q3 2014 earnings release...pentair q3 2014 earnings release 354 354 363 381 388 391 390 376 396 413...

PENTAIR Q3 2014 Earnings Release

Q3 2014 EARNINGS RELEASEOctober 21, 2014

PENTAIR Q3 2014 Earnings Release 2

FORWARD-LOOKING STATEMENTSCAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This communication contains statements that we believe to be “forward-looking statements” within the meaning of the

Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact are forward-

looking statements. Without limitation, any statements preceded or followed by or that include the words “targets,”

“plans,” “believes,” “expects,” “intends,” “will,” “likely,” “may,” “anticipates,” “estimates,” “projects,” “should,”

“would,” “positioned,” “strategy,” “future” or words, phrases or terms of similar substance or the negative thereof, are

forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject

to risks, uncertainties, assumptions and other factors, some of which are beyond our control, which could cause actual

results to differ materially from those expressed or implied by such forward-looking statements. These factors include

the ability to successfully integrate the Flow Control business and achieve expected benefits from such combination; the

ability to successfully complete the disposition of our Water Transport business on anticipated terms and timetable;

overall global economic and business conditions; competition and pricing pressures in the markets we serve; the

strength of housing and related markets; volatility in currency exchange rates and commodity prices; inability to

generate savings from excellence in operations initiatives consisting of lean enterprise, supply management and cash

flow practices; increased risks associated with operating foreign businesses; the ability to deliver backlog and win future

project work; failure of markets to accept new product introductions and enhancements; the ability to successfully

identify, complete and integrate acquisitions; the impact of changes in laws and regulations, including those that limit

U.S. tax benefits; the outcome of litigation and governmental proceedings; the ability to achieve our long-term strategic

operating goals; and the ability to achieve the expected benefits from our recent redomicile. Additional information

concerning these and other factors is contained in our filings with the U.S. Securities and Exchange Commission

(“SEC”), including in our 2013 Annual Report on Form 10-K. All forward-looking statements speak only as of the date of

this report. We assume no obligation, and disclaim any obligation, to update the information contained in this report.


KEY DEFINITIONS

• Except as Otherwise Noted All References to 2014 and 2013Represent Our Results from Continuing Operations for the PeriodIndicated Presented on an Adjusted Basis

• See Appendix for GAAP to Non-GAAP Reconciliations


Adj. Op Income Up 12%

Adj. EPS Up 22%• Effective Tax Rate of 23.2%

• Net Interest of $17.1M; Share Count 193.1M

FINANCIAL HIGHLIGHTS (YoY)

SUMMARY

Sales Up 3%

• Valves & Controls Flat

• Process Technologies Up 4%

• Flow Technologies Down 2%

• Technical Solutions Up 8%

Top Line Met Expectations, Strong Operational Beat, EPS Up 22%

• Sales in All Verticals Grew … Led byIndustrial / Process

• Strong Margin Expansion Continued, Driven byProductivity and Synergies

• Share Buyback In Line with Expectations ($400M)

• Free Cash Flow >120% of Net Income

$1.76B

$267M

$267M

15.2%

$1.00

$1.00

Q3'14 Q3'13Sales

Op Income (Rpt.)

Op Income (Adj.)

ROS (Adj.)

EPS (Rpt.)

EPS (Adj.)

$1.71B

$230M

$238M

13.9%

$0.81

$0.82

YTD Free Cash Flow of $600M• Expect to Deliver FY FCF >110% of Net Income

Adj. Op Margins 15.2% … Up 130 bps

Q3'14 PENTAIR RESULTS


Operating Margins 15.2%

• Productivity and Synergies Strong

• Inflation Consistent with First Half

• Lean, Sourcing Actions and G&A ReductionsContinue to Read Out

5

Sales Highlights

Solid Top Line Growth Leads to Strong Income and Margin Expansion

SALES OPERATING INCOME

Q3'14 PENTAIR PERFORMANCE

$1.71B$1.76B$3M

0 pts 3 pts2 pts

$24M

Q3'13Adjusted

Prod./Price

Infl.Growth Q3'14

$4M$267M$52M

$238M ($27M)

ROS(1.6%) 2.9%13.9%

ROS

15.2%ROS

+12%YoY

Sales Up 3%

• Core Volume and Price +3%

• All Verticals Positive First Time This Year

• FX Neutral

1 pt

$19M

0.0%

Q3'13 Price Q3'14Volume FX

At PYOp. Margin Includes

GrowthLeverage

+3%YoY

Operating Margins / Productivity Highlights


Sales Highlights (by Vertical)

Another Strong Quarter of Margin Expansion


Q3'14 VALVES & CONTROLS PERFORMANCE

$612M $613M$3M

+0%YoY

0 pts 0 pts(1 pt)

($7M)

Q3'13Adjusted

Prod./Price

Infl.Growth Q3'14

($0M)$96M$26M

$80M ($10M)

ROS(1.5%) 4.1%13.1%

ROS

15.7%ROS

+20%YoY

Backlog Down 3% ex-FX Sequentiallyat $1.3B … Orders of $568M; Flat YoY

Sales Flat YoY• Industrial – Process Up 5%

• Energy – Oil & Gas Up 3%

• Energy – Power Down 13%

• Energy – Mining Down 6%


• Strong Productivity and Synergies

• OMT Investment on Track

• PIMS Momentum with Lean Accelerating

1 pt

$5M

0.0%

Q3'13 Price FX Q3'14Volume

Includes ($4M)of OMT

Investment



354 354 363 381 388 391 390 376 396 413370

0

100

200

300

400

500

600

Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14

554 540 565 562 549 530 545 543 550 564 557

0

100

200

300

400

500

600

Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14

379 398 368 372 374 371 353 364 368 373 345

0

100

200

300

400

500

600

Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14

76 72 82 99 90 87 77 70 71 63 49

0

100

200

300

400

500

600

Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14

77

VALVES & CONTROLS BACKLOG

Lumpy Orders Continue … Trailing Six Months Orders Positive

INDUSTRIAL - Process ENERGY - Oil & Gas

ENERGY - Power ENERGY - Mining

• 2013: Revenue ~40%

• Third Quarter Orders Down 6% Y-o-Y

• 2013: Revenue ~15%


• 2013: Revenue ~35%

• Third Quarter Orders Up 9% Y-o-Y

• 2013: Revenue ~10%


Backlog ($ Millions)

Backlog ($ Millions)Backlog ($ Millions)

Backlog ($ Millions)


ANOTHER VIEW OF VALVES & CONTROLS ORDERS

6 Month Trailing Orders Positive … Quarterly Push Outs Continue8

-15%

-10%

-5%

0%

5%

10%

15%

Trailing 3-Months Trailing 6-Months Trailing 12-Months

Yo

YC

han

ge

Q1'13

Q2'13

Q3'13

Q4'13

Q1'14

Q2'14

Q3'14

Trailing 3-MonthsRemains Lumpy

Trailing 6-MonthsRecently Positive

Trailing 12-MonthsTurned Positive

As of


Sales Highlights (by Vertical)

Top Line Growth Offset by Negative Mix and Productivity


Q3'14 PROCESS TECHNOLOGIES PERFORMANCE

$421M

$438M$0M

Q3'13 Price FX Q3'14

$5M

+4%YoY

1 pt 0 pts 4 pts

Volume

3 pts

$12M

Q3'13Adjusted

Prod./Price

Infl.Growth Q3'14

$2M $58M$3M$60M ($7M)

ROS(1.6%)0.0% 0.7%14.2%

ROS

13.3%ROS

(3%)YoY

Sales Up 4%

• Residential / Commercial Up 7%

• Food & Beverage Up 5%

• Infrastructure Up 2%


• Price Remained Positive

• Negative Mix Impact Driven by LargerContribution from Projects

• Increased NPD Investments Continued



Operating Margins / Productivity HighlightsSales Highlights (by Vertical)

Top Line Challenges Remain but Mix Helping Margins


Q3'14 FLOW TECHNOLOGIES PERFORMANCE

$282M$275M$3M

($10M) ($1M) $39M$5M$39M ($4M)

ROS

Sales Down 2%

• Residential / Commercial Down 3%

• Food & Beverage Up 2%

• Industrial Down 9%

• Infrastructure Down 2%


• Strategic Shift from Lower Margin Retail Business

• Price and Productivity More Than Offset Inflation

• Differentiated Growth Offset by WeakIndustrial and Infrastructure

$0M

Q3'13 Price FX Q3'14

1 pt 0 pts (2 pts)

Volume

(3 pts)

Q3'13 Prod./Price

Infl.Growth Q3'14

ROS(1.5%)0.0% 1.8%13.8% 14.1%

ROS

(2%)YoY

+0%YoY


Q3'14 TECHNICAL SOLUTIONS PERFORMANCE

Strength Across All Verticals... Strong Operating Leverage


Operating Margins / Productivity HighlightsSales Highlights (by Vertical)

Q3'13Adjusted

Prod./Price

Infl.Growth Q3'14

$6M$97M$14M

$84M ($7M)

+15%YoY

ROS(1.7%)0.0% 3.1%20.6% 22.0%

ROS

$406M

$439M($1M)$6M$28M

7 pt 0 pts 8 pt

Sales Up 8%

• Industrial Up 5%

• Energy Up 13%

• Infrastructure Up 12%

• Residential / Commercial Up 9%


• Strong Leverage with Top Line Growth

• Standardization and Repositioning on Track

• Broad Based Growth and Favorable Mix

Q3'13 Price Q3'14Volume FX

1 pts

+8%YoY


Food & Bev~9% of Sales*

• Tougher Comps in Electronics in Q4

• Sluggish Muni Spending Continues

FY’14 Fcst: ~+4%

12

TOTAL PENTAIR GROWTH PROFILE

Fast Growth Regions Tough Comps Ending … Developed Regions Solid

KEY VERTICALSKEY GEOGRAPHIES

• US/CANADA ~48% of Sales*

– US Led Growth Once Again

– Growth in Canada First Time This Year;Too Early to Call a Recovery

• WESTERN EUROPE ~20% of Sales*

– Energy and Industrial Softness

– Resi / Comm Remained Positive

– Electronics Growth

• FAST GROWTH ~25% of Sales*

– Overall Down 2% YoY

– China

– Middle East

– Latin America

– SE Asia

Vertical Commentary / Growth Rates (YoY)

Energy~29% of Sales* • Project Delays Continue

• Oil & Gas Order Improvement

FY’14 Fcst: ~-2%

Industrial~29% of Sales* • Recovery Continues

• Process Order Improvement

FY’14 Fcst: ~+1%

Residential/Commercial~26% of Sales*

• NA Strength Continues, but Moderating

• Commercial Recovery Ongoing

FY’14 Fcst: ~+5%

Infrastructure~7% of Sales*

• Beverage Shipments Timing Impact

• Slower Ag Demand

FY’14 Fcst: ~+4%

YTD: -4%

*Full Year 2013 Sales

YTD: +1%

YTD: +6%

YTD: +4%

YTD: +5%

Q3: +1%

Q3: +2%

Q3: +4%

Q3: +4%

Q3: +5%


Adj. EPS Up ~20%• Tax Rate of ~23.5%

• Net Interest ~$18M; Shares ~187M

Q4 Free Cash Flow Expected to beStrong; >125% of Net Income

Q4'14 FINANCIAL OUTLOOK (YoY)

SUMMARY

Continued Top Line Softness … Another Quarter of 20% EPS Growth

Q4'14 PENTAIR OUTLOOK

• Organic Revenue Growth Remains Moderate

• OMT Investment in V&C and Mix Challenges inProcess Technologies Continue in Q4 … EasingHeading into 2015

• Cash Flow Remains Strong, Share BuybackExpected to Continue (~$300M Expected)

Sales Up ~1-2% (Including FX Headwind)• Valves & Controls ~Flat

• Process Technologies Up ~5%

• Flow Technologies Down ~4%

• Technical Solutions Up ~4%

Adj. Op Income Up ~9%

Adj. Op Margins ~14.5% … Up ~90 bps• Valves & Controls Margins, ~15.0%

• Process Technologies Margins, ~13.5%

• Flow Technologies Margins, ~10.0%

• Technical Solutions Margins, ~23.0%

~$1.85B

~$270M

~$270M

~14.5%

$1.02-$1.04

$1.02-$1.04

Q4'14 Q4’13Sales

Op Income (Rpt.)

Op Income (Adj.)

ROS (Adj.)

EPS (Rpt.)

EPS (Adj.)

$1.83B

$241M

$249M

13.6%

$0.81

$0.86


Other FY Key Financial Metrics:

• Capital Expenditures ~$140M

• Total D&A of ~$250M + ~$30M of Non-CashStock Compensation

• Share Buyback of $850M YTD (~$300M ofAuthorization Remaining)

• ROIC at Quarter End 10.5%

14

BALANCE SHEET AND CASH FLOW

Consistently Strong Cash Flow Remains a Key Focus

DEBT ROLLFORWARD

CASH FLOW DEBT SUMMARY

*Does Not Include $157M of Cash on Hand

Maturity

Variable

$3.0B*

Q3'14 Avg. Rate ~2.5%~67% Fixed …

$2.0B

$1.0B ’19

Fixed ’15 – ‘22

Q3 Q3

($M) 2014 2013 YOY Chg

Net Income from ContinuingOperations Attributable toPentair plc $ 192 $ 165 $ 27

Non-Cash Items $ 71 $ 73 $ (2)

Subtotal $ 263 $ 238 $ 25

Working Capital $ (8) $ (34) $ 26

Capital Expenditures $ (33) $ (38) $ 5

Asset Sales $ 1 $ - $ 1

Other Accruals/Other $ 39 $ 18 $ 21

Free Cash Flow fromContinuing Operations $ 262 $ 184 $ 78

Q3 Q3

Use of Cash: ($M) 2014 2013 YOY Chg

Beginning Debt $ 2,740 $ 2,735 $ (5)

Generated Cash $ (262) $ (184) $ 78

Share Repurchase $ 399 $ 57 $ (342)

Dividends $ 57 $ 50 $ (7)

Other $ 30 $ (89) $ (119)

Ending Debt $ 2,964 $ 2,569 $ (395)


Adj. EPS Up ~22%• Tax Rate of ~23.5%

• Net Interest ~$70M; Shares ~195M

Free Cash Flow of ~$850M; >110% Net Income

FY’14 FINANCIAL OUTLOOK (YoY)

SUMMARY

Strong Execution Driving Margin and EPS Growth

FULL YEAR 2014 PENTAIR OUTLOOK

• Cost Actions on Track

• Improving Global Industrial

• Strong EPS Growth ~20%

• Strong Cash Flow and Balance Sheet

Sales Up ~1-2%• Valves & Controls Down ~1%

• Process Technologies Up ~5%

• Flow Technologies Down ~2%

• Technical Solutions Up ~4%

Adj. Op Income Up ~13% (Includes ~$20M of OMT Investment)

Adj. Op Margins ~14.3% … Up ~140 bps• Valves & Controls Margins, ~14.0%

• Process Technologies Margins, ~14.5%

• Flow Technologies Margins, ~12.0%

• Technical Solutions Margins, ~20.5%

~$7.1B

~$0.94B

~$1.01B

~14.3%

$3.43-$3.45

$3.72-$3.74

FY’14 FY’13Sales

Op Income (Rpt.)

Op Income (Adj.)

ROS (Adj.)

EPS (Rpt.)

EPS (Adj.)

$7.0B

$743M

$902M

12.9%

$2.50

$3.05


APPENDIXGAAP to Non-GAAP Measurements & Reconciliations


REPORTED TO ADJUSTED 2014 RECONCILIATION

Pentair plc and Subsidiaries

Reconciliation of the GAAP “As Reported” year ended December 31, 2014 to the “Adjusted” non-GAAP

excluding the effect of 2014 adjustments (Unaudited)

Actual Forecast

In millions, except per-share data

FirstQuarter

SecondQuarter

FullYear

Total PentairNet sales $1,644.0 $1,834.1 approx $ 7,100Operating income—as reported 182.1 226.4 approx 939

% of net sales 11.1 % 12.3 % approx 13.2 %

Adjustments:Restructuring and other 17.0 44.1 approx 61Redomicile related expenses 1.5 8.8 approx 10

Operating income—as adjusted 200.6 279.3 approx 1,010% of net sales 12.2 % 15.2 % approx 14.3 %

Net income from continuing operations attributable to Pentair plc—as reported 125.5 159.2 approx 667

Adjustments, net of tax 16.4 41.5 approx 58

Net income from continuing operations attributable to Pentair plc—as adjusted $ 141.9 $ 200.7 approx $ 725

Continuing earnings per common share attributable to Pentair plc—diluted

Diluted earnings per common share—as reported $ 0.63 $ 0.81 approx $3.43 - $3.45

Adjustments 0.08 0.21 approx 0.29Diluted earnings per common share—as adjusted $ 0.71 $ 1.02 approx $3.72 - $3.74


REPORTED TO ADJUSTED 2014 RECONCILIATIONPentair plc and Subsidiaries



Actual Forecast

In millionsFirst

QuarterSecondQuarter

FullYear

Valves & Controls

Net sales $ 534.8 $ 633.9 approx $ 2,435

Operating income—as reported 52.2 71.5 approx 318% of net sales 9.8 % 11.3 % approx 13.1 %

Adjustments:

Restructuring and other 9.5 17.9 approx 27

Operating income—as adjusted 61.7 89.4 approx 345% of net sales 11.5 % 14.1 % approx 14.0 %

Process Technologies

Net sales $ 418.3 $ 496.8 approx $ 1,845

Operating income —as reported 46.3 82.4 approx 252% of net sales 11.1 % 16.6 % approx 13.7 %

Adjustments:



Flow Technologies

Net Sales $ 282.0 $ 300.3 approx $ 1,110

Operating income—as reported 29.6 34.1 approx 125


Adjustments:


Operating income—as adjusted 32.3 41.6 approx 135


Technical Solutions

Net sales $ 415.3 $ 408.6 approx $ 1,730

Operating income—as reported 76.2 73.6 approx 354% of net sales 18.4 % 18.0 % approx 20.5 %

Adjustments:




ROIC RECONCILIATION

Third Quarter Fourth Quarter First Quarter Second Quarter Third Quarter

In millions 2013 2013 2014 2014 2014

Reported Operating Income 230.0$ 241.3$ 182.1$ 226.4$ 267.4$

Adjustments 7.9 7.3 18.5 52.9 -

Adjusted Operating Income 237.9$ 248.6$ 200.6$ 279.3$ 267.4$

Reported Provision for Income Taxes 46.7$ 64.1$ 40.8$ 49.4$ 58.1$

Effect of Adjustments on Provision for Income Taxes 7.3 (7.0) 2.2 11.6 -

Adjusted Provision for Income Taxes 54.0$ 57.1$ 43.0$ 61.0$ 58.1$

Reported Effective TaxRate 21.9% 28.1% 24.5% 23.7% 23.2%

Adjusted Effective TaxRate 24.4% 24.5% 23.2% 23.3% 23.2%

NOPAT 179.7$ 187.7$ 154.0$ 214.2$ 205.4$

Adjusted Depreciation & Amortization ("D&A") 65.7 59.8 63.3 63.4 63.0

Capital expenditures ("Cap Ex") (38.4) (43.6) (27.2) (32.4) (32.9)

Total NOPAT, D&A and Cap Ex 207.0$ 203.9$ 190.1$ 245.2$ 235.5$

Trailing four quarter NOPAT, D&A and Cap Ex 684.3$ 762.3$ 812.2$ 846.1$ 874.6$

Ending Invested Capital (excluding noncontrolling interest) 8,431.4$ 8,389.6$ 8,663.8$ 8,293.7$ 7,774.0$

Trailing five quarter average invested capital 8,447.0$ 8,475.5$ 8,491.2$ 8,422.5$ 8,310.5$

After TaxReturn on Invested Capital 9.0% 9.6% 10.0% 10.5%

NOPAT (Net Operating Profit After Tax) is Defined as [(Adjusted OI) X (1 - Adjusted Effective Tax Rate)]

Ending Invested Capital is Defined as [Total Shareholders' Equity - Noncontrolling interest + Long-term Debt + Current Maturities of Long-term Debt + Short-term Borrowings

- Cash and Cash Equivalents]


REPORTED TO ADJUSTED 2013 RECONCILIATION

Pentair plc and Subsidiaries



In millions, except per-share dataFirst


ThirdQuarter

FourthQuarter

FullYear

Total PentairNet sales $ 1,663.7 $ 1,791.7 $ 1,713.3 $ 1,831.0 $ 6,999.7Operating income—as reported 66.4 204.9 230.0 241.3 742.6

% of net sales 4.0 % 11.4 % 13.4 % 13.2 % 10.6 %

Adjustments:Inventory step-up and customer backlog 76.6 10.0 — — 86.6Restructuring and other 26.6 31.3 7.9 54.1 119.9Pension and other post-retirement mark-to-market gain — — — (63.2) (63.2)

Trade name impairment — — — 11.0 11.0Redomicile related expenses — — — 5.4 5.4

Operating income—as adjusted 169.6 246.2 237.9 248.6 902.3% of net sales 10.2 % 13.7 % 13.9 % 13.6 % 12.9 %

Net income from continuing operations attributable to Pentair plc—as reported 45.2 138.6 165.0 162.9 511.7

Gain on sale of businesses, net of tax (12.5) — — (3.0) (15.5)Interest expense, net of tax — 1.6 — — 1.6Adjustments, net of tax 79.8 33.0 0.5 13.4 126.7

Net income from continuing operations attributable to Pentair plc—as adjusted $ 112.5 $ 173.2 $ 165.5 $ 173.3 $ 624.5

Continuing earnings per common share attributable to Pentair plc—diluted

Diluted earnings per common share—as reported $ 0.22 $ 0.67 $ 0.81 $ 0.81 $ 2.50Adjustments 0.32 0.17 0.01 0.05 0.55Diluted earnings per common share—as adjusted $ 0.54 $ 0.84 $ 0.82 $ 0.86 $ 3.05


REPORTED TO ADJUSTED 2013 RECONCILIATIONPentair plc and Subsidiaries



In millionsFirst


ThirdQuarter

FourthQuarter Year

Valves & Controls

Net sales $ 585.8 $ 619.9 $ 611.5 $ 652.0 $ 2,469.2

Operating income (loss)—as reported (18.6) 56.9 76.6 46.5 161.4% of net sales (3.2 )% 9.2 % 12.5 % 7.1 % 6.5 %

Adjustments:

Restructuring and other 7.3 17.0 3.7 32.8 60.8

Inventory step-up and customer backlog 70.6 10.0 — — 80.6


Process Technologies

Net sales $ 396.6 $ 477.6 $ 421.2 $ 470.5 $ 1,765.9

Operating income—as reported 43.4 76.8 57.1 65.9 243.2% of net sales 10.9 % 16.1 % 13.6 % 14.0 % 13.7 %

Adjustments:


Inventory step-up and customer backlog 0.4 — — — 0.4


Flow Technologies

Net sales $ 279.1 $ 305.0 $ 281.5 $ 266.0 $ 1,131.6


Adjustments:

Restructuring and other 4.3 2.9 — 6.8 14.0


Technical Solutions

Net sales $ 410.0 $ 397.4 $ 405.9 $ 450.1 $ 1,663.4


Adjustments:


Tradename impairment — — — 11.0 11.0

Inventory step-up and customer backlog 5.7 — — — 5.7


q3 2014 earnings release...pentair q3 2014 earnings release 354 354 363 381 388 391 390 376 396 413...

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