UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission File No. 001-11625
PENTAIR, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0907434
(State or other jurisdiction (IRS Employer
of incorporation or Identification No.)
organization)
1500 County B2 West, Suite 400
St. Paul, Minnesota 55113-3105
(Address of principal executive offices) (Zip Code)
(612) 636-7920
(Registrant's telephone number,
including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of Registrant's only class of common stock on
June 30, 1997 was 37,982,011.
<PAGE>
PENTAIR, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of
Results of Operations and
Financial Condition
PART II - OTHER INFORMATION
Item 2. Acquisition or Disposition of Assets
Item 6. Exhibits and Reports on Form 8-K
Signature Page
Exhibit Index
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PENTAIR, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
($ expressed in thousands except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended Quarter Ended
June 30 June 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $833,444 $729,190 $422,305 $362,900
Operating costs
Cost of goods sold 578,542 507,968 293,354 256,414
Selling, general and
administrative 178,855 155,745 90,383 73,634
Total operating costs 757,397 663,713 383,737 330,048
Operating income 76,047 65,477 38,568 32,852
Interest expense 10,316 10,136 5,028 4,798
Interest income 221 862 51 149
Income before
income taxes 65,952 56,203 33,591 28,203
Provision for
income taxes 26,051 22,594 13,107 11,094
Net income 39,901 33,609 20,484 17,109
Preferred dividend
requirements 2,434 2,548 1,216 1,273
Earnings applicable
to common stock $37,467 $31,061 $19,268 $15,836
Earnings per share:
Primary $0.98 $0.82 $0.50 $0.42
Diluted $0.92 $0.78 $0.47 $0.40
Weighted average common
and common equivalent shares:
Primary 38,309 37,855 38,371 37,981
Diluted 42,977 42,722 43,015 42,791
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PENTAIR, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
($ expressed in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $28,592 $22,973
Accounts receivable - net 332,768 299,055
Inventories
Finished goods 161,189 159,617
Work in process 55,472 47,689
Raw materials and supplies 76,296 49,409
Total inventory 292,957 256,715
Deferred income taxes 23,494 23,084
Other current assets 14,360 12,428
Total current assets 692,171 614,255
Property, plant and equipment 565,709 525,918
Accumulated depreciation 251,519 227,069
PP & E - net 314,190 298,849
Marketable securities -
insurance subsidiary 43,193 40,764
Goodwill - net 292,166 298,372
Deferred Income Taxes 4,373 2,381
Other assets 43,888 34,393
TOTAL ASSETS $1,389,981 $1,289,014
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $103,205 $98,146
Compensation and other
benefits accruals 66,782 61,713
Income taxes 6,908 24,919
Accrued product claims
and warranties 26,215 25,167
Accrued expenses and
other liabilities 63,894 58,765
Current maturities of
long-term debt 37,946 32,928
Total current liabilities 304,950 301,638
Long-term debt 348,506 279,889
Pensions and other
retirement compensation 47,138 47,018
Postretirement medical and
other benefits 47,162 47,045
Reserves - insurance subsidiary 34,664 32,322
Other liabilities 15,261 17,251
Commitments and contingencies
Shareholders' equity
Preferred stock - at
liquidation value
Authorized: 2,500,000 shares
Outstanding: 1997 - 1,736,718 60,935 62,058
1996 - 1,769,983
Unearned compensation
relating to ESOP (12,460) (14,440)
Common stock - par value, $.16 2/3
Authorized: 72,500,000 shares
Outstanding: 1997 - 37,982,011 6,332 6,287
1996 - 37,717,022
Additional paid-in capital 183,275 179,143
Currency translation,
marketable security and
pension adjustments 4,005 8,053
Retained earnings 350,213 322,750
Total shareholders' equity 592,300 563,851
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,389,981 $1,289,014
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PENTAIR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
($ expressed in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30 June 30
1997 1996
Cash provided by (used for)
Operating activities
<S> <C> <C>
Net income $39,901 $33,609
Adjustments to reconcile
to cash flow:
Depreciation 28,630 23,892
Amortization 6,191 5,601
Deferred income taxes (118) 503
Changes in assets and liabilities,
net of effects of acquisition
Accounts receivable (28,924) (17,917)
Inventories (40,662) (53,873)
Accounts payable 4,384 6,401
Compensation and benefits 4,334 (1,416)
Income taxes (17,457) 539
Pensions and other
retirement compensation 2,735 2,821
Reserves - insurance subsidiary 2,342 2,371
Other assets/liabilities - net (7,687) (8,090)
Cash used for operating activities (6,331) (5,559)
Investing activities
Capital expenditures (46,146) (22,483)
Construction funds in escrow (5,225) (10,262)
Net proceeds (purchases)
of marketable securities (2,429) (3,172)
Acquisitions -
net of cash acquired (16,419) (47,977)
Cash used for investing activities (70,219) (83,894)
Financing activities
Borrowings 92,267 81,350
Debt payments (7,590) (2,546)
Unearned ESOP
compensation decrease 1,980 2,070
Employee stock plans and other 3,279 4,147
Dividends paid (12,663) (11,877)
Cash provided by (used for)
financing activities 77,273 73,144
Effects of currency
exchange rate changes 4,896 2,703
Increase (decrease)
in cash and cash equivalents 5,619 (13,606)
Cash and cash equivalents
- beginning of period 22,973 36,648
- end of period $28,592 $23,042
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PENTAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with instructions for Form 10-Q and, accordingly,
do not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting only of normal recurring accruals,
considered necessary for a fair presentation have been included.
These statements should be read in conjunction with the financial statements
and footnotes included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, previously filed with the Commission.
2. The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of the operating results to be expected for the full
year.
3. Income tax provisions for interim periods are based on the current best
estimate of the effective federal, state and foreign income tax rates.
4. Earnings per common share are based on the weighted average number of
common and common equivalent shares outstanding during each period. The tax
benefits applicable to preferred dividends paid to ESOPs are: for allocated
shares credited to income tax expense and for unallocated shares, credited
to retained earnings and are not considered earnings applicable to common stock.
Fully diluted computations assume full conversion of each series of preferred
stock into common stock, the elimination of preferred dividend requirements,
and the recognition of the tax benefit on deductible ESOP dividends applicable
to allocated shares payable based on the converted common dividend rate.
Conversion was assumed during the portion of each period that the securities
were outstanding.
5. The long-term debt is summarized as follows ($ millions):
June 30,December 31,
1997 1996
Revolving credit facilities $200 $168
Private placement debt 148 115
Other 39 30
TOTAL 387 313
Current maturities (38) (33)
Total long-term debt $349 $280
Debt agreements contain various restrictive covenants, including a limitation
on the payment of dividends and certain other restricted payments. Under the
most restrictive covenants, $125 million of the June 30, 1997 retained earnings
were unrestricted for such purposes.
6.Statement of Cash Flows
The following is supplemental information relating to the Statement of
Cash Flows ($000's):
Six Months Ended June 30
1997 1996
Interest paid
(net of capitalized interest in 1997) $7,130 $10,469
Income tax payments 39,773 15,630
7. Recent Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, " Earnings Per Share," which is
effective for financial statements issued for the periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted. The Company has determined that adoption of the standard will not
have a material effect on the Company's financial position or results of
operations.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
BUSINESS SEGMENT INFORMATION
Selected information for business segments for the six months ended
June 30, 1997 and 1996 follows ($ millions):
<TABLE>
<CAPTION>
General
Specialty Industrial
Products Equipment Corporate Total
1997
<S> <C> <C> <C> <C>
Net Sales $354.3 $479.1 $ 0.0 $833.4
Operating Income 40.1 48.4 (12.5) 76.0
Identifiable Assets 499.0 815.4 75.6 1,390.0
Depreciation
and Amortization 11.1 23.6 0.1 34.8
Capital Expenditures 10.0 36.1 0.0 46.1
1996
Net Sales $303.7 $425.5 $0.0 $729.2
Operating Income 34.9 39.2 (8.6) 65.5
Identifiable Assets 453.4 732.0 65.9 1,251.3
Depreciation
and Amortization 9.5 20.0 0.0 29.5
Capital Expenditures 7.5 15.0 0.0 22.5
</TABLE>
RESULTS OF OPERATIONS
Consolidated Results.
Consolidated net sales increased to $833.4 million in 1997, representing
a 14.3% increase over 1996. The double digit growth rate is attributed to
strength in professional power tool and North American enclosure markets as
well as acquisitions (Flex, Century, SIATA, and Transrack). These factors
more than offset reduced period sales in 1997 due to continuing economic
weakness in Europe and adverse currency effects of the strong U.S. dollar.
Operating income increased to $76.0 million in 1997, up 16.1% over 1996,
and operating income as a percent of sales improved from 9.0% to 9.1%.
Gross profit margins increased .3% in 1997 to 30.6% versus 30.3% in 1996
due primarily to product mix, and also improved profitability at Federal
Cartridge. Selling, general and administrative expense (SG&A) as a percent
of sales was 21.5% in 1997 as compared to 21.4% in 1996.
Specialty Products Segment.
Specialty Products sales increased $50.6 million or 16.7%, propelled
by new product introductions, expanded distribution in home center and
hardware channels, and acquisitions. The tool businesses grew from
acquisitions (Flex by Porter-Cable) and continued expansion into new
distribution channels and new product introductions. Sales increased
in the water products businesses: slow economic conditions in the
European markets were more than offset by gains in the North American
businesses. The SIATA acquisition (made in December 1996 by Fleck Controls)
contributed to sales and income in 1997.
Operating income as a percent of sales decreased to 11.3% in 1997 from 11.5%
in 1996 due to product mix and the continued economic softness in Europe that
affected both Flex and Fleck Controls.
General Industrial Equipment Segment.
General Industrial Equipment sales increased $53.6 million or 12.6%. North
American sales growth was strong enough to overcome weaker European sales
(especially as measured in a stronger U.S. Dollar) in the enclosure and
lubrication systems businesses in the first half of 1997. Sales at Federal
increased as a result of new product introductions and increased volume
in the ammunition industry. The acquisition of Century Manufacturing in
November 1996, contributed sales and income to the vehicle service
equipment businesses.
Operating income as a percent of sales increased to 10.1% in 1997 from
9.2% in 1996 primarily as a result of higher profitability at Federal.
FINANCIAL CONDITION
Cash flow from operating activities was negative $6.3 million in 1997
compared to negative $5.6 million in 1996. The Company had a negative
free cash flow of $52.5 million in the first half of 1997 compared to
negative $28.0 million in the first half of 1996. Free cash flow, a
measure of the internal financing of operational cash needs, is defined
as cash from operations less capital expenditures.
Accounts receivable levels increased due to acquisitions and dating programs.
Working Capital is somewhat seasonal and has increased to meet business needs.
Inventory was built in anticipation of strong third and fourth quarter sales.
Capital expenditures were $46.1 million in 1997 as compared to $22.5 million
in 1996. The increase is primarily due to peak construction efforts at
Hoffman's new Mt. Sterling facility.
Borrowings in the first half of 1997 financed the small net operating need,
acquisition payments and capital expenditures. The percentage of long-term
debt to total capital was 37% at June 30, 1997 compared to 33% at
December 31, 1996.
OUTLOOK
In general, the Company is well-positioned to continue its aggressive growth.
Recent acquisitions are expected to contribute to sales and earnings growth.
The strong emphasis on product development and aggressive efforts to expand
distribution channels are expected to generate growth in market share, sales
and profits. In all subsidiaries, sales are expected to grow as a result of
new products and enhanced customer service. Pentair also continues to search
for strategic or synergistic industrial acquisitions to complement its
existing businesses (See Part II, Item 2).
Continuing diversification of the industrial businesses in Pentair's various
markets has helped the company to maintain consistent growth over the past
few years. Geographic diversity has also helped the company to balance the
impacts of various economic patterns in the U.S. and Europe.
Capital outlays in 1997 are expected to be in the $75-80 million range.
Projects include completion of the manufacturing plant for Hoffman Engineering
in Mount Sterling, Kentucky, reconfiguration and expansion of other
manufacturing facilities and new product development. These capital
expenditures are expected to be financed out of its operating cash flows.
The Company expects that cash from operating activities should continue to
provide the funds for capital investments, dividends and small acquisitions.
The Company increased its revolving credit facility effective from $300 million
to $390 million effective August 1, 1997. Based upon current operating
expectations, credit available is expected to be adequate.
The Company's future results of operations and the other forward looking
statements contained in the Outlook, in particular statements about
acquisitions, capital spending and sales growth, involve a number of
risks and uncertainties. In addition to the factors discussed specifically
above, among the other factors that could cause actual results to differ
materially include the following: business conditions and the general economy;
competitive factors, such as market acceptance of new products, pricing, and
the impact of competitive products; risk of nonpayment of accounts receivable;
manufacturing capacity; risks associated with foreign operations; risks of
inventory obsolescence due to shifts in market demand; timing of product
introductions; and litigation regarding environmental issues. The actual
results the Company achieves may differ materially from those anticipated
as a result of these risks and uncertainties. Readers are encouraged to
carefully review and consider disclosures made by the Company in this
report and in the Company's Annual Report and other reports filed from time
to time with the Securities and Exchange Commission.
Future revenues, costs, margins, product mix and profits are all influenced
by a number of factors, as discussed above, however Pentair believes that it
has the products, facilities, personnel, competitive advantage, and financial
resources for continued business success.
PART II - OTHER INFORMATION
ITEM 2 - Acquisition or Disposition of Assets
Disposition - On June 16, 1997 the Company announced that it has signed
a letter of intent to sell its wholly owned subsidiary, Federal Cartridge
Co. Of Anoka, Minnesota, to Blount International, Inc. of Montgomery, Alabama,
for an amount in excess of Federal's book value. The transaction, which is
subject to regulatory clearance, further due diligence, and completion of a
definitive agreement, is expected to close in the third quarter of 1997.
Proceeds from the sale of Federal will be applied to repayment of revolving
indebtedness, which would become available for future acquisitions in Pentair's
three chosen markets -- enclosures; professional power tools and equipment;
and water products.
Acquisition - On July 21, 1997 the Company announced it has entered into
an agreement to acquire the Pump Group of General Signal Corporation. The
transaction is expected to close by the end of the third quarter 1997. The
purchase price is approximately $200 million, an amount slightly less than
one times the Pump Group's annual revenues. General Signal's Pump Group (GSPG)
designs, manufactures, and markets pumps for residential, commercial, and
municipal applications. GSPG comprises four brand-name pump businesses:
Aurora, Hydromatic, Fairbanks Morse, and Layne & Bowler. The Group employs
approximately 1,000 people at three domestic manufacturing locations --
Ashland, Ohio; North Aurora, Illinois; and Kansas City, Kansas -- and at an
assembly plant in Thomasville, Georgia. Pentair, which will finance the
acquisition through existing lines of credit, anticipates that the acquisition
will be slightly dilutive to the Company's 1997 earnings, but accretive to
earnings within the first 12 months after acquisition.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are included with this Form 10-Q
Report as required by Item 601 of Regulation S-K.
Exhibit Description
Number
11 Calculation of Earnings per Common and Common Equivalent Share
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
/s/ Richard W. Ingman
Richard W. Ingman
Executive Vice President and
Chief Financial Officer
August 12, 1997
<PAGE>
EXHIBIT INDEX
Exhibit Number
11 Calculation of Earnings per Common and Common Equivalent Share
27 Financial Data Schedule
EXHIBIT 11
PENTAIR, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON
AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
Six Months Quarter Ended
June 30 June 30
1997 1996 1997 1996
INCOME ($ thousands)
<S> <C> <C> <C> <C>
Net income $39,901 $33,609 $20,484 $17,109
Preferred dividend requirements 2,434 2,548 1,216 1,273
Earnings available to common and common
equivalent shares - Primary 37,467 31,061 19,268 15,836
Preferred dividends assuming conversion
of Preferred Stock:
Series 1988 454 478 226 238
Series 1990 1,980 2,070 990 1,035
Tax benefit on preferred ESOP dividend
eliminated due to conversion into common (743) (683) (371) (333)
Tax benefit on ESOP dividend assuming con-
version to common, at common dividend rate 387 330 193 161
Earnings available for common
and common equivalent
shares - Diluted $39,545 $33,256 $20,306 $16,937
SHARES (thousands)
Weighted average number
of shares outstanding
during the period 37,896 37,364 37,950 37,471
Shares issuable on exercise
of stock options less shares
repurchaseable from proceeds 413 491 421 510
Common and Common Equivalent Shares -
Primary 38,309 37,855 38,371 37,981
Shares issuable on conversion of:
$7.50 Callable Cumulative Convertible
Preferred Stock, Series 1988 907 956 903 950
8% Callable Cumulative Voting
Convertible
Preferred Stock, Series 1990 3,761 3,911 3,741 3,860
Common and Common Equivalent Shares -
Diluted 42,977 42,722 43,015 42,791
Earnings per Share:
Primary $.98 $.82 $.50 $.42
Diluted $.92 $.78 $.47 $.40
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 28592000
<SECURITIES> 0
<RECEIVABLES> 332768000
<ALLOWANCES> 0
<INVENTORY> 292957000
<CURRENT-ASSETS> 692171000
<PP&E> 565709000
<DEPRECIATION> 251519000
<TOTAL-ASSETS> 1389981000
<CURRENT-LIABILITIES> 304950000
<BONDS> 0
<COMMON> 546555000
0
48745000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1389981000
<SALES> 833444000
<TOTAL-REVENUES> 833444000
<CGS> 578542000
<TOTAL-COSTS> 757397000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10316000
<INCOME-PRETAX> 65952000
<INCOME-TAX> 26051000
<INCOME-CONTINUING> 39901000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39901000
<EPS-PRIMARY> 0.98
<EPS-DILUTED> 0.92
</TABLE>
