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Pentair Delivers 44% EPS Growth in Third Quarter 2005
10.25.2005

Third Quarter 2005 Highlights

  • Earnings per share of $0.46, up 44%.
  • Operating income of 80.8 million, up 26%.
  • Operating margins up 80 bps. to 11.3%.
  • Net sales of $716.3 million, up 18%.
  • Cash flow of $76.0 million brings YTD total Free Cash Flow to $95.2 million.
  • Water margins of 11.7%, up 60 bps.
  • Water business integration activities captured $26 million YTD in net synergies.

GOLDEN VALLEY, Minn., Oct. 25 /PRNewswire-FirstCall/ -- Pentair (NYSE: PNR) today announced its third quarter 2005 results, highlighting a 44 percent year-over-year increase in earnings per share (EPS) from continuing operations on a sales gain of 18 percent. Sales growth on a pro forma basis, assuming WICOR had been acquired at the beginning of the third quarter of 2004, and excluding favorable foreign currency exchange, was approximately seven percent.

According to Pentair Chairman and Chief Executive Officer, Randall J. Hogan, "Pentair made excellent progress on several fronts in the third quarter. We delivered seven percent pro forma sales growth, achieved our 15th consecutive quarter of sequential margin improvement in Enclosures, increased Water Group margins 60 basis points, and captured water business net integration synergies of $11 million. Our net integration synergy savings on a year-to-date basis are approximately $26 million, with our current full year estimate of $37 million compared to our goal of $30 million. Strong sales in pool and enclosure markets and continued success in implementing our Pentair Integrated Management System (PIMS), helped offset manufacturing move-related expenses, lower growth in retail pump and residential filtration markets, and inflationary pressures.

"We are on track with our integration synergies, yet we saw a decline in our price to inflation spread from the first half of 2005," Hogan said. "We expect this price to inflation pressure to continue into the fourth quarter as raw material input costs continue to rise ahead of price increases. This tighter spread, together with investments in Asia and in acquisition activity, will affect earnings in the fourth quarter. Therefore, we now expect fourth quarter 2005 earnings from continuing operations in a range between $0.40 and $0.42, approximately 25 percent higher than the same period last year. As a result, EPS from continuing operations is expected to gain 40 percent in 2005 compared to 2004. In addition, we are initiating guidance for 2006 EPS in a range between $2.20 and $2.30, assuming sales growth in the mid-single digits and excluding the pending adoption of SFAS No.123-R requiring the expensing of stock options.

"Our previously announced acquisition of APW's thermal management businesses will expand our Enclosures Group offering with the capability to provide advanced thermal solutions," Hogan said. "We are assuming the transaction will close in the fourth quarter and have included a slightly dilutive impact in our fourth quarter 2005 EPS guidance. We do expect the acquisition will be accretive to earnings within the first 12 months."

Third Quarter 2005 Financial Comments

Earnings:

Operating income totaled $80.8 million, 26 percent greater than the $64.1 million reported in the same period last year. Operating margins of 11.3 percent in the third quarter reflected a gain of 80 basis points over the year-earlier level of 10.5 percent. EPS from continuing operations of $0.46 was 44 percent higher than third quarter 2004 EPS from continuing operations of $0.32.

Third quarter 2005 EPS included a $1.0 million favorable tax accrual adjustment related to the recently filed 2004 Federal tax return. The overall effective tax rate of 32.3 percent was due to this one-time item and adjusting the year-to-date tax run rate from 35.5 percent to 35.0 percent. These adjustments combined added $0.02 to earnings in the third quarter.

Revenue:

Net sales totaled $716.3 million, up 18 percent from $607.8 million in the same period a year ago. Sales growth on a pro forma basis, assuming WICOR had been acquired at the beginning of the third quarter of 2004, and excluding favorable foreign currency exchange, was approximately seven percent.

Cash:

Cash flow totaled $76.0 million, bringing free cash flow for the first nine months of 2005 to $95.2 million. Pentair has revised its free cash flow expectations for 2005 to a range of between $170 million and $190 million due primarily to higher than previously anticipated working capital related to increases in safety stocks of certain critical materials, such as resins and motors. In addition, Pentair is experiencing higher inventories on products sourced out of Asia. Pentair expects these conditions will be mitigated throughout 2006 as the supply chain is optimized.

Water Group Third Quarter Comments

  • Sales of $515.9 million were up 21 percent over the same period last year, and were up approximately five percent on a pro forma basis, assuming WICOR had been acquired at the beginning of the third quarter of 2004.
  • Pool equipment sales grew in the high teens as favorable weather conditions combined with successful fall stocking programs.
  • Specialty pump sales were up in the high single digits, spurred by strong municipal, industrial, and agriculture equipment demand, and by pricing actions.
  • European water sales rebounded, driven by successful share gains in pump, and strong penetration of the food and beverage markets with filtration products.
  • New products were significant in driving sales and included new transfer, split-case, and solids handling pumps; and new pool lighting products, and control systems.
  • Operating income totaled $60.3 million, up 27 percent compared to the same period last year, driven by pricing and synergy savings.
  • Margins expanded to 11.7 percent, a gain of 60 basis points over the same period last year.
  • The integration of the water businesses continued on-track with $26 million in net savings realized during the first nine months of 2005 against a total year goal of $30 million.
  • Of the three ongoing plant shutdowns in the quarter, two were completed and one is still in progress. Two low-cost country plants were ramping up to accommodate the product relocated as a result of the shutdowns. The shutdown still in process was delayed to ensure that our processes were stable at the new location, which manufactures water storage tanks. We are now gaining NSF approval for the tank products, and are on-track to complete the move in February.
  • Inflationary pressures increased during the third quarter, with raw material and energy costs rising and closing the margin gap between price and inflation.

Enclosures Group Third Quarter Comments

  • Sales of $200.4 million grew 11 percent over the same period last year. Favorable foreign currency exchange accounted for less than one percent of the growth.
  • The Group continued to grow in North America, with strong sales in the industrial, commercial, medical and networking markets. Sales in China more than doubled compared to the same period in 2004. Enclosures' growth in Europe remained weak in a tough market environment.
  • Enclosures rolled out a number of new products targeting growth in specific end markets. New cable management and data interface products were introduced to drive growth in the networking market, while two new cabinets were targeted toward high thermal load applications. The previously announced Varistar cabinet line also continues to ramp quickly and customer interest is strong.
  • Operating income set a new third quarter record of $28.5 million, up 23 percent compared to the same period last year, driven by volume, supply savings, productivity improvements, and pricing.
  • Margins reached 14.2 percent, expanding by 140 basis points over the third quarter 2004, and delivering the Enclosures Group's 15th consecutive quarter of sequential margin improvement.
  • Raw material costs increased about six percent in the quarter, and were offset by actions in both pricing and productivity. Steel costs are expected to moderate through the balance of the year, although higher transportation and energy costs are anticipated.

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 ( http://www.pentair.com ) 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 Enclosures Group is a leader in the global enclosures market, designing and manufacturing standard, modified and custom enclosures that house and protect sensitive electronics and electrical components. With 2004 revenues of $2.28 billion, or $2.76 billion on a pro forma basis, Pentair has approximately 13,000 employees 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; the ability to integrate the WICOR acquisition successfully and the risk that expected synergies may not be fully realized or may take longer to realize than expected; the ability to close and integrate the acquisition of APW's thermal management businesses; 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
                          October 1   October 2    October 1    October 2
    In thousands,            2005        2004         2005         2004
     except per-share
     data
    Net sales             $716,308     $607,767   $2,214,466   $1,626,653
    Cost of goods sold     515,467      437,983    1,574,254    1,155,145

    Gross profit           200,841      169,784      640,212      471,508
      % of net sales         28.0%        27.9%        28.9%        29.0%

    Selling, general
     and administrative    108,917       96,882      338,479      264,794
      % of net sales         15.2%        15.9%        15.3%        16.3%

    Research and
     development            11,148        8,803       33,107       21,521
      % of net sales          1.5%         1.5%         1.5%         1.3%

    Operating income        80,776       64,099      268,626      185,193
      % of net sales         11.3%        10.5%        12.1%        11.4%

    Gain on sale of
     investment                  -            -        5,199            -

    Net interest expense    10,752       11,172       33,726       26,317
      % of net sales          1.5%         1.8%         1.5%         1.6%
    Income from continuing
     operations before
     income taxes           70,024       52,927      240,099      158,876
      % of net sales          9.8%         8.7%        10.8%         9.8%

    Provision for income
     taxes                  22,649       19,835       84,897       55,548
      Effective tax rate     32.3%        37.5%        35.4%        35.0%

    Income from continuing
     operations             47,375       33,092      155,202      103,328

    Income from
     discontinued
     operations, net of
     tax                         -       14,810            -       40,247
    Net income            $ 47,375      $47,902     $155,202     $143,575

    Earnings per
     common share
    Basic
    Continuing operations    $0.47        $0.33        $1.54        $1.04
    Discontinued operations      -         0.15            -         0.41
    Basic earnings per
     common share            $0.47        $0.48        $1.54        $1.45

    Diluted
    Continuing operations    $0.46        $0.32        $1.51        $1.02
    Discontinued operations      -         0.15            -         0.40
    Diluted earnings per
     common share            $0.46        $0.47        $1.51        $1.42

    Weighted average common
     shares outstanding
    Basic                  100,922       99,502      100,685       99,083
    Diluted                102,973      102,059      102,894      101,428

    Cash dividends declared
     per common share       $0.130      $ 0.110       $0.390       $0.320



                        Pentair, Inc. and Subsidiaries
              Condensed Consolidated Balance Sheets (Unaudited)

                                  October 1      December 31     October 2
    In thousands                     2005            2004          2004
                Assets
    Current assets
    Cash and cash equivalents      $ 49,352        $ 31,495      $ 78,794
    Accounts and notes
     receivable, net                428,486         396,459       397,098
    Inventories                     344,676         323,676       315,414
    Current assets of
     discontinued operations              -               -       394,937
    Deferred tax assets              63,098          49,074        45,304
    Prepaid expenses and other
     current assets                  28,244          24,433        30,967
    Total current assets            913,856         825,137     1,262,514

    Property, plant and equipment,
     net                            316,491         336,302       335,976

    Other assets
    Non-current assets of
     discontinued operations              -             393       565,071
    Goodwill                      1,637,020       1,620,404     1,619,635
    Intangibles, net                251,308         258,126       259,770
    Other                            61,739          80,213        83,839
    Total other assets            1,950,067       1,959,136     2,528,315
    Total assets                 $3,180,414      $3,120,575    $4,126,805


         Liabilities and Shareholders' Equity
    Current liabilities
    Short-term borrowings               $ -             $ -      $850,000
    Current maturities of
     long-term debt                   4,003          11,957         9,865
    Accounts payable                183,376         195,289       184,741
    Employee compensation and
     benefits                        90,722         104,821        88,779
    Accrued product claims
     and warranties                  43,252          42,524        35,200
    Current liabilities of
     discontinued operations            192             192       209,339
    Income taxes                     44,134          27,395        49,697
    Accrued rebates and sales
     incentives                      41,397          41,618        40,292
    Other current liabilities       114,176         103,083        97,239
    Total current liabilities       521,252         526,879     1,565,152

    Long-term debt                  685,354         724,148       737,719
    Pension and other retirement
     compensation                   142,584         135,356       129,779
    Post-retirement medical and
     other benefits                  70,794          69,667        58,007
    Deferred tax liabilities        143,533         142,873       140,656
    Other non-current liabilities    69,369          70,804        63,875
    Non-current liabilities of
     discontinued operations          2,027           3,054        41,598
    Total liabilities             1,634,913       1,672,781     2,736,786

    Shareholders' equity          1,545,501       1,447,794     1,390,019
    Total liabilities and
     shareholders' equity        $3,180,414      $3,120,575    $4,126,805


    Days sales in accounts
     receivable (13 month
     moving average)                     55              52            52
    Days inventory on hand
     (13 month moving average)           70              62            58
    Days in accounts payable
     (13 month moving average)           56              57            56
    Debt/total capital                30.8%           33.7%         53.5%



                        Pentair, Inc. and Subsidiaries
         Condensed Consolidated Statements of Cash Flows (Unaudited)

                                                       Nine months ended
                                                   October 1      October 2
    In thousands                                       2005           2004
    Operating activities
    Net income                                      $155,202        $143,575
    Adjustments to reconcile net income to
     net cash provided by operating activities
    Net income from discontinued operations                -         (40,247)
    Depreciation                                      43,144          34,946
    Amortization                                      17,818          10,310
    Deferred income taxes                              3,457            (449)
    Stock compensation                                   777               -
    Gain on sale of investment                        (5,199)              -
    Changes in assets and liabilities, net
     of effects of business acquisitions
     and dispositions
       Accounts and notes receivable                 (43,760)         13,611
       Inventories                                   (29,435)        (46,043)
       Prepaid expenses and other current assets      (4,458)        (13,835)
       Accounts payable                               (8,374)         14,090
       Employee compensation and benefits            (23,876)          6,127
       Accrued product claims and warranties             290           2,009
       Income taxes                                   17,637          24,602
       Other current liabilities                       3,875          28,914
       Pension and post-retirement benefits           11,911           7,121
       Other assets and liabilities                   (4,115)         (1,059)
         Net cash provided by continuing
          operations                                 134,894         183,672
         Net cash provided by (used for)
          operating activities of discontinued
          operations                                    (634)         14,031

           Net cash provided by operating
            activities                               134,260         197,703

    Investing activities
    Capital expenditures                             (50,597)        (28,553)
    Proceeds from sale of property and equipment      11,534               -
    Acquisitions, net of cash acquired               (10,515)       (877,717)
    Divestitures                                     (10,574)              -
    Proceeds from sale of investment                  23,599               -
    Other                                               (950)              -

           Net cash used for investing activities    (37,503)       (906,270)

    Financing activities
    Net short-term borrowings                              -         845,838
    Proceeds from long-term debt                     403,425         231,516
    Repayment of long-term debt                     (448,148)       (317,152)
    Proceeds from exercise of stock options            7,029          10,225
    Dividends paid                                   (39,889)        (32,042)

           Net cash provided by (used for)
            financing activities                     (77,583)        738,385

    Effect of exchange rate changes on cash           (1,317)            987
    Change in cash and cash equivalents               17,857          30,805
    Cash and cash equivalents, beginning of period    31,495          47,989
    Cash and cash equivalents, end of period        $ 49,352        $ 78,794


    Free cash flow
    Net cash provided by operating activities       $134,260        $197,703
    Less capital expenditures continuing operations  (50,597)         (2,793)
    Less capital expenditures discontinued operations      -          (5,760)
    Proceeds from sale of property and equipment      11,534               -
    Free cash flow                                  $ 95,197        $169,150



                        Pentair, Inc. and Subsidiaries
Supplemental Financial Information by Reportable Business Segment (Unaudited)
                         First Qtr     Second Qtr    Third Qtr   Nine Months
    In thousands           2005           2005         2005         2005

    Net sales to external
     customers
    Water                 $512,088     $585,657     $515,945   $1,613,690
    Enclosures             197,547      202,866      200,363      600,776
    Consolidated          $709,635     $788,523     $716,308   $2,214,466

    Intersegment sales
    Water                      $22         $187         $280         $489
    Enclosures                 402          630          407        1,439
    Other                     (424)        (817)        (687)      (1,928)
    Consolidated               $--          $--          $--          $--

    Operating income
    (loss)
    Water                 $ 61,803      $93,481      $60,278     $215,562
    Enclosures              25,926       27,078       28,531       81,535
    Other                  (11,356)      (9,082)      (8,033)     (28,471)
    Consolidated          $ 76,373     $111,477      $80,776     $268,626

    Operating income as
     a percent of net sales
    Water                    12.1%        16.0%        11.7%        13.4%
    Enclosures               13.1%        13.3%        14.2%        13.6%
    Consolidated             10.8%        14.1%        11.3%        12.1%



                          First Qtr   Second Qtr    Third Qtr   Nine Months
    In thousands            2004         2004         2004         2004


    Net sales to external
     customers
    Water                 $313,981     $353,316     $426,670   $1,093,967
    Enclosures             174,472      177,117      181,097      532,686
    Consolidated          $488,453     $530,433     $607,767   $1,626,653

    Intersegment sales
    Water                      $21          $29          $26          $76
    Enclosures                 332          986            3        1,321
    Other                     (353)      (1,015)         (29)      (1,397)
    Consolidated               $--          $--          $--          $--

    Operating income (loss)
    Water                  $41,547      $59,253      $47,410     $148,210
    Enclosures              19,354       21,590       23,211       64,155
    Other                  (10,791)      (9,859)      (6,522)     (27,172)
    Consolidated           $50,110      $70,984      $64,099     $185,193

    Operating income as
     a percent of net sales
    Water                    13.2%        16.8%        11.1%        13.5%
    Enclosures               11.1%        12.2%        12.8%        12.0%
    Consolidated             10.3%        13.4%        10.5%        11.4%

Pentair Contacts:

Rachael Jarosh
Communications
Tel.: (763) 656-5280
E-mail: rachael.jarosh@pentair.com

Mark Cain
Investor Relations
Tel.: (763) 656-5278
E-mail: mark.cain@pentair.com

SOURCE Pentair, Inc.

CONTACT: Rachael Jarosh, Communications, +1-763-656-5280, rachael.jarosh@pentair.com , or Mark Cain, Investor Relations, +1-763-656-5278, mark.cain@pentair.com , both of Pentair, Inc.

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