Q4 2015 EARNINGS RELEASE · PENTAIR Q4 2015 Earnings Release 5Note: 2015 Excludes Impairment Charge...

PENTAIR Q4 2015 Earnings Release

Q4 2015 EARNINGS RELEASE February 2, 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

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,

including the ability to successfully integrate and achieve the expected benefits of the acquisition of ERICO Global

Company; 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 Quarterly Report on Form 10-Q for the quarter ended

September 26, 2015 and our 2014 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

PENTAIR Q4 2015 Earnings Release 3

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 Represents 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

Met Q4 Expectations and Maintaining 2016 Outlook 4

• Q4 Met Expectations Operationally … Better Ongoing Tax Rate Provided Upside to Quarterly Results

• Energy and Industrial Headwinds Persist … Food & Beverage and Residential & Commercial Remain Healthy

• Valves & Controls Continues to Focus on Cost Out as Gross Margin Remains Under Pressure Due to Mix / Price

• ERICO Integration Well Underway and Tracking to Expectations

• Cash Flow Short of Target Due to Working Capital Timing … Expect a Strong 2016 Cash Flow Year

• Maintaining Full Year 2016 Adjusted EPS Guidance of $4.05 to $4.25


Segment Income Down 7%

Adj. EPS Down 3% • Adjusted Tax Rate of 16.3%

• Net Interest of $35M; Share Count 183M

FINANCIAL HIGHLIGHTS (YoY)

SUMMARY

Core Sales Down ~4% (Down ~2% Incl. FX and ERICO)

• Valves & Controls Down ~15% (Down ~22% Incl. FX)

• Flow & Filtration Solutions Down ~2% (Down ~8% Incl. FX)

• Water Quality Systems Up ~7% (Up ~4% Incl. FX)

• Technical Solutions ~Flat (Up ~23% Incl. FX and ERICO)

Q4 Operationally on Track … Better Tax Rate Provided Upside

• Food & Beverage and Residential & Commercial Remained Solid, Infrastructure Improved

• Water Quality Systems and Flow & Filtration Solutions had Solid Margin Improvement

• V&C Cost Reduction Actions Accelerated

$1.76B

$163M

$280M

15.9%

$0.51

$1.13

Q4'15 Q4'14 Sales

Op. Income Seg. Income ROS

EPS (Rpt.)

EPS (Adj.)

$1.80B

$176M

$302M

16.8%

$0.70

$1.17

Q4 Free Cash Flow of $316M • Delivered QTD FCF >150% of Adjusted Net Income

ROS 15.9% … Down 90 bps

Q4'15 PENTAIR RESULTS

Note: 2015 Excludes Impairment Charge


Top Line Remained Under Pressure … Non-V&C Margins Stabilizing

Return on Sales 15.9%

• Productivity and Price Offset Inflation

• Negative Mix in Technical Solutions

• V&C Cost Out Accelerated, but not Enough to Offset Margin Compression due to Project Pricing and Mix

6

Sales Highlights

SALES SEGMENT INCOME

Q4'15 PENTAIR PERFORMANCE

Q4'14 Infl. Acq/Div Growth/

FX Q4'15

Core Sales Down 4%

• Residential / Commercial Up 3%

• Industrial Down 8%

• Energy Down 10%

• Food & Beverage Up 2%

• Infrastructure Flat

Segment Margins / Productivity Highlights

Q4'14 Price Q4'15 Volume FX Acq/Div

($73M)

$1.80B $4M

$134M

($105M)

$1.76B

(4 pts) 0 pts 7 pts (5 pts) (3.7%) 0.7% (1.0%) 3.1%

(2%) YoY

$302M

($90M)

$36M

($18M)

$50M $280M

(7%) YoY

ROS ROS 16.8% 15.9%

Core (4%)

(2 pts)

Prod./ Price


Sales Highlights (by Vertical)

Top Line Met Forecast but Gross Margin Remained Under Pressure


Q4'15 VALVES & CONTROLS PERFORMANCE

Backlog Including FX Down 4% Sequentially at $1.13B … Orders of $438M; Core Down 15% YoY

Core Sales Down 15% YoY • Industrial – Process Down 12%

• Energy – Oil & Gas Down 20%

• Energy – Power Down 21%

• Energy – Mining Up 14%


• Margin Compression on Project Orders

• Negative Mix

• Productivity Remained Positive


$610M

$474M

($48M) (22%)

YoY

(7 pts) (22 pts) (15 pts)

($87M)

(0 pts)

($1M)

Q4'14 Price FX Q4'15 Volume Q4'14 Prod./

Price Infl.

Growth/ FX

Q4'15

($71M)

$8M

($5M) ROS (1.0%) 1.5%

ROS ROS

(59%) YoY

(9.5%)

$116M

$48M

19.0% 10.0%

Core (15%)


376 396 413 370 349 344 341 337 320

0

100

200

300

400

500

600

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

543 550 564 557 508 482 476 447 450

0

100

200

300

400

500

600

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

364 368 373 345 328 310 335 337 325

0

100

200

300

400

500

600

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

70 71 63 49 50 52 58 50 33

0

100

200

300

400

500

600

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

8 8

VALVES & CONTROLS BACKLOG (Includes Impact of FX)

Short Cycle and Long Cycle Orders Remain Challenged

INDUSTRIAL - Process ENERGY - Oil & Gas

ENERGY - Power ENERGY - Mining

• 2015: Revenue ~40%

• Fourth Quarter Core Orders Down 16% YoY

• 2015: Revenue ~15%


• 2015: Revenue ~35%


• 2015: Revenue ~10%


Backlog ($ Millions)

Backlog ($ Millions) Backlog ($ Millions)

Backlog ($ Millions)


Sales Highlights (by Vertical)

Further Signs of Margin Improvement


Q4'15 FLOW & FILTRATION PERFORMANCE

Q4'14 Prod./ Price

Infl. Growth/

FX Q4'15

Core Sales Down 2%

• Residential / Commercial Down 7%

• Food & Beverage Down 2%

• Infrastructure Down 3%


• Price and Productivity Offset Inflation

• Cost-Out Actions Reading Out

• Improved Mix


($10M)

$15M

($7M)

ROS (1.8%) (1.8%) 4.0% 10.9%

ROS

11.3% ROS

(4%) YoY

$383M $354M

($23M)

Q4‘14 Price FX Q4‘15

$3M

(8%) YoY

1 pts (6 pts) (8 pts)

Volume

(3 pts)

($9M)

Core (2%)

$42M $40M


Segment Margins / Productivity Highlights Sales Highlights (by Vertical)

Strong Top Line AND Margin Performance


Q4'15 WATER QUALITY SYSTEMS PERFORMANCE

Core Sales Up 7%


• Food & Beverage Up 9%


• Price Offset Inflation … Strong Productivity

• Improved Mix

• Growth Investments Continued

$350M $365M $2M $23M

($10M)

Q4'14 Price FX Q4'15

1 pt (3 pts) 4 pts

Volume

6 pts

4% YoY

$5M

$15M

($1M)

ROS

Q4'14 Prod./ Price

Infl. Growth/

FX Q4'15

ROS (0.2%) 0.7% 4.0% 17.8% 22.3%

ROS

30% YoY

Core 7%

$81M

$62M


Q4'15 TECHNICAL SOLUTIONS PERFORMANCE

ERICO Acquisition Offsets Sluggish Industrial


Segment Margins / Productivity Highlights Sales Highlights (by Vertical)

Core Sales Flat

• Industrial Down 2%

• Energy Down 3%

• Infrastructure Up 2%



• Negative Mix

• Positive ERICO Contribution

• Cost-Out Actions Implemented to Address Near-Term Industrial Headwinds

Q4'14 Infl. Acq/Div (ERICO)

Growth/ FX

Q4'15

$465M $574M

($25M) $0M

($0M)

(0 pts) (6 pts) 23 pts

Q4'14 Price Q4'15 Volume FX

0 pts

23% YoY

($16M)

($5M)

$36M

17% YoY

ROS 0.6% (2.2%) (1.0%) 23.9% 22.6%

ROS

Core Flat

$4M

$111M

Acq/Div (ERICO)

$134M

29 pts

Prod./ Price

1.3%

$130M


Segment Income Down 12%

Adj. EPS Down 7% • Adjusted Tax Rate of 21.2%

• Adjusted Net Interest of $92M; Share Count 183M

FINANCIAL HIGHLIGHTS (YoY)

SUMMARY

Core Sales Down ~4% (Down ~8% Incl. FX and ERICO)


• Flow & Filtration Solutions Down ~4% (Down ~10% Incl. FX)


• Technical Solutions Up ~2% (Up ~5% Incl. FX and ERICO)

A Challenging Year that is Now Behind Us

• Energy and Industrial Weakness Persisted … Residential & Commercial and Food & Beverage were Positive … Infrastructure Stabilizing

• Cost Actions Implemented to Address Ongoing Energy and Industrial Weakness

• Free Cash Flow ~90% of Adjusted Net Income due to Working Capital Timing

$6.4B

$732M

$1.0B

15.5%

$2.63

$3.94

FY'15 FY'14 Sales


EPS (Rpt.)

EPS (Adj.)

$7.0B

$852M

$1.1B

16.1%

$3.14

$4.23

FY Free Cash Flow of $643M

ROS 15.5% … Down 60 bps

FULL YEAR 2015 PENTAIR RESULTS



2016 OUTLOOK KEY ASSUMPTIONS

Maintain Full Year Adjusted EPS Guidance Range with Tax Offsetting V&C

Resi / Comm Less Bullish than 2015, but Overall Remains Strong

Energy Lower Oil Prices and Continued Short Cycle Pressure

Industrial Maintenance Spending Remains Uncertain

Food & Beverage Expect Continued Growth, Albeit More Choppy

Infrastructure Further Signs of Stabilization Exiting 2015

FX Remains Near Levels Used in Original Forecast

Other Tax Rate Now Expected to be ~20.5%

VS. 12/17/15 Guidance


Industry Uncertainty Continues

V&C UPDATE

Orders Flat to Down 1% Flat to Down 5%

Revenue ~ $1.7B ~ $1.65B

Margin Compression ~ 3pts. ~ 4pts.

Cost Out ~ $135M ~ $150M

Segment Income ~ $200M ~ $175M

Return on Sales ~ 11.5% ~ 10.5%

Current Previous View (12/17/2015)


NON-CASH GOODWILL IMPAIRMENT

15

Dealing with Reality of Energy Industry Reset

• We Performed Step One of the Goodwill Impairment Analysis as Required by the Accounting Rules and Concluded the Fair Value of Valves & Controls was Below its Carrying Value

• Carrying Value Established in 2012 at Fair Value with Flow Control Merger … Oil was >$100 at that Time

• Since 2012, the Energy Industry has Faced a Significant Reset … Uncertainty Remains Around the Timing of a Recovery in the Energy Industry

• We Estimate a Pre-Tax Non-Cash Impairment Charge in the Range of $400M to $600M to be Recorded in Q4 2015


Other FY Key Financial Metrics:

• Capital Expenditures ~$134M

• Total D&A of ~$261M + ~$33M of Non-Cash

Stock Compensation

• ROIC at Quarter End 9.9%

16

BALANCE SHEET AND CASH FLOW

Anticipating Substantial Working Capital Improvement in 2016

DEBT ROLLFORWARD

CASH FLOW DEBT SUMMARY

*Does Not Include $126M of Cash on Hand

Maturity

Variable

$4.7B*

Q4'15 Avg. Rate ~3.02% ~71% Fixed …

$3.3B

$1.4B ’19

Fixed ’17 – ‘25

Q4 YTD ($M) 2015 2015

Net Income - Continuing Ops $ 93 $ 481 Amortization 38 121 Subtotal $ 131 $ 602 Depreciation 38 140 Capital Expenditures (34) (134) Asset Sales 2 27 Working Capital 154 42 Other Accruals/Other 25 (34) Free Cash Flow $ 316 $ 643

Q4 YTD

Use of Cash: ($M) 2015 2015

Beginning Debt $ 4,986 $ 3,004

Used (Generated) Cash (316) (643)

Share Repurchase - 200

Dividends 58 232

Bond Issuances (Repayments) (350) 1,348

Other 332 569

Ending Debt $ 4,710 $ 4,710


Adj. EPS Down ~7% • Tax Rate of ~20.5%

• Net Interest ~$33M; Shares ~183M

Q1 Free Cash Flow Expected to be Negative Consistent with Historical Seasonality

Q1'16 FINANCIAL OUTLOOK (YoY)

SUMMARY

Q1 Seasonally Slow Start to the Year In-Line with Historical Patterns

Q1'16 PENTAIR OUTLOOK

• ERICO Accretion and Better Tax Rate Offsetting Continued Energy and Industrial Headwinds

• Cost-Out Actions Reading Out and Building Momentum Throughout the Year

• Expect 3 of 4 Segments to Deliver Core Sales Growth and Margin Expansion

• Seasonal Free Cash Flow Usage Anticipated

Core Sales Up ~1% (Up ~7% Including FX and ERICO)


• Flow & Filtration Solutions Up ~4% (Up ~1% Incl. FX)


• Technical Solutions Up ~4% (Up ~33% Incl. FX and ERICO)

Segment Income Down ~1%

Return on Sales ~12.4% … Down ~110 bps • Valves & Controls Margins, ~6.5%

• Flow & Filtration Solutions Margins, ~12.0%

• Water Quality Systems Margins, ~17.5%

• Technical Solutions Margins, ~21.5%

~$1.58B

~$159M

~$197M

~12.4%

$0.54-$0.56

$0.70-$0.72

Q1'16 Q1’15 Sales


EPS (Rpt.)

EPS (Adj.)

$1.48B

$171M

$199M

13.5%

$0.65

$0.76


FY’16 FINANCIAL OUTLOOK (YoY)

SUMMARY

Still Expecting Full Year Income and Cash Flow Growth

FULL YEAR 2016 PENTAIR OUTLOOK

• Energy and Industrial Headwinds Expected to Continue with Growth Expected in Residential & Commercial and Food & Beverage

• Margin Expansion and EPS Growth on Cost-Out Actions and ERICO Contribution

• Expect 3 of 4 Segments to Grow Income • Strong Cash Flow Expected as Working Capital

Opportunities Remain

~$6.6B

~$936M

~$1.1B

~16.5%

$3.40-$3.60

$4.05-$4.25

FY’16 FY’15 Sales


EPS (Rpt.)

EPS (Adj.)

$6.45B

$732M

$1.0B

15.5%

$2.63

$3.94

Adj. EPS Up ~5% • Tax Rate of ~20.5%

• Net Interest / Other ~$135M; Shares ~183M

Free Cash Flow of >$750M; ~100% Adj. Net Inc.

Core Sales Down ~2% (Up ~2% Incl. FX and ERICO)


• Flow & Filtration Solutions Up ~2% (Up ~1% Incl. FX)


• Technical Solutions Down ~4% (Up ~15% Incl. FX and ERICO)

Segment Income Up ~9%

ROS ~16.5% … Up ~100 bps • Valves & Controls ~10.5%

• Flow & Filtration Solutions ~14.0%

• Water Quality Systems ~21.0%

• Technical Solutions ~24.0%



APPENDIX GAAP to Non-GAAP Measurements & Reconciliations


REPORTED TO ADJUSTED 2015 RECONCILIATION


Q4 & FY 2015 CORE SALES GROWTH RECONCILIATION


OTHER RECONCILIATIONS


REPORTED TO ADJUSTED 2014 RECONCILIATION

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