q4 2016 earnings release · q4 2016 earnings release 3 key definitions • except as otherwise...

Q4 2016 Earnings Release

Q4 2016 EARNINGS RELEASE January 31, 2017


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 company’s ability to complete the sale of the Valves & Controls business on anticipated

terms and timetable; overall global economic and business conditions, including worldwide demand for oil and gas;

the ability to achieve the benefits of our restructuring plans; the ability to successfully identify, finance, complete

and integrate acquisitions; 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 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 ("SEC"), including in our 2015

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.

2

Q4 2016 Earnings Release 3

KEY DEFINITIONS

• Except as Otherwise Noted All References to 2016 and 2015 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 Represents Equity Income of Unconsolidated Subsidiaries and 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

• Return on Sales ("ROS") Equals Segment Income Divided by Sales

• See Appendix for GAAP to Non-GAAP Reconciliations


EXECUTIVE SUMMARY

Positioned for Strong EPS Growth Despite Ongoing Headwinds 4

• Delivered FY16 Sales Growth of 6% with Core Sales Down 1%, Segment Income Growth of 11%, and EPS Growth of 8% with Strong Free Cash Flow Conversion of 109% of Adjusted Net Income

• Moving to Two Segments from Three to Better Position for More Predictable Long-Term Growth in Water and Electrical

• We Still Believe the V&C Sale will Close by the End of Q1

• Cost Actions Remain on Track to Align with the Reality of a Slow Growth World

• Introducing 2017 Adjusted EPS Guidance of $3.45 - $3.55


SALES

SEGMENT INCOME

FULL YEAR 2016 PENTAIR PERFORMANCE

2015 Price 2016 Volume FX Acq.

($80M)

$4.62B $16M $372M

($34M)

$4.89B

(2 pts) 1 pt 8 pts (1 pt)

6% YoY

Core (1%)

6 pts

*Non-Cash Intangible Amortization

2015 Infl. Growth/ Acq./FX

2016

(0.2%) (1.0%) 2.0%

$755M $37M

($46M)

$94M $840M

11% YoY

ROS ROS 16.4% 17.2%

Prod./ Price

$68M *

$96M *

Strong Income and Margin Expansion Coupled with Robust Cash Flow

FINANCIAL HIGHLIGHTS (YoY)

Core Sales Down 1% (Up 6% Incl. FX and ERICO)

• Water Quality Systems Up 4% (Up 3% Incl. FX)

• Flow & Filtration Solutions Down 5% (Down 5% Incl. FX)

• Technical Solutions Down 3% (Up 17% Incl. FX and ERICO)

Segment Income Up 11%

Adj. EPS $3.05 … Up 8% • Adjusted Tax Rate of 20.1%

• Net Interest of $140M; Shares 183M

FY Free Cash Flow was $609M … 109% Conversion to Adj. Net Income; Total Free Cash Flow, Including Discontinued Operations, was $770M

ROS 17.2% ... Up 80 bps


SALES

SEGMENT INCOME

Q4'16 PENTAIR PERFORMANCE

Q4'15 Price Q4'16 Volume FX Acq.

($102M)

$1.29B $6M $0M

($5M)

$1.19B

(8 pts) 1 pt 0 pts (1 pt)

(8%) YoY

Core (7%)

(8 pts)


Q4'15 Infl. Growth/

FX Q4'16

(1.6%) (1.0%) 2.1%

$228M

($38M) ($12M)

$26M $204M

(11%) YoY

ROS ROS 17.7% 17.2%

Prod./ Price

$24M * $24M *

Core Sales Down 1% Excluding Impact of Days

Core Sales Down 7% (Down 8% Incl. FX)

• Water Quality Systems Up 2% (Up 2% Incl. FX)

• Flow & Filtration Solutions Down 11% (Down 11% Incl. FX)

• Technical Solutions Down 11% (Down 12% Incl. FX)

Segment Income Down 11%

Adj. EPS $0.78 … Down 11% • Adjusted Tax Rate of 15.7%

• Net Interest of $34M; Shares 184M

FINANCIAL HIGHLIGHTS (YoY)

Q4 Free Cash Flow was $220M; Total Free Cash Flow, Including Discontinued Operations, was $288M • Delivered QTD FCF > 150% of Adjusted Net Income

ROS 17.2% … Down 50 bps

($81M; 6%) Impact from Fewer Selling Days


SALES

SEGMENT INCOME

Q4'16 WATER QUALITY SYSTEMS PERFORMANCE

$365M $371M $6M $0M $0M

Q4'15 Price FX Q4'16

2 pts 0 pts 2 pts

Volume

0 pts

2% YoY

Core 2%


$2M $3M

($2M)

ROS

Q4'15 Prod./ Price

Infl. Growth/

FX Q4'16

ROS (0.6%) 0.6% 0.3% 22.3% 22.6%

ROS

4% YoY

$84M $81M $2M * $3M *

Continued Aquatics Strength and Solid Margin Performance

CORE SALES AND HIGHLIGHTS (YoY)

Aquatic & Environmental Systems Up 8%

• Q4 Core Sales Up 14% Excluding Days Impact

• FY Core Sales Up 7%

• Continued Dealer Wins and Strong New Product Offerings

Water Filtration Down 8%

• Q4 Core Sales Down 1% Excluding Days Impact

• FY Core Sales Down 1%

• Q4 Orders Improved After Muted Restaurant Spending Throughout 2016



SALES

SEGMENT INCOME

Q4'16 FLOW & FILTRATION SOLUTIONS PERFORMANCE

$354M $314M

($1M)

Q4'15 Price FX Q4'16

$2M

(11%) YoY

1 pt (0 pts) (11 pts)

Volume

(12 pts)

($41M)

Core (11%)


Q4'15 Prod./ Price

Infl. Growth/

FX Q4'16

($17M)

$16M

($4M) ROS

(1.2%) (3.7%) 5.0% 11.4% 11.5% ROS

(12%) YoY

$41M $36M $7M *

$6M *

Focus Remains on Complexity Reduction and Margin Expansion


Water Technologies Down 14%



• Distributor Orders Slow at Year-End

Fluid Solutions Down 4%

• Q4 Core Sales Up 2% Excluding Days Impact


• Improved Ag Performance and Strong Beverage and Biogas Orders

Process Filtration Down 6%

• Q4 Core Sales Flat Excluding Days Impact


• Tough Sales Comp, but Order Improvement



Q4'16 TECHNICAL SOLUTIONS PERFORMANCE

$574M $508M

($4M) ($3M) ($59M)

(10 pts) (1 pt) (12 pts)

Q4’15 Price Q4'16 Volume FX

(1 pt)

(12%) YoY

Core (11%)

Acq.

$0M

0 pts


SALES

SEGMENT INCOME

Q4'15 Infl. Growth/

FX Q4'16

($23M) ($6M) (21%)

YoY

ROS (1.8%) (1.0%) 22.6% 20.3%

ROS

$2M

$130M

Prod./ Price

0.5%

$103M $15M *

$15M *

Stabilization in Daily Order Rates … Project Headwinds in 2017


Enclosures Down 7%



• Stabilization in Daily Order Rate … Further Telecom Delays

Thermal Management Down 15%


• FY Core Sales Up 1%

• Project Headwinds and Slow MRO Spending

Engineered Fastening Solutions Down 10%


• FY Core Sales N/A

• Integration Complete … Commercial Growth Moderating and Infrastructure Delays



PURPOSE OF ORGANIZATION CHANGE

• More Predictable, Higher Performance Through Simplifying, and Standardizing Support

• One Water Segment will Focus Our Water Strategy, Raise Execution, and Improve Collaboration

• Use PIMS to Lead Our Growth and Operational Efforts

• Align Costs to Reflect New Size of Organization

• Develop Talent Pipeline

Simplifying, Standardizing & Aligning for High Performance


Lean and Focused Structure

PENTAIR SEGMENT OVERVIEW

11

PENTAIR: $4.9B;

$840M OF SEGMENT INCOME @ 17% ROS

WATER: ~$2.8B;


ELECTRICAL ~$2.1B;


SEGMENTS

STRATEGIC BUSINESS GROUPS (SBGS)

ENCLOSURES

$0.9B

THERMAL MANAGEMENT

$0.7B

ELECTRICAL & FASTENING SOLUTIONS

$0.5B

AQUATIC & ENVIRONMENTAL SYSTEMS

$0.9B

FLOW TECHNOLOGIES

$0.9B

FILTRATION & PROCESS

$1.0B

Based on 2016 Financials


OPTIMIZING ACROSS PENTAIR

Working as ONE TEAM to Optimize Performance

Randy Hogan Chairman

& CEO

Mark Borin Chief Accounting

Officer

John Stauch Finance, Ops, IT

Karen Keegans HR &

Communications

John Jacko Marketing &

Growth

Angela Jilek Legal &

Compliance

Karl Frykman Water

Beth Wozniak Electrical

• Reduced Reporting Segments from 3 to 2 and Ensuring They are an Extension of PNR … Deploying Central Expertise to Drive Performance and PIMS Processes while Ensuring SBGs Deliver on Growth and Income Commitments

• Added a Senior Growth Leader to Improve PIMS Growth Processes and Outcomes

• We are Functionalizing G&A to Optimize Efficiency, Reduce Enterprise Wide Waste, and Improve Costs

• WE ARE NOW ONE TEAM Focused on Optimizing Pentair and not Individual Businesses or Segments


FY'17 FINANCIAL OUTLOOK (YoY)

SUMMARY

FULL YEAR 2017 PENTAIR OUTLOOK

• Impact of 2016 Large Jobs Creates Top Line Headwind

• Robust Margin Expansion Expected on Strong Productivity, Cost Out Actions, and Improved Mix

• EPS Growth Expected from Core and Lower Interest Expense

FY'17 FY'16 Sales

Op. Income Seg. Income ROS

EPS (Rpt.)

EPS (Adj.)

~$4.7B

~$773M

~$870M

~18.4%

~$3.03 - $3.13

~$3.45 - $3.55

$4.9B

$701M

$840M

17.2%

$2.47

$3.05

Adj. EPS Up ~15% • Tax Rate of ~20.0%

• Net Interest ~$73M; Shares ~182M

Free Cash Flow ~100% of Adjusted Net Income • Capital Expenditures ~$100M

• Total D&A of ~$190M + ~$36M of Non-Cash Stock Compensation

Core Sales Down ~3% (Down ~1% Excl. Large Jobs)

• Water Down ~1% (~Flat Excl. Large Jobs)

• Electrical Down ~5% (Down ~1% Excl. Large Jobs)

Segment Income Up ~4%

ROS ~18.4% … Up ~120 bps

• Water ~19%

• Electrical ~22% - 23%

2017 Focus on Long-Term Positioning and Delivering Strong EPS Growth


2017 FORECASTED REVENUE

Energy, FX, and Industrial Headwinds Expected to Continue

$4.89B

~$4.74B

(~$75M)*

(1 pt)

5 pts

(4 pts)

~$50M

1 pt

(~$185M)

2016 Price 2017F Including Impact of Currency

Volume FX Impact at Current Rates

(~3%) YoY

~$4.81B

2017F at 2016

Currency

(~2%) YoY

*Euro Rate at $1.05

14

Water Electrical Impact

Q1 ($4M) ($35M) (3%)

Q2 ($3M) ($30M) (3%)

Q3 ($3M) ($24M) (2%)

Q4 ($4M) ($6M) (1%)

FY ($15M) ($95M) (2%)

Large Jobs Included in Volume

Completed Acquisitions &

Divestitures

~$60M

1 pt

Large Jobs: 1 Dairy Job in Water and 3 Oil Sands Jobs in Electrical


2017 FORECASTED SEGMENT INCOME

Expecting Strong Productivity and Improved Mix 15

Growth/ Price/

Acquisitions

(~$20M)

~$870M ~$880M

$840M

ROS ~18.4% ~17.2%

ROS

~18.4% ROS

~+4% YoY

(~0.1%)

Productivity Net of Inflation

~1.3%

~$60M

(~$10M)*

(~0.0%)

~+5% YoY

2017F Including Impact of Currency

FX Impact at Current Rates

2017F at 2016

Currency

15

Water Electrical Impact

Q1 ($0M) ($10M) (6%)

Q2 ($0M) ($5M) (2%)

Q3 ($0M) ($3M) (2%)

Q4 ($0M) ($1M) (0%)

FY ($0M) ($19M) (2%)

Large Jobs Included in Growth

Large Jobs: 1 Dairy Job in Water and 3 Oil Sands Jobs in Electrical

*Euro Rate at $1.05

Productivity $135M Inflation ($75M)

2016 Segment Income


Anticipating 15% Adjusted EPS Growth at Midpoint

2017 FORECASTED ADJ. EPS WALK (AT MIDPOINT OF RANGE)

~$3.05

~$0.30

2016 Debt Restructuring

& Other

Large Jobs

(~$0.05)

+15% YOY

2017F Growth/ Price/

Acquisitions

(~$0.10)

~$3.50

Productivity Net of

Inflation

Other Considerations: - Tax Rate ~20.0% - Net Interest ~$73M - Shares Outstanding ~182M

FX

~$0.02

~$0.28

16

*Euro Rate at $1.05


SALES (% of FY)

Trends are Consistent with Historical Seasonality

ANTICIPATED 2017 SEASONALITY SEGMENT INCOME (% of FY)

24% 26% 25% 25%

Q1 Q2 Q3 Q4

ADJUSTED EPS (% of FY)

20%

29% 26% 25%

Q1 Q2 Q3 Q4

17%

30% 27% 26%

Q1 Q2 Q3 Q4

COMMENTS

• Q1 Revenue Seasonality Combined with Higher Corporate and Interest Costs

• Q2 Segment Income Experiences the Greatest Benefit from Residential & Commercial Strength

• Q2-Q4 EPS Growth Driven by Lower Interest Expense from Debt Restructuring and Ramping of Cost-Out Savings

2016 24% 24% 25% 27% 2016 21% 24% 26% 29%

2016 20% 25% 26% 29%


Q1’17 FINANCIAL OUTLOOK (YoY)

SUMMARY

Q1'17 PENTAIR OUTLOOK

• Seasonally Slowest Quarter

• Historically Higher Corporate Expense

• Cost Out and Productivity Ramping

• Anticipate Closing of V&C Deal by End of Q1

Q1'17 Q1'16 Sales

Op. Income Seg. Income ROS

EPS (Rpt.)

EPS (Adj.)

~$1.14B

~$150M

~$174M

~15.2%

~$0.50

~$0.61

$1.19B

$153M

$178M

15.0%

$0.50

$0.61

Q1 Seasonality Consistent with Historical Performance

Adj. EPS ~Flat

• Tax Rate of ~20.0%

• Net Interest ~$35M; Shares ~184M

Free Cash Flow Usage Consistent with

Historical Seasonality

Core Sales Down ~4% (Down ~1% Excl. Large Jobs)

• Water Down ~1% (~Flat Excl. Large Jobs)

• Electrical Down ~7% (Down ~1% Excl. Large Jobs)

Segment Income Down 2%

ROS ~15.2% … Up ~20 bps

• Water ~17%

• Electrical ~20%


Other FY Key Financial Metrics:

• Capital Expenditures ~$118M

• Total D&A of ~$181M + ~$34M of Non-Cash Stock Compensation

• ROIC at Quarter End 10.4%

19

BALANCE SHEET AND CASH FLOW

DEBT ROLLFORWARD

CASH FLOW DEBT SUMMARY

Q4 FY ($M) 2016 2016

Net Income - Continuing Ops $ 110 $ 452 Amortization 24 96 Subtotal $ 134 $ 548 Depreciation 20 85 Capital Expenditures (23) (118) Asset Sales 1 25 Working Capital 43 93 Other Accruals/Other 113 138 Free Cash Flow – Total $ 288 $ 770 Free Cash Flow – Discontinued Ops 68 161 Free Cash Flow – Continuing Ops $ 220 $ 609

Q4 FY

Use of Cash: ($M) 2016 2016

Beginning Debt $ 4,411 $ 4,686

Used (Generated) Cash (288) (770)

Dividends 62 244

Other 94 119

Ending Debt $ 4,279 $ 4,279

Strong Cash Flow & Strengthening Balance Sheet

*Does Not Include $239M of Cash on Hand

Maturity

Variable

$4.3B*

Q4'16 Avg. Rate ~3.35% ~77% Fixed …

$3.3B

$1.0B '19

Fixed '17 – '25


APPENDIX GAAP to Non-GAAP Measurements & Reconciliations


WATER SEGMENT

$2.8B of Revenue with 18% ROS

*2016 Revenue

21

GEOGRAPHIC DISTRIBUTION* VERTICAL DISTRIBUTION*

Filtration & Process (Revenue $1.0B)

Flow Technologies (Revenue $0.9B)

Revenue ~$2.8B

Segment Margin ~18%

STRATEGIC BUSINESS GROUPS 2016 FINANCIALS

Aquatic & Environmental Systems (Revenue $0.9B)

Industrial ~6%

Resi/Comm ~59%

Energy ~3%

Infrastructure ~10%

Food & Beverage ~22%

North America ~63%

Dev. Asia ~5% Europe

~14%

Fast Growth ~18%


FILTRATION & PROCESS REVENUE APPLICATIONS

2017 OUTLOOK

22

2014 2015 2016

$1.1B $1.0B $1.0B

• Healthy Real Estate Market in NA, Flat in Europe, and Slowing in China / SEA

• Competitive Threats in Foodservice

• Strong Demand Growth for Biogas

• Headwind from Completion of 2016 Projects

• Improved Industrial Economic Outlook

• Customer Intimacy to Grow Sales and Inform NPD Efforts

• Strengthen Point of Use Filtration Offerings

• Expand Presence in Foodservice “Back of the House”

• Disciplined Project Execution

• Solutions Focus for Craft Beer, Biogas, Dairy

Foodservice Movement &

Treatment of Water

Beer Membrane Filtration

Point Of Use (POU) Systems/

Components

2017 PRIORITIES


FLOW TECHNOLOGIES REVENUE

23

2014 2015 2016

2017 OUTLOOK

$1.1B $1.0B $0.9B

• Market Headwinds in Irrigation

• Improved Outlook for Infrastructure

• Continued Weakness in Agriculture OEM Market

• Complexity Reduction

• Quality Improvements

• Lead Time Reduction to Customer Expectations

APPLICATIONS

Precision Agriculture

Building Solutions

Water Well & Irrigation

2017 PRIORITIES


AQUATIC & ENVIRONMENTAL SYSTEMS REVENUE

24

2014 2015 2016

2017 OUTLOOK

$0.8B $0.8B $0.9B

• Improving Health of NA Residential Real Estate Market

• Customer Wins from 2016 Drive 2017 Growth

• Pool Dealer Share Gains

• Innovative Product Launches

APPLICATIONS

Aquatic Systems Commercial Aquaculture

2017 PRIORITIES

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ELECTRICAL SEGMENT

GEOGRAPHIC DISTRIBUTION* VERTICAL DISTRIBUTION*

Enclosures (Revenue $0.9B)

Thermal Management (Revenue $0.7B)

Revenue ~$2.1B

Segment Margin ~21%

STRATEGIC BUSINESS GROUPS 2016 FINANCIALS

$2.1B of Revenue with 21% ROS

Electrical & Fastening Solutions (Revenue $0.5B)

Industrial ~40%

Resi/Comm ~27%

Energy ~19%

Infrastructure ~14%

North America ~67%

Europe ~20%

Fast Growth ~11%

25

*2016 Revenue

Dev. Asia ~2%


ENCLOSURES

26

2014 2015 2016

2017 OUTLOOK

• Industrial Stabilization and Modest Recovery

• Moderating Energy Declines

• Next Generation Technology Demand in Electronics

• Metals Inflation

• Commercial Excellence: End User Focus with Direct Sales and Global Accounts, Enhanced Channel Partner Programs, Pricing Excellence

• Customer First: Improve “Ease of Doing Business”

• Operations: Productivity & Responsiveness

$1.1B $1.0B $0.9B

APPLICATIONS

Indoor & Outdoor Cabinets Electronics Subracks

Control Panel Air Conditioners Industrial Enclosures

REVENUE

2017 PRIORITIES


THERMAL MANAGEMENT

27

2014 2015 2016

2017 OUTLOOK

$0.7B $0.7B $0.7B

• Moderating Energy Declines/Slower Commercial

• Aftermarket Demand Recovery

• Growth in Connected Controls, Next Gen Heating

• Commercial Excellence: Aftermarket Focus, Channel Optimization, Pricing Excellence

• NPD: New Connected Controls Platform

• Operations: Productivity & Improved Project Execution

APPLICATIONS

Self Regulating Heating Cables Fire-rated Electrical Cables

EPC Services for Heat Tracing Systems Heat-Tracing Controls

REVENUE

2017 PRIORITIES


ELECTRICAL & FASTENING SOLUTIONS

28

2014 2015 2016

2017 OUTLOOK 2017 PRIORITIES

$0.1B

$0.5B

• Moderating Commercial Growth

• Industrial Stabilization and Modest Recovery

• Rail/ Utilities/ Energy Expected to be Down

• Metal / Copper Inflation

• Commercial Excellence: Digital Marketing, Global Expansion, Pricing Excellence

• Customer First: Improve “Ease of Doing Business”

• NPD: Innovative New Product Launches

APPLICATIONS

Fastening, Grounding, Bonding

REVENUE


REPORTED TO ADJUSTED 2016 RECONCILIATION


Q4 2016 CORE SALES GROWTH RECONCILIATION


OTHER RECONCILIATIONS


REPORTED TO ADJUSTED 2015 RECONCILIATION


2016 NEW SBG CORE SALES RECONCILIATION


2015-2016 NEW SBG SEGMENTATION (NET SALES)

q4 2016 earnings release · q4 2016 earnings release 3 key definitions • except as otherwise...

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