q3 2015 earnings release - s22.q4cdn.com · pentair q3 2015 earnings release 5 adj. op income down...

PENTAIR Q3 2015 Earnings Release

Q3 2015 EARNINGS RELEASE October 20, 2015

PENTAIR Q3 2015 Earnings Release 2

FORWARD-LOOKING STATEMENTS CAUTION 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 achieve the benefits of planned cost take-out actions; the ability to successfully identify, complete and

integrate acquisitions, including the ability to successfully integrate and achieve the expected benefits of the acquisition

of ERICO Global Company; 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 complete the disposition of the remaining portion of the Water Transport business on anticipated

terms and timetable; the impact of changes in laws and regulations, including those that limit U.S. tax benefits; the

outcome of litigation and governmental proceedings; and the ability to achieve our long-term strategic operating goals.

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

Exchange Commission, including in our 2014 Annual Report on Form 10-K. All forward-looking statements speak only as

of the date of this communication. We assume no obligation, and disclaim any obligation, to update the information

contained in this communication.


KEY DEFINITIONS

• Except as Otherwise Noted All References to 2015 and 2014 Represent Our Results from Continuing Operations for the Period Indicated Presented on an Adjusted Basis

• “Core Sales” Refers to GAAP Revenue from Existing Operations Excluding (1) the Impact of Currency Translation and (2) the Impact of Revenue from Acquired Businesses Recorded Prior to the First Anniversary of the Acquisition Less the Amount of Sales Attributable to Divested Product Lines Not Considered Discontinued Operations

• Segment Income and Adjusted Operating Income Represent Operating Income from Continuing Operations Exclusive of Non-Cash Intangible Amortization, Certain Acquisition Related Expenses, Costs of Restructuring Activities, “Mark-to-Market" Gain (Loss) for Pension and Other Post-Retirement Plans, Impairments, and Other Unusual Non-Operating Items

• See Appendix for GAAP to Non-GAAP Reconciliations


EXECUTIVE SUMMARY

Delivered Solid Third Quarter Results Despite V&C Challenges 4

• Delivered Third Quarter Results at High End of Expectations with 3 of 4 Segments Delivering Solid Margin Improvement

• Energy and Industrial Headwinds Persist … Food & Beverage and Residential & Commercial Remain Healthy

• Right Sizing of Cost Structure at Valves & Controls Well Underway

• Closed ERICO Deal on September 18th … Integration is Underway and We Still Expect $0.40 of Accretion in 2016

• Narrowing 2015 Adjusted EPS Guidance to $3.84 - $3.86

• Cash Flow Timing Expected to Benefit from Year-End Working Capital Improvement


Adj. Op Income Down 16%

Adj. EPS Down 13% • Effective Tax Rate of 23.0%

• Adjusted Net Interest of $21M; Share Count 183M

FINANCIAL HIGHLIGHTS (YoY)

SUMMARY

Core Sales Down 5%

• Valves & Controls Down 18%

• Flow & Filtration Solutions Down 1%

• Water Quality Systems Up 3%

• Technical Solutions Up 2%

Lower Top Line Offset by Productivity and Cost Actions to Meet Q3 Expectations

• Food & Beverage and Residential & Commercial Remained Solid

• Water Quality Systems and Technical Solutions Delivered Positive Core Growth

• Flow & Filtration Solutions had Solid Margin Improvement and Core Top Line Stabilization

• V&C Cost Reduction Actions Accelerating

$1.55B

$180M

$249M

16.1%

$0.63

$0.97

Q3'15 Q3'14 Sales

Op Income (Rpt.)

Op Income (Adj.)

ROS (Adj.)

EPS (Rpt.)

EPS (Adj.)

$1.76B

$267M

$296M

16.8%

$1.00

$1.11

YTD Free Cash Flow of $327M • Expect to Deliver FY FCF ~100% of Adjusted

Net Income

Adj. Op Margins 16.1% … Down 70 bps

Q3'15 PENTAIR RESULTS


Cost Structure is Being Right Sized … Expect to See Benefits Starting in Q4

Adjusted Operating Margins 16.1%

• Productivity and Price Offsetting Inflation

• Negative Mix in Technical Solutions

• V&C Cost Out Accelerating but not Enough to Offset Decrementals on Top Line Pressures

6

Sales Highlights

SALES OPERATING INCOME

Q3'15 PENTAIR PERFORMANCE

Q3'14 Adjusted

Prod./ Price

Infl. Growth Q3'15

Adjusted

Core Sales Down 5%

• Residential / Commercial Up 2%

• Industrial Down 11%

• Energy Down 10%

• Food & Beverage Up 7%

• Infrastructure Down 5%

Operating Margins / Productivity Highlights

$1.76B

$1.55B ($127M)

(7 pts) (12 pts) (5 pts)

($85M)

0 pts

$5M

Q3'14 Price Q3'15 Volume FX

(12%) YoY

($81M)

$249M $53M

$296M

($19M)

ROS (1.1%) 3.3% 16.8%

ROS

16.1% ROS

(16%) YoY

(2.9%)

Core (5%)

$267M

$221M

$29M*

$28M*

*Non-Cash Intangible Amortization

$13M

Acq/Div

0 pts


Core (18%)

7

Sales Highlights (by Vertical)

Weakness Across All Verticals … Even in Short Cycle Business

SALES SEGMENT INCOME

Q3'15 VALVES & CONTROLS PERFORMANCE

Backlog Including FX Down 3% Sequentially at $1.2B … Orders of $433M; Core Down 12% YoY

Core Sales Down 18% YoY • Industrial – Process Down 18%

• Energy – Oil & Gas Down 17%

• Energy – Power Down 18%

• Energy – Mining Down 30%

Segment Margins 12.6%

• Margins Greatly Reduced on Lower Volume

• Productivity Remains Positive

• Pricing Pressure on Project Orders … Standard Pricing Remains Stable

Segment Margins / Productivity Highlights

$608M

$441M ($60M)

(28%) YoY

(10 pts) (28 pts) (18 pts)

($107M)

0 pts

$0M

Q3'14 Price FX Q3'15 Volume Q3'14 Prod./

Price Infl. Growth Q3'15

($62M)

$42M

$16M

$94M

($6M)

ROS (1.0%) 3.1% 17.7%

ROS

12.6% ROS

(48%) YoY

(7.2%)

$108M

$56M

$14M*

$14M*



390 376 396 413 370 349 344 341 337

0

100

200

300

400

500

600

Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15

545 543 550 564 557 508 482 476 447

0

100

200

300

400

500

600

Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15

353 364 368 373 345 328 310 335 337

0

100

200

300

400

500

600

Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15

77 70 71 63 49 50 52 58 50

0

100

200

300

400

500

600

Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15

8 8

VALVES & CONTROLS BACKLOG (Includes Impact of FX)

Rate of Decline Stabilizing … Too Early to Call a Bottom

INDUSTRIAL - Process ENERGY - Oil & Gas

ENERGY - Power ENERGY - Mining

• 2014: Revenue ~40%

• Third Quarter Core Orders Down 9% Y-o-Y

• 2014: Revenue ~15%

• Third Quarter Core Orders Up 6% Y-o-Y

• 2014: Revenue ~35%


• 2014: Revenue ~10%


Backlog ($ Millions)

Backlog ($ Millions) Backlog ($ Millions)

Backlog ($ Millions)


On Track and Driving for Expected Income Growth in 2016

V&C “INDUSTRY RESET” & COST OUT UPDATE

2016 Cost OutTarget

Current Status9/26/15

Sourcing

Op. Expense

Mfg. Cost 2016 Offsets

• Expecting Project Pricing Challenges to Continue • Expecting Labor Inflation / YOY Incentive

Reinstatements • Pay-as-Go Restructuring • Potential 2016 to 2017 Project Push-Outs

Key Cost Out Actions • Aggressively Drive Sourcing Initiatives to Offset

Project Pricing Challenges • Repositioning Footprint … Distribution,

Manufacturing, Service to Focus on Priority Projects and MRO / Aftermarket Need ($70M)

• Re-Tooling the Salesforce Globally … Focus on Key Accounts and Selling Motions ($30M)

• G&A Reductions ($15M)

$135M $125M

$20M $20M

$45M $40M

$70M $65M


Sales Highlights (by Vertical)

Top Line Stabilization and Strong Margin Improvement


Q3'15 FLOW & FILTRATION PERFORMANCE

Q3'14 Prod./ Price

Infl. Growth Q3'15

Core Sales Down 1%

• Residential / Commercial Down 5%

• Food & Beverage Up 11%

• Infrastructure Up 6%



• Price and Productivity Offset Inflation

• Cost-Out Actions Reading Out

• Improved Mix

Segment Margins / Productivity Highlights

($16M)

$46M

$21M

$46M ($5M)

ROS (1.3%) (3.1%) 5.4% 13.6%

ROS

14.6% ROS

Flat YoY

$394M $363M

($27M)

Q3‘14 Price FX Q3‘15

$4M

(8%) YoY

1 pt (7 pts) (8 pts)

Volume

(2 pts)

($8M)

Core (1%)

$53M $53M $7M* $7M*



Segment Margins / Productivity Highlights Sales Highlights (by Vertical)

Solid Core Performance and Robust Margin Expansion


Q3'15 WATER QUALITY SYSTEMS PERFORMANCE

Core Sales Up 3%


• Food & Beverage Flat


• Price Offset Inflation … Strong Productivity

• Improved Mix

• Growth Investments Continue

$324M $322M $3M $6M ($11M)

Q3'14 Price FX Q3'15


Volume

2 pts

(1%) YoY

$1M

$58M

$7M

$53M

($3M)

ROS

Q3'14 Prod./ Price

Infl. Growth Q3'15

ROS (1.0%) 0.5% 2.0% 17.3% 18.8%

ROS

+8% YoY

Core 3%

$61M $56M $3M*

$3M*



Q3'15 TECHNICAL SOLUTIONS PERFORMANCE

Core Growth Despite Short Cycle Challenges … Margins Remain Strong


Segment Margins / Productivity Highlights Sales Highlights (by Vertical)

Core Sales Up 2%


• Energy Up 9%

• Infrastructure Down 17%



• Negative Mix

• Productivity and Price Offset Inflation

• Cost-Out Actions Addressing Near-Term Industrial Headwinds

Q3'14 Prod./ Price

Infl. Growth Q3'15

$439M $432M ($29M) ($1M) $10M


Q3'14 Price Q3'15 Volume FX

0 pts

(1%) YoY

($6M)

$95M

$10M

$96M

($4M)

Flat YoY

ROS (1.0%) (1.1%) 2.4% 23.1% 23.4%

ROS

Core 2%

$101M $101M $5M* $6M*


Acq/Div (ERICO)

$13M

3 pts


CLOSING OUT 2015

13

Building Momentum Exiting the Year … Cautious on Near Term Trends

• Closed ERICO Deal on September 18th … Integration is Underway and We Expect ~$0.05 of Net Accretion After Accelerated Integration Costs

• Energy and Industrial Headwinds Persist ~($0.05) Versus Previous Guidance … Right Sizing of Cost Structure at Valves & Controls Well Underway

• Residential & Commercial and Food & Beverage Remain Healthy … Infrastructure Positioned to Turn Positive

• Narrowing 2015 Adjusted EPS Guidance to $3.84 - $3.86

• Driving Working Capital Improvement to Augment Full Year Free Cash Flow


Other FY Key Financial Metrics:

• Capital Expenditures ~$140M

• Total D&A of ~$261M + ~$33M of Non-Cash

Stock Compensation

• ROIC at Quarter End 10.1%

14

BALANCE SHEET AND CASH FLOW

Cash Flow to Benefit from Q4 Working Capital Timing

DEBT ROLLFORWARD

CASH FLOW DEBT SUMMARY

Q3 YTD ($M) 2015 2015

Net Income - Continuing Ops $ 115 $ 387 Amortization $ 28 $ 84 Subtotal $ 143 $ 471 Depreciation $ 35 $ 101 Capital Expenditures $ (34) $ (101) Asset Sales $ 2 $ 25 Working Capital $ 26 $ (111) Other Accruals/Other $ 6 $ (65) Free Cash Flow $ 178 $ 320 Discontinued Operations FCF $ 2 $ (7) Continuing Operations FCF $ 176 $ 327

Q3 YTD

Use of Cash: ($M) 2015 2015

Beginning Debt $ 3,266 $ 3,004

Used (Generated) Cash $ (178) $ (320)

Share Repurchase $ - $ 200

Dividends $ 58 $ 173

Bond Issuances $ 1,709 $ 1,709

Other $ 131 $ 219

Ending Debt $ 4,986 $ 4,986

*Does Not Include $145M of Cash on Hand

Maturity

Variable

$5.0B*

Q3'15 Avg. Rate ~2.75% ~74% Fixed …

$3.7B

$1.3B ’19

Fixed ’15 – ‘25


Long-Term Commitment to Creating Shareholder Value

IMPROVED CASH GENERATING CAPABILITIES

$0

$200

$400

$600

$800

$1,000

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15

FREE CASH FLOW ($M)

~100% of Adj. Net Income

*2012 Free Cash Flow is Adjusted to Exclude Accelerated Pension Funding of $193M, Deal-Related Payments of $126M, and Repositioning Payments of $20M

Organic Growth

• Highest ROIC from Funding Organic Opportunities (Distribution Channel, R&D, Sales / Marketing, Capital, etc.)

Debt Management

• Maintain Investment Grade Rating

ALLOCATION PRIORITIES

Dividends

• 39 Straight Years of Increases

• Competitive Dividend Yield

Acquisitions or Share Repurchases

• $2.4B of Share Repurchases Since September 2012

• ERICO Integration on Track *


Adj. EPS Down ~10% • Tax Rate of ~23.0%

• Net Interest ~$34M; Shares ~183M

Q4 Free Cash Flow Expected to be Strong; >100% of Adjusted Net Income

Q4'15 FINANCIAL OUTLOOK (YoY)

SUMMARY

Q4 Outlook Reflects Continuing Market Challenges

Q4'15 PENTAIR OUTLOOK

• ERICO Accretion Offsetting Continued Energy Weakness and Industrial Headwinds

• Cost-Out Actions Begin to Read Out and Build Momentum Entering Next Year

• Continued Strength in WQS and Margin Momentum in FFS

• FX Headwinds Remain

Core Sales Down ~5% (Down 3% Including FX and Acquisitions)

• Valves & Controls Down ~16%

• Flow & Filtration Solutions Down ~5%

• Water Quality Systems Up ~8%

• Technical Solutions Down ~2%

Adj. Op Income Down ~7%

Adj. Op Margins ~16.0% … Down ~80 bps • Valves & Controls Margins, ~12%

• Flow & Filtration Solutions Margins, ~12%

• Water Quality Systems Margins, ~21%

• Technical Solutions Margins, ~23%

~$1.75B

~$158M

~$280M

~16.0%

$0.52-$0.54

$1.03-$1.05

Q4'15 Q4’14 Sales

Op Income (Rpt.)

Op Income (Adj.)

ROS (Adj.)

EPS (Rpt.)

EPS (Adj.)

$1.80B

$176M

$303M

16.8%

$0.70

$1.17


Adj. EPS Down ~9% • Tax Rate of ~23.0%

• Adjusted Net Interest ~$91M; Shares ~183M

Free Cash Flow ~100% Adjusted Net Income

FY’15 FINANCIAL OUTLOOK (YoY)

SUMMARY

Expecting to Exit the Year with Cost-Out Momentum … Positioning for 2016

FULL YEAR 2015 PENTAIR OUTLOOK

• Energy Headwinds Persist, Push Outs Continue, and Maintenance Spending Delays

• Aggressive Cost-Out Actions in V&C to Position for 2016

• Free Cash Flow Strength

• ERICO Acquisition Completed and Integration Efforts Underway

Core Sales Down ~4% (Down 9% Including FX and Acquisitions)

• Valves & Controls Down ~14%

• Flow & Filtration Solutions Down ~4%

• Water Quality Systems Up ~5%

• Technical Solutions Up ~2%

Adj. Op Income Down ~12%

Adj. Op Margins ~15.6% … Down ~50 bps • Valves & Controls Margins, ~13.0%

• Flow & Filtration Solutions Margins, ~13.0%

• Water Quality Systems Margins, ~20.0%

• Technical Solutions Margins, ~22.0%

~$6.43B

~$726M

~$1.00B

~15.6%

$2.64-$2.66

$3.84-$3.86

FY’15 FY’14 Sales

Op Income (Rpt.)

Op Income (Adj.)

ROS (Adj.)

EPS (Rpt.)

EPS (Adj.)

$7.04B

$852M

$1.14B

16.1%

$3.14

$4.23


APPENDIX GAAP to Non-GAAP Measurements & Reconciliations


REPORTED TO ADJUSTED 2015 RECONCILIATION


Q3 2015 CORE SALES GROWTH RECONCILIATION


OTHER RECONCILIATIONS


REPORTED TO ADJUSTED 2014 RECONCILIATION

q3 2015 earnings release - s22.q4cdn.com · pentair q3 2015 earnings release 5 adj. op income down...

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