Pentair plc (PNR) reported third-quarter 2014 earnings of $1.00 per share, up 22% from adjusted earnings of 82 cents reported in the year-ago quarter. The results were ahead of the Zacks Consensus Estimate of 94 cents per share.
Earnings came above the upper end of the company’s guidance range of 93 cents to 95 cents. The year-ago quarter figure excluded repositioning costs, acquisition and redomicile-related expenses, gain/loss on sale of a business and certain tax items. Including these items, earnings came at 81 cents in the prior-year quarter. There were no such items in the reported quarter. Compared to the year ago earnings of 81 cents, earnings in the reported quarter increased 23%.
Operational Update
Net sales increased 3% year over year to $1.76 billion but fell short of the Zacks Consensus Estimates of $1.79 billion. Revenues were in line with management's guidance.
Cost of sales increased 3.2% to $1.13 billion in the third quarter from $1.10 billion in the year-ago quarter. Gross profit in the reported quarter was $624.7 million, up 1.6% compared with $614.7 million in the prior-year quarter. Gross margin, however, declined 40 basis points (bps) year over year to 35.5% in the quarter.
Operating income increased 12% to $267 million from adjusted operating income of $238 million in the year-ago quarter. Operating margin increased 130 bps to 15.2%.
Segmental Performance
Net sales in the Valves & Controls segment amounted to $613 million, flat year over year. Sales in the Energy vertical (60% of the segment sales) decreased 3%. Sales to the oil & gas industry increased 3%. Sales to the power and mining industry, however, remained soft with declines of 13% and 6%, respectively. Sales in the Industrial vertical (balance 40% of the segment’s sales) increased 5%.
Segment operating profit rose 20% to $96 million from $80 million in the year-ago quarter as Backlog in the segment decreased 6 % to $1.3 billion compared with second-quarter 2014.
The Process Technologies segment reported revenues of $438 million, up 4% from the year-ago quarter. Sales in the Residential & Commercial vertical increased 7%. Sales in the Food & Beverage vertical also went up 5%. Segment operating earnings, however, went down 3% year over year to $58 million.
Sales from the Flow Technologies segment decreased 2% year over year to $275 million. Sales in the Residential & Commercial vertical decreased 3% and in the Infrastructure vertical decreased 2%, while the Industrial vertical posted the major decline of 9%. Sales in the Food & Beverage vertical went up 2%. Operating earnings, however, remained flat year over year at $39 million.
Revenues in the Technical Solutions segment grew 8% year over year to $439 million. Sales in the Infrastructure vertical increased 12% and in the Residential & Commercial vertical grew 9%. In addition, sales increased 5% in the Industrial vertical and 13% in the Energy vertical. Operating profit increased 15% year over year to $97 million from $84 million in the year-ago quarter.
Financial Update
As of Sep 27, 2014, cash and cash equivalents were $156.6 million, down compared with $256 million as of Dec 31, 2013. The company recorded cash flow from operating activities of $683.4 million in the first nine month period of 2014, ended Sep 27, 2014, compared with $634 million in the prior-year comparable period. Free cash flow was $260 million in the reported quarter.
Total debt of the company increased to $2.96 billion as of Sep 27, 2014 from $2.55 billion as of Dec 31, 2013. The company’s debt-to-total-capital ratio stood at 37% as of Sep 27, 2014, compared with 29% as of Dec 31, 2013.
Sale of Water Transport Business
On Jul 28, 2014, Pentair`s board of directors approved the decision to exit its Water Transport business. Pentair recognized an impairment charge of $380 million, net of tax, in the third quarter of 2014, representing estimated loss on disposal.
Guidance
Pentair raised its adjusted earnings per share (EPS) guidance to the new range of $3.72–$3.74 from $3.65–$3.70 for 2014. The guidance represents an increase of around 22% over 2013 adjusted EPS of $3.05.
The company lowered its revenue guidance to $7.1 billion from $7.15 billion, which reflects an increase of around 1% to 2% over 2013 sales. Pentair reiterated its free cash flow outlook and expects it to remain in excess of 110% of net income in 2014.
Additionally, Pentair projects fourth-quarter 2014 EPS in the range of $1.02 to $1.04, up around 20% from the prior-year quarter. Fourth-quarter revenues are expected to be approximately $1.86 billion, up 1% to 2% year over year.
Pentair will benefit from improvement in the North American residential market as well as global food and beverage market, stabilization across Europe, cost synergies from last year’s merger with Tyco Flow and consistent share repurchases. However, a weak Australian economy and fluctuations in exchange rates remain concerns.
Pentair delivers industry-leading products, services and solutions to meet diverse needs of customers related to water and other fluids, thermal management and equipment protection.
Pentair currently carries a Zacks Rank #4 (Sell). However, other better-ranked stocks worth a look in the industrial products sector include Advanced Emissions Solutions, Inc. (ADES), Alamo Group, Inc. (ALG) and Allegion plc Ordinary Shares (ALLE). All of these carry a Zacks Rank #2 (Buy).
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