Pentair's Third Quarter 2006 Continuing Operations EPS of $0.33 Reflects Continued Strong Performance in Technical Products and Pump, Weakness in Pool - Iasi, Romania
Iasi, Romania
GOLDEN VALLEY, Minn.--(BUSINESS WIRE)--Pentair (NYSE:PNR):
Third Quarter 2006 Highlights
Net sales of $778.0 million increased 9%, of which 3% was organic, excluding foreign exchange.
EPS from continuing operations of $0.33, including one-time costs of $17 million, or ($0.11) of EPS.
Excluding one-time costs, operating income was flat year-over-year as Technical Products gains offset Water declines.
The Technical Products Group achieved 15 percent operating margin for the second consecutive quarter and achieved its 16th consecutive quarter of year-over-year margin expansion.
Sales in Asia grew water treatment plant nearly 25% in local currencies, while sales in Europe and the Middle East gained 10% in local currencies.
Cash flow of $66 million brings YTD free cash flow to $93 million.
Pentair (NYSE:PNR) today announced its third quarter 2006 results, highlighting earnings per share (EPS) from continuing operations of $0.33 on sales of $778 million, a total sales increase of nine percent over the same period last year. The results reflected strong performance in Technical Products and in the industrial and commercial pump and filtration markets. Accelerating growth in the Asian and European markets also contributed to the Company's sales performance.
Pentair Chairman and Chief Executive Officer, Randall J. Hogan, said: "The majority of our businesses performed well with continued excellent results from our Technical Products and Pump businesses. Sales in commercial and industrial markets have remained robust and investments are beginning to pay off in international sales growth. In addition, our Filtration business achieved the strongest sales growth we have seen in two years.
"As anticipated, however, this performance was offset by the impact of the softening pool equipment and spa and bath markets on the performance of our Pool and Spa business. The majority of installed pumps were not initially designed for their current function. Frequently, a line in a plant is relocated and the pump that once providedcooling water to an injection molding machine is now needed to move oil from a rail car to a tank. Sadly, this is the cause of quite a few problems for the pump and the facility. Pumps operate where the pump curve crosses the system curve. When you move a pump from one system to another, this means that the system curve is different. This new system may cause the pump to operate away from its best efficiency point, leading to seal failures and other component failures that are merely symptoms of a mis-matched pump and system.On September 26, 2006, Pentair revised its earnings guidance for the third and fourth quarters of 2006 in recognition of the weaker pool markets and included a third quarter charge of $17 million, or ($0.11) EPS. The charge related to increased reserves for accounts receivable, inventory, and warranty in Pentair's Pool and Spa business and some severance costs in the Water Group and at Corporate.
"Excluding the Pool and Spa business, the Water Group's sales grew nearly five percent in the quarter. However, as expected and reflected in our revised guidance, third quarter sales in Pool and Spa were about two percent lower than a year ago, driven by the slowing housing market, which affects both new pool construction and spa and bath markets.
"While the downturn in our pool and spa markets is challenging in the near term, we have taken actions that we expect will drive improved performance in this uncertain environment, including actions to reduce costs and accelerate growth in other Water markets, particularly municipal, foodservice, commercial, and international markets.
"As previously announced, we expect fourth quarter sales in Pool and Spa to be down significantly as pool distribution customers continue to adjust inventory levels. We believe this inventory drawdown will be essentially complete by the end of the fourth quarter and, thereafter, we should track more closely to end-market demand, which includes both replacement and new pool-related sales.
"We are reiterating our full-year 2006 EPS guidance from continuing operations of between $1.72 and $1.76. In addition, we are initiating EPS guidance for full-year 2007 in a range between $2.00 and $2.15, indicating an increase of between 14 percent and 25 percent over 2006 EPS. The low end of the 2007 guidance assumes a sustained weakness in housing markets that would affect both our pump and pool businesses, while the high end of the range represents some moderation of housing markets and continued strength in other markets."
Third Quarter 2006 Financial Comments
Earnings:
Operating income for the third quarter totaled $60.3 million, 22 percent below the $76.9 million reported in the same period last year. Operating margins of 7.7 percent in the third quarter were down from those of a year ago as higher Technical Products Group margins were offset by the impact of softer pool and spa markets and one-time costs in the Water Group. Third quarter 2006 EPS from continuing operations of $0.33 was lower than the $0.43 in the same period last year. Earnings per share of $0.33 included $0.03 of favorable prior year tax settlements - versus $0.01 of favorable tax settlements in the same quarter last year - and was in-line with our EPS guidance of $0.30 to $0.32. Earnings also included one-time costs of $17 million, or ($0.11) EPS, related to severance costs in the Water Group and at Corporate, and increased reserves for accounts receivable, inventory, and warranty in the Pool and Spa business.
Pentair's resolution of prior year tax items also resulted in $1.4 million of net income from discontinued operations or approximately one cent per share.
Revenue:
Pentair's third quarter 2006 net sales totaled $778.0 million, up nine percent from $716.3 million in the same period a year ago. Organic sales - removing the effects of acquisitions and excluding favorable foreign currency exchange - grew approximately three percent, or approximately four percent also pentair pumps excluding the decline of our Pool and Spa business.
Cash:
Cash flow totaled $66 million, bringing YTD free cash flow to $93 million. This compares favorably to YTD free cash flow through the third quarter of 2005 of $87 million.
Water Group Third Quarter Comments
Water Group sales grew three percent over the same period last year to $531.7 million. The impact of foreign currency exchange was negligible.
Pump sales were up in the third quarter, driven by strong double-digit commercial and export sales and mid-single-digit applied wastewater and residential sales.
Pool sales were down in the low single-digits including the decreases in inventory levels of pool distribution customers. The pool equipment market was estimated to be flat, with growth in replacement product offsetting declines in new pool construction.
Filtration sales were up, driven by commercial and industrial markets that more than offset declines in RV and marine markets.
Sales in Europe were up, driven by pump and filtration, while sales gains in Asia resulted from continued strong pressure vessel demand and improved performance in Australia and New Zealand.
Global sales of Codeline pressure vessels continued very strong in the quarter, driven principally by desalination-related demand in North America, Europe and the Middle East, as well as a large OEM project.
Operating income for the Group totaled $36.2 million, down 39 percent from the same period last year. Return on sales was 6.8 percent, down 460 basis points compared to last year. The decline was attributed to one-time costs for increased reserves and severance totaling $15 million; lower unit volume in Pool and Spa; and ongoing investment spending.
Both the Pump and Asia businesses improved return on sales year-over-year, driven by improved productivity, pricing, and growth.
Recent price actions more than offset inflationary pressures for key commodities such as resins, copper and brass.
The Faradyne pump motor joint venture continues to progress well. Motor shipments to Pentair began in the third quarter, and four-inch Faradyne-motor-equipped submersible pumps began shipping to Pentair customers in September.
Technical Products Group Third Quarter Comments
Sales of $246.3 million for the quarter increased 23 percent over the same quarter last year. Excluding the impact of the acquired Thermal Management businesses and favorable foreign currency exchange, organic growth was approximately four percent.
Excluding acquisitions, sales in North American markets were flat. Continued robust sales to commercial and industrial markets were offset by declines in sales to telecom and data, primarily due to OEM projects that reached end-of-life or were transitioned to our Asian operations.
The newly acquired McLean Thermal Management business set sales records for the third quarter.
In Europe, sales grew in the low teens. Excluding the impact of favorable foreign currency exchange, growth was in the high single digits. Markets in Europe overall remain robust, particularly in test and measurement and telecom markets. Several new European customers also bolstered growth.
Continued strong growth in Asia benefited from key OEM programs in China, continued ATCA sales in Japan, as well as sales of Schroff components into semiconductor markets.
Volume, supply management savings, cost reductions, and improved productivity resulted in operating income of $37.1 million, a 33 percent gain over year-ago levels.
The Group met its 15 percent operating margin goal for the second consecutive quarter and achieved its 16th consecutive quarter of year-over-year margin expansion.
Margins in Europe improved as a result of volume and supply management savings.
Margins in Asia reached new highs on the strength of OEM programs in China and continued strong performance in Japan.
Horizon Litigation Update
As announced in a June 29, 2006 news release, a jury verdict was rendered against Pentair for $193 million, exclusive of pre-judgment interest and attorney's fees, in the commercial damages portion of the previously disclosed Horizon litigation. Post-trial motions have been filed and Pentair anticipates they will be heard and decided in the fourth quarter. Therefore, Pentair made no adjustments to its previously established reserves except for the accrual of an additional quarter's interest expense and legal fees related to the matter. Pentair's EPS guidance does not reflect any potential impact of this litigation.
A Pentair conference call scheduled for 11:00 a.m. CDT today will be webcast live via http://www.pentair.com. A link to the conference call is posted on the site's "Financial Information" page and will be archived at the same location.
About Pentair, Inc.
Pentair, Inc. (NYSE:PNR) is a diversified operating company headquartered in Minnesota. Its Water Group is a global leader in providing innovative products and systems used worldwide in the movement, treatment, storage and enjoyment of water. Pentair's Technical Products Group is a leader in global enclosures and thermal management markets, designing and manufacturing thermal management products and standard, modified, and custom enclosures that house and protect sensitive electronics and electrical components. With 2005 revenues of $2.95 billion, Pentair employs approximately 15,000 people worldwide.
Caution concerning forward-looking statements
Any statements made about the company's anticipated financial results are forward-looking statements subject to risks and uncertainties such as continued economic growth, including the strength of housing and related markets; the ability to successfully appeal and limit damages payable arising out of the Horizon litigation; foreign currency effects; retail and industrial demand; product introductions; and pricing and other competitive pressures. Forward-looking statements included herein are made as of the date hereof, and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. Actual results could differ materially from anticipated results.
Pentair, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
Three months ended
Nine months ended
September 30
October 1
September 30
October 1
In thousands, except per-share data
2006
2005
2006
2005
Net sales
$ 778,020
$ 716,308
$ 2,411,431
$2,214,466
Cost of goods sold
565,533
515,467
1,713,747
1,574,254
Gross profit
212,487
200,841
697,684
640,212
% of net sales
27.3%
28.0%
28.9%
28.9%
Selling, general and administrative
137,923
112,813
406,843
350,905
% of net sales
17.7%
15.7%
16.9%
15.8%
Research and development
14,271
11,148
44,017
33,107
% of net sales
1.9%
1.6%
1.8%
1.5%
Operating income
60,293
76,880
246,824
256,200
% of net sales
7.7%
10.7%
10.2%
11.6%
Gain on sale of investment
167
--
167
5,199
Net interest expense
13,024
10,752
38,861
33,724
% of net sales
1.7%
1.5%
1.6%
1.5%
Income from continuing operations before income taxes
47,436
66,128
208,130
227,675
% of net sales
6.1%
9.2%
8.6%
10.3%
Provision for income taxes
13,995
21,595
62,985
81,582
Effective tax rate
29.5%
32.7%
30.3%
35.8%
Income from continuing operations
33,441
44,533
145,145
146,093
Gain (loss) on disposal of discontinued operations, net of tax
1,400
--
(51)
--
Net income
$ 34,841
$ 44,533
$ 145,094
$ 146,093
Earnings per common share
Basic
Continuing operations
$ 0.34
$ 0.44
$ 1.45
$ 1.45
Discontinued operations
0.01
--
--
--
Basic earnings per common share
$ 0.35
$ 0.44
$ 1.45
$ 1.45
Diluted
Continuing operations
$ 0.33
$ 0.43
$ 1.42
$ 1.42
Discontinued operations
0.01
--
--
--
Diluted earnings per common share
$ 0.34
$ 0.43
$ 1.42
$ 1.42
Weighted average common shares outstanding
Basic
99,419
100,922
100,133
100,685
Diluted
101,062
102,866
101,998
102,787
Cash dividends declared per common share
$ 0.14
$ 0.13
$ 0.42
$ 0.39
Pentair, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
September 30
December 31
October 1
In thousands
2006
2005
2005
Assets
Current assets
Cash and cash equivalents
$ 45,153
$ 48,500
$ 49,352
Accounts and notes receivable, net
454,255
423,847
428,486
Inventories
397,637
349,312
344,676
Deferred tax assets
46,040
48,971
64,793
Prepaid expenses and other current assets
28,736
24,394
28,244
Total current assets
971,821
895,024
915,551
Property, plant and equipment, net
312,295
311,839
316,491
Other assets
Goodwill
1,732,410
1,718,207
1,629,978
Intangibles, net
261,261
266,533
251,308
Other
77,386
62,152
61,739
Total other assets
2,071,057
2,046,892
1,943,025
Total assets
$ 3,355,173
$ 3,253,755
$ 3,175,067
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt
$ 6,912
$ 4,137
$ 4,003
Accounts payable
191,206
207,320
183,376
Employee compensation and benefits
93,431
95,552
90,722
Accrued product claims and warranties
44,016
43,551
43,252
Current liabilities of discontinued operations
--
192
192
Income taxes
--
17,518
40,820
Accrued rebates and sales incentives
41,982
45,374
41,397
Other current liabilities
95,122
111,026
114,176
Total current liabilities
472,669
524,670
517,938
Long-term debt
788,066
748,477
685,354
Pension and other retirement compensation
171,063
152,780
142,584
Post-retirement medical and other benefits
73,398
73,949
70,794
Deferred tax liabilities
124,393
125,785
138,186
Other non-current liabilities
84,783
70,455
69,369
Non-current liabilities of discontinued operations
--
2,029
2,027
Total liabilities
1,714,372
1,698,145
1,626,252
Shareholders' equity
1,640,801
1,555,610
1,548,815
Total liabilities and shareholders' equity
$ 3,355,173
$ 3,253,755
$ 3,175,067
Days sales in accounts receivable (13 month moving average)
54
54
55
Days inventory on hand (13 month moving average)
73
70
70
Days in accounts payable (13 month moving average)
56
56
56
Debt/total capital
32.6%
32.6%
30.8%
Pentair, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended
September 30
October 1
In thousands
2006
2005
Operating activities
Net income
$ 145,094
$ 146,093
Adjustments to reconcile net income to net cash provided by operating activities
Loss on disposal of discontinued operations
51
--
Depreciation
44,762
43,144
Amortization
13,955
11,815
Deferred income taxes
(89)
3,457
Stock compensation
18,058
19,205
Excess tax benefits from stock-based compensation
(2,677)
(7,983)
Gain on sale of investment
(167)
(5,199)
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable
(23,210)
(43,760)
Inventories
(43,360)
(29,435)
Prepaid expenses and other current assets
(3,671)
(4,458)
Accounts payable
(22,136)
(8,374)
Employee compensation and benefits
(7,153)
(23,876)
Accrued product claims and warranties
547
290
Income taxes
(14,800)
14,321
Other current liabilities
(2,263)
3,875
Pension and post-retirement benefits
14,365
11,911
Other assets and liabilities
8,546
(4,115)
Net cash provided by continuing operations
125,852
126,911
Net cash provided by (used for) operating activities of discontinued operations
48
(634)
Net cash provided by operating activities
125,900
126,277
Investing activities
Capital expenditures
(33,311)
(50,597)
Proceeds from sale of property and equipment
497
11,534
Acquisitions, net of cash acquired
(22,879)
(10,515)
Divestitures
(24,007)
(10,574)
Proceeds from sale of investment
167
23,599
Other
(6,823)
(950)
Net cash used for investing activities
(86,356)
(37,503)
Financing activities
Proceeds from long-term debt
568,996
241,610
Repayment of long-term debt
(526,599)
(286,333)
Proceeds from exercise of stock options
3,126
7,029
Excess tax benefits from stock-based compensation
2,677
7,983
Repurchases of common stock
(50,000)
--
Dividends paid
(42,616)
(39,889)
Net cash used for financing activities
(44,416)
(69,600)
Effect of exchange rate changes on cash and cash equivalents
1,525
(1,317)
Change in cash and cash equivalents
(3,347)
17,857
Cash and cash equivalents, beginning of period
48,500
31,495
Cash and cash equivalents, end of period
$ 45,153
$ 49,352
Free cash flow
Net cash provided by operating activities
$ 125,900
$ 126,277
Less capital expenditures
(33,311)
(50,597)
Proceeds from sale of property and equipment
497
11,534
Free cash flow
$ 93,086
$ 87,214
Pentair, Inc. and Subsidiaries
Supplemental Financial Information by Reportable Business Segment (Unaudited)
First Qtr
Second Qtr
Third Qtr
Nine Months
First Qtr
Second Qtr
Third Qtr
Nine Months
In thousands
2006
2006
2006
2006
2005
2005
2005
2005
Net sales to external customers
Water
$ 517,169
$ 605,516
$ 531,703
$ 1,654,388
$ 512,088
$ 585,657
$ 515,945
$ 1,613,690
Technical Products
254,220
256,506
246,317
757,043
197,547
202,866
200,363
600,776
Consolidated
$ 771,389
$ 862,022
$ 778,020
$ 2,411,431
$ 709,635
$ 788,523
$ 716,308
$ 2,214,466
Intersegment sales
Water
$ 50
$ 55
$ 140
$ 245
$ 22
$ 187
$ 280
$ 489
Technical Products
889
1,312
1,133
3,334
402
630
402
1,434
Other
(939)
(1,367)
(1,273)
(3,579)
(424)
(817)
(682)
(1,923)
Consolidated
$ --
$ --
$ --
$ --
$ --
$ --
$ --
$ --
Operating income (loss)
Water
$ 55,587
$ 84,191
$ 36,226
$ 176,004
$ 60,489
$ 92,167
$ 58,964
$ 211,620
Technical Products
37,704
39,678
37,050
114,432
25,172
26,325
27,778
79,275
Other
(14,735)
(15,894)
(12,983)
(43,612)
(13,575)
(11,258)
(9,862)
(34,695)
Consolidated
$ 78,556
$ 107,975
$ 60,293
$ 246,824
$ 72,086
$ 107,234
$ 76,880
$ 256,200
Operating income as a percent of net sales
Water
10.8%
13.9%
6.8%
10.6%
11.8%
15.7%
11.4%
13.1%
Technical Products
14.8%
15.5%
15.0%
15.1%
12.7%
13.0%
13.9%
13.2%
Consolidated
10.2%
12.5%
7.7%
10.2%
10.2%
13.6%
10.7%
11.6%