Pentair (PNR) Q2 Earnings in Line, Revises 2014 Guidance

Pentair plc (PNR) reported second-quarter 2014 adjusted earnings of $1.04 per share, up 13% from 92 cents reported in the year-ago quarter. The results were in line with the Zacks Consensus Estimate.

Earnings came close to the upper end of the company’s guidance range of $1.02 to $1.05. Both the reported quarter and the year-ago quarter figures exclude repositioning costs, acquisition and redomicile-related expenses, gain/loss on sale of a business and certain tax items. Including these items, earnings were 82 cents per share in the reported quarter compared with 75 cents in the prior-year quarter.

Cost of sales decreased 3% to $1.25 billion in the second quarter from $1.29 billion in the year-ago quarter. Gross profit in the reported quarter was $659 million, down 1% compared with $667 million in the prior-year quarter. Gross margin however expanded 50 basis points (bps) year over year to 34.5% in the quarter.

Adjusted operating income increased 5% year over year to $283 million. Operating margin increased 110 bps to 14.8%. Excluding the Water Transport business, adjusted operating income was at $279 million, a 13% increase year over year, while operating margin expanded 150 basis points to 15.2%.

Segmental Performance

Net sales in the Valves & Controls segment amounted to $634 million, up 2% year over year. Sales in the Energy vertical (60% of the segment sales) remained flat. Sales to the oil & gas industry increased 2% and sales to the power industry increase 1%. However, sales to the mining industry remained a deterring factor, decreasing 8%. Sales in the Industrial vertical (balance 40% of the segment’s sales) increased 6%.

Segment adjusted operating profit rose 7% to $89 million from $84 million in the year-ago quarter as price and productivity more than offset inflation during the quarter. Backlog grew 2% sequentially to $1.4 billion.

The Process Technologies segment reported revenues of $497 million, up 4% from the year-ago quarter. Sales in the Residential & Commercial vertical increased 10% while sales in the Food & Beverage vertical, dipped 1%. Segment adjusted operating earnings went up 17% year over year to $93 million. Price and productivity more than offset inflation, leading to the improvement.

Sales from the Flow Technologies segment decreased 21% year over year to $378 million. Excluding the Water Transport business, the segment’s sales stood at $300 million, down 2% year over year. Sales in the Residential & Commercial vertical, decreased 1% and sales in the Infrastructure vertical, decreased 11%. Sales in the Food & Beverage vertical went up 2% and in the Industrial vertical grew 6%. Adjusted operating earnings however edged up 1% year over year to $42 million.

Revenues in the Technical Solutions segment grew 3% year over year to $409 million. Sales in the Infrastructure vertical increased 33% and in the Residential & Commercial vertical grew 15%. This helped offset a 1% decline in sales in the Industrial vertical and 11% drop in sales in the Energy vertical. Adjusted operating profit increased 10% year over year to $77 million from $70 million in the year-ago quarter.

Financial Update

As of Jun 28, 2014, cash and cash equivalents were $174.4 million, compared with $265 million as of Dec 31, 2013. The company recorded cash flow from operating activities of $415 million in the first nine month period of 2014, ended Jun 28, 2014, compared with $386.1 million in the prior-year comparable period. Free cash flow was $384 million in the reported quarter.

Total debt of the company increased to $2.7 billion as of Jun 28, 2014 from $2.55 billion as of Dec 31, 2013. The company’s debt-to-total-capital ratio stood at 32% as of Jun 28, 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.

Guidance

Pentair lowered its adjusted earnings per share (EPS) guidance to the range of $3.65???$3.70 from the previous range of $3.85???$4.00 for full-year 2014. This reflects the exit of the Water Transport Business. The guidance represents an increase of around 220% over 2013 adjusted EPS of $3.05.

The company expects sales to be around $7.15 billion, up 2% over 2013 sales. Pentair also expects free cash flow to remain in excess of 110% of net income in 2014.

Additionally, Pentair projects third-quarter 2014 adjusted EPS in the range of 93 cents to 95 cents, up around 15% from the prior-year quarter. Third-quarter revenues are expected to be approximately $1.76 billion, up 3% year over year.

Pentair also updated its 2015 earnings per share target to $4.50 from $5.00. This reflects the exit of the Water Transport business, ongoing Energy Capital expenditure deferrals, and ongoing economic headwinds.

Pentair will benefit from the 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 prodcucts, services and solutions to meet diverse needs of customers related to water and other fluids, thermal management and equipment protection.

Pentair currently carries a short-term Zacks Rank #3 (Hold). However, other better-ranked stocks worth a look in the industrial products sector include AO Smith Corp. (AOS), Emerson Electric Co. (EMR) and Powell Industries, Inc. (POWL). All of these carry a Zacks Rank #2 (Buy).