Pentair Q1 Earnings In Line, Revs Lag Ests - Analyst Blog

Pentair Ltd. PNR reported first-quarter 2014 adjusted earnings of 73 cents per share, up 26% from 58 cents reported in the year-ago quarter. The results were in line with the Zacks Consensus Estimate.

Earnings came at the upper end of the company's guidance range of 70 to 73 cents. Both the reported quarter and the year-ago quarter figures exclude repositioning costs, acquisition and redomicile-related expenses, gain/loss on sale of a business and certain tax items. Including these items, earnings were 59 cents per share in the reported quarter compared with 28 cents in the prior-year quarter.

Operational Update

Net sales decreased 2.8% year over year to $1,725 million and also fell short of the Zacks Consensus Estimate of $1,800 million.

Cost of sales decreased 8.3% to $1.15 billion in the first quarter from $1.25 billion in the year-ago quarter. Gross profit in the reported quarter was $578 million, up 10% compared with $523.8 million in the prior-year quarter. Consequently, gross margin expanded 400 basis points (bps) year over year to 33.5% in the quarter.

Adjusted operating income jumped more than two-fold to $204.3 million from the year-ago quarter. Operating margin increased 50 bps to 11.8%.

Segmental Performance

Net sales in the Valves & Controls segment amounted to $535 million, down 9% year over year. Segment adjusted operating profit rose 4% to $62 million from $59 million in the year-ago quarter. Backlog grew 2% sequentially to $1.4 billion.

The Process Technologies segment reported revenues of $418 million, up 5% from the year-ago quarter. Segment adjusted operating earnings went up 6% year over year to $49 million.

Sales from the Flow Technologies segment decreased 7% year over year to $364 million. Adjusted operating earnings also declined 2% year over year to $37 million.

Revenues in the Technical Solutions segment grew 1% year over year to $415 million. Adjusted operating profit increased 13% year over year to $79 million from $70 million in the year-ago quarter.

Financial Update

As of Mar 29, 2014, cash and cash equivalents were $211 million, compared with $265 million as of Dec 31, 2013. The company recorded cash usage in operating activities of $27.3 million in the reported quarter, compared with $18.5 million in the prior-year quarter. Total debt of the company increased to $2.9 billion as of Mar 29, 2014 from $2.6 billion as of Dec 31, 2013. The company's debt-to-total-capital ratio stood at 33% as of Mar 29, 2014, compared with 29% as of Dec 31, 2013.

Outlook

Pentair reaffirmed its adjusted earnings per share EPS guidance in the range of $3.85 - $4.00 for full-year 2014, which represents an increase of around 22% over 2013 adjusted EPS. The company reiterated its sales guidance for 2014. It expects sales to be around $7.7 billion, up 2%–3% over 2013 sales. Pentair also expects free cash flow to remain in excess of 105% of net income in 2014.

Additionally, Pentair projects second-quarter 2014 adjusted EPS in the range of $1.02 to $1.05, up around 13% from the prior-year quarter. Second-quarter revenues are expected to be approximately $1.95 billion.

Pentair expects to deliver double-digit EPS growth in 2014. The company will benefit from the improvement in the North American residential market as well as global food and beverage market, stabilization across Europe, cost synergies from last year's merger with Tyco Flow and consistent share repurchases. However, a weak Australian economy and fluctuations in exchange rates remain concerns.

Pentair delivers industry-leading products, services and solutions to meet diverse needs of customers related to water and other fluids, thermal management and equipment protection. Notably, the company has more than 30,000 employees worldwide.

Pentair currently carries a short-term Zacks Rank #4 (Sell). However, other better-ranked stocks worth a look in the industrial products sector include AO Smith Corp. AOS, Zebra Technologies Corp. ZBRA and AVT, Inc. (AVTC). While AO Smith sports a Zacks Rank #1 (Strong Buy), Zebra Technologies and AVT carry a Zacks Rank #2 (Buy).