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 September 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
September 30, 1997 was 38,080,709.
<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>
Nine Months Ended Quarter Ended
September 30 September 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $1,315,533 $1,140,160 $482,089 $410,970
Operating costs
Cost of goods sold 918,341 802,950 339,799 294,982
Selling, general and
administrative 278,388 236,110 99,533 80,365
Total operating costs 1,196,729 1,039,060 439,332 375,347
Operating income 118,804 101,100 42,757 35,623
Interest net 16,146 13,829 6,051 4,555
Income before
income taxes 102,658 87,271 36,706 31,068
Provision for
income taxes 40,550 35,084 14,499 12,490
Net income 62,108 52,187 22,207 18,578
Preferred dividend
requirements 3,646 3,816 1,212 1,268
Earnings applicable
to common stock $58,462 $48,371 $20,995 $17,310
Earnings per share:
Primary $1.52 $1.28 $0.54 $0.46
Diluted $1.43 $1.21 $0.51 $0.43
Weighted average common
and common equivalent shares:
Primary 38,380 37,915 38,523 38,037
Diluted 43,027 42,745 43,126 42,793
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PENTAIR, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
($ expressed in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $25,042 $22,973
Accounts receivable - net 397,193 299,055
Inventories
Finished goods 174,721 159,617
Work in process 66,429 47,689
Raw materials and supplies 90,341 49,409
Total inventory 331,491 256,715
Deferred income taxes 26,786 23,084
Other current assets 11,746 12,428
Total current assets 792,258 614,255
Property, plant and equipment 589,709 525,918
Accumulated depreciation 262,496 227,069
PP & E - net 327,213 298,849
Marketable securities -
insurance subsidiary 0 40,764
Goodwill - net 456,015 298,372
Deferred Income Taxes 1,940 2,381
Other assets 31,931 34,393
TOTAL ASSETS $1,609,357 $1,289,014
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $132,795 $98,146
Compensation and other
benefits accruals 75,836 61,713
Income taxes 6,896 24,919
Accrued product claims
and warranties 31,620 25,167
Accrued expenses and
other liabilities 82,532 58,765
Current maturities of
long-term debt 34,346 32,928
Total current liabilities 364,025 301,638
Long-term debt 468,098 279,889
Pensions and other
retirement compensation 48,343 47,018
Postretirement medical and
other benefits 50,078 47,045
Reserves - insurance subsidiary 35,710 32,322
Other liabilities 39,972 17,251
Commitments and contingencies
Shareholders' equity
Preferred stock - at
liquidation value
Authorized: 2,500,000 shares
Outstanding: 1997 - 1,721,506 60,323 62,058
1996 - 1,769,983
Unearned compensation
relating to ESOP (11,470) (14,440)
Common stock - par value, $.16 2/3
Authorized: 72,500,000 shares
Outstanding: 1997 - 38,080,709 6,348 6,287
1996 - 37,717,022
Additional paid-in capital 183,232 179,143
Currency translation,
marketable security and
pension adjustments (1,482) 8,053
Retained earnings 366,180 322,750
Total shareholders' equity 603,131 563,851
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,609,357 $1,289,014
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PENTAIR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
($ expressed in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1997 1996
Cash provided by (used for)
Operating activities
<S> <C> <C>
Net income $62,108 $52,187
Adjustments to reconcile
to cash flow:
Depreciation 41,769 35,802
Amortization 9,589 8,566
Gain on sale of securities (5,932) 0
Deferred income taxes (854) 3,230
Changes in assets and liabilities,
net of effects of acquisition
Accounts receivable (60,754) (39,935)
Inventories (50,451) (39,453)
Accounts payable 19,901 2,506
Compensation and benefits 11,930 (5,949)
Income taxes (17,434) 3,130
Pensions and other
retirement compensation 4,343 5,917
Reserves - insurance subsidiary 3,388 3,745
Other assets/liabilities - net 11,039 (2,983)
Cash used for operating activities 28,642 26,763
Investing activities
Capital expenditures (55,873) (39,497)
Construction funds in escrow 886 (9,748)
Net proceeds (purchases)
of marketable securities 46,696 (5,774)
Acquisitions -
net of cash acquired (210,651) (48,151)
Cash used for investing activities (218,942) (103,170)
Financing activities
Borrowings 215,626 80,350
Debt payments (11,398) (1,227)
Unearned ESOP
compensation decrease 2,970 3,105
Employee stock plans and other 2,754 4,410
Dividends paid (19,012) (17,844)
Cash provided by (used for)
financing activities 190,940 68,794
Effects of currency
exchange rate changes 1,429 5,594
Increase (decrease)
in cash and cash equivalents 2,069 (2,019)
Cash and cash equivalents
- beginning of period 22,973 36,648
- end of period $25,042 $34,629
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PENTAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with instructions for Form 10-Q and, accordingly,
do not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting only of normal recurring accruals,
considered necessary for a fair presentation have been included.
These statements should be read in conjunction with the financial statements
and footnotes included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, previously filed with the Commission.
2. The results of operations for the nine months ended September 30, 1997 are
not necessarily indicative of the operating results to be expected for the full
year.
3. Income tax provisions for interim periods are based on the current best
estimate of the annual effective federal, state and foreign income tax rates.
4. Earnings per common share are based on the weighted average number of
common and common equivalent shares outstanding during each period. The tax
benefits applicable to preferred dividends paid to ESOPs are: for allocated
shares credited to income tax expense and for unallocated shares, credited
to retained earnings and are not considered earnings applicable to common stock.
Fully diluted computations assume full conversion of each series of preferred
stock into common stock, the elimination of preferred dividend requirements,
and the recognition of the tax benefit on deductible ESOP dividends applicable
to allocated shares payable based on the converted common dividend rate.
Conversion was assumed during the portion of each period that the securities
were outstanding.
5. The long-term debt is summarized as follows ($ millions):
September 30,December 31,
1997 1996
Revolving credit facilities $322 $168
Private placement debt 148 115
Other 32 30
TOTAL 502 313
Current maturities (34) (33)
Total long-term debt $468 $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 September 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):
Nine Months Ended September 30
1997 1996
Interest paid
(net of capitalized interest in 1997) $13,348 $12,374
Income tax payments 52,045 21,863
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.
8. Acquisition
Effective August 23, 1997 Pentair purchased the assets of the Pump Group of
General Signal Corporation (GS Pump). Results of operations since that date
are included in consolidated results. The purchase price was approximately
$200 million.
9. Subsequent Event
On November 4, 1997 Pentair announced that it had completed the sale of
Federal Cartridge for approximately $112 million.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
BUSINESS SEGMENT INFORMATION
Selected information for business segments for the nine months ended
September 30, 1997 and 1996 follows ($ millions):
<TABLE>
<CAPTION>
General
Specialty Industrial
Products Equipment Corporate Total
1997
<S> <C> <C> <C> <C>
Net Sales $569.2 $746.3 $ 0.0 $1,315.5
Operating Income 65.2 73.6 (20.0) 118.8
Identifiable Assets 758.6 810.2 40.6 1,609.4
Depreciation
and Amortization 17.8 33.4 0.2 51.4
Capital Expenditures 13.6 42.1 0.2 55.9
1996
Net Sales $476.4 $663.8 $0.0 $1,140.2
Operating Income 55.2 61.5 (15.6) 101.1
Identifiable Assets 468.3 734.8 77.8 1,280.9
Depreciation
and Amortization 13.9 30.4 0.1 44.4
Capital Expenditures 12.5 26.9 0.1 39.5
</TABLE>
RESULTS OF OPERATIONS
Consolidated Results.
Consolidated net sales increased to $1,315.5 million in 1997, representing
a 15.4% 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, Transrack, and GS Pump). 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 $118.8 million in 1997, up 17.5% over 1996,
and operating income as a percent of sales improved from 8.9% to 9.0%.
Gross profit margins increased .6 points in 1997 to 30.2% versus 29.6% in 1996
due to product mix and improved profitability at Federal Cartridge. Selling,
general and administrative expense (SG&A) as a percent of sales was 21.2%
in 1997 as compared to 20.7% in 1996, due to implementation of new systems
and costs associated with introductions of new products.
Specialty Products Segment.
Specialty Products sales increased $92.8 million or 19.5%, propelled
by new product introductions, acquisitions, and expanded distribution in
home center and hardware channels. The tool businesses grew as a result of
acquisitions (Flex by Porter-Cable), 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)
and the August 1997 acquisition of GS Pump contributed to sales and income
in 1997.
Operating income as a percent of sales decreased to 11.5% in 1997 from 11.6%
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 $82.5 million or 12.4%. The
acquisitions of Century Manufacturing in November 1996 and Transrack effective
January 1997 were major contributors to the increase in sales. 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 9 months of 1997. Sales at Federal
increased as a result of new product introductions and increased volume.
Operating income as a percent of sales increased to 9.9% in 1997 from
9.3% in 1996 primarily as a result of higher profitability at Federal.
FINANCIAL CONDITION
Cash flow from operating activities was $28.6 million in 1997 compared to
$26.8 million in 1996. The Company had a negative free cash flow of
$27.2 million in 1997 compared to negative $12.7 million in 1996.
Free cash flow, a measure of the internal financing of operational
cash needs, is defined as cash from operations less capital expenditures.
Gains from the sale of securities of the captive insurance company were
substantially offset by increases in insurance reserves necessary to cover
additional risks.
Working capital is somewhat seasonal and has increased to meet business needs.
Finished goods inventory was built in anticipation of strong fourth quarter
sales. Accounts receivable levels increased due to acquisitions and dating
programs.
Capital expenditures were $55.9 million in 1997 as compared to $39.5 million
in 1996. The increase is primarily due to completion of construction efforts at
Hoffman's new Mt. Sterling facility.
Borrowings in the first 9 months of 1997 financed acquisition payments and
a portion of capital expenditures, with cash from operations providing
the remainder. The percentage of long-term debt to total capital was 44% at
September 30, 1997 compared to 33% at December 31, 1996.
Proceeds from the sale of Federal Cartridge received in the fourth quarter
are being used to pay down debt and fund future growth in Pentair's chosen
markets.
OUTLOOK
In general, the Company is well-positioned to continue its recent growth with
acquisitions contributing to sales and operating growth. Strong emphasis on
product development and aggressive efforts to expand distribution channels
in all businesses are expected to generate growth in market share, sales
and profits. Pentair also continues to search for strategic or synergistic
industrial acquisitions to complement its existing businesses.
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 $75-85 million range.
Projects include the completion of the manufacturing plant for Hoffman
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 product and 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.
PART II - OTHER INFORMATION
ITEM 2 - Acquisition or Disposition of Assets
Disposition - On November 4, 1997 the Company announced that it had
completed the sale of its wholly owned subsidiary, Federal Cartridge
Co. of Anoka, Minnesota, to Blount Inc. of Montgomery, Alabama.
The transaction, an all-cash sale for approximately $112 million, was
effective as of October 31, 1997. Proceeds from the sale will be used
to pay down debt and fund future growth in Pentair's three chosen markets:
enclosures; professional tools and equipment; and water products.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are included with this Form 10-Q
Report as required by Item 601 of Regulation S-K.
Exhibit Description
Number
11 Calculation of Earnings per Common and Common Equivalent Share
27 Financial Data Schedule
(b) Reports on Form 8-K.
Form 8-K dated July 21, 1997 regarding the purchase of the General Signal
Pump Group.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
/s/ Richard W. Ingman
Richard W. Ingman
Executive Vice President and
Chief Financial Officer
November 13, 1997
<PAGE>
EXHIBIT INDEX
Exhibit Number
11 Calculation of Earnings per Common and Common Equivalent Share
27 Financial Data Schedule
EXHIBIT 11
PENTAIR, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON
AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
Nine Months Quarter Ended
September 30 September 30
1997 1996 1997 1996
INCOME ($ thousands)
<S> <C> <C> <C> <C>
Net income $62,108 $52,187 $22,207 $18,578
Preferred dividend requirements 3,646 3,816 1,212 1,268
Earnings available to common and common
equivalent shares - Primary 58,462 48,371 20,995 17,310
Preferred dividends assuming conversion
of Preferred Stock:
Series 1988 676 711 222 233
Series 1990 2,970 3,105 990 1,035
Tax benefit on preferred ESOP dividend
eliminated due to conversion into common (1,114) (1,010) (371) (327)
Tax benefit on ESOP dividend assuming con-
version to common, at common dividend rate 581 488 194 158
Earnings available for common
and common equivalent
shares - Diluted $61,575 $51,665 $22,030 $18,409
SHARES (thousands)
Weighted average number
of shares outstanding
during the period 37,943 37,433 38,037 37,573
Shares issuable on exercise
of stock options less shares
repurchaseable from proceeds 437 482 486 464
Common and Common Equivalent Shares -
Primary 38,380 37,915 38,523 38,037
Shares issuable on conversion of:
$7.50 Callable Cumulative Convertible
Preferred Stock, Series 1988 902 948 890 931
8% Callable Cumulative Voting
Convertible
Preferred Stock, Series 1990 3,745 3,882 3,713 3,825
Common and Common Equivalent Shares -
Diluted 43,027 42,745 43,126 42,793
Earnings per Share:
Primary $1.52 $1.28 $.54 $.46
Diluted $1.43 $1.21 $.51 $.43
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 25042000
<SECURITIES> 0
<RECEIVABLES> 397193000
<ALLOWANCES> 0
<INVENTORY> 331491000
<CURRENT-ASSETS> 792258000
<PP&E> 589709000
<DEPRECIATION> 262496000
<TOTAL-ASSETS> 1609357000
<CURRENT-LIABILITIES> 364025000
<BONDS> 0
<COMMON> 554278000
0
48853000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1609357000
<SALES> 1315533000
<TOTAL-REVENUES> 1315533000
<CGS> 918341000
<TOTAL-COSTS> 1196729000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16146000
<INCOME-PRETAX> 102658000
<INCOME-TAX> 40550000
<INCOME-CONTINUING> 62108000
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<NET-INCOME> 62108000
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.43
</TABLE>
