Pentair Reports Solid Third Quarter 2011 Results

By Benzinga Staff
October 26, 2011 7:02 AM

- Third quarter sales increased 15 percent to $891 million

- Reported EPS of $0.51; Adjusted EPS of $0.58, up 5 percent

- Generated free cash flow of $70 million in the quarter

- Updated full year reported EPS outlook to a range of $2.26 to $2.29; adjusted EPS outlook of $2.44 to 2.47, up 22 to 24 percent

All financial information and period-to-period references are on a continuing operations basis unless otherwise noted. Reconciliations of GAAP to Non-GAAP measures are in the attached financial tables.

PR Newswire

MINNEAPOLIS, Oct. 26, 2011

MINNEAPOLIS, Oct. 26, 2011 /PRNewswire/ -- Pentair, Inc. (NYSE: PNR) announced third quarter 2011 sales of $891 million, an increase of 15 percent from the same quarter last year. These results reflected growth across both segments, Water and Technical Products, including 11 percentage points from the acquisition of Norit's Clean Process Technologies (CPT) and 2 percentage points from favorable foreign currency. Earnings per diluted share from continuing operations (EPS) were $0.51 in the third quarter 2011. Third quarter 2011 results included restructuring charges of $2 million, or approximately $0.02 of EPS, related to repositioning actions in its Water business. Adjusting to exclude acquisition related costs and restructuring charges, third quarter 2011 EPS was $0.58, an increase of 5 percent over the same quarter last year.

"We had another solid quarter with balanced top-line growth and good margin performance across our businesses," said Randall J. Hogan, Pentair chairman and chief executive officer. "Growth investments continued to yield positive results with fast growth regions up 22 percent in the quarter, before including the CPT acquisition. Innovation, expanded distribution and improved operating performance helped to drive solid global demand across our end markets. The CPT results reflected strong double digit sales growth from a year ago, demonstrating the strength of its membrane technology and systems expertise in water and beverage solutions."

"Solid price realization of 2 percent in the quarter combined with productivity more than offset inflation. The year-over-year margin decline reflected the negative impact of the CPT acquisition and related intangible amortization and acquisition related costs, as we anticipated. We expect to drive sequential CPT margin improvement through a combination of volume leverage, lean-driven efficiencies, as well as repositioning efforts that are already underway," added Hogan.

The company reported third quarter operating income of $93 million compared to $91 million in the prior year quarter. Adjusting to exclude acquisition related costs and restructuring charges, operating income increased 11 percent to $101 million and the company achieved operating margins of 11.3 percent compared to 11.7 percent of a year ago, reflecting the impact of the CPT acquisition. Pricing combined with productivity gains more than offset inflation across both Water and Technical Products. Third quarter 2011 results included the benefit of a lower effective tax rate, largely resulting from the CPT acquisition and a favorable geographic mix.

Free cash flow was $70 million in the third quarter, resulting in $188 million through the first three quarters of 2011. The company said it expects to achieve free cash flow of approximately $250 million for the full year 2011.

THIRD QUARTER BUSINESS HIGHLIGHTS

Water sales grew 20 percent year-over-year to $615 million, including 17 percentage points from the CPT acquisition and a two-percentage point favorable impact from foreign currency. Year-over-year sales growth was negatively impacted by approximately 6 percentage points due to sales in 2010 related to the Gulf Intracoastal Waterway (GIWW) project. Within the five Water global businesses, the third quarter sales performances were as follows:

Residential Flow sales were up 15 percent versus the prior year quarter, led by double-digit growth in U.S. residential de-watering products and the agricultural business.
Residential Filtration sales were up 5 percent, as the benefit from new products and increased penetration in fast growth regions offset softness in the U.S. market.
Pool sales were up 14 percent driven by strong demand for energy efficient pool products and expanded distribution.
Engineered Flow sales were down 32 percent due to lower U.S. municipal sales largely related to the prior year benefit from GIWW, while commercial and industrial pumps sales increased year-over-year. The year-over-year impact of GIWW resulted in 28 percentage points of the decline.
Filtration Solutions sales increased 141 percent year-over-year, reflecting a 133-percentage point or $89 million benefit from the CPT acquisition. The remaining 8 percentage points of growth mainly reflected increased sales in foodservice and desalination.

Water's third quarter reported operating income totaled $60 million. Excluding the acquisition related costs and restructuring charges included in the Water segment, third quarter operating income increased 15 percent to $67 million while operating margins decreased 40 basis points to 11 percent, reflecting the negative 100 basis point impact from the CPT acquisition. Pricing and productivity improvements more than offset the negative impact from inflation and continued growth investments.

Technical Products delivered third quarter 2011 sales of $276 million, an increase of 6 percent versus the prior year quarter, including a three-percentage point favorable impact from foreign currency.

Solid global demand drove double-digit growth across many of the end markets served, including industrial, commercial, general electronics and energy, partially offset by an expected decline in communications.
Sales in the U.S were relatively flat year-over-year, reflecting the softness in communications. Fast growth regions were up 29 percent, led by China and Latin America, due to distribution gains and expanded product offerings.

Technical Products' third quarter reported operating income totaled $49 million, up 14 percent compared to $43 million in the same quarter last year. Third quarter 2011 operating margins increased to 17.6 percent, an increase of 130 basis points when compared to the prior year quarter. Strong pricing and productivity gains, more than offset the negative impact from inflation and continued growth investments.

OUTLOOK

The company provided its fourth quarter 2011 EPS guidance of $0.57 to $0.60. Excluding the acquisition related costs and restructuring charges, the company expects an adjusted fourth quarter 2011 EPS in the range of $0.59 to $0.62, an increase of 20 to 27 percent from the prior year quarter, on an estimated sales growth of 17 to 19 percent.

The company expects full year 2011 reported EPS to be in the $2.26 to $2.29 range, including approximately $0.18 of acquisition related costs and restructuring charges. Excluding these costs, the company expects full year 2011 adjusted EPS in the range of $2.44 to $2.47. This represents an increase of 22 to 24 percent compared to 2010 EPS on expected full year 2011 sales of approximately $3.5 billion, up approximately 15 percent compared to the prior year.

"I'm pleased with the performance and progress we've made in 2011," added Hogan. "We enter the fourth quarter with solid price realization, fast growth region momentum and accelerated productivity efforts. Despite challenges in a few end markets, we continue to grow the top-line, expand margins and position Pentair for continued success in 2012 and beyond."

EARNINGS CONFERENCE CALL

Pentair Chairman and CEO Randall J. Hogan and Chief Financial Officer John L. Stauch will discuss the company's performance and third quarter 2011 results and 2011 outlook on a two-way conference call with investors and a live audio webcast at 9 a.m. Eastern today. Reconciliation of non-GAAP financial measures are set forth in the attachments to this third quarter 2011 earnings release and the third quarter 2011 earnings conference call presentation, both of which can be found at Pentair's web site (www.pentair.com). Related financial charts and certain other information to be discussed on the conference call will be available on the company's website shortly before the conference call. The webcast and presentation will be archived at the same site following the conclusion of the conference call.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

Any statements made about the company's anticipated financial results are forward-looking statements subject to risks and uncertainties such as our ability to integrate the CPT acquisition successfully; the magnitude, timing and scope of recovery from the global economic downturn or any potential future downturn; the strength of housing and related markets; the risk that expected benefits from restructuring and other cost reduction plans may not be fully realized, or may take longer to realize than expected; foreign currency effects; material inflation outpacing our productivity and pricing actions; retail, commercial and industrial demand; increased risks associated with operating foreign businesses; product introductions; pricing and other competitive pressures; and the company's ability to achieve its long-term strategic operating goals, as well as other risk factors set forth in our SEC filings. Forward-looking statements included herein are made as of the date hereof, and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. Actual results could differ materially from anticipated results.

ABOUT PENTAIR, INC.

Pentair (www.pentair.com) is a global diversified industrial company headquartered in Minneapolis, Minnesota. Its Water Group is a global leader in providing innovative products and systems used worldwide in the movement, treatment, storage and enjoyment of water. Pentair's Technical Products Group is a leader in the global enclosures and thermal management markets, designing and manufacturing thermal management products and standard, modified, and custom enclosures that protect sensitive electronics and the people that use them. With 2010 revenues of $3.0 billion, Pentair employs over 15,000 people worldwide.

Pentair Contacts:
Sara Zawoyski
Vice President, Investor Relations
Tel.: (763) 656-5575
E-mail: sara.zawoyski@pentair.com

Betsy Day
Corporate Communications Manager
Tel.: (763) 656-5537
E-mail: betsy.day@pentair.com

Pentair, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)

			Three months ended				Nine months ended
			October 1,		October 2,		October 1,		October 2,
In thousands, except per-share data			2011		2010		2011		2010
Net sales		$	890,546	$	773,735	$	2,590,994	$	2,276,915
Cost of goods sold			618,484		537,193		1,782,137		1,578,503
Gross profit			272,062		236,542		808,857		698,412
	% of net sales		30.6%		30.6%		31.2%		30.7%
Selling, general and administrative		159,068			128,854		462,260		392,787
	% of net sales		17.9%		16.7%		17.8%		17.3%
Research and development			20,091		16,865		58,095		51,075
	% of net sales		2.3%		2.2%		2.3%		2.2%
Operating income			92,903		90,823		288,502		254,550
	% of net sales		10.4%		11.7%		11.1%		11.2%

Other (income) expense:

Equity income of unconsolidated subsidiaries			(574)		(347)		(1,481)		(1,806)
Net interest expense			17,373		8,953		41,311		27,049
	% of net sales		2.0%		1.2%		1.6%		1.2%
Income from continuing operations before income taxes
and noncontrolling interest		76,104			82,217		248,672		229,307
Provision for income taxes			24,050		26,488		76,447		75,937
	effective tax rate		31.6%		32.2%		30.7%		33.1%
Income from continuing operations			52,054		55,729		172,225		153,370
Gain on disposal of discontinued operations, net of tax			—		549		—		1,666
Net income before noncontrolling interest			52,054		56,278		172,225		155,036
Noncontrolling interest			962		1,228		3,880		3,584
Net income attributable to Pentair, Inc.		$	51,092	$	55,050	$	168,345	$	151,452

Net income from continuing operations attributable to Pentair, Inc.		$	51,092	$	54,501	$	168,345	$	149,786

Earnings per common share attributable to Pentair, Inc.
*Basic*
Continuing operations		$	0.52	$	0.55	$	1.71	$	1.53
Discontinued operations			—		0.01		—		0.01
Basic earnings per common share		$	0.52	$	0.56	$	1.71	$	1.54

*Diluted*
Continuing operations		$	0.51	$	0.55	$	1.69	$	1.51
Discontinued operations			—		—		—		0.01
Diluted earnings per common share		$	0.51	$	0.55	$	1.69	$	1.52


Weighted average common shares outstanding
Basic			98,472		98,298		98,228		98,105
Diluted			99,802		99,514		99,759		99,326

Cash dividends declared per common share		$	0.20	$	0.19	$	0.60	$	0.57

Pentair, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)

		October 1,		December 31,		October 2,
In thousands		2011		2010		2010
Assets
Current assets
Cash and cash equivalents	$	52,665	$	46,056	$	56,995
Accounts and notes receivable, net		556,688		516,905		490,221
Inventories		459,916		405,356		410,072
Deferred tax assets		61,411		56,349		50,991
Prepaid expenses and other current assets		147,568		44,631		48,555
Total current assets		1,278,248		1,069,297		1,056,834

Property, plant and equipment, net		394,922		329,435		327,602

Other assets
Goodwill		2,516,692		2,066,044		2,070,911
Intangibles, net		619,262		453,570		461,378
Other		73,319		55,187		56,033
Total other assets		3,209,273		2,574,801		2,588,322
Total assets	$	4,882,443	$	3,973,533	$	3,972,758

Liabilities and Shareholders' Equity
Current liabilities
Short-term borrowings	$	29,705	$	4,933	$	4,180
Current maturities of long-term debt		1,194		18		37
Accounts payable		281,448		262,357		266,416
Employee compensation and benefits		117,538		107,995		100,626
Current pension and post-retirement benefits		8,733		8,733		8,948
Accrued product claims and warranties		43,920		42,295		40,783
Income taxes		26,283		5,964		22,202
Accrued rebates and sales incentives		45,231		33,559		39,066
Other current liabilities		163,550		80,942		90,286
Total current liabilities		717,602		546,796		572,544

Other liabilities
Long-term debt		1,317,454		702,521		673,265
Pension and other retirement compensation		190,221		209,859		219,463
Post-retirement medical and other benefits		26,933		30,325		28,506
Long-term income taxes payable		23,891		23,507		23,857
Deferred tax liabilities		228,737		169,198		147,772
Other non-current liabilities		79,489		86,295		93,681
Total liabilities		2,584,327		1,768,501		1,759,088

Shareholders' equity		2,298,116		2,205,032		2,213,670
Total liabilities and shareholders' equity	$	4,882,443	$	3,973,533	$	3,972,758

Days sales in accounts receivable (13 month moving average)		61		60		59
Days inventory on hand (13 month moving average)		83		82		82
Days in accounts payable (13 month moving average)		72		71		68

		Pentair, Inc. and Subsidiaries
		Condensed Consolidated Statements of Cash Flows (Unaudited)
				Nine months ended
				October 1,		October 2,
In thousands				2011		2010
Operating activities
Net income before noncontrolling interest			$	172,225	$	155,036
Adjustments to reconcile net income to net cash provided by (used for) operating activities
Gain on disposal of discontinued operations				—		(1,666)
Equity income of unconsolidated subsidiaries				(1,481)		(1,806)
Depreciation				49,079		43,141
Amortization				29,807		19,742
Deferred income taxes				4,445		4,866
Stock compensation				14,695		16,598
Excess tax benefits from stock-based compensation				(3,137)		(2,193)
Loss on sale of assets				702		166
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
	Accounts and notes receivable			22,657		(36,216)
	Inventories			15,633		(49,822)
	Prepaid expenses and other current assets			(26,380)		(1,476)
	Accounts payable			(45,759)		60,162
	Employee compensation and benefits			(12,334)		21,600
	Accrued product claims and warranties			115		6,556
	Income taxes			18,045		18,013
	Other current liabilities			46,924		15,493
	Pension and post-retirement benefits			(23,636)		(15,197)
	Other assets and liabilities			(21,041)		(3,754)
		Net cash provided by (used for) operating activities		240,559		249,243

Investing activities
Capital expenditures				(53,063)		(42,981)
Proceeds from sale of property and equipment				139		340
Acquisitions, net of cash acquired				(733,105)		—
Other				(441)		(1,232)
		Net cash provided by (used for) investing activities		(786,470)		(43,873)

Financing activities
Net short-term borrowings				24,772		1,975
Proceeds from long-term debt				1,370,423		493,821
Repayment of long-term debt				(771,793)		(624,007)
Debt issuance costs				(8,973)		(50)
Excess tax benefits from stock-based compensation				3,137		2,193
Stock issued to employees, net of shares withheld				11,788		7,861
Repurchases of common stock				(12,785)		(2,786)
Dividends paid				(59,669)		(56,584)
		Net cash provided by (used for) financing activities		556,900		(177,577)

Effect of exchange rate changes on cash and cash equivalents				(4,380)		(4,194)
Change in cash and cash equivalents				6,609		23,599
Cash and cash equivalents, beginning of period				46,056		33,396
Cash and cash equivalents, end of period			$	52,665	$	56,995

Free cash flow
Net cash provided by (used for) operating activities			$	240,559	$	249,243
Capital expenditures				(53,063)		(42,981)
Proceeds from sale of property and equipment				139		340
Free cash flow			$	187,635	$	206,602

Pentair, Inc. and Subsidiaries
Supplemental Financial Information by Reportable Business Segment (Unaudited)

		First Qtr		Second Qtr		Third Qtr		Nine Months
In thousands		2011		2011		2011		2011
*Net sales to external customers*
Water Group	$	515,368	$	631,994	$	614,557	$	1,761,919
Technical Products Group		274,905		278,181		275,989		829,075
Consolidated	$	790,273	$	910,175	$	890,546	$	2,590,994

*Intersegment sales*
Water Group	$	455	$	316	$	426	$	1,197
Technical Products Group		999		1,559		1,755		4,313
Other		(1,454)		(1,875)		(2,181)		(5,510)
Consolidated	$	—	$	—	$	—	$	—

*Operating income (loss)*
Water Group	$	56,528	$	84,521	$	59,608	$	200,657
Technical Products Group		48,087		48,261		48,611		144,959
Other		(18,438)		(23,360)		(15,316)		(57,114)
Consolidated	$	86,177	$	109,422	$	92,903	$	288,502

*Operating income as a percent of net sales*
Water Group		11.0%		13.4%		9.7%		11.4%
Technical Products Group		17.5%		17.3%		17.6%		17.5%
Consolidated		10.9%		12.0%		10.4%		11.1%


		First Qtr		Second Qtr		Third Qtr		Nine Months
In thousands		2010		2010		2010		2010
*Net sales to external customers*
Water Group	$	478,038	$	549,318	$	512,587	$	1,539,943
Technical Products Group		228,975		246,849		261,148		736,972
Consolidated	$	707,013	$	796,167	$	773,735	$	2,276,915

*Intersegment sales*
Water Group	$	517	$	427	$	442	$	1,386
Technical Products Group		703		1,047		1,154		2,904
Other		(1,220)		(1,474)		(1,596)		(4,290)
Consolidated	$	—	$	—	$	—	$	—

*Operating income (loss)*
Water Group	$	42,138	$	75,954	$	58,457	$	176,549
Technical Products Group		33,098		37,990		42,605		113,693
Other		(11,635)		(13,818)		(10,239)		(35,692)
Consolidated	$	63,601	$	100,126	$	90,823	$	254,550

*Operating income as a percent of net sales*
Water Group		8.8%		13.8%		11.4%		11.5%
Technical Products Group		14.5%		15.4%		16.3%		15.4%
Consolidated		9.0%		12.6%		11.7%		11.2%

Pentair, Inc. and Subsidiaries
Reconciliation of the GAAP "As Reported" year ending December 31, 2011 to the "Adjusted" non-GAAP
excluding the effect of 2011 adjustments (Unaudited)

Total Pentair	First Quarter	Second Quarter	Third Quarter	Fourth Quarter	Year
In thousands, except per-share data	2011	2011	2011	2011	2011
Net sales	$ 790,273	$ 910,175	$ 890,546	$880,000 - $900,000	approx $ 3.5B

Operating income - as reported	86,177	109,422	92,903	98,000 - 102,000	approx 386 - 390M
% of net sales	10.9%	12.0%	10.4%	11% - 11.5%	approx 11%+
Adjustments:
CPT deal related costs	1,709	6,136	—
Restructuring	—	—	2,079
Inventory step-up and customer backlog	197	5,256	5,798	approx 2,000	approx 23M
Operating income - as adjusted	88,083	120,814	100,780	100,000 - 104,000	approx 409 - 413M
% of net sales	11.1%	13.3%	11.3%	11% - 11.5%	approx 12%

Net income from continuing operations attributable
to Pentair, Inc. - as reported	50,541	66,712	51,092	56,000 - 60,000	approx 225 - 229M
Adjusments net of tax	1,287	8,803	6,561	approx 2,000	approx 18M
Net income from continuing operations attributable
to Pentair, Inc. - as adjusted	51,828	75,515	57,653	58,000 - 62,000	approx 243 - 247M

Continuing earnings per common share attributable to Pentair, Inc. - diluted
Diluted earnings per common share - as reported	$ 0.51	$ 0.67	$ 0.51	$0.57 - $0.60	$2.26 - $2.29
Adjustments	0.01	0.08	0.07	0.02	0.18
Diluted earnings per common share - as adjusted	$ 0.52	$ 0.75	$ 0.58	$0.59 - $0.62	$2.44 - $2.47

Pentair, Inc. and Subsidiaries
Reconciliation of the GAAP "As Reported" year ending December 31, 2011 to the "Adjusted" non-GAAP
excluding the effect of 2011 adjustments (Unaudited)


Water	First Quarter	Second Quarter	Third Quarter	Fourth Quarter	Year
In thousands	2011	2011	2011	2011	2011
Net sales	$ 515,368	$ 631,944	$ 614,557	$620,000 - $635,000	approx $2.4B

Operating income - as reported	56,528	84,521	59,608	68,000 - 73,000	269 - 274M
% of net sales	11.0%	13.4%	9.7%	approx 11-11.5%	approx 11-11.5%
Adjustments:
Restructuring	—	—	1,955
Inventory step-up and customer backlog	197	5,256	5,798	approx 2,000	approx 15M
Operating income - as adjusted	56,725	89,777	67,361	70,000 - 75,000	284 - 289M
% of net sales	11.0%	14.2%	11.0%	approx 11.5%	approx 11.5-12%