James C. Lucas - Vice President of Investor Relations Randall J. Hogan - Chairman, Chief Executive Officer and Member of International Committee John L. Stauch - Chief Financial Officer and Executive Vice President.

Steve Tusa - JPMorgan Steven Winoker - Sanford C. Bernstein & Co., LLC Mike Halloran - Robert W. Baird Joe Ritchie - Goldman Sachs Nathan Jones - Stifel Nicolaus Scott Graham - Jefferies Jeff Hammond - KeyBanc Capital Markets Brian Konigsberg - Vertical Research Partners Christopher Glynn - Oppenheimer & Co.

Josh Pokrzywinski - Buckingham Research Brian Drab - William Blair Andrew Obin - Bank Of America Merrill Lynch Jonathan Wright - Nomura Securities David Rose - Wedbush Securities.

Good morning. My name is Keith and I will be your conference operator today. At this time, I would like to welcome everyone to the Pentair Q3 2014 Earnings Conference Call. (Operator Instructions) Thank you. Jim Lucas, Vice President of Investor Relations, you may begin your conference..

Thanks, Keith, and welcome to Pentair's third quarter 2014 earnings conference call. We're glad you could join us. I'm Jim Lucas, Vice President of Investor Relations, and with me today is Randy Hogan, our Chairman and Chief Executive Officer; and John Stauch, our Chief Financial Officer.

On today's call, we will provide details on our third quarter 2014 performance, as well as our fourth quarter and full year 2014 outlook as outlined in this morning's release.

Before we begin, let me remind you that any statements made about the company's anticipated financial results are forward-looking statements subject to future risks and uncertainties, such as the risks outlined in Pentair's most recent 10-K and 10-Q in today's release.

Forward-looking statements included herein are made as of today 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.

Today's webcast is accompanied by a presentation, which can be found in Investors section of Pentair's website. We will reference to these slides throughout our prepared remarks. Any references to non-GAAP financials are reconciled in the appendix of the presentation. We will be sure to reserve time for questions and answers after our prepared remarks.

(Operator Instructions) I will now turn the call over to Randy..

Thanks, Jim, and good morning, everyone. Let me begin with our third quarter performance, which is on Slide four. We are very pleased with third quarter performance as revenue met our forecast and we delivered strong margin expansion and EPS growth once again. Sales grew 3% during the quarter with Technical Solutions leading the way with 8% growth.

Our operating income grew 12% and operating margins expanded 130 basis points to 15.2%. EPS grew 22% and exceeded the high end of our guidance for the quarter. Free cash flow continued to be strong and was greater than 120% of net income in Q3. We remain on track to generate free cash flow greater than 110% for the full year.

Now let’s turn to Slide five for a more detailed look at the third quarter results. After a slow start to the year, the 3% sales growth was an encouraging continuation of the top-line acceleration experienced in the second quarter. Volume grew 2% and we delivered a positive point of price in the third quarter.

Foreign exchange was neutral, but we are closely watching the strengthening of the dollar against many currencies and are anticipating FX headwinds to pick up in the fourth quarter.

We will discuss the geographical and vertical performance of the company in more detail shortly, but it was particularly encouraging to see all five vertical markets grow in the quarter. The right half of the page shows third quarter Pentair operating profits and margins.

Our adjusted operating income increase of 12% and adjusted operating margin expansion of 130 basis points to 15.2% were driven by growth leverage and strong productivity and synergies. Inflation remained consistent with the first half and price and productivity continued to more than offset inflation.

We continue to make great progress with our lean and sourcing initiatives, particularly in our 16 focus factories. Now let’s turn to Slide six for a review of our largest segment, Valves & Controls. In the third quarter, Valves & Controls had flat sales with price mostly offsetting slightly weaker volume.

Orders were flat in the quarter and backlog was down 3%, excluding FX, to $1.3 billion. During the quarter Oil & Gas grew 3% and process sales saw a 5% growth, while the smaller Power and Mining sales declined. We continue to see quarter-to-quarter volatility in Power, but the Mining weakness is expected to continue.

The right half of the page shows third quarter Valves & Controls operating profits and margins. We were very pleased with the operating performance of Valves & Controls in the third quarter, with adjusted operating margins expanding 260 basis points to 15.7%, even including $4 million in cost for the segment Operating Model Transformation, or OMT.

As a reminder, we expect the OMT investments in Valves & Controls to continue on an annual basis through 2016, with that investment expected to drive nearly $80 million of annual operating income savings, once completed, and overall tax benefits to Pentair of roughly three points through the optimization of the global Valves & Controls structure.

We continue to see strong adoption of PIMS and momentum in Lean is accelerating as seen by continuing improvements in on-time deliveries in Valves & Controls Now let’s turn to Slide seven for a look at the orders and backlogs GBU.

As you can see on Slide seven, Valves & Controls backlog is broken down in four key industries, three of which fall into our energy vertical, Oil & Gas, Power & Mining and one in our industrial vertical, which is the Process business. Overall backlog at the end of the quarter down 3% including FX to $1.3 billion.

Energy remained mix in Valves & Controls with Oil & Gas delivering strong order growth while Power declined and Mining was weak. This is the second consecutive quarter of orders growth for Oil & Gas and quoting remains healthy. In particular, we continue to see strength in North American LNG.

With a sharp decline in oil prices the past month, we are monitoring quoting activity closely. Overall Power orders were down in the quarter. We did see some large Power orders finally break in India and China during the quarter, while Europe remained soft. Mining continued to be in a secular decline.

And while we’re seeing maintenance orders comes through in Mining, the overall outlook for this smallest piece of Valves & Controls remains guarded. We saw the biggest backlog declines in Process and Power.

Although Power is expected to remain volatile quarter-to-quarter, we expect improvements in Process in 2015 as we continue to see positive signs with an acceleration in North American orders based upon strong quoting activity. Now let’s move to Slide eight for another view of Valves & Controls orders.

Obviously, the fluctuations around orders and backlog are disquieting. That’s why we’re building more rigor in our forecasting of Valves & Controls orders and sales. This chart is an example of one way we’re looking at the business. The left side shows the quarterly volatility we’ve seen in Valves & Controls orders.

So to see clearer trends, we look at running averages. You can see on a trailing six-month basis, orders are showing that a positive trend may be emerging. On a trailing 12-month basis, that potential trend is further evident.

It's likely that quarter-to-quarter volatility will continue with this business given project timing and customer needs, but our improved forecasting models are showing improvement in both the trailing six and trailing 12-month orders for both industrial process and oil and gas.

Given these two industries comprise nearly 75% of Valves & Controls business, we remain cautiously optimistic for the GBU. Now let’s move to Slide nine for a look at our Process Technologies segment. Process Technologies reported solid top line growth of 4%, with volumes contributing 3% and a positive 1% from price.

Residential & Commercial remained strong with 7% growth, Food & Beverage grew 5% and Infrastructure was up 2%. Our beverage business experienced some customer delays in spending, but these projects or delays are not cancellations. Our food service business delivered another strong quarter of double digit growth, which was broad based globally.

The right half of the page shows second quarter Process Technologies operating profits and margins. We are disappointed with the operating margins of Process Technology during the quarter.

Mix was a primary factor in the income and margin declines as we saw more growth from our lower margin project businesses within Process Technologies and our pool business began managing its early buy program more closely.

In our Residential Filtration business, we have seen a shift to more point-of-entry than point-of-use solutions, which also had a detrimental effect on margins.

While mix will be important to improving margins, we continue to have a lot of opportunities to drive productivity within the businesses and so this is an area of focus for Process Technologies. Now let’s move to Slide 10 for a look at Flow Technologies.

Flow Tech reported a 2% revenue decline as a point of positive price contribution was not enough to offset a 3% reduction in volume. As we indicated last quarter, we have strategically been deemphasizing lower margin retail business and this did have a negative impact on the quarter's reported results.

This is the correct strategic and financial decision. And while we will have a few more quarters of top-line headwind, we more clearly focused on driving differentiated growth in the more profitable Flow channel.

The retail shift was the contributing factor to the Residential & Commercial decline in the quarter, but we also saw the industrial and infrastructure businesses decline in this GBU. Industrial saw growth in its global fire offerings, but this was not enough to offset sluggish OEM demand.

Within infrastructure, we saw some growth in the break and fix business where project activity continued to be slow for our engineered flow business. We saw growth in Food & Beverage as our applied water business once again delivered differentiated growth, which more than offset continued weakness in agriculture.

The right half of the page show second quarter Flow Technologies operating profits and margins. Operating income was flat with operating margins expanding 30 basis points to 14.1%. Flow Technologies delivered positive price and productivity that offset inflation during the quarter.

The weaker top-line, including the retail shift we mentioned previously, hindered income growth. But operating margin expansion is expected to accelerate as mix slowly improves. Let’s now turn to Slide 11 for a look at Technical Solutions results.

Technical Solutions had a great third quarter with 8% sales growth, with all verticals contributing in the quarter. Volume grew 7% and price was a positive contribution of 1%. Industrial grew 5% led by our North American Equipment Protection business.

Energy still showed strong growth of 13% in the quarter with strength globally, particularly in Canada. While it was encouraging to see Canada turn positive for the first time this year for Technical Solutions, it is far too early to call this a trend, but we’re watching order rates in the oil sands very closely.

Infrastructure was up 12% on the strength of our European Electronics business where comparisons will begin to get tougher starting in the fourth quarter. Finally, Residential & Commercial grew 9% as last year’s cold winter has led to early stocking in both North America and European channels.

The right half of the page shows third quarter Technical Solutions operating profits and margins. Operating income grew 15% and operating margins expanded 140 basis points to 22%. Price and productivity remained a hallmark of this GBU.

What the strong top-line demonstrates is leverage in this business and how little bit of growth can quickly flow through to the bottom line. Again, we’re very encouraged by the strength of Technical Solutions in the quarter.

And while the growth rate is expected to moderate in the fourth quarter, it does appear that the industrial business is strengthening the back half of the year as we had expected. Let’s now turn to Slide 12 for a closer look at the total Pentair growth profile.

Like the first half of the year, during the third quarter we saw solid growth in developed countries while fast growth regions remain mix. U.S. grew at a mid single digit rate and Canada grew double digits. But we saw Europe decline for the first time this year. Overall, developed economies delivered solid growth.

Fast growth regions were down modestly for the quarter, but it truly was a mixed bag. China, South East Asia and Latin America, all grew double digits, but we continue to see declines in the Middle East and softness in Eastern Europe and Africa.

While weakness in the Middle East is due mostly to a couple of large projects last year that did not repeat, we still see attractive growth prospects for the Middle East long term. Energy turned positive for the first time this year, but remains down year-to-date. Part of the decline is the previously mentioned large projects in the Middle East.

We’re seeing strength the last few quarters in oil and gas, particularly in North America, but the declines occurring in the smaller power and mining industries are masking the oil and gas improvement. Industrial grew modestly overall and is up year-to-date.

We're particularly encouraged to see the strength in our high margin North American equipment protection business. While process orders have shown quarterly lumpiness, we believe that we’re well positioned for what we see as improving North American orders in 2015 and 2016.

Quoting activity remained strong as process companies made CapEx commitments to take advantage of lower energy and feedstock prices. While we’ve seen residential and commercial growth rates moderate, growth remains healthy on the strength of a strong North American housing market.

We also saw continued signs of recovery in our smaller commercial businesses. Food and beverage has seen growth moderate largely due to two factors. First, as mentioned earlier, the slowing in agriculture is clearly having an impact on our Ag related businesses. Second, delays in beverage projects have muted the growth in this vertical.

Infrastructure was a positive story once again this quarter, driven mostly by our electronics business within Technical Solutions. While the comps begin to get tougher for electronics next quarter, we’re seeing small signs of encouragement that make us believe our water related infrastructure businesses are slowly turning positive.

After a slow start to the year, we’re seeing improvements in our two largest verticals, Energy and Industrial. We continue to grow albeit at a more moderate rate than was anticipated at this point of an economic recovery, and we’re positive about the progress we’re making around productivity and standardization.

While the global economic environment has its share of challenges, we remain cautiously optimistic. Cash flow remains a very bright spot for us and we remain focused on disciplined capital allocation. With that, I’ll turn the call over to John..

Thank you, Randy. Please turn to Slide #13 titled Q4 '14 Pentair Outlook. For the fourth quarter of 2014, we expect sales to be up approximately 1% to 2% to 1.85 billion which includes about a point of anticipated FX headwinds.

Valves & Controls is forecast to be flat, Process Technologies is expected to be up 5%, Flow Technologies is estimated to be down 4% with tougher comps in Ag and further deemphasis of lower margin retail business, and Technical Solutions is expected to be up 4% on continued strength in industrial.

We expect operating income to be up roughly 9% and operating margins to expand 90 basis points to 14.5%. This includes ongoing OMT investments in Valves & Controls unless of a negative mix issue in Process Technologies. Our EPS forecast for the fourth quarter is a range of $1.02 to $1.04 for an increase of roughly 20%.

We are expecting the tax rate to be around 23.5% and the share count to be around 187 million, reflecting recent stock buyback efforts. Please turn to Slide #14 labeled Balance Sheet and Cash Flow. Quarter end debt was approximately 3 billion, or 2.7 billion on a net debt basis, inclusive of global cash on hand.

In the third quarter we returned over 450 million to shareholders in the form of dividends and share repurchases. At the end of the third quarter we had approximately 300 million remaining under our current 1 billion share repurchase authorization, but we plan to exhaust the remaining authorization levels in the fourth quarter.

Our ROIC ended the quarter above 10%. We continue to have a lot of opportunities on the working capital front with the legacy flow control businesses and we expect to make further progress as the year continues. Please to turn to Slide #15 labeled Full Year 2014 Pentair Outlook.

We are raising our 2014 adjusted EPS to a range of $3.72 to $3.74 from a range of $3.65 to $3.70 or greater than 20% growth reflecting the third quarter results. For the year, we’re expecting the top line to grow 1% to 2% inclusive of the impact of foreign exchange to 7.1 billion. We expect Valves & Controls to be down modestly for the full year.

Process Technologies is expected to grow 5% for the year on the strength of pool, beverage systems and food service. Flow Technologies is anticipated to be down 2% for the full year and Technical Solutions is forecast to grow 4% due largely to an improving industrial business.

Adjusted operating income is expected to be up approximately 13% to just over 1.01 billion and this includes roughly 20 million of OMT investments within Valves & Controls. Adjusted operating margins are anticipated to expand 140 basis points to 14.3%.

For the full year, we expect the tax rate to be around 23.5% and the share count to be about 195 million. Free cash flow remains on track to be north of 110% of net income. Operator, can you please open the line for questions? Thank you..

(Operator Instructions) Your first question comes from the line of Steve Tusa from JP Morgan. Your line is open..

So when we think about the dynamics around the valve orders and some of the stuff that's coming out of process or which segment is the one that’s down in the fourth quarter, the flow segment, this year along with some other incremental headwinds, how does all this kind of mix together and set up for the growth dynamics for next year? You talked about the rolling valve orders being good.

Does the fourth quarter look okay on that front? Maybe you could just talk about those dynamics..

I think we never put too much emphasis on Q3, first of all. I mean with August being a pretty light quarter month traditionally than July, and we take a look at a couple of dynamics. We look at our win rate in the quarter’s that we're quoting. We look at how strong the front log is than where the quote log is.

The actual quoted activity in Q3 was down, so we feel like our win rate held in. And we still see a bunch of projects heading into Q4. So we're expecting Q4 to be another strong orders growth and we need it as we set up our expectations for next year.

But we're certainly in wait-and-see mode on the pace of those orders and obviously mid-December we'll be providing guidance that will give an update on how we feel about next year..

And so can you still -- that $4.50 number is still kind of out there as a possibility or is it too late now to book enough orders to have that at least as part of a range?.

I wouldn’t take it off the table at all, no. I mean we are not done until we're done. As we mentioned, our hit rate is good. There is lots of activity out there. We track hit rate, and things have slid, we all know that, everyone in the industry has seen that. But we haven’t seen massive cancellations or share loss that we can calculate..

Steve, I think when you look at the dynamics of what we are trying to drive, and I think Q3 is indicative of this, we want to have most of the things in our control. And one of the things not in our control is the market. But we still have a lot of synergies remaining and we are building momentum at Lean.

We have got carryover restructuring that we are still working on heading into next year. And the operational performance is encouraging because we are building momentum there. We want to grow more than anybody. And every time we see some markets go forward, a couple of markets go backwards.

And so we have got to look at things we can control and within the things we control, we're exceeding our expectations. And then we have to see where the market is going to shake out next year. But I think given our operational execution, we still feel confident that we can deliver superior value to the company..

What percentage of your oil and gas business is midstream, upstream, downstream? How do we think about that?.

Just under a third would be midstream..

And then upstream? Is it a third, a third, a third?.

It is more than a third and then downstream is a little down of third..

The way we look at Valves & Controls, we are particularly strong in mining and power. They are not as big as oil and gas obviously, or process. So their being weak is not great news for us. But frankly, we are very strong in LNG and we are very strong in process.

And those two, the outlook for those two applications, LNG in particular with cryogenic applications, we are very strong in that. We see a number of projects there that are quite exciting.

And there is going to be five-six -- in just in North America there are going to be five or six new plants every year for the next three years in the Petrochem space and probably five to six expansions.

And it's early days for the valves to be led in that because in the way it rolls out, there will be plant level awards first and then get to the valves. But we are tracking them all and we feel good about those..

Your next question comes from the line of Steven Winoker of Bernstein Research. Your line open..

Hey Randy, maybe you could follow up a little bit on that.

In terms of if oil prices were to stay similar to the current range for a little bit more of an extended time and you look at the balance of your exposure that you just described upstream, midstream, downstream, I mean to what extent do you see that as kind of a headwind versus tailwind for the company?.

Well I am not an oil guru, but we are watching with great anticipation like everyone else on what the impact will be, what oil price is, different activity change. But the end customers don’t -- they are not changing their CapEx plans based on movements week-to-week on oil prices.

They are waiting – they'll take the year to do directionally drill the well in a tight shale formation. So it's not something that you turn on and off on a weekly or monthly basis, so – if we look at overall CapEx plans.

But in particular if you take a look at the two businesses that I just talked about, LNG, the thing that’s driving LNG right now is the opportunity to export LNG from North America.

If you take a look at it, we have a vast amount of natural gas that is priced for the first time the lowest BTU value since the deregulation natural gas and the first time natural gas is trading at a price lower than its BTU value.

And with the abundance of natural gas, you can see us having a real opportunity to export that gas to other countries, but basically Asia and Europe. And there's four or five projects underway right now then there are 17 being planned. And then on the petrochem side same thing.

A lot of the investment left overtime as natural gas, which is the feedstock at petrochem, the natural gas liquids, as they even up in price, that capacity left in the country and now it’s coming back and all for the same reason, natural gas prices were pretty low. So, those two in particular benefit from the longer term lower cost of natural gas.

So that’s why I'm encouraged and I’m worried less about what oil prices do to those two things than I am to what it would do to E&P..

And then John, Page five, which is really helpful, the operating income walk that talked about growth inflation and productivity versus price. The inflation you're saying is sort of 1.5% for the whole company.

I mean I make the assumption that that’s including wage and material, total inflation, And then mix is somewhere baked in here, maybe you could describe where you put it. And then the basic business model then is kind of 1.5% inflation offset by 1% of price and 1% of productivity. Is that the way – that just happened obviously this quarter.

But as you think about kind of the business model for the company in the absence of growth, how should we think about this? And then how do you think about it sort of a little bit longer term?.

You’re right. I mean our inflation numbers include both labor inflation and material inflation, so you’re right. And then mix is netted into productivity and price columns and that’s inclusive of a negative mix we have.

I think as we think about where we are right now, I think inflation is going to get a little higher and that’s not a bad thing, we’re actually hoping it to go up a little bit. And then overall we do strive to get about a point of price.

I mean where 70 to 80 basis points of price is a full yield for us given the fact that half of the revenue -- or about 40% of our global revenue is more projects and systems now, so less price opportunity there. And our productivity is two points and that’s what we try to archive. And right now we've got a lot of tailwinds there.

We'll start to see benefits in OMP next year. But as I mentioned, we have to carry over restructuring and we’re really building momentum around lean and sourcing in the new flow control additions. So I don’t think it’s time to pull back on productivity anytime soon. As a matter of fact, we want to push the pedal harder on that, Steve.

And those – I said it earlier, those are in our control..

Your next question comes from the line of Mike Halloran from Baird. Your line is open..

So just on the thermal side of the business, maybe you could just talk a little bit about how backlogs are trending there, project acceptance, some of the Canadian activity.

But then also what that quoting activity looks like and how that’s tracking relative to expectations?.

So a couple of elements there, I mean I’ll start with Canada first. Canada, we are at levels now on an annual basis that we feel really reflect hopefully a floor. But we’ve been tracking at those levels and starting to see an uptick and we did see an uptick at both orders and shipments in Canada in Q3 that we think continue into Q4.

As far as the order rates, certainly getting a strong pickup in the order rates on the industrial side, industrial heat tracing, and starting to see the benefits of some of those petrochemical, particularly sulfur orders that Randy mentioned earlier and we’re starting to see some fairly strong encouraging news on what’s happening in energy in that space.

And so we feel pretty optimistic heading into Q4 that we’re starting to see those orders pick up in a way that could be helpful in the future..

And I’d add, one of the things, as we've talked before, we’ve gone underneath the segments we’ve gone to 19 focus platforms to drive growth. In the thermal areas what that did was we broke out the commercial thermal business, commercial thermal solutions, and that focus has led to higher growth.

I mentioned in the script that we’ve seen some nice stocking orders in preparation for – or as a result of the cold winter last year we actually had stock out last winter with the heat tracing for snow melt and rail protection and et cetera.

And so our business, with the focus we have, we've been able to get out front make sure the stock is in place for what might be needed for this upcoming winter and that whole focus has led to some more innovations in terms of other applications in the commercial space for install on hot water and some other interesting applications.

So thermal is looking pretty good..

And then at a higher level, obviously you guys took down revenue expectations last quarter. There is still talk of push outs and there is a few moving pieces within the portfolio.

I guess what I’m asking is if you take out the FX swings with the strengthening dollar here, relative to your expectations, how much on a revenue line on a forward basis has really changed? So maybe you could just talk about a couple of the puts and takes as you see versus where you guys laid out expectations last quarter?.

Yes. The way we do FX is we take the ending rate at the end of September of about 28 on euro, and there's other currencies of course, but that one had the biggest impact.

And so if you would take that into next year and assume that we’re tracking right around where the euros to dollar is today, that is roughly a 1% headwind next year and that is current views. We can forecast where the currency is going to go.

The way I would tell you is every penny of euro to dollar movement is worth about 10 million to Pentair on an annual basis..

On the revenue line..

On the revenue line. And what it gives the operating income line is the natural transactional benefits that also occurs of not being substantial headwind. Other than that, I think we’ll be watching as we head into next year where the Valves & Control backlog is and how that impacts next year. And then we’ve had a couple of headwinds.

We’ve had this retail issues in flow which is about a point of revenue to Pentair and that continues next year. So, I mean there is puts and takes. At the same time, the industrial and the thermal is performing at a higher level..

But I'd say with the exception of FX, we kind of see the world where we did when we talked last quarter. I mean FX is different. But other than that....

That makes sense. And that’s what I thought you were driving to. So, appreciate the time..

Your next question comes from the line of Joe Ritchie from Goldman Sachs. Your line is open..

So, my first question is -- really just not to delve few much into the oil & gas pressures that we’ve seen of late, but perhaps maybe you can talk a little bit about the quoting activity that you mentioned, it was lower this quarter.

Is that a seasonal factor? How much of that related to what you were hearing from your oil and gas customers? And specifically going back to the question that was asked earlier on your exposure, when you talk about your upstream exposure, what percentage of your business is linked to longer term projects versus shorter term projects?.

On that one, I can’t give you how it splits in here right now.

I don’t know if John, you can get that?.

Yes. So, I mean yes, Q3 is seasonal. We inherited some businesses that used to have a fiscal year of September. So just to remind everyone, it used to be a big push for them because it was a fiscal year end.

But naturally, Q3 would be a lighter quoting activity given kind of shutdowns in August in Europe and that kind of leaking over in the United States lifestyle. When it comes to projects, large projects do make up about 70% of our overall quote activity still today and so we are looking for large projects.

I want to define large projects as anything over $1 million to $5 million. These aren't mega projects at all. They're just larger valve order rates. So those continue to be the trends that we are looking to.

And like Randy said, the quarters have been very volatile and what we’ve been looking to is the six-month, the trailing month order rates to try to get some sense of normality as to where these markets are going..

And so is it fair to say in a sense necessarily from the conversations you were having with your customers that the project push outs we’ve been talking about for quite some time now, but there wasn’t really -- was there much of a change in the quarter and in the tone relating to the projects that you’re looking at?.

We would have expected to be up modestly in orders entering into the quarter and we came out around flat. So there were a couple of projects that we could point to that felt like they slipped primarily around EPC actions and activities that have pushed those out. And so that’s consistent with what I think you’re hearing from others.

And we don’t feel like there is any share loss in there and therefore we feel like as the market comes back, we’re going to participate in that. .

Okay. And just one follow-up question on the margins, because look, the margins in your Valves & Controls business was really strong this quarter. The expectation as you head into 4Q is another really strong quarter. So, two follow-ups there.

One, can you tell me the OMT headwind that you’re expecting in 4Q versus 3Q? And then secondly, you’re basically expecting to see about 280 basis points of margin expansion in 4Q. Just help me understand the confidence in that number from where we sit today..

Yes. So we're expecting 5 million of OMT in Q4, which is about 1 million higher than it was in Q3, but no tracking to the 20 million on the annual basis. That’s fairly consistent. The margins last year, just to remind you, we had a little challenge in a couple of our factories and a couple of....

We had one big project too that shifted..

One big project that was a very low margin project. So, when you take a look at it sequentially, it looks more normal. And we feel like Q3 performance is indicative of how we are performing in our factories and the sourcing benefits we’re receiving and the mix of projects that we’re shipping.

So we feel comfortable heading into Q4 with that same margin look..

Your next question comes from the line of Nathan Jones from Stifel. Your line is open..

If we go back to the Valves & Controls business, you said you were looking at order rates pretty closely with the decline in oil and gas.

If you looked more at the short cycles part of that business, have you seen any meaningful change there over the last couple of months with the price decline in oil?.

Well, we were softer in short-cycle orders than we'd have liked to have been in the third quarter. That’s largely due to lower mining activity and lower power than it is in oil and gas. As when we take a look at what the change rate was, not so big a difference in oil and gas..

Okay. You also called out softer Middle East relative to some tough comps from projects last year. It’s pretty typical of the Middle East to build a lot, digest for a while, build a lot, digest for while. It sounds like we are in that digesting period.

Can you talk about the outlook there and where you think we are in those cycles, maybe when you expect to pick up in Middle East?.

Well, I would say second half next year would be when we would expect to see it. I mean there is some activity in terms of quotations now that wouldn’t hit sales until the second half of next year..

So you would expect orders to start hitting maybe six months before that?.

Yeah..

Your next question comes from line of Scott Graham from Jefferies. Your line is open..

When we look at the fourth quarter sales guidance and we adjust for the FX, it doesn’t really look a lot different than what we saw in the third quarter. Yes, we've had a bunch of negative headlines in press from second quarter till now.

Is this essentially a function of your saying -- or are you essentially saying to us that your customers have really not -- their orders have not been impacted. And again, the company as a whole I am talking about here. I think that there was some fear of that out there heading into the quarter and you guys are in a lot of markets.

So just as a general statement, are you not seeing your customers pull back off of some of these negative headlines?.

Well, let me start with your last point. We do serve a diverse set of end markets and they are not all moving together. And they don't all move with move oil and gas. Even within oil and gas, as I mentioned, the lower prices are actually good for some applications. But, we think food and beverage is still strong.

We think our residential position in the U.S. is going to continue to give us growth, albeit maybe at a little bit more moderate rate. And so we think that particularly those two businesses are quite good. Europe is the thing that is weaker now than we thought it would be. So we are cautious on oil and gas.

But again, oil and gas is just part of our energy exposure and energy is only 28% of our sales. So oil and gas is less than 15% or so. I will give you exact number. So we look at all of those end markets as important to us. And particularly the industrial North American growth and capital spending is a huge driver for us.

And we saw that in the third quarter and you can see what it does when we get some growth there if we don’t expect to book another 8% in the fourth quarter then..

It sounds like there was nothing knee-jerk from what you saw in the quarter, essentially?.

Right..

The second question is more about the intended usage of cash next year.

With sort of the reset to the guidance and the divestiture of that business, kind of looking at that $4.50 maybe a little bit differently, is there a chance that we could see some M&A mixed into your cash usage next year on top of share repurchases?.

Yeah..

There's a chance, yes..

There's a chance..

Okay.

From anything sizable? Are you no longer looking at small things? Are you looking at things that are maybe a little more sized as the company is larger?.

We are always actively looking at and we have been actively looking hard. We think that we have proven that we can integrate. And there is some of our platforms and businesses that are -- certainly have an appetite to do deals and have the capacity to do deals.

So we are constantly looking and we got to have the right price between the seller and the buyer and those things have to line up. So it’s hard to predict..

Fair enough.

In the absence of M&A though, we should, I think realistically then, expect more share repurchases in 2015 kind of maybe not along the lines of year and a half ago, but maybe something along the lines of maybe the last couple of quarters that we have seen?.

Currently we are a new company, but we used to be -- before our merger we had 250 million in cash flow, that was a big deal. We are going to do over 800 million and as we get bigger it's going to be in the billion dollar range.

Over the last -- since the merger, which was just two years ago, close to two years ago, we have returned almost -- we have almost done 2 billion in share buybacks already. So we see the benefit of doing that. At that level and with that rate, it would be pretty dramatic. But we do believe in returning shareholders -- giving shareholders return.

And we have done it about 38 years in a row – or was it 39 -- 38 ears in a row with our dividend increases. And our belief is that capital should be used, not wasted..

Your next question comes from the line of Jeff Hammond of KeyBanc Capital Markets. Your line is open..

John, just back to your comment about we expect strong orders in the fourth quarter, can you just clarify that? I mean, is that just translating some of this quoting activity into orders?.

Yes. What I was saying is that obviously we’re going to put the pedal to the metal on trying to get as much orders as possible. And there still is activity out there. And as Randy mentioned, we can’t just be wed to the price of oil and there is a lot of other markets in which we serve that we’re focused on.

So, I mean we've got to keep going after it and there is still a good solid quote log heading into Q4 and we want to continue to take advantage of that..

And then just on this $4.50 number, clearly you’re doing a lot more buyback here than certainly I would have thought. That helps. You seem to be pushing pretty hard still on productivity and you should get some OMT benefit.

But can you maybe frame how you think about -- what do you need in terms of top line growth to kind of approach that $4.50 number?.

I mean, I think just to remind everybody, the $4.50 was in response to the $5 target with about a quarter of that related to losing water transport contribution, the other quarter due to macro environment and that’s all at a point in time.

So as we talked about earlier, mid December we’ll be giving guidance heading into next year which will frame kind of how we feel about the overall contribution based upon what we see in December.

That will include our Q4 order rates and include current foreign exchange views, include where we think the balance sheet participates in that and we'll have a better insight to what to provide. Right now there is really nothing out there against that number..

Yes. Where we are in our process right now, over the next month and a half we will be doing the heavy lifting and doing the discipline planning. Productivity will always be part of our strategy.

We plan our work and we execute that and I think you can see in our integration and you can see in our consistent productivity overtime, we know how to do that. What we'll be doing is building that detailed growth plan. That will roll off into our budget. Those budgets will then form the guidance we give in December. So we'll tell you then..

Your next question comes from the line of Brian Konigsberg from the Vertical Research. Your line is open..

Can you actually just give an update on where you stand with the synergy number? I know you've been kind of moving away from it. But you talked about 200 million completed as of the end of Q2.

Where do you stand at the end of Q3? And to the extent you can, maybe what the bridge will be between '14 and '15?.

I think the 200 million was – it might be the same number, but it was also the repositioning our cost takeout that we were actually driving to, so permanent cost structure reduction.

I mean, as we gave the update, we’re looking to get over $275 million of synergies by the end of next year, which was the new number exclusive of the water transport contribution. And given where we ended Q3, it’s fair to say we’re tracking stronger than that number.

And if you would push me for a number, I would say we're $10 million to $15 million, maybe $20 million better than expectation. We’ve been blending this in.

What we’re really looking at is what we do in gross margin and how much that gross margin is coming from lean and sourcing, and then what are we doing on cost structure, primarily G&A, and what is that percentage of sales in the reductions there. That’s really where we’re driving it.

It falls under standardization category, the reductions in ERPs, reductions in accounting centers and then where are we as far as lean evolution in the all factories, including legacy Pentair side as well. We feel really good about what we've achieved so far..

Yeah, it's been good. Another question, just coming back, you talked about your strong position in LNG and chemical.

When you’re bidding for these projects, are you really appointed as a sole source supplier as valves and heat tracking equipment on these projects or are they breaking it up amongst multiple suppliers?.

It really depends on what the specific quotes are. Sometimes it will be a multiple package. The range of technologies and then performance characteristics of valves are pretty broad. So for instance we’re a leader in triple offset valve, we’re a leader in pressure relief valves.

And all of those get specified and you bid those, sometimes you bid them as a package. The EPC and the end customer in our large project will decide how those split up the packages. They'll let the DCS go and then they'll do the pumps and then when they get to the piping and the valves, each of those common packages.

So it’s not a one-size-fits-all on how it gets bid. And then it depends on, I mentioned LNG. LNG has a lot of cryogenic applications. We’re a leader in that in terms of our valves, our triple offset valves and our pressure relief valves. So we tend to have higher share in those applications. Other applications, maybe not, so maybe not so high a share.

So it's kind of hard to generalize..

Can I just sneak one last quick one in? I see you changed your CapEx modestly to downside, same with D&A.

Can you just address what the thought behind that was?.

Yes. I mean it's really as simple as every year the GBUs -- our businesses and segments start out with a plan and we approve the capital if it goes along and we make those capital decisions based on the returns. And usually they overestimate in the beginning on what we're going to spend. And usually by the end of the year we get to the correct number.

So we’re just kind of getting to the correct number..

Brian, in my 14 years it's probably 12 out of 14 years where that's been the case..

Your next question comes from the line of Christopher Glynn from Oppenheimer. Your line is open..

Hey John, just wanted to go back to the Valves and Controls margins, sort of showed some pretty significant upside versus the margins. The plant issues last year were known and so a pretty sudden sharp uptick.

I’m wondering is that just all sustainable structural step up?.

I think that we crossed into the upper 15%s. We are forecasting just slightly above 14.5% to 15% for Q4. The only difference is that we get a stronger level of manufacturing in the September and December we sort of have those last couple of weeks where we start to tail off which creates some absorption issues in some of the factories.

So we think that we’re now at this type of run rate, we feel very good about the progress being made around sourcing, as I mentioned, and we can see margin of backlog and we’ve got a better handle on a lot of the inter-company shipments between each other. So, feeling good about the Q3 performance and feeling good about our ability to sustain it..

Great. And then you mentioned being aggressive to get the orders in place in the fourth quarter. Just to kind of beat the dead horse on the Valves and Controls margin sustainability.

Do the second half run rates here – do they reflect the level of quoting discipline that you have room to back up a little bit?.

Yes. And I don’t -- I wouldn’t say that we’re necessarily backing off. But one of the things that the Valves and Controls team has done a nice job of is using Lean across the quoting activity. And we’re spending quality time on the right quotes and right engineering jobs.

And when we’re doing that, we feel good about our ability to go on with a quote that we think meets our margin needs and meets the customers' value proposition. So, I think we feel good about the progress we’re making using the Lean tools outside the factory and I think you’ve seen that in our quoting activity..

Your next question comes from the line of Josh Pokrzywinski from Buckingham Research. Your line is open..

Hey guys. I think it's me based on the announcement. On the -- just to circle upon Valves and Controls, you mentioned some of the other areas that you’re participating in and are focusing on outside of oil and gas and maybe why we shouldn’t be focused on the correction in oil prices and I get all that.

But I guess thinking about a comment you made earlier, John, on 70% of the business being project related in some way, even if those projects are smaller, how much of this business that you’re going after in pockets of strength is a legacy position for Flow Control or for Valves and Controls where you’re calling on customers where you have relationships versus trying to start things from scratch and maybe in an environment where projects are getting pushed around and it’s a little tougher to kind of calling a customer for the first time?.

Yes. We have -- our brands are well known and they're known pretty much to all the EPCs and all of the oil and gas or any other customer set for that matter. But we are, for instance in sub-sea, we're not really strong in sub-sea. So, a lot of the sub-sea activity we’re not going get. We do better on land.

In that category I mentioned, we do better in liquefaction stations and natural gas than we do in pipelines. And this is really more of a product mix.

So, we look at all of that and we look at our hit rate and what I would like to do is I'd like to see a higher hit rate on where we’re strong and I would like to see us figure out how to get better in some of the places where our hit rate isn't. So there isn’t a general answer I can give you on that..

I guess what drives the better hit rate though is my question. I mean clearly it’s not price. I mean you guys have been very forthright with that. Is it lead time, is it capability, is it just....

We believe configured-to-order can help us on smaller projects in particular. Having product in stock and being able to configure to order in our 80 locations is something that we think we can do better at. That’s an idea yet, it’s not a plan. We are doing some alpha test on that that will be helpful for the smaller projects.

The rest is a lot of specification work. And we’d rather be specified and take our chances than just compete on price, as you said. We have been more disciplined, we believe, on price than maybe before..

Got you. And then John, just two follow-ups, little housekeeping items.

If spot rates stay where they're at on FX, and you mentioned that point of top line headwind in the next year, what does that work out to on an EPS basis with some of these transactional benefits you get that you mentioned? And then on the share count, if you do what you claim in the fourth quarter, what is the starting share count for 2015?.

Yeah. So a couple of different answers there. I mean on the transactional and translational FX basis, if we saw somewhere around a $0.10 movement in the currency, that would be the impact on the revenue line of $0.10 times what I said before. $100 million on the top-line, we would be inside of a nickel is what the impact would be on EPS.

That’s a model that we run quarterly and annually. And there is, as I mentioned, benefits to currency going down that offset some of the impacts of currency going down. When we take a look at where we are in share count heading into next year, we are anticipating what purchase should be made.

And as of today there is $70 million remaining on the authorization and that would drive somewhere around 185 million of the share count next year..

Your next question comes from the line of Brian Drab from William Blair. Your line is open..

I think at this point in the call I need to drive in some finer detail on a high level that hasn't been touched on. One comment you made today is that you are seeing a shift I think the point of entry water filtration system..

Yeah, I said that back. I am glad you asked that. It’s point of use, not point of entry. I said it backwards. I've read that script three times and I didn't think [indiscernible]. Basically a lot more under sink, a lot more point of use versus point of entry. Point of entry has a bigger content for us and frankly a better mix of margins on the products.

So I'm glad you asked..

All right, thanks for that clarification. The related question was just going to be around that Hybrid DI system.

I think it was last year with your Milwaukee team, they said that they are working hard on that product, but it didn’t seem to be at the point yet where the price was going to result in an inflection point where you'd see a significant uptick in adoption of that product.

But how is that going with that Hybrid DI product?.

We are still in development. We have actually done some redesigning work to take some of the cost out and improve the efficiency of the what's called the sack, a membrane sack, and improve the control of it so that it doesn’t have to cycle as often. And so we have got that on beta test now and looking at it.

We don’t have a new launch date yet to go public with. But we still have positive thoughts about what that can do in the marketplace to eliminate – we basically provide the softness..

And then I guess you touched on this but I just wanted to ask maybe a little different way. For the fourth quarter forecast for Valves and Controls and I am just trying to get a better, a higher level of confidence in the forecast.

Your forecasting plant revenue for the segment suggests a 5% sequential increase, but backlog was down sequentially in the third quarter. Is this just the typical end of your push seasonality dynamic or is there a particular vertical you have more confidence in or better than average visibility in? Thanks..

Yeah. Part of the backlog decline was foreign exchange and that’s already reflected. But that rolls through over the next 12 months. So there is a small impact to Q4 related to that. It is a combination of how we feel about the shippable backlog.

And then just as a reminder, we had about 35 million to 40 million of one project last year that went out on zero margin, which was in the Q4 number last year. So if you pull that out, you're going to see a little bit more revenue growth excluding that project.

And year-over-year you should see the benefit of that drop through as it pertains to the operating income and where the margin.

Does that help?.

Your next question comes from the line of Andrew Obin from Bank Of America Merrill Lynch. Your line is open. .

Just a question on your bridge, just going back to Slide 5. As I am think to the fourth quarter and I am thinking about your productivity price in the fourth quarter. Should we see it roughly in line with the third quarter? Because if you sort of do the math, it implies a slight deceleration. .

Yeah, I mean as I mentioned earlier, we don’t tend to get the same December contribution that we get out of June and September on an end of quarter basis primarily because of the way the holidays impact the last couple of weeks of shipping in the year.

But all other components, inflation roughly there, little bit of headwind from foreign exchange, not a lot, and then also we expect to see a good productivity price push as well. .

And just to clarify, no restructuring this quarter? And what’s the thinking -- does that mean we are accelerating in the fourth quarter?.

We have not taken any incremental restructuring in Q3, as you indicated. And as Randy mentioned earlier, the context of rolling up plans and taking a look at where we think we are going to be next year and what contribution we have in productivity and growth, any further decisions on that would be taken as necessary..

So are we waiting for the board meeting or right now there's plan for no restructuring in the fourth quarter, it's just a placeholder?.

No, we are evaluating where the markets are going. We are evaluating the confidence in the growth plans. We are evaluating the confidence in the current productivity views and how all of those things work their way into any further access we need..

And your next question comes from the line of Jonathan Wright from Nomura Securities. Your line is open..

Just on SG&A, 18.7% sales this quarter. I think in the past you've talked about a long term target of 20% of that.

Is there anything going on specifically in the quarter that was weighing on or bringing down SG&A or is that longer-term target now sort of sliding down a little bit? Can you get more cost out there than you originally thought?.

It is a combination of a couple of things. I mean one is we do think we can get more G&A out, no doubt about it, but certainly feel even on current levels of G&A, we don’t need to add any, so growth helps to leverage that down.

And then we certainly -- we come up the difference by adding more into the R&D line overtime and adding to selling and marketing if necessary.

And right now we’re evaluating these 19 growth platforms that Randy mentioned and we’re certainly giving them all the money that need at the moment as they earn the right to invest in more, we’ll add more to the growth pocket..

So looking forward, do you think SG&A as going to sales is going to be more like 18% to 19% sustainable?.

Yes, I think so. I mean the quarters fluctuate. So we can take a look at where your full year's coming it and right now we think around 20% is achievable and then also drifting down to 19% would not be -- there is no magic formula there..

But we are disciples of Lean enterprise. And G&A -- no offense to anybody on my team -- G&A is considered muda in the lean concepts. Muda is waste. So we want G&A to be as productive. In a perfect world there would be no G&A..

Operator, any more questions in the queue?.

We do have one more question from the line of David Rose. Your line is open..

I don’t want to beat this to death either. But just to get a little bit more clarity around the comfort in orders for Q4, if I look at Q4 last year, you really had an exceptional period and you've got some very tough comps. Mining, as you mentioned, is not doing that great. That’s probably your easiest comparison.

Help me get more comfortable on the specific projects that you’re looking at and how do we frame the risk at Q4 orders on the upside and the downside given where they were last year?.

I can say comfort is a word that I’m not familiar with while you’re projecting the future. But I mean in terms of the model, when you think about it, we look at our backlog we have and we look at what's shippable and we look at the quotation activities and that’s what we use to drive our forecast..

So this is all front line, right?.

Yes. And I just -- what we’re doing is we’re trying to build the backlog up to get the next nine to 12 months of shippable backlog. And there is also booking shift in the order take as well. So I agree with Randy. I wouldn’t use the word comfortable.

But the level of execution around consistently getting robust orders growth is where we’re trying to drive to and we are not yet ready to say that it’s not where we needed to be.

But I also want to remind you it relates to a third of our business and we also are looking at all the order and the booking shift business and the other two thirds of the business.

And there is, as Randy mentioned, when you see oil and gas move in a particular direction, that’s not necessarily bad for some of the industrial segments that we serve either. So all of it has got to weigh into what we think we can achieve for next year..

And maybe last one is, last time we had a big disruption in Europe or at least concerns over Europe, there was a lot of destocking in the channel.

Has October shaped up to be that way at all?.

I'd say too soon to tell in terms of Europe specifically. I mean, Europe was the surprise weakness and Europe was -- we had growth in Europe in the first half and then it declined in the third quarter. So that’s a note of caution in terms of what we’re looking at..

It was one of the bigger pull-backs in September -- with the Europe performance in September was really soft..

And for Europe, because July and August are vacation months, it’s all about September in Europe. So making sense of what that means when you have a weak September in Europe takes a little while..

Thank you. So that’s it then. You can give the calling information please, operator. Thank you for listening..

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