Q3 2016 EARNINGS RELEASE - s22.q4cdn.com · Q3 2016 Earnings Release 3 KEY DEFINITIONS • Except...

Q3 2016 Earnings Release

Q3 2016 EARNINGS RELEASE October 25, 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 the company’s ability to complete the sale of the Valves & Controls business on anticipated

terms and timetable; 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; 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

Q3 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

Pulling Cost Lever to Align with Reality of a Slow Growth World 4

• Delivered Q3 EPS on Strong Cost Actions Offsetting Sluggish Industrial Environment and Project Pricing Pressures

• V&C Moved to Discontinued Operations … Sale Remains on Track for Late 2016 / Early 2017 Close

• Lowering Q4 Outlook on Further CapEx and OpEx Deferrals

• Planning for Significant EPS Expansion in 2017 Despite Slower Growth Environment


Core Sales Down 2% (Up 9% Incl. FX and ERICO) • Water Quality Systems Up 2% (Up 2% Incl. FX)

• Flow & Filtration Solutions Down 6% (Down 6% Incl. FX)

• Technical Solutions Down 1% (Up 26% Incl. FX and ERICO)

5

Segment Income Up 15%

Adj. EPS Up 11% • Adjusted Tax Rate of 21.5%

• Net Interest of $34M; Shares 184M

FINANCIAL HIGHLIGHTS (YoY)

SUMMARY

Quarter Met Expectations on Strong Cost Management

• Core Sales Challenged by Broad-Based Industrial Capital Expenditure and Maintenance Deferrals

• ERICO Integration Successfully Completed

• Strong Margin Expansion on Cost Execution

• Free Cash Flow Remains Strong

$1.21B

$183M

$216M

17.9%

$0.64

$0.78

Q3'16 Q3'15 Sales

Op. Income Seg. Income ROS

EPS (Rpt.)

EPS (Adj.)

$1.11B

$153M

$188M

16.8%

$0.52

$0.70

Q3 Total Free Cash Flow was $170M; YTD Total Free Cash Flow of $474M,

Up $154M YoY

ROS 17.9% … Up 110 bps

Q3'16 PENTAIR RESULTS


Return on Sales 17.9%

• Strong Productivity More than Offset Inflation

• Better Cost Control Across the Enterprise

• ERICO Contributed Strength to Bottom Line

6

Sales Highlights

SALES SEGMENT INCOME

Q3'16 PENTAIR PERFORMANCE

Core Sales Down 2%

• Residential & Commercial Up 3% (~45% of Sales)

• Industrial Down 5% (~20% of Sales)

• Food & Beverage Down 1% (~15% of Sales)

• Infrastructure Down 4% (~10% of Sales)

• Energy Down 15% (~10% of Sales)

Segment Income Highlights

Q3'15 Price Q3'16 Volume FX Acq.

($22M)

$1.11B $5M

$115M $0M $1.21B

(2 pts) 0 pts 11 pts 0 pts

9% YoY

Core (2%)

9 pts

*Non-Cash Intangible Amortization

Q3'15 Infl. Growth/ Acq./FX

Q3'16

0.3% (1.0%) 1.8%

$188M $21M

($11M)

$18M $216M

15% YoY

ROS ROS 16.8% 17.9%

Prod./ Price

$15M * $24M *

Broad-Based Slowdown in Capital Spending Impacted Most Verticals


Segment Income Highlights Sales Highlights (by Strategic Business Group)


Q3'16 WATER QUALITY SYSTEMS PERFORMANCE

$322M $329M $4M $3M $0M

Q3'15 Price FX Q3'16

1 pt 0 pts 2 pts

Volume

1 pt

2% YoY

Core 2%

Core Sales Up 2%

• Aquatic & Environmental Systems Up 6%

• Water Filtration Down 3%


• Positive Mix

• Price and Productivity Offset Inflation

• Growth Investments Continued


$1M $11M

($3M)

ROS

Q3'15 Prod./ Price

Infl. Growth/

FX Q3'16

ROS (0.8%) 0.2% 3.0% 18.8% 21.2%

ROS

15% YoY

$70M $61M $3M *

$2M *

Strong Aquatic Performance, Tough Filtration Comps


Sales Highlights (by Strategic Business Group)


Q3'16 FLOW & FILTRATION SOLUTIONS PERFORMANCE

Segment Income Highlights

$363M $343M $0M

Q3'15 Price FX Q3'16

$4M

(6%) YoY

1 pt 0 pts (6 pts)

Volume

(7 pts)

($24M)

Core (6%)

Core Sales Down 6%

• Water Technologies Down 3%

• Fluid Solutions Down 1%

• Process Filtration Down 22%


• Price and Productivity Offset Inflation

• Cost-Out Actions Accelerated

• Improved Project Execution


Q3'15 Prod./ Price

Infl. Growth/

FX Q3'16

($6M)

$7M

($4M)

ROS (1.1%) (0.9%) 1.7% 14.7%

ROS

14.4% ROS

(7%) YoY

$53M $50M

$7M * $6M *

Continued Focus on Cost and Execution … Positioning for Growth


Q3'16 TECHNICAL SOLUTIONS PERFORMANCE

Segment Income Highlights Sales Highlights (by Strategic Business Group)

Core Sales Down 1%

• Enclosures Down 1%

• Thermal Management Down 5%

• Engineered Fastening Solutions N/A

$432M

$543M $0M

($2M) ($2M)

0 pts 0 pts 26 pts

Q3'15 Price Q3'16 Volume FX

(1 pt)

26% YoY

Core (1%)

Acq.

$115M

27 pts


• Positive ERICO Contribution

• Negative Mix Impact from Thermal Projects

• Accelerated Cost-Out Actions



Q3'15 Infl. Growth/ Acq./FX

Q3'16

$26M

($4M)

18% YoY

ROS (0.5%) (1.0%) 23.4% 22.0%

ROS

($3M) $101M

Prod./ Price

0.1%

$120M

$6M *

$15M *

Industrial Headwinds Intensified, Looking for Stabilization in 2017


Q4'16 FINANCIAL OUTLOOK (YoY)

SUMMARY

Q4'16 PENTAIR OUTLOOK

• Project Headwinds and Sluggish Industrial Contributing to Weaker Core Sales

• Long Cycle Businesses Impacted by Slower Capital Spending Exiting the Year

• Seasonal Free Cash Flow Generation

Q4'16 Q4'15 Sales


EPS (Rpt.)

EPS (Adj.)

Adj. EPS Down ~17% • Tax Rate of ~21.5%

• Net Interest ~$35M; Shares ~184M

Q4 Free Cash Flow Expected to be

Strong; >100% of Adjusted Net Income

Core Sales Down ~6% (Down ~6% Including FX)

• Water Quality Systems Up ~2% (Up ~3% Incl. FX)

• Flow & Filtration Solutions Down ~9% (Down ~8% Incl. FX)

• Technical Solutions Down ~10% (Down ~10% Incl. FX)

Segment Income Down ~10%

Return on Sales ~17.0% … Down 70bps • Water Quality Systems ~22.5%

• Flow & Filtration Solutions ~12.0%

• Technical Solutions ~21.0%

~$1.22B

~$181M

~$206M

~17.0%

~$0.63

~$0.73

$1.29B

$172M

$228M

17.7%

$0.57

$0.88

Q4 Outlook Reflects Muted Capital and Maintenance Spending


FY'16 FINANCIAL OUTLOOK (YoY)

SUMMARY

FULL YEAR 2016 PENTAIR OUTLOOK

• Lowered Our Energy Exposure; Industrial in Recession

• Residential & Commercial Slowing, but Still Growing

• Aligning Cost Structure with Reality of a Slow Growth World

• Strong Free Cash Flow

FY'16 FY'15 Sales


EPS (Rpt.)

EPS (Adj.)

~$4.92B

~$719M

~$841M

~17.1%

~$2.50

~$3.00

$4.62B

$616M

$755M

16.4%

$2.17

$2.83

Adj. EPS Up ~6% • Tax Rate of ~21.5%

• Net Interest ~$141M; Shares ~183M

Free Cash Flow ~100% of Adjusted Net Income

Core Sales Down ~1% (Up ~7% Incl. FX and ERICO)

• Water Quality Systems Up ~4% (Up ~4% Incl. FX)

• Flow & Filtration Solutions Down ~4% (Down ~5% Incl. FX)

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

Segment Income Up ~11%

ROS ~17.1% … Up ~70 bps • Water Quality Systems ~22.0%

• Flow & Filtration Solutions ~13.5%

• Technical Solutions ~21.5%

Accelerated Cost-Out Momentum … Positioning for 2017


Other FY Key Financial Metrics:

• Capital Expenditures ~$130M

• Total D&A of ~$184M + ~$31M of Non-Cash Stock Compensation

• ROIC at Quarter End 10.6%

12

BALANCE SHEET AND CASH FLOW

DEBT ROLLFORWARD

CASH FLOW DEBT SUMMARY

Q3 YTD ($M) 2016 2016

Net Income - Continuing Ops $ 117 $ 342 Amortization 24 73 Subtotal $ 141 $ 415 Depreciation 21 64 Capital Expenditures (31) (95) Asset Sales 17 24 Working Capital (6) 49 Other Accruals/Other 28 17 Free Cash Flow – Total $ 170 $ 474 Free Cash Flow – Discontinued Ops 45 85 Free Cash Flow – Continuing Ops $ 125 $ 389

Q3 YTD

Use of Cash: ($M) 2016 2016

Beginning Debt $ 4,552 $ 4,686

Used (Generated) Cash (170) (474)

Dividends 62 182

Other (33) 17

Ending Debt $ 4,411 $ 4,411

Expect Balance Sheet Flexibility to Return After V&C Sale Closes

*Does Not Include $171M of Cash on Hand

Maturity

Variable

$4.41B*

Q3'16 Avg. Rate ~3.25% ~76% Fixed …

$3.37B

$1.04B '19

Fixed '17 – '25


CURRENT ENVIRONMENT

Doing What We Can to Control Our Destiny

• Sale of Valves & Controls Remains on Track to Close Late 2016 / Early 2017

• Exploring Debt Restructuring Options to Reduce Interest Expense

• Planning for Significant EPS Expansion in 2017 Despite Slower Growth Environment

• Continuing to Build Bolt-on Acquisition Funnel for Businesses that have Earned the Right to Grow


SEGMENT POSITIONING

14

Short-Term Headwinds and Well-Positioned Long-Term

WATER QUALITY SYSTEMS

FLOW & FILTRATION SOLUTIONS

TECHNICAL SOLUTIONS

• Continued Positive Momentum in Aquatics

• Ongoing Investments to Better Position Residential Filtration

• Building on Leading Foodservice Position

• Operating Leverage Leading to Further Margin Expansion

• Focus on Reducing Complexity and Accelerating Cost Out Actions

• Continued Momentum in Biogas and Agriculture Growth

• Infrastructure Orders and Backlog Improving

• Increasing Focus on Aftermarket and Service Capabilities to Leverage Installed Base

• Looking for Signs of Industrial Stabilization

• Commercial Construction Slowing, but Still Growing

• Large Canadian Oil Sands Thermal Projects Completed

• Aggressive Cost Out Actions to Align Segment with Reality of Slow Growth Environment


2017 FRAMEWORK

Positioning 2017 for Strong EPS Growth with Little Top Line Help

2015 Incl. V&C Excl. V&C

2016F Excl. V&C

2017 Considerations 2017

Framework

Core Sales (4%) +1% (1%) Expect Challenging Global Environment to Continue

-2 to +2%

Segment Income

(12%) +7% +11% Drive Productivity and Right Size

Cost Structure >5%

ROS (60bps) +130bps +70bps Improve Mix and Cost/Productivity

Read-Out >50bps

EPS (7%) +14% +6% Debt Restructuring Exclusive of Capital Allocation Opportunities

>15%

15


APPENDIX GAAP to Non-GAAP Measurements & Reconciliations


REPORTED TO ADJUSTED 2016 RECONCILIATION


Q3 2016 CORE SALES GROWTH RECONCILIATION


OTHER RECONCILIATIONS


REPORTED TO ADJUSTED 2015 RECONCILIATION

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