon Litigation Update
A jury verdict was rendered against Pentair for $193 million, exclusive of pre-judgment interest and attorney's fees, in the commercial damages portion of the previously disclosed Horizon litigation. Post-trial motions have been filed and Pentair anticipates they will be heard and decided in the fourth quarter. Therefore, Pentair made no adjustments to its previously established reserves except for the accrual of an additional quarter's interest expense and legal fees related to the matter. Pentair's EPS guidance does not reflect any potential impact of this litigation.
Source: Pentair plc.