Pentair (PNR) Surpasses Q2 Earnings, Curbs '16 EPS View

Pentair plc PNR reported second-quarter 2016 adjusted earnings of $1.11 per share, improved around 2.8% from $1.08 in the year-ago quarter and beat the Zacks Consensus Estimate by a penny. Earnings also came at the higher end of the management guidance of EPS range of $1.08–$1.11.

Including one-time items, the company reported earnings of 78 cents per share, down 7% from 84 cents in the year-ago quarter.

Operational Update

Net sales, which increased 4% year over year to $1.73 billion, just came ahead of the Zacks Consensus Estimate of $1.72 billion. Revenues came in line with the management guidance of $1.7 billion. Excluding the unfavorable impact of currency translation and positive contribution from acquisitions, core sales declined 3%.

Cost of sales grew 3.6% to $1,134 million in the quarter from $1,095 million in the year-ago quarter. Gross profit in the reported quarter was $599 million, up 5.8% from $566 million in the prior-year quarter. Gross margin expanded 50 basis points (bps) year over year to 34.6% in the quarter.

Adjusted segment income went up 6.5% to $291.4 million from $273.5 million in the year-ago quarter. Operating margin enhanced 30 bps to 16.8%.

Segmental Performance

Net sales in the Valves & Controls segment were $433.6 million, down 12.7% year over year. Segment operating profit plunged 32% to $43.7 million from $64.4 million in the year-ago quarter.

The Flow & Filtration Solutions segment reported revenues of $368.7 million, down 1.6% from the year-ago quarter. Segment operating earnings fell 2.8% year over year to $55.5 million.

Sales from the Water Quality Systems segment rose 2.4% year over year to $397 million. Operating earnings went up 11.4% to $98.2 million.

Revenues in the Technical Solutions segment jumped 32.8% to $540.6 million. Operating earnings surged 29% year over year to $111.6 million.

Financial Update

Pentair had cash and cash equivalents of $173.3 million at the end of second-quarter 2016 compared with $126 million at the end of 2015. Cash flow from operations came in at $369.5 million for the six-month period ended Jun 30, 2016 compared with $195 million in the comparable year-ago period. As of quarter end, Pentair's total debt dropped to $4.6 billion from $4.7 billion as of Dec 31, 2015.

Guidance

Pentair lowered the upper end of its 2016 EPS guidance range to $4.05–$4.20 from the prior band of $4.05–$4.25, reflecting further signs of stabilization in its industrial business and sequential flattening in Energy business. The company reaffirmed its fiscal 2016 sales projection of $6.7 billion, which is up approximately 4% year over year on a reported basis but down 1% on a core basis. It still expects to deliver full-year free cash flow of approximately 100% of adjusted net income. Pentair's cash flow remains strong and is focused on further strengthening balance sheet.

Pentair also initiated its third-quarter 2016 guidance. The company expects EPS in the range of $1.02–$1.08. Earnings will be up approximately 8% year over year on an adjusted basis. Revenues are projected at around $1.66 billion, up around 7% on a reported basis and flat on a core basis compared to third-quarter 2015 revenue.

Zacks Rank

Pentair currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industrial products sector include Apogee Enterprises, Inc. APOG, Harsco Corporation HSC and Mobile Mini, Inc. MINI. All these stocks sport a Zacks Rank #1 (Strong Buy).

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