UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File No. 001-11625
PENTAIR, INC.
(Exact name of Registrant as specified in its
charter)
Minnesota 41-907434
State of incorporation) (IRS Employer Identification No.)
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, 1998 was
38,557,008.
<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 Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature Page
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
PENTAIR, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
($ expressed in thousands except per share amounts)
<CAPTION>
Six Months Ended Quarter Ended
June 30 June 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $936,755 $833,444 $471,790 $422,305
Operating costs:
Cost of goods sold 645,575 578,542 325,420 293,354
Selling, general and
Administrative 202,593 178,855 101,672 90,383
Total operating costs 848,168 757,397 427,092 383,737
Operating Income 88,587 76,047 44,698 38,568
Interest expense - net 10,969 10,095 5,616 4,977
Income before
income taxes 77,618 65,952 39,082 33,591
Provision for
income taxes 29,495 26,051 14,668 13,107
Net income 48,123 39,901 24,414 20,484
Preferred dividend
requirements 2,362 2,434 1,178 1,216
Income available to
common shareholders $45,761 $37,467 $23,236 $19,268
Basic Earnings
per Common Share $1.19 $0.99 $0.60 $0.51
Diluted Earnings
per Common Share $1.10 $0.92 $0.56 $0.47
Weighted Average
Common Shares
Outstanding 38,408 37,896 38,525 37,950
Outstanding
Assuming Dilution 43,336 42,977 43,381 43,015
</TABLE>
<PAGE>
<TABLE>
PENTAIR, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited) (in thousands)
<CAPTION>
June 30, December 31,
1998 1997
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $35,343 $34,340
Accounts and notes receivable 372,947 369,220
Inventories 282,885 266,409
Other current assets 35,936 35,401
Total current assets 727,111 705,370
Property, Plant & Equipment - net 281,570 293,554
Goodwill 425,589 429,279
Other assets 46,698 44,659
TOTAL ASSETS $1,480,968 $1,472,862
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and notes payable $123,574 $152,592
Compensation and other
benefits accruals 67,516 70,758
Income taxes 1,291 15,158
Accrued product claims and
warranties 32,585 35,114
Accrued rebates 11,777 21,658
Accrued expenses and other
liabilities 62,354 62,194
Current maturities of
long-term debt 40,000 34,703
Total current liabilities 339,097 392,177
Long-term debt 322,638 294,549
Pensions and other retirement
compensation 54,849 52,470
Postretirement medical and
other benefits 41,739 45,135
Reserves - insurance subsidiary 33,466 32,313
Other liabilities 23,146 25,656
Commitments and contingencies
Preferred stock
- at liquidation value 55,987 59,696
Unearned compensation
relating to ESOP (4,365) (6,315)
Common stock - par value, $.16 2/3 6,427 6,365
Additional paid-in capital 189,710 186,486
Accumulated other
comprehensive income (5,600) (5,085)
Retained earnings 423,874 389,415
Total shareholders' equity 666,033 630,562
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,480,968 $1,472,862
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
PENTAIR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) (in thousands)
<CAPTION>
Six Months Ended
June 30 June 30
1998 1997
Cash provided by (used for)
Operating activities
<S> <C> <C>
Net income $48,123 $39,901
Adjustments to reconcile
to cash flow:
Depreciation 27,683 28,630
Amortization 9,183 6,191
Deferred income taxes (1,230) (118)
Changes in assets and liabilities,
net of effects of
acquisitions/dispositions
Accounts receivable (15,085) (28,924)
Inventories (15,924) (40,662)
Accounts payable (24,650) 4,384
Compensation and benefits (3,474) 4,334
Income taxes (13,887) (17,457)
Pensions and other
retirement compensation 2,452 2,735
Reserves - insurance subsidiary 1,153 2,342
Other assets/liabilities - net (14,528) (7,687)
Cash used for operating activities (184) (6,331)
Investing activities
Capital expenditures (15,569) (46,146)
Payments for acquisition
of businesses (15,925) (16,419)
Proceeds from sale of businesses 13,001 0
Other 650 (7,654)
Cash used for investing activities (17,843) (70,219)
Financing activities
Borrowings 69,689 92,267
Debt payments (34,454) (7,590)
Repurchase of stock (2,577) 0
Unearned ESOP compensation
decrease 1,950 1,980
Employee stock plans and other 2,365 3,279
Dividends paid (13,861) (12,663)
Cash provided by financing
activities 23,112 77,273
Effects of currency
exchange rate changes (4,082) 4,896
Increase in cash
and cash equivalents 1,003 5,619
Cash and cash equivalents
- beginning of period 34,340 22,973
- end of period $35,343 $28,592
</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, 1997, previously filed with
the Commission.
The results of operations for the six months ended
June 30, 1998 are not necessarily indicative of the
operating results to be expected for the full year.
Income tax provisions for interim periods are based
on the current best estimate of the effective annual
federal, state and foreign income tax rates.
2. Adoption of New Accounting Standards
In 1997, the Company adopted the following new
accounting standards: Statement of Financial
Accounting Standard (FAS) No. 128, "Earnings per
Share", Statement of Financial Accounting Standard
(FAS) No. 130 "Reporting Comprehensive Income", and
Statement of Financial Accounting Standard (FAS) No.
131 "Disclosures about Segments of an Enterprise and
Related Information".
FAS 128 requires the reporting of earnings per share
(EPS) in two forms: basic EPS and diluted EPS.
Pentair has historically reported its EPS on a fully
diluted basis, which reflects the dilution resulting
from employee stock options and convertible
securities related to employee benefit plans, and is
directly comparable to the new diluted EPS reported.
See also Note 3.
FAS 130 establishes standards for the reporting of
comprehensive income and its components.
Comprehensive income is defined as the change in
equity during the period from transactions and other
events and circumstances from non-owner sources.
See also Note 4.
FAS 131 requires the Company to report information
about its operating segments based upon how the
Company manages its operations. The Company manages
its businesses in three distinct operating groups
and has realigned its external reportable segments
to conform with these internal management
structures. The three reportable segments --
Professional Tools and Equipment, Water and Fluid
Technologies, and Electrical and Electronic
Enclosures - replace the Specialty Products and
General Industrial Equipment segments which had been
reported since 1991.
Prior year financial statements have been restated
accordingly.
3. Earnings per common share
Basic earnings per common share is computed by
dividing net income, after deducting preferred stock
dividends, by the average common shares outstanding
during the period.
Diluted earnings per common share is computed by
dividing net income after adjusting the tax benefits
on deductible ESOP dividends by the average common
shares outstanding plus the incremental shares that
would have been outstanding upon the assumed
exercise of dilutive stock options and upon the
assumed conversion of each series preferred stock.
The tax benefits applicable to preferred dividends
paid to ESOPs are recorded in the following ways:
for allocated shares, they are credited to income
tax expense and included in the earnings per share
calculation; for unallocated shares, they are
credited to retained earnings and excluded from the
earnings per share calculation.
Effective December 15, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS No. 128). Earnings per
share amounts presented for 1997 have been restated
for the adoption of SFAS No. 128. The following
table reflects the calculation of basic and diluted
earnings per share.
<TABLE>
(In thousands except per share amounts)
June 30 June 30
1998 1997
<S> <C> <C>
Earnings per share
Income from continuing operations $48,123 $39,901
Preferred dividend requirements 2,362 2,434
Income available to
common shareholders 45,761 37,467
Weighted average
shares outstanding 38,408 37,896
Basic Earnings per Common Share $1.19 $0.99
Earnings per share - assuming dilution
Income available to
common shareholders 45,761 37,467
Add back preferred dividend
requirements due to
conversion into common shares 2,362 2,434
Elimination of tax benefit on
preferred ESOP dividend due to
conversion into common shares (768) (743)
Addition of tax benefit on ESOP
dividend assuming conversion to
common shares - at common
dividend rate 444 387
Income available to common
shareholders assuming dilution 47,799 39,545
Weighted average
shares outstanding 38,408 37,896
Dilutive impact of stock
options outstanding 524 413
Assumed conversion of
preferred stock 4,404 4,668
Weighted average shares
and potentially dilutive
shares outstanding 43,336 42,977
Diluted Earnings per Common Share $1.10 $0.92
</TABLE>
4. Comprehensive Income
(in thousands)
Six Months Ended June 30
1998 1997
Total Comprehensive Income $47,608 $35,853
Three Months Ended June 30
1998 1997
Total Comprehensive Income $23,991 $22,595
5. Inventories
(In thousands) June 30, December 31,
1998 1997
Finished goods $153,455 $131,847
Work in process 60,097 58,047
Raw materials and supplies 69,333 76,515
Total $282,885 $266,409
6. Property Plant and Equipment
(In thousands) June 30, December 31,
1998 1997
Land and land improvements $14,404 $14,278
Buildings 121,162 119,996
Machinery and equipment 386,422 374,967
Construction in progress 19,998 19,113
Accumulated depreciation (260,416) (234,800)
Net Property Plant
and Equipment $281,570 $293,554
7. The long-term debt is summarized as follows:
(in thousands)
June 30, December 31,
1998 1997
Revolving credit facilities $133,021 $102,119
Private placement debt 195,716 197,858
Other 33,901 29,275
TOTAL 362,638 329,252
Current maturities (40,000) (34,703)
Total long-term debt $322,638 $294,549
Debt agreements contain various restrictive
covenants, including a limitation on the payment of
dividends and certain other restricted payments.
Under the most restrictive covenants, $147 million
of the June 30, 1998 retained earnings were
unrestricted for such purposes.
8. Capital Stock
Preferred - authorized 2,800,000
outstanding - Series 1988 108,224
outstanding - Series 1990 1,493,239
Common - authorized 122,200,000
outstanding 38,557,008
On December 29, 1997, the Company announced that the
Pentair board had authorized the repurchase within
the next 12 months of up to 350,000 shares of
Pentair common stock. Any purchases would be made
periodically in the open market, by block purchases
or private transactions. The share repurchase is
intended to offset the dilution caused by stock
issuances under employee stock compensation plans.
The Company has repurchased 70,000 shares through
June 30, 1998.
9. Supplemental Statement of Cash Flows Information
The following is supplemental information relating
to the Statement of Cash Flows ($000's):
Six Months Ended June 30
1998 1997
Interest paid $11,563 $7,130
Income tax payments 44,408 39,773
10. Reclassifications
Certain reclassifications have been made to prior
years' financial statements to conform to the
current year presentation.
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, 1998 and 1997 follows:
<TABLE>
Segment Information ($000s):
1998 PTE WFT EEE Other Total
<S> <C> <C> <C> <C> <C>
Net sales from
external customers $382,866 $270,365 $283,524 $0 $936,755
Intersegment net sales 3,369 3,452 0 (6,821) 0
Segment profit (loss)
- operating income 43,298 33,164 29,343 (17,218) 88,587
Segment assets 434,322 511,743 470,895 64,008 1,480,968
1997
Net sales from
external customers $325,962 $162,528 $286,613 $58,341 $833,444
Intersegment net sales 4,886 3,619 0 (8,505) 0
Segment profit (loss)
- operating income 30,702 22,415 29,245 (6,315) 76,047
Segment assets 381,637 277,445 521,034 209,865 1,389,981
</TABLE>
PTE = Professional Tools and Equipment
WFT = Water and Fluid Technologies
EEE = Electrical and Electronic Enclosures
Other = Corporate expenses, captive insurance
company, intermediate financial companies, charges
that do not relate to current operations, divested
operations (Federal Cartridge, 1997), intercompany
eliminations, and all cash and cash equivalents.
Second quarter 1998 included unusually heavy
expenses associated with acquisition activities.
RESULTS OF OPERATIONS
Consolidated Results.
Consolidated net sales increased to $936.8 million
for the first six months of 1998, representing a
12.4% increase over 1997. The double-digit growth
rate is attributed to excellent performance in the
tools and equipment businesses and acquisitions
(primarily the pump businesses purchased from General
Signal), net of the divestiture of Federal Cartridge.
Operating income increased to $88.6 million in 1998,
up 16.5% over 1997, and operating income as a
percent of sales improved from 9.1% to 9.5%. Gross
profit margins increased in 1998 to 31.1% versus
30.6% in 1997. This is primarily due to internal
cost reduction efforts. Selling, general and
administrative expense (SG&A) as a percent of sales
was 21.6% in 1998 as compared to 21.5% in 1997. Net
income increased 20.6% over first half 1997.
Earnings per share for the first six months of 1998
of $1.10 was an increase of 19.6%. The second
quarter of 1998 is Pentair's 19th consecutive
quarter in which earnings per share improved over
the same quarter in prior years.
The effect of foreign currency translation for the
first half of 1998 on Pentair's operations has been
unfavorable but, except for the impact on Electrical
and Electronic Enclosures sales, has not been
material.
Professional Tools and Equipment Segment
This segment continued to perform extremely well as
a result of high consumer confidence levels and
several new tool introductions, such as Porter-
Cable's cordless nailer, called the Bammer. In the
equipment businesses, the benefits of recent
acquisitions and closer cooperation among these
units are beginning to be reflected in increased
sales and lower costs.
Net sales increased to $386.2 million in 1998,
representing a 16.7% increase over 1997. Operating
income increased to $43.3 million in 1998, up 41.0%
over 1997, and operating income as a percent of
sales improved from 9.3% to 11.2%.
Water and Fluid Technologies Segment
In this segment, efforts are continuing to focus on
bringing the pump businesses we acquired from
General Signal up to our performance standards.
Great progress has been made in rationalizing the
Pump Group product line, streamlining manufacturing
operations, and taking advantage of joint purchasing
opportunities among all the pump businesses.
Similarly, the results of efforts to improve
production capacity in the water conditioning
control valve business favorably impacted the first
half. As for overseas markets, European sales were
strong this quarter.
Net sales increased to $273.8 million in 1998,
representing a 64.8% increase over 1997. Excluding
the effects of acquisitions, sales grew due to
improving European markets and weather patterns in
the central US that increased demand for sump pumps.
Operating income increased to $33.2 million in 1998,
up 48.0% over 1997, but operating income as a
percent of sales declined from 13.5% to 12.1%. This
decrease is due to lower initial margins from newly
acquired businesses.
Electrical and Electronic Enclosures Segment
Sales in North American enclosure markets were down
slightly in the first half compared to the same
period last year. Sales of electronic enclosures
were affected by weakness in the Asian markets,
while reduced capital spending in the semiconductor
and automotive markets dampened demand for
enclosures in North America. The European enclosure
situation is improving and order intake has been
stronger in 1998. European enclosure sales in the
first half of this year increased as measured in
local currency, but were unfavorably impacted when
translated to US dollars.
Net sales were $283.5 million in 1998, representing
a 1.1% decrease from 1997. Operating income
increased to $29.3 million in 1998, up 0.3% over
1997, and operating income as a percent of sales
improved from 10.2% to 10.3%.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was negative $.2
million in 1998 compared to negative $6.3 million in
1997. This improvement was achieved despite a one-
time $17 million tax payment in the first quarter of
1998 associated with the Federal Cartridge
divestiture.
Capital expenditures were $15.6 million in 1998
compared to $46.2 million in 1997. The Company had a
negative free cash flow of $15.8 million in 1998
compared to a negative $52.5 million in 1997. Free
cash flow, a measure of the internal financing of
operational cash needs, is defined as cash from
operations less capital expenditures. One of
Pentair s primary financial goals is to maximize
free cash flow within the framework of supporting
the operations of all of its businesses.
Historically, cumulative free cash flow is negative
during the first part of each fiscal year and
positive thereafter.
Borrowings in the first half of 1998 financed
capital expenditures and acquisitions. The
percentage of long-term debt to total capital was
33% at June 30, 1998 compared to 32% at December 31,
1997.
OUTLOOK
While the outlook for each of its segments in 1998
is encouraging, Pentair wishes to further improve
its performance on a company-wide basis in
profitability and generation of free cash flow. The
Company has implemented a program (named "PACE" -
Pentair Accelerating Competitive Excellence) to reduce
the costs of its operations over the next two
years and to maintain those reductions in future
years through improvements in purchasing and supply
management and reengineering of support services.
In addition, Pentair continues to look for
synergistic acquisitions in each of its business
segments, in line with its pattern over the past
three years. Pentair will continue to pursue
complementary acquisitions to fold into current
operations, but will also carefully review larger
targets, which would significantly expand its
current segments. Other acquisitions are possible,
but only if they present Pentair extraordinary
opportunities.
Acquisition and internal growth initiatives, coupled
with the savings anticipated from our cost-reduction
activities, should generate consistent and attractive
results for Pentair shareholders in 1998 and beyond.
YEAR 2000 and "Euro" CURRENCY ISSUES
The Company has been evaluating its computer,
telecommunications, and embedded logic systems since
1995 for compliance with Year 2000 requirements and
over the past year for the new "Euro" currency. The
Company has determined that expected costs for
compliance will not be material to its results of
operations, liquidity or capital expenditures. Most
of the businesses have installed or are in the
process of installing complete new business
management systems which go beyond just Year 2000
and "Euro" compliance. Some businesses have chosen
to upgrade existing systems to be compliant. Under
current plans, the Company does not anticipate
significant risks to its operations from internal
noncompliance with these issues. While the Company's
businesses are working with their respective customers
and suppliers to certify compliance within their
organization, the Company cannot predict whether
noncompliance by third parties will affect their
operations. Significant noncompliance by customers
and suppliers would be expected to adversely impact
sales and operating income.
NOTIFICATION REGARDING FORWARD-LOOKING INFORMATION
Except for historical information contained herein,
certain statements are forward-looking statements
that involve risks and uncertainties, including, but
not limited to, the effect of economic conditions,
product demand and market acceptance risks, customer
mix, the impact of competitive products and pricing,
product development, commercialization and
technological difficulties, production efficiency
improvement opportunities, capacity and supply
constraints or difficulties, the results of
financing efforts, actual purchases under agreements
and the effect of the Company's accounting policies.
The actual results that the Company achieves may
differ materially from these forward-looking
statements due to such risks and uncertainties. The
Company undertakes no obligation to revise any
forward-looking statements in order to reflect
events or circumstances that may arise after the
date of the Company's Annual Report. Readers are
urged to carefully review and consider the various
disclosures made by the Company in this report and
in the Company's other filings with the Securities
and Exchange Commission from time to time that
advise interested parties of the risks and
uncertainties that may affect the Company's
financial condition and results of operations.
<PAGE>
PART II - OTHER INFORMATION
ITEM 5 - Other Information
On April 30, 1998, Century Manufacturing acquired
the assets of T-Tech Industries, which designs,
manufactures, and markets automatic transmission
fluid exchanger systems and accessories. The
company is profitable and results will likely be
accretive to Pentair's 1998 earnings.
On May 5, 1998, the board of directors of Pentair
announced its intention to make a cash offer for the
entire issued and to-be-issued share capital of VERO
Group plc, of Southampton, England, a supplier of
racks, subracks, and enclosures to the general
electronics, networking and telecommunications
industries. Following a subsequent increased offer
by a competing bidder, Pentair declined to increase
its offer, which it considered to have been fully
priced.
Shareholder Proposal Amendments Effective May 21, 1998
As of the date of the 1998 Annual Meeting of
Shareholders, Rule 14a-4(c) under the Securities and
Exchange Act of 1934 provided that a proxy could
grant discretionary authority to vote on matters at
an annual stockholders' meeting if (i) the person or
persons soliciting the proxy did not know that such
matters were to be presented at the annual
stockholders' meeting at least a reasonable time
before the solicitation and (ii) a specific
statement to that effect is made in the proxy
statement or form of proxy. In a recent release by
the Securities and Exchange Commission, Rule 14a-
4(c) was revised to remove the ambiguity of a
"reasonable time" and establish a bright-line test
for when proxies could grant discretionary authority
to vote on matters not submitted to the company in
compliance with Rule 14a-8.
As revised, Rule 14a-4(c) provides that a proxy can
grant discretionary authority to vote on matters at
an annual stockholders' meeting if (i) the company
has not received notice of the matter at least 45
days before the date on which the company first
mailed its proxy materials for the prior year's
annual stockholders' meeting and (ii) a specific
statement that the company has not received such
notice is included in the proxy statement or form of
proxy. As a result of the revisions, the Company
advises all stockholders that the deadline for
submitting non-Rule 14a-8 stockholder proposals
for the Company's 1999 Annual Meeting of
Shareholders will be January 19, 1999. Any shareholder
proposals submitted after January 19,1999 will be
considered untimely for purposes of Rules 14a-4 and
14a-5(e).
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
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the
quarter ended June 30, 1998.
<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
Executive Vice President and
Chief Financial Officer
August 10, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 35343
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<ALLOWANCES> 8000
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0
51622
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