q1 2016 earnings release · 2018. 2. 20. · pentair q1 2016 earnings release 3 key definitions •...

PENTAIR Q1 2016 Earnings Release

Q1 2016 EARNINGS RELEASE April 26, 2016


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 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, including the ability to successfully integrate and achieve the expected benefits

of the acquisition of ERICO Global Company; 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

PENTAIR Q1 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

Cash and Execution Remain the Key Focus 4

• Q1 Results Beat Expectations with Strong Margin Expansion in Three Segments and Strong Execution Across the Board

• New V&C Leader in Place … Prior Cost-Out Actions are on Schedule and Continued Focus on Cost and Cash

• ERICO Integration Meeting Expectations … Synergies on Track

• Strong Free Cash Flow Start to the Year … Full Year Free Cash Flow Still Anticipated to be Approximately $750 Million

• Maintain Full Year EPS Outlook of $4.05 to $4.25


Core Sales Up 1% (Up 7% Incl. FX and ERICO) • Water Quality Systems Up 9% (Up 8% Incl. FX)

• Flow & Filtration Solutions Down 2% (Down 4% Incl. FX)

• Technical Solutions Up 5% (Up 33% Incl. FX and ERICO)

• Valves & Controls Down 7% (Down 10% Incl. FX)

5

Segment Income Up 5%

Adj. EPS Flat • Adjusted Tax Rate of 20.5%

• Net Interest of $36M; Share Count 182M

FINANCIAL HIGHLIGHTS (YoY)

SUMMARY

Solid Execution Across the Board

• 3 of 4 Segments Beat or Met Sales Forecast

• 3 of 4 Segments Delivered Strong Margin Expansion

• Cash Flow Usage Better than Expected

$1.58B

$171M

$210M

13.3%

$0.59

$0.76

Q1'16 Q1'15 Sales

Op. Income Seg. Income ROS

EPS (Rpt.)

EPS (Adj.)

$1.48B

$171M

$199M

13.5%

$0.65

$0.76

Q1 Free Cash Flow Usage of $47M,

Consistent with Seasonality

ROS 13.3% … Down 20 bps

Q1'16 PENTAIR RESULTS


Strong Residential & Commercial … Signs of Industrial Stabilization

Return on Sales 13.3%

• Price and Productivity More than Offsetting Inflation

• Cost-Out Actions Reading Out

• ERICO Contributed Strength to Bottom Line

6

Sales Highlights

SALES SEGMENT INCOME

Q1'16 PENTAIR PERFORMANCE

Q1'15 Infl. Growth/ Acq./FX

Q1'16

Core Sales Up 1%

• Residential / Commercial Up 11% (~35% of Sales)

• Industrial Down 1% (~25% of Sales)

• Energy Down 7% (~20% of Sales)

• Food & Beverage Down 8% (~10% of Sales)

• Infrastructure Up 11% (~10% of Sales)

Segment Income Highlights

Q1'15 Price Q1'16 Volume FX Acq.

$14M $1.48B $2M

$120M

($36M)

$1.58B

1 pt 0 pts 8 pts (2 pts) (2.7%) (1.0%) 3.5%

7% YoY

$199M

($25M) ($15M)

$51M $210M

5% YoY

ROS ROS 13.5% 13.3%

Core 1%

7 pts

Prod./ Price

$28M * $38M *

*Non-Cash Intangible Amortization


Valves & Controls

(Revenue ~$1.8B)

Aftermarket/MRO

(Revenue ~$900M)

Engineered Projects

(Revenue ~$900M)

Flow & Filtration Solutions

(Revenue ~$1.4B)

Water Technologies

(Revenue ~$800M)

Fluid Solutions

(Revenue ~$425M)

Process Filtration

(Revenue ~$200M)

Water Quality Systems

(Revenue ~$1.4B)

Aquatic & Environ. Systems

(Revenue ~$825M)

Water Filtration

(Revenue ~$550M)

Technical Solutions

(Revenue ~$2.2B*)

Enclosures

(Revenue ~$950M)

Thermal Management

(Revenue ~$700M)

Eng. Fastening Solutions

(Revenue ~$525M*)

*Pro Forma Including ~$375M for ERICO

Aligned to Increase Focus on Key Priorities

SEGMENT & STRATEGIC BUSINESS GROUP STRUCTURE

Four External Reporting Segments

10 Strategic Business Groups

7

Revenue Based on 2015 Actuals Unless Otherwise Noted


Segment Income Highlights Sales Highlights (by Strategic Business Group)

Strong Growth and Execution as Usual


Q1'16 WATER QUALITY SYSTEMS PERFORMANCE

$307M

$332M $1M $28M

($4M)

Q1'15 Price FX Q1'16

0 pts (1 pt) 8 pts

Volume

9 pts

8% YoY

$9M $4M

($3M)

ROS

Q1'15 Prod./ Price

Infl. Growth/

FX Q1'16

ROS (0.9%) 1.5% 1.1% 16.9% 18.6%

ROS

19% YoY Core 9%

$62M

$52M

Core Sales Up 9%

• Aquatic & Environmental Systems Up 13%

• Water Filtration Up 5%


• Robust Operating Leverage

• Productivity/Price Greater than Inflation

• Continued Investments in Growth

$3M *

$3M *



Sales Highlights (by Strategic Business Group)

Another Solid Quarter of Margin Expansion


Q1'16 FLOW & FILTRATION PERFORMANCE

Q1'15 Prod./ Price

Infl. Growth/

FX Q1'16


($5M)

$13M

($4M)

ROS (1.3%) (1.1%) 3.7% 10.4%

ROS

11.7% ROS

9% YoY

$350M $338M

($7M)

Q1'15 Price FX Q1'16

$3M

(4%) YoY

0 pts (2 pts) (4 pts)

Volume

(2 pts)

($8M)

Core (2%)

$36M $40M

Core Sales Down 2%

• Water Technologies Down 1%

• Fluid Solutions Down 5%

• Process Filtration Up 4%


• Price and Productivity Offset Inflation

• Improved Mix

• Cost-Out Actions Gaining Momentum


$7M * $7M *


Q1'16 TECHNICAL SOLUTIONS PERFORMANCE

Continued Strength in Execution … ERICO Integration on Track


Segment Income Highlights Sales Highlights (by Strategic Business Group)

Core Sales Up 5%

• Enclosures Down 5%

• Thermal Management Up 22%

• Engineered Fastening Solutions N/A

Q1'15 Infl. Growth/ Acq./FX

Q1'16

$396M

$525M

($11M)

($1M)

$21M

5 pts (2 pts) 33 pts

Q1'15 Price Q1'16 Volume FX

(0 pts)

33% YoY

$26M

($4M)

45% YoY

ROS

0.0% (1.1%) 19.6% 21.5% ROS

Core 5%

$13M

$78M

Acq.

$120M

30 pts

Prod./ Price

3.0%

$113M


• ERICO Contributed Strength to Bottom Line

• Continued Cost-Out Actions

• Negative Impact from Mix


$5M *

$15M *


Sales Highlights (by Strategic Business Group)

Top Line and Margins Met Expectations Despite Tough Environment


Q1'16 VALVES & CONTROLS PERFORMANCE

Backlog Including FX Down 2% Sequentially at $1.1B … Orders of $357M; Core Down 11% YoY

Core Sales Down 7% YoY

• Aftermarket/MRO Down 9%

• Engineered Projects Down 4%

Return on Sales 6.5% • Project Margins Remain Under Pressure • Negative Mix and Aftermarket Pricing Pressure • Productivity and Cost-Out Benefits • 2015 Manufacturing Variances Carried into

1H’16 (Netted in Productivity)


$429M $387M

($14M)

(10%) YoY

(3 pts) (10 pts) (6 pts)

($27M)

(1 pt)

($1M)

Q1'15 Price FX Q1'16 Volume

Q1'15 Prod./ Price

Infl. Growth/

FX Q1'16

($56M)

$29M

($3M)

ROS (0.7%) 7.5%

ROS

(54%) YoY

(13.2%)

$55M

$25M

12.9% 6.5%

Core (7%)


$13M *

$13M *

PENTAIR Q1 2016 Earnings Release 12 12

VALVES & CONTROLS BACKLOG

Order Weakness Persists … Continue to Build Funnel

• Core Orders Down 5% YoY and Down 9% Sequentially

• Weak Activity in US & Europe on Continued Customer Maintenance Deferral

• Customer OpEx Constraints Clearly Impacting Orders

$1,385 $1,413 $1,321 $1,235 $1,188 $1,210 $1,171 $1,128 $1,109

$0

$200

$400

$600

$0

$500

$1,000

$1,500

Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16

Backlog Short Cycle Orders Long Cycle Orders

SHORT CYCLE ORDERS

($ Millions)

LONG CYCLE ORDERS

• Core Orders Down 18% YoY and Down 25% Sequentially

• Oil & Gas Remains Weak

• Power (Coal) in China Showed Strength in Q1

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PENTAIR Q1 2016 Earnings Release 13 13

SEGMENT POSITIONING/UPDATE

3 out of 4 Segments Well Positioned … V&C Adjusting to New Reality

TECHNICAL SOLUTIONS

FLOW & FILTRATION SOLUTIONS WATER QUALITY SYSTEMS

VALVES & CONTROLS

• Proven Growth Culture Built on Innovative Technology and Customer Intimacy

• Extending PIMS Expertise to Water Filtration

• Well Positioned in the Residential & Commercial and Food & Beverage Verticals

• Adjusting to New Reality – Lowering Cost Structure

• Still Opportunities to Grow – Aftermarket, LNG, Petrochemical

• PIMS Adoption – Aligning into Two Value Streams; Sales Excellence

• Evolving from Products to Solutions

• PIMS Acceleration to Drive Margin Expansion

• Well Positioned Portfolio to Grow with Macro Trends

• Focus on Differentiated Growth – Sales Excellence, Smart Products, Global Expansion

• ERICO Integration

• Well Positioned to Drive Growth and High Profitability

• Industrial Outlook / Recovery


Other FY Key Financial Metrics:

• Capital Expenditures ~$150M

• Total D&A of ~$285M + ~$37M of Non-Cash

Stock Compensation

• ROIC at Quarter End 9.6%

14

BALANCE SHEET AND CASH FLOW

Remain Focused on Free Cash Flow and Debt Reduction

DEBT ROLLFORWARD

CASH FLOW DEBT SUMMARY

*Does Not Include $158M of Cash on Hand

Maturity

Variable

$4.8B*

Q1'16 Avg. Rate ~3.06% ~69% Fixed …

$3.3B

$1.5B '19

Fixed '17 – '25

Q1 Q1 ($M) 2016 2015

Net Income - Continuing Ops $ 107 $ 118 Amortization 38 28 Subtotal $ 145 $ 146 Depreciation 33 32 Capital Expenditures (38) (35) Asset Sales 6 2 Working Capital (107) (234) Other Accruals/Other (86) (70) Free Cash Flow $ (47) $ (159)

Q1 Q4

Use of Cash: ($M) 2016 2015

Beginning Debt $ 4,687 $ 4,962

Used (Generated) Cash 47 (316)

Dividends 60 58

Bond Repayments - (350)

Other 44 333

Ending Debt $ 4,838 $ 4,687


Adj. EPS Up ~2% • Tax Rate of ~20.5%

• Net Interest ~$35M; Shares ~182M

Q2 Free Cash Flow Expected to be Strong Consistent with Historical Seasonality

Q2'16 FINANCIAL OUTLOOK (YoY)

SUMMARY

Seasonal Strength in WQS Expected to Offset Ongoing Energy Weakness

Q2'16 PENTAIR OUTLOOK

• Growth Expected in Both Water Businesses

• ERICO Contributing to Bottom Line and Margin Expansion

• V&C Cost-Out Benefits Gaining Momentum

• Seasonal Free Cash Flow Strength Expected to Follow Historical Sequential Trends

Core Sales Down ~3% (Up ~4% Including FX and ERICO)

• Water Quality Systems Up ~5% (Up ~5% Incl. FX)

• Flow & Filtration Solutions Up ~1% (~Flat Incl. FX)

• Technical Solutions Down ~3% (Up ~29% Incl. FX and ERICO)

• Valves & Controls Down ~13% (Down ~15% Incl. FX)

Segment Income Up ~5%

Return on Sales ~16.5% … ~Flat • Water Quality Systems ~23.0%

• Flow & Filtration Solutions ~15.5%

• Technical Solutions ~22.0%

• Valves & Controls ~9.5%

~$1.72B

~$246M

~$285M

~16.5%

$0.91-$0.94

$1.08-$1.11

Q2'16 Q2'15 Sales


EPS (Rpt.)

EPS (Adj.)

$1.66B

$218M

$274M

16.5%

$0.84

$1.08


FY'16 FINANCIAL OUTLOOK (YoY)

SUMMARY

Maintaining Full Year EPS and Cash Flow Outlook

FULL YEAR 2016 PENTAIR OUTLOOK

• Residential & Commercial Strength Expected to Continue … Industrial Stabilization

• Expect 3 of 4 Segments to Grow Income

• Margin Expansion and EPS Growth on Cost-Out Actions and ERICO Contribution

• Strong Cash Flow Expected as Working Capital Opportunities Remain

~$6.7B

~$945M

~$1.1B

~16.5%

$3.39-$3.59

$4.05-$4.25

FY'16 FY'15 Sales


EPS (Rpt.)

EPS (Adj.)

$6.45B

$177M

$1.0B

15.6%

($0.36)

$3.94

Adj. EPS Up ~5% • Tax Rate of ~20.5%

• Net Interest / Other ~$140M; Shares ~182M

Free Cash Flow of >$750M; ~100% Adj. Net Inc.

Core Sales Down ~1% (Up ~3% Incl. FX and ERICO)

• Water Quality Systems Up ~5% (Up ~5% Incl. FX)

• Flow & Filtration Solutions Up ~2% (Up ~1% Incl. FX)

• Technical Solutions Down ~2% (Up ~18% Incl. FX and ERICO)

• Valves & Controls Down ~8% (Down ~10% Incl. FX)

Segment Income Up ~9%

ROS ~16.5% … Up ~90 bps • Water Quality Systems ~21.0%

• Flow & Filtration Solutions ~14.0%

• Technical Solutions ~23.5%

• Valves & Controls ~10.5%


APPENDIX GAAP to Non-GAAP Measurements & Reconciliations


REPORTED TO ADJUSTED 2016 RECONCILIATION


Q1 2016 CORE SALES GROWTH RECONCILIATION


OTHER RECONCILIATIONS


REPORTED TO ADJUSTED 2015 RECONCILIATION

q1 2016 earnings release · 2018. 2. 20. · pentair q1 2016 earnings release 3 key definitions •...

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