q2 2015 earnings release · 2018. 2. 20. · pentair q2 2015 earnings release 5 adj. op income down...

PENTAIR Q2 2015 Earnings Release

Q2 2015 EARNINGS RELEASE July 21, 2015

PENTAIR Q2 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; 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 (Loss) Represents Operating Income (Loss) from Continuing Operations Exclusive of 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

3 of 4 Segments Delivering … Accelerating V&C Cost Actions 4

• Second Quarter Met Expectations with Technical Solutions and Water Quality Systems Delivering Strong Core Growth

• Valves & Controls Facing an Industry Reset, not Just a Cyclical Downturn … Accelerating Cost Actions to Better Position Long-Term

• Expect Continued Pause in Industrial Capital Spending Throughout the Second Half of 2015

• Updated 2015 Adjusted EPS Guidance of $3.80 - $3.90, Which Now Excludes ~$0.45 of Non-Cash Amortization

• Balance Sheet and Cash Flow Expectations Remain Strong … Will Continue to Invest in M&A Where Appropriate While Executing the Cost Playbook


Adj. Op Income Down 12%

Adj. EPS Down 6% • Effective Tax Rate of 23%

• Net Interest of $19M; Share Count 182M

FINANCIAL HIGHLIGHTS (YoY)

SUMMARY

Core Sales Down 2% (Sales Down 9% including FX)

• Valves & Controls Down 11%

• Flow & Filtration Solutions Down 5%

• Water Quality Systems Up 6%

• Technical Solutions Up 6%

Q2 Met Expectations Led by Water Quality Systems & Technical Solutions

• Strong Core Growth in Water Quality Systems and Technical Solutions

• FX Headwind Remains Significant … Volume Weakness in Valves & Controls Continues

• Productivity and Price Not Enough to Offset Volume Shortfall

$1.66B

$218M

$245M

14.7%

$0.84

$0.96 $1.08

Q2’15 Q2’14 Sales

Op Income (Rpt.)

Op Income (Adj.)

ROS (Adj.)

EPS (Rpt.)

EPS (Adj.)

EPS (Adj., ex Amort.)

$1.83B

$226M

$279M

15.2%

$0.81

$1.02 $1.13

Adj. Op Margins 14.7% … Down 50 bps

Q2'15 PENTAIR RESULTS

YTD Free Cash Flow of $151M • Expect to Deliver FY FCF >120% of Net Income


Adjusted Operating Margins 14.7%

• Volume Shortfall and FX Deleverage Negatively Impacted Margins

• Inflation Headwinds Remained Modest

• Lean, Sourcing Actions, and G&A Reductions Drove Productivity Gains

6

Sales Highlights (by Vertical)

Ongoing Food & Beverage Strength … Industrial Sluggishness Continues

SALES OPERATING INCOME

Q2'15 PENTAIR PERFORMANCE

$1.83B

$1.66B ($128M)

(7 pts) (9 pts) (3 pts)

($56M)

Q2'14 Adjusted

Prod./ Price

Infl. Vol/FX Q2'15

Adjusted

($64M) $245M $50M

$279M

($20M)

ROS (1.1%) 2.8% 15.2%

ROS

14.7% ROS

(12%) YoY

Core Sales Down 2%

• Industrial Down 6%

• Residential & Commercial Up 1%

• Energy Down 5%

• Food & Beverage Up 5%

• Infrastructure Down 4%

1 pt

$11M

(2.2%)

Q2'14 Price Q2'15 Volume FX

(9%) YoY

Operating Margins / Productivity Highlights

Core (2%)


Sales Highlights (by Vertical)

Leadership Change … Accelerating Cost Actions to Address Industry Reality

SALES SEGMENT INCOME

Q2'15 VALVES & CONTROLS PERFORMANCE

$629M

$496M ($61M)

(21%) YoY

(10 pts) (21 pts) (11 pts)

($72M)

Prod./ Price

Infl. Vol/FX Q2'15

($46M)

$51M $16M

$88M

($7M)

ROS (1.0%) 2.9% 13.9%

ROS

10.3% ROS

(42%) YoY

Backlog Including FX Up 2% Sequentially

to $1.2B … Orders of $512M; Core Down 12% YoY

Core Sales Down 11% YoY • Industrial – Process Down 14%

• Energy – Oil & Gas Down 5%

• Energy – Power Down 8%

• Energy – Mining Down 34%

Segment Margins 10.3%

• Volume Drop Significantly Impacted Margins

• Productivity More than Offset Inflation

• Lean, Sourcing Actions, and G&A Reductions Drove Productivity

0 pts

$0M

(5.5%)

Q2'14 Price FX Q2'15 Volume

Segment Margins / Productivity Highlights

Core (11%)

Q2'14


391 390 376 396 413 370 349 344 341

0

100

200

300

400

500

600

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

530 545 543 550 564 557 508 482 476

0

100

200

300

400

500

600

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

371 353 364 368 373 345 328 310 335

0

100

200

300

400

500

600

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

87 77 70 71 63 49 50 52 58

0

100

200

300

400

500

600

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

8 8

VALVES & CONTROLS BACKLOG (Includes Impact of FX)

FX Challenges Persist ... Total Backlog Stabilizing

INDUSTRIAL - Process ENERGY - Oil & Gas

ENERGY - Power ENERGY - Mining

• 2014: Revenue ~40%

• Second Quarter Core Orders Down 14% Y-o-Y

• 2014: Revenue ~15%

• Second Quarter Core Orders Up 7% Y-o-Y

• 2014: Revenue ~35%


• 2014: Revenue ~10%


Backlog ($ Millions)

Backlog ($ Millions) Backlog ($ Millions)

Backlog ($ Millions)


Targets in Place and Being Executed for >$100M of 2016 Savings

V&C “INDUSTRY RESET” & COST OUT COMMITMENT

14% 10%

2014 2015

Material

Labor & OH

Op. Expense

Amortization

Op. Income

Industry Conditions • O&G Capex Spending Down >20% YOY • Broad Based Capex Reset … Not Just Upstream • Orders Keep Pushing to the Right … Uncertainty

Remains Around When Projects Move Forward • Pricing Pressure Beginning to Spread Beyond Just

New Projects • North America Has Been Only Region with

Pockets of Growth (LNG & Petrochemicals)

Corrective Actions • Leadership Change • Aggressively Drive Sourcing Initiatives to Offset

Price Erosion / Challenges • Reposition Footprint … Distribution,

Manufacturing, Service ($70M) • Re-Tool Salesforce Globally … Focus on Key

Accounts and Selling Motions ($30M) • G&A Reductions ($15M)

Constant Currency Forecast

Revenue $2.2B $1.9B


Segment Margins / Productivity Highlights Sales Highlights (by Vertical)

Margin Improvement on Cost Actions and Pricing


Q2'15 FLOW & FILTRATION SOLUTIONS PERFORMANCE

$424M $375M

$5M ($25M) ($15M) $50M $16M

$54M

($5M)

ROS

Core Sales Down 5%

• Residential & Commercial Down 10%



• Industrial Down 4%


• Repositioning Actions Gaining Momentum

• Improved Mix and Strong Productivity

• Price Offsetting Inflation

($29M)

Q2'14 Price FX Q2'15

1 pt (7 pts) (12 pts)

Volume

(6 pts)

Prod./ Price

Infl. Vol/FX Q2'15

ROS (1.1%) (2.2%) 3.9% 12.7% 13.3%

ROS

(12%) YoY

(8%) YoY

Core (5%)

Q2'14



Another Strong Quarter of Execution


Q2'15 WATER QUALITY SYSTEMS PERFORMANCE

$378M $388M $4M $17M $1M $86M $7M $82M ($4M)

ROS

Core Sales Up 6%




• Price Offset Inflation

• Productivity Solid

• Continued Growth Investments

($11M)

Q2'14 Price FX Q2'15

1 pt (3 pts) 3 pts

Volume

5 pts

Prod./ Price

Infl. Vol/FX Q2'15

ROS (1.0%) (0.2%) 1.6% 21.7% 22.1%

ROS

3% YoY

5% YoY

Core 6%

Q2'14


Q2'15 TECHNICAL SOLUTIONS PERFORMANCE

Strong Growth and Margin Expansion



Prod./ Price

Infl. Vol/FX Q2'15

($4M) $81M $13M $77M ($5M)

5% YoY

ROS (1.2%) (0.9%) 3.2% 18.8% 19.9%

ROS

$409M $407M ($27M) $2M $23M

5 pts (6 pts) (0 pts)

Core Sales Up 6%

• Industrial Up 4%

• Energy Up 17%



Q2'14 Price Q2'15 Volume FX

1 pt

(0%) YoY Core 6%

Q2'14


• Volume Drop Through

• Material Inflation Moderating

• Productivity Offset Partially by FX Headwinds


2015 – 2016 KEY PRIORITIES

13

Strategic Investments Continue

Valves & Controls (2015F $1.9B)

Water Quality Systems (2015F $1.4B)

Flow & Filtration Solutions (2015F $1.4B)

Technical Solutions (2015F $1.7B)

• Acknowledge Energy Industry Reset

• Sales Excellence

• Realignment / Cost Out

• Growth:

― North America LNG

― North America Petrochem

• Continue to Build Strategic Acquisition Funnel

• Growth:

― Global Pool

― Residential & Commercial Filtration

― Food Service

― Aquaculture

• Weather a Slower Industrial Capex Cycle

• Continue to Build Strategic Acquisition Funnel

• Growth:

― North America Electrical Channel

― Industrial Heat Trace

― Thermal Building … North America

• Prioritization of Key Technologies

• Sales Excellence

• Margin Expansion

• Growth:

― Beer and Dairy

― Industrial Water Re-Use


Sales Highlights

3 of 4 Segments Strong or Improving … Aggressive Cost Out in V&C

SALES OPERATING INCOME

2015 CURRENT OUTLOOK (FY)

$7.0B $6.4B

$0M ($230M) ($140M)

$880M

$0M

$1.02B

($85M)

ROS

Core Sales Down ~3%

• ~$100M of V&C Pushed to 2016

• Food & Beverage Remains Strong

• Weakness in Energy Persists

• Industrial Capital Spending Muted

• FX Headwind Continues

($410M)

FY'14 Price FX FY'15

0 pts (6 pts) (9 pts)

Volume

(3 pts)

Price Infl. Vol FY'15

ROS (0.0%) (1.5%) 0.0% 14.5% 13.8%

ROS

(9%) YoY

(14%) YoY

Core (3%)

FY'14

4/21/15 $0M ($450M) $6.5B ($120M) 4/21/15 ($65M) $160M $970M ($50M)

FX Prod.

($60M)

(1.2%) 2.0%

$145M

($95M) $0M

Operating Income Detail

Adjusted Operating Margins 13.8%

• High Decrementals in V&C Due to Cost-Out Timing

• Material Inflation Moderating in Second Half

• Price Flat Despite V&C Industry Pressures

• Accelerated Cost Actions to Help Mitigate FX Headwinds and Top Line Pressures


2015 ADJUSTED EPS OUTLOOK

$4.23

2014 V&C Industry

Reset Prior 2015 Guidance

Current 2015 Guidance

($0.40)

~(9)% YOY

$3.35 - $3.45

Adjusted EPS to Exclude Non-Cash Amortization

$3.80 - $3.90

$3.78

$0.45*

~$4.25

~$0.45*

~$3.80

~$0.45*

*Non-Cash Intangible Amortization


Other FY Key Financial Metrics:

• Capital Expenditures ~$150M

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

Stock Compensation

• ROIC at Quarter End 10.9%

16

BALANCE SHEET AND CASH FLOW

Working Capital Timing Effects 1H Cash Flow … FY on Track for >120% of NI Conversion

DEBT ROLLFORWARD

CASH FLOW DEBT SUMMARY

Q2 Q2 ($M) 2015 2014 YOY Chg

Net Income - Continuing Ops $ 154 $ 159 $ (5) Amortization $ 28 $ 29 $ (1) Subtotal $ 182 $ 188 $ (6) Depreciation $ 34 $ 34 $ - Capital Expenditures $ (32) $ (32) $ - Asset Sales $ 21 $ 2 $ 19 Working Capital $ 94 $ 151 $ (57) Other Accruals/Other $ 8 $ 38 $ (30) Free Cash Flow $ 307 $ 381 $ (74) Discontinued Operations FCF $ (3) $ (18) $ 15 Continuing Operations FCF $ 310 $ 399 $ (89)

Q2 Q2

Use of Cash: ($M) 2015 2014 YOY Chg

Beginning Debt $ 3,409 $ 2,931 $ (478)

Used (Generated) Cash $ (307) $ (381) $ (74)

Share Repurchase $ - $ 199 $ 199

Dividends $ 58 $ 50 $ (8)

Other $ 106 $ (59) $ (165)

Ending Debt $ 3,266 $ 2,740 $ (526)

*Does Not Include $147M of Cash on Hand

Maturity

Variable

$3.3B*

Q2'15 Avg. Rate ~2.32% ~61% Fixed …

$2.0B

$1.3B ’19

Fixed ’15 – ‘22


Consistent Return of Capital to Shareholders

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)

>120% of 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

• Building Acquisition Pipeline Across Portfolio *


Adj. EPS Down ~14%

• Tax Rate of ~23%

• Net Interest / Other ~$19M; Shares ~182M

Q3 Free Cash Flow Expected to Show Further Improvement Sequentially

Q3'15 FINANCIAL OUTLOOK (YoY)

SUMMARY

Top Line Stabilizing … Further Cost Actions in V&C

Q3'15 PENTAIR OUTLOOK

• FX Headwinds Remain

• Global Capital Spending Impacting Top Line

• Continued Strength in WQS and TS

• Repositioning Actions Accelerated at V&C

Adj. Op Income ~$220M

Adj. Op Margins ~13.8% … Down ~140 bps • Valves & Controls Margins, ~10.0%

• Flow & Filtration Solutions Margins, ~11.5%

• Water Quality Systems Margins, ~17.5%

• Technical Solutions Margins, ~22.5%

~$1.6B

~$188M

~$220M

~13.8%

$0.68 - $0.71

$0.94 - $0.97

Q3’15 Q3’14 Sales

Op Income (Rpt.)

Op Income (Adj.)

ROS (Adj.)

EPS (Rpt.)


$1.76B

$267M

$267M

15.2%

$1.00

$1.11

Core Sales Down ~2-3% (FX ~6% Headwind)

• Valves & Controls Down ~11-12%

• Flow & Filtration Solutions Down ~4-5%

• Water Quality Systems Up ~7-8%

• Technical Solutions Up ~2-4%


Adj. EPS Down ~9% • Tax Rate of ~23%

• Net Interest / Other ~$73M; Shares ~183M

Free Cash Flow of ~$750M; >120% Net Income

FY’15 FINANCIAL OUTLOOK (YoY)

SUMMARY

Positioning for Modest Recovery in 2016

FULL YEAR 2015 PENTAIR OUTLOOK

• Energy Headwinds Persist and Further Spread Within Industrial

• More Aggressive Cost Actions to Position for 2016

• Strong Cash Flow & Balance Sheet

• M&A Funnel Continues to Build … Focus on Strategic Bolt-Ons

Adj. Op Income Down ~14%

Adj. Op Margins ~13.8% … Down ~70 bps • Valves & Controls Margins, ~10.0%

• Flow & Filtration Solutions Margins, ~11.0%

• Water Quality Systems Margins, ~19.5%

• Technical Solutions Margins, ~21.0%

~$6.4B

~$792M

~$880M

~13.8%

~$2.97 - $3.07

~$3.80 - $3.90

FY’15 FY’14 Sales

Op Income (Rpt.)

Op Income (Adj.)

ROS (Adj.)

EPS (Rpt.)


$7.0B

$852M

$1.02B

14.5%

$3.14

$4.23

Core Sales Down ~2-3% (FX ~6% Headwind)

• Valves & Controls Down ~11-12%

• Flow & Filtration Solutions Down ~4-6%

• Water Quality Systems Up ~6-7%

• Technical Solutions Up ~1-2%


APPENDIX GAAP to Non-GAAP Measurements & Reconciliations


REPORTED TO ADJUSTED 2015 RECONCILIATION


Q2 2015 CORE SALES GROWTH RECONCILIATION


OTHER RECONCILIATIONS Second Quarter Third Quarter Fourth Quarter First Quarter Second Quarter

Dollars in millions 2014 2014 2014 2015 2015

Reported Operating Income 226.4$ 267.4$ 176.0$ 171.2$ 217.9$

Adjustments 52.9 - 98.4 - 27.0

Adjusted Operating Income 279.3$ 267.4$ 274.4$ 171.2$ 244.9$

Reported Provision for Income Taxes 49.4$ 58.1$ 29.0$ 35.3$ 46.0$

Effect of Adjustments on Provision for Income Taxes 11.6 - 31.4 - 6.2

Adjusted Provision for Income Taxes 61.0$ 58.1$ 60.4$ 35.3$ 52.2$

Reported Effective Tax Rate 23.7% 23.2% 18.3% 23.0% 23.0%

Adjusted Effective Tax Rate 23.3% 23.2% 23.5% 23.0% 23.0%

NOPAT 214.2$ 205.4$ 210.0$ 131.8$ 188.5$

Depreciation & Amortization ("D&A") 63.4 63.0 63.0 60.0 62.4

Capital expenditures ("Cap Ex") (32.4) (32.9) (37.1) (34.8) (32.0)

Total NOPAT, D&A and Cap Ex 245.2$ 235.5$ 235.9$ 157.0$ 218.9$

Trailing four quarter NOPAT, D&A and Cap Ex 846.3$ 874.8$ 906.6$ 873.6$ 847.4$

Ending Invested Capital (excluding noncontrolling interest) 8,293.8$ 7,774.1$ 7,557.5$ 7,701.2$ 7,671.1$

Trailing five quarter average invested capital 8,422.5$ 8,310.6$ 8,135.8$ 7,998.1$ 7,799.5$

After Tax Return on Invested Capital 10.0% 10.5% 11.1% 10.9% 10.9%

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]

Free Cash Flow

Net cash provided by (used for) operating activities 427.7$ 293.4$ 316.8$ (126.2)$ 321.3$

Capital expenditures (32.4) (32.9) (37.1) (34.8) (32.0)

Proceeds from sale of property and equipment 2.3 1.4 9.0 2.3 20.8

Free cash flow 397.6$ 261.9$ 288.7$ (158.7)$ 310.1$

EBITDA

Adjusted Operating Income 279.3$ 267.4$ 274.4$ 171.2$ 244.9$

Depreciation & Amortization ("D&A") 63.4 63.0 63.0 60.0 62.4

EBITDA 342.7$ 330.4$ 337.4$ 231.2$ 307.3$

Trailing four quarters EBITDA 1,218.7$ 1,245.5$ 1,274.4$ 1,241.7$ 1,206.3$


REPORTED TO ADJUSTED 2014 RECONCILIATION

q2 2015 earnings release · 2018. 2. 20. · pentair q2 2015 earnings release 5 adj. op income down...

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