Pentair Reports Third Quarter Net Income Per Share from Continuing Operations of $0.38; Adjusted EPS of $0.42

Pentair, Inc. (NYSE:PNR) today announced third quarter 2009 net earnings per diluted share from continuing operations (EPS) of $0.38. This represents a decrease of 12 percent as compared to the $0.43 of EPS in the third quarter last year. Current period results included a negative $0.04 per share impact from restructuring charges. Adjusting for these items, third quarter 2009 EPS was $0.42, compared to adjusted third quarter 2008 EPS of $0.56, a decrease of 25 percent.

Total company sales decreased 23 percent to $663 million, compared with $856 million in the third quarter of 2008. The company delivered third quarter operating income of $67 million. On an adjusted basis, the company delivered operating income of $74 million versus $101 million in the year-ago quarter. The company’s adjusted operating income in the current quarter excluded the impact of additional severance charges associated with the third quarter elimination of 275 positions not included in prior restructuring. Overall, adjusted operating margins for the third quarter contracted 60 basis points to 11.2 percent. The positive impact from productivity and price did not offset the significant negative impact related to lower volumes.

Total company free cash flow was positive $103 million for the quarter. Year-to-date the company has generated $202 million of free cash flow, which is $95 million more than was generated in the first three quarters of 2008. The company said it remains on track to achieve free cash flow greater than $225 million for 2009.

“We continue to benefit from our cost actions and remain committed to our full year outlook. Additionally, with our strong free cash flow generation and the investments we have maintained in product innovation and sales and marketing we believe the company remains in an excellent position to benefit as markets recover,” said Randall J. Hogan, Pentair chairman and chief executive officer.

THIRD QUARTER BUSINESS HIGHLIGHTS

The Water Group delivered $462 million in sales, a 17 percent decline year-over-year. Sales were down 16 percent excluding foreign exchange.

Flow Technologies sales were down 14 percent versus the year-ago quarter, as growth in the company’s global municipal market did not offset declines in commercial, industrial and residential markets.
Filtration sales were down 21 percent as sales to global residential, commercial and industrial markets continue to reflect inventory destocking and overall market softness.
Global Pool sales were down 16 percent as the prolonged decline in North American residential pool markets persists.

The Water Group’s third quarter reported operating income totaled $53 million, up 7 percent as compared to $50 million in the same period last year. In the quarter, the Water Group had $3 million in pre-tax restructuring charges associated with severance from recently announced additional headcount reductions. Excluding these items, third quarter 2009 adjusted operating income was $56 million, down 12 percent versus third quarter 2008 adjusted operating income of $63 million. Adjusted operating margins of 12.1 percent were up 80 basis points as benefits from productivity more than offset the negative impact from volume declines, inflation, and pay-as-you-go restructuring costs.

Technical Products delivered third quarter 2009 sales of $201 million, a decrease of 32 percent versus the year-earlier period. Sales were down 31 percent excluding the impact of foreign exchange.

Global Electrical sales were down 29 percent as industrial customers continue to reduce capital projects and distributors aggressively reduced inventory levels.
Global Electronic sales were down 34 percent as each of our major vertical markets contracted.

Technical Products’ third quarter reported operating income totaled $24 million, down 49 percent compared to $48 million in the same quarter last year. Adjusting for a restructuring charge, operating income was $29 million. Adjusted operating margins were 14.4 percent, down 180 basis points versus the third quarter 2008. In the quarter, the benefits from productivity did not offset the negative impact from volume declines and foreign exchange.

“Overall, our third quarter results were solid given the recessionary environment. The results of our productivity actions were reflected in our Water business adjusted margins which expanded 80 basis points year over year despite a 17 percent sales decline,” said Randall J. Hogan, Pentair chairman and chief executive officer. “Additionally, our Technical Products business produced adjusted margins of over 14 percent despite sales declines of 32 percent, which were worse than anticipated and reflected declines in most major end markets.”

OUTLOOK

The company introduces its fourth quarter reported 2009 EPS guidance range of $0.37 to $0.41 which would be up when compared to fourth quarter 2008 reported EPS of $0.22. Adjusting for non-recurring items in both years (see attached reconciliation table) fourth quarter adjusted EPS is expected to be $0.40 to $0.44 or essentially flat with the year ago quarter. Fourth quarter sales are expected to be down approximately 14 percent.

The company updates its full year reported 2009 EPS guidance to $1.25 to $1.29, which would be down approximately 50 percent when compared to reported full year 2008 EPS. Adjusting for non-recurring items in both years full year adjusted 2009 EPS is expected to be $1.40 to $1.44 or down approximately 35 percent year over year. The company continues to anticipate future non-recurring gains from certain tax items but the timing is uncertain so these items are not included in the current full year reported EPS guidance.

“As anticipated, the benefits of our cost actions are rapidly improving our operating margins and earnings,” said Hogan. “Our fourth quarter EPS guidance demonstrates the results of our structural cost savings as we expect earnings to be flat year over year with higher operating margins despite anticipated sales declines.”

“We continue to position the company for market recovery, which we are seeing in some select markets and regions, and expect our operating margins and earnings growth will demonstrate that much of what we’ve accomplished in 2009 is sustainable,” Hogan added.

EARNINGS CONFERENCE CALL

Pentair Chairman and CEO Randall J. Hogan and Chief Financial Officer John L. Stauch will discuss the company’s performance and fourth quarter and full year 2009 guidance on a two-way conference call with investors and a live audio webcast at 9 a.m. Eastern today. Reconciliation of non-GAAP financial measures are set forth in the attachments to this third quarter 2009 earnings release and in the third quarter 2009 earning release conference call presentation, both of which can be found at Pentair’s web site (www.pentair.com). Related financial charts and certain other information to be discussed on the conference call will be available on the company’s website shortly before the conference call. The web cast and presentation will be archived at the same site following the conclusion of the conference call.

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 the breadth and severity of the global economic downturn; the strength of housing and related markets; the ability to implement our restructuring and other cost reduction plans successfully and the risk that expected benefits may not be fully realized or may take longer to realize than expected; foreign currency effects; retail, commercial and industrial demand; product introductions; and pricing and other competitive pressures, as well as other risk factors set forth in our SEC filings. 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.

ABOUT PENTAIR, INC.

Pentair (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 Technical Products Group is a leader in the global enclosures and thermal management markets, designing and manufacturing thermal management products and standard, modified, and custom enclosures that house and protect sensitive electronics and electrical components. With 2008 revenues of $3.35 billion, Pentair employs approximately 13,100 people worldwide.

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

	Three months ended				Nine months ended
In thousands, except per-share data	September 26 2009		September 27 2008		September 26 2009		September 27 2008
Net sales	$	662,665	$	855,815	$	1,990,217	$	2,584,339
Cost of goods sold		455,698		599,862		1,417,539		1,799,282
Gross profit		206,967		255,953		572,678		785,057
% of net sales		31.2%		29.9%		28.8%		30.4%
Selling, general and administrative		125,578		154,118		361,957		437,831
% of net sales		18.9%		18.0%		18.2%		16.9%
Research and development		14,707		16,221		43,265		47,303
% of net sales		2.2%		1.9%		2.2%		1.8%
Legal settlement		—		—		—		20,435
Operating income		66,682		85,614		167,456		279,488
% of net sales		10.1%		10.0%		8.4%		10.8%

Other (income) expense:

Gain on sale of interest in subsidiaries		—		—		—		(109,648)
Equity losses of unconsolidated subsidiary		135		669		691		2,433
Loss on early extinguishment of debt		—		4,611		4,804		4,611
Net interest expense		9,711		13,740		31,328		45,691
% of net sales		1.5%		1.6%		1.6%		1.8%
Income from continuing operations before income taxes and noncontrolling interest		56,836		66,594		130,633		336,401
Provision for income taxes		18,159		21,592		41,808		99,099
Income from continuing operations		38,677		45,002		88,825		237,302
Loss from discontinued operations, net of tax		—		(1,514)		—		(3,652)
Loss on disposal of discontinued operations, net of tax		(85)		(268)		(153)		(7,405)
Net income before noncontrolling interest		38,592		43,220		88,672		226,245
Noncontrolling interest		1,644		2,100		2,531		2,100
Net income attributable to Pentair, Inc.	$	36,948	$	41,120	$	86,141	$	224,145

Net income from continuing operations attributable to Pentair, Inc.	$	37,033	$	42,902	$	86,294	$	235,202

Earnings (loss) per common share attributable to Pentair, Inc.
Basic
Continuing operations	$	0.38	$	0.44	$	0.89	$	2.40
Discontinued operations		-		(0.02)		-		(0.11)
Basic earnings per common share	$	0.38	$	0.42	$	0.89	$	2.29

Diluted
Continuing operations	$	0.38	$	0.43	$	0.88	$	2.37
Discontinued operations		-		(0.02)		-		(0.11)
Diluted earnings per common share	$	0.38	$	0.41	$	0.88	$	2.26

Weighted average common shares outstanding
Basic		97,496		97,827		97,495		98,049
Diluted		98,641		99,319		98,329		99,372

Cash dividends declared per common share	$	0.18	$	0.17	$	0.54	$	0.51

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

In thousands	September 26 2009		December 31 2008		September 27 2008
Assets
Current assets
Cash and cash equivalents	$	50,214	$	39,344	$	93,544
Accounts and notes receivable, net		423,125		461,081		511,779
Inventories		366,416		417,287		417,525
Deferred tax assets		52,997		51,354		50,061
Prepaid expenses and other current assets		48,446		63,113		53,383
Current assets of discontinued operations		—		—		18,443
Total current assets		941,198		1,032,179		1,144,735

Property, plant and equipment, net		339,412		343,881		359,543

Other assets
Goodwill		2,127,082		2,101,851		2,128,430
Intangibles, net		506,837		515,508		534,898
Other		67,723		59,794		69,873
Non-current assets of discontinued operations		—		—		13,646
Total other assets		2,701,642		2,677,153		2,746,847
Total assets	$	3,982,252	$	4,053,213	$	4,251,125

Liabilities and Shareholders' Equity
Current liabilities
Short-term borrowings	$	16	$	—	$	—
Current maturities of long-term debt		98		624		3,913
Accounts payable		199,002		217,898		224,646
Employee compensation and benefits		78,225		90,210		106,939
Current pension and post-retirement benefits		8,890		8,890		8,557
Accrued product claims and warranties		33,179		41,559		42,618
Income taxes		24,302		5,451		9,454
Accrued rebates and sales incentives		27,989		28,897		35,748
Other current liabilities		95,367		104,975		100,890
Current liabilities of discontinued operations		—		—		252
Total current liabilities		467,068		498,504		533,017

Other liabilities
Long-term debt		814,857		953,468		1,035,150
Pension and other retirement compensation		264,472		270,139		164,776
Post-retirement medical and other benefits		32,019		34,723		34,218
Long-term income taxes payable		27,792		28,139		25,356
Deferred tax liabilities		153,984		146,559		183,780
Other non-current liabilities		102,924		101,612		96,941
Non-current liabilities of discontinued operations		—		—		1,665
Total liabilities		1,863,116		2,033,144		2,074,903

Shareholders' equity		2,119,136		2,020,069		2,176,222
Total liabilities and shareholders' equity	$	3,982,252	$	4,053,213	$	4,251,125

Days sales in accounts receivable (13 month moving average)		62		57		56
Days inventory on hand (13 month moving average)		92		79		76
Days in accounts payable (13 month moving average)		65		59		58

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

	Nine months ended
In thousands	September 26 2009		September 27 2008
Operating activities
Net income before noncontrolling interest	$	88,672	$	226,245
Adjustments to reconcile net income to net cash provided by (used for) operating activities
Loss from discontinued operations		—		3,652
Loss on disposal of discontinued operations		153		7,405
Equity losses of unconsolidated subsidiary		691		2,433
Depreciation		44,186		44,929
Amortization		22,054		20,220
Deferred income taxes		170		25,905
Stock compensation		13,092		15,948
Excess tax benefits from stock-based compensation		(754)		(1,617)
(Gain) loss on sale of assets		(177)		87
Gain on sale of interest in subsidiaries		—		(109,648)
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable		46,718		(55,449)
Inventories		56,459		(27,109)
Prepaid expenses and other current assets		16,061		(15,785)
Accounts payable		(18,659)		2,230
Employee compensation and benefits		(17,883)		(7,303)
Accrued product claims and warranties		(8,565)		(6,572)
Income taxes		19,166		(6,224)
Other current liabilities		(9,699)		9,040
Pension and post-retirement benefits		(12,251)		592
Other assets and liabilities		747		13,143
Net cash provided by (used for) continuing operations		240,181		142,122
Net cash provided by (used for) operating activities of discontinued operations		(1,531)		(5,243)
Net cash provided by (used for) operating activities		238,650		136,879

Investing activities
Capital expenditures		(39,306)		(39,769)
Proceeds from sale of property and equipment		817		4,304
Acquisitions, net of cash acquired or received		—		(1,609)
Divestitures		1,506		29,526
Other		(3,272)		(7)
Net cash provided by (used for) investing activities		(40,255)		(7,555)

Financing activities
Net short-term borrowings (repayments)		(16)		(14,180)
Proceeds from long-term debt		490,000		479,405
Repayment of long-term debt		(628,776)		(486,492)
Debt issuance costs		(50)		(114)
Excess tax benefits from stock-based compensation		754		1,617
Proceeds from exercise of stock options		1,729		5,140
Repurchases of common stock		—		(37,342)
Dividends paid		(53,162)		(50,541)
Net cash provided by (used for) financing activities		(189,521)		(102,507)

Effect of exchange rate changes on cash and cash equivalents		1,996		(4,068)
Change in cash and cash equivalents		10,870		22,749
Cash and cash equivalents, beginning of period		39,344		70,795
Cash and cash equivalents, end of period	$	50,214	$	93,544

Free cash flow
Net cash provided by (used for) continuing operations	$	240,181	$	142,122
Capital expenditures		(39,306)		(39,769)
Proceeds from sale of property and equipment		817		4,304
Free cash flow	$	201,692	$	106,657

Pentair, Inc. and Subsidiaries Supplemental Financial Information by Reportable Business Segment (Unaudited)

In thousands	First Qtr 2009		Second Qtr 2009		Third Qtr 2009		Nine Months 2009

Net sales to external customers
Water	$	423,932	$	486,990	$	461,570	$	1,372,492
Technical Products		209,908		206,722		201,095		617,725
Consolidated	$	633,840	$	693,712	$	662,665	$	1,990,217

Intersegment sales
Water	$	289	$	198	$	284	$	771
Technical Products		233		600		544		1,377
Other		(522)		(798)		(828)		(2,148)
Consolidated	$	—	$	—	$	—	$	—

Operating income (loss)
Water	$	26,976	$	49,781	$	53,085	$	129,842
Technical Products		20,462		23,578		24,356		68,396
Other		(10,224)		(9,799)		(10,759)		(30,782)
Consolidated	$	37,214	$	63,560	$	66,682	$	167,456

Operating income as a percent of net sales
Water		6.4%		10.2%		11.5%		9.5%
Technical Products		9.7%		11.4%		12.1%		11.1%
Consolidated		5.9%		9.2%		10.1%		8.4%


In thousands	First Qtr 2008		Second Qtr 2008		Third Qtr 2008		Nine Months 2008

Net sales to external customers
Water	$	544,686	$	594,118	$	557,976	$	1,696,780
Technical Products		285,460		304,260		297,839		887,559
Consolidated	$	830,146	$	898,378	$	855,815	$	2,584,339

Intersegment sales
Water	$	372	$	139	$	305	$	816
Technical Products		1,138		1,034		765		2,937
Other		(1,510)		(1,173)		(1,070)		(3,753)
Consolidated	$	—	$	—	$	—	$	—

Operating income (loss)
Water	$	65,035	$	59,475	$	49,684	$	174,194
Technical Products		45,337		49,732		47,585		142,654
Other		(13,045)		(12,660)		(11,655)		(37,360)
Consolidated	$	97,327	$	96,547	$	85,614	$	279,488

Operating income as a percent of net sales
Water		11.9%		10.0%		8.9%		10.3%
Technical Products		15.9%		16.3%		16.0%		16.1%
Consolidated		11.7%		10.8%		10.0%		10.8%

Pentair, Inc. and Subsidiaries Reconciliation of the GAAP "As Reported" year ending December 31, 2009 to the "Adjusted" non-GAAP excluding the effect of 2009 adjustments (Unaudited)


In thousands, except per-share data	First Quarter 2009		Second Quarter 2009		Third Quarter 2009		Fourth Quarter 2009		Year 2009
Net sales	$	633,840	$	693,712	$	662,665	$655,000-$670,000		approx $2,650M

Operating income - as reported		37,214		63,560		66,682	67,500 - 72,500		approx 237,500
% of net sales		5.9%		9.2%		10.1%	approx 10.6%		approx 9.0%
Adjustments:
Restructuring and asset impairment		2,824		2,944		7,295	approx 4,500		approx 17,500
Operating income - as adjusted		40,038		66,504		73,977	72,000 - 77,000		approx 255,000
% of net sales		6.3%		9.6%		11.2%	approx 11.3%		approx 9.6%

Net income from continuing operations attributable to Pentair, Inc. - as reported		17,255		32,006		37,033	36,500 - 40,500		approx 125,000
Adjustments - tax affected
Restructuring and asset impairment		1,864		1,943		4,815	approx 3,000		approx 11,500
Bond tender		—		3,171		—	—		3,171
Net income from continuing operations attributable to Pentair, Inc. - as adjusted		19,119		37,120		41,848	39,500 - 43,500		approx 140,000

Continuing earnings per common share attributable to Pentair, Inc. - diluted
Diluted earnings per common share - as reported	$	0.18	$	0.33	$	0.38	$0.37 - $0.41		$1.25 - $1.29
Adjustments		0.02		0.05		0.04	approx 0.03		approx 0.15
Diluted earnings per common share - as adjusted	$	0.20	$	0.38	$	0.42	$0.40 - $0.44		$1.40 - $1.44

Weighted average common shares outstanding - Diluted		97,966		98,422		98,641	98,900		98,500



Pentair, Inc. and Subsidiaries Reconciliation of the GAAP "As Reported" year ending December 31, 2008 to the "Adjusted" non-GAAP excluding the effect of 2008 adjustments (Unaudited)


In thousands, except per-share data	First Quarter 2008		Second Quarter 2008		Third Quarter 2008		Fourth Quarter 2008		Year 2008
Net sales	$	830,146	$	898,378	$	855,815	$	767,637	$	3,351,976

Operating income - as reported		97,327		96,547		85,614		45,197		324,685
% of net sales		11.7%		10.7%		10.0%		5.9%		9.7%
Adjustments:
Restructuring and asset impairment		—		2,586		15,207		28,377		46,170
Horizon settlement		—		20,435		—		—		20,435
Operating income - as adjusted		97,327		119,568		100,821		73,574		391,290
% of net sales		11.7%		13.3%		11.8%		9.6%		11.7%

Net income from continuing operations attributable to Pentair, Inc. - as reported		52,463		139,837		42,902		21,161		256,363
Adjustments - tax affected
Restructuring and asset impairment		—		1,707		10,037		18,729		30,473
Horizon settlement		—		13,487		—		—		13,487
Gain on PRF transaction		—		(85,832)		—		—		(85,832)
Bond tender		—		—		3,043		—		3,043
Net income from continuing operations attributable to Pentair, Inc. - as adjusted		52,463		69,199		55,982		39,890		217,534

Continuing earnings per common share attributable to Pentair, Inc. - diluted
Diluted earnings per common share - as reported	$	0.53	$	1.41	$	0.43	$	0.22	$	2.59
Adjustments		—		(0.71)		0.13		0.19		(0.39)
Diluted earnings per common share - as adjusted	$	0.53	$	0.70	$	0.56	$	0.41	$	2.20

Weighted average common shares outstanding - Diluted		99,558		99,509		99,319		98,299		99,068

Pentair, Inc. and Subsidiaries Reconciliation of the GAAP "As Reported" year ending December 31, 2009 to the "Adjusted" non-GAAP excluding the effect of 2009 adjustments (Unaudited)


In thousands	First Quarter 2009		Second Quarter 2009		Third Quarter 2009		Fourth Quarter 2009		Year 2009
Water
Net sales	$	423,932	$	486,990	$	461,570	$	445,000-$455,000	approx $1,825M

Operating income - as reported		26,976		49,781		53,085		52,000-57,000		182,000-187,000
% of net sales		6.4%		10.2%		11.5%		11.4% - 12.8%	approx 10.1%
Adjustments - restructuring and asset impairment		1,464		1,460		2,639	approx 1,500		approx 7,000
Operating income - as adjusted		28,440		51,241		55,724		53,500-58,500		189,000-194,000
% of net sales		6.7%		10.5%		12.1%		11.8% - 13.1%	approx 10.5%


Technical Products
Net sales	$	209,908	$	206,722	$	201,095	$	210,000-$215,000	approx $830M

Operating income - as reported		20,462		23,578		24,356		27,000-32,000		95,500-100,500
% of net sales		9.7%		11.4%		12.1%		12.6% - 15.2%	approx 11.8%
Adjustments - restructuring and asset impairment		792		1,139		4,557	approx 3,000		approx 9,500
Operating income - as adjusted		21,254		24,717		28,913		30,000-35,000		105,000-110,000
% of net sales		10.1%		12.0%		14.4%		14.0% - 16.7%	approx 13.0%



Pentair, Inc. and Subsidiaries Reconciliation of the GAAP "As Reported" year ending December 31, 2008 to the "Adjusted" non-GAAP excluding the effect of 2008 adjustments (Unaudited)


In thousands	First Quarter 2008		Second Quarter 2008		Third Quarter 2008		Fourth Quarter 2008		Year 2008
Water
Net sales	$	544,686	$	594,118	$	557,976	$	509,362	$	2,206,142

Operating income - as reported		65,035		59,475		49,684		32,163		206,357
% of net sales		11.9%		10.0%		8.9%		6.3%		9.4%
Adjustments
Restructuring and asset impairment		—		2,157		13,438		19,628		35,223
Horizon settlement		—		20,435		—		—		20,435
Operating income - as adjusted		65,035		82,067		63,122		51,791		262,015
% of net sales		11.9%		13.8%		11.3%		10.2%		11.9%


Technical Products
Net sales	$	285,460	$	304,260	$	297,839	$	258,275	$	1,145,834

Operating income - as reported		45,337		49,732		47,585		26,661		169,315
% of net sales		15.9%		16.3%		16.0%		10.3%		14.8%
Adjustments - restructuring and asset impairment		—		429		633		7,209		8,271
Operating income - as adjusted		45,337		50,161		48,218		33,870		177,586
% of net sales		15.9%		16.4%		16.2%		13.1%		15.5%

Pentair (PNR)

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