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 September 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)
(651) 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, 1998 was
38,402,505.
<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
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
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $1,413,535 $1,315,533 $476,780 $482,089
Operating costs:
Cost of goods sold 974,729 918,341 329,154 339,799
Selling, general and
Administrative 303,558 278,388 100,965 99,533
Total operating costs 1,278,287 1,196,729 430,119 439,332
Operating Income 135,248 118,804 46,661 42,757
Interest expense - net 16,565 16,146 5,596 6,051
Income before income taxes 118,683 102,658 41,065 36,706
Provision for income taxes 44,764 40,550 15,269 14,499
Net income 73,919 62,108 25,796 22,207
Preferred dividend requirements 3,533 3,646 1,171 1,212
Income available to
common shareholders $ 70,386 $ 58,462 $ 24,625 $ 20,995
Basic Earnings per Common Share $1.83 $1.54 $0.64 $0.55
Diluted Earnings per Common Share $1.70 $1.43 $0.60 $0.51
Weighted Average Common Shares
Outstanding 38,440 37,943 38,506 38,036
Outstanding Assuming Dilution 43,229 43,027 43,014 43,126
</TABLE>
<PAGE>
PENTAIR, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 33,794 $ 34,340
Accounts and notes receivable 369,516 369,220
Inventories 290,816 266,409
Other current assets 36,128 35,401
Total current assets 730,254 705,370
Property, Plant & Equipment - net 287,108 293,554
Goodwill 435,119 429,279
Other assets 52,860 44,659
TOTAL ASSETS $1,505,341 $1,472,862
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and notes payable $ 114,763 $ 152,592
Compensation and other benefits accruals 71,094 70,758
Income taxes 4,395 15,158
Accrued product claims and warranties 31,124 35,114
Accrued rebates 15,912 21,658
Accrued expenses and other liabilities 67,650 62,194
Current maturities of long-term debt 76,084 34,703
Total current liabilities 381,022 392,177
Long-term debt 282,989 294,549
Pensions and other retirement compensation 58,178 52,470
Postretirement medical and other benefits 41,723 45,135
Reserves - insurance subsidiary 34,523 32,313
Other liabilities 27,365 25,656
Commitments and contingencies
Preferred stock - at liquidation value 54,547 59,696
Unearned compensation relating to ESOP (3,390) (6,315)
Common stock - par value, $.16 2/3 6,402 6,365
Additional paid-in capital 181,615 186,486
Accumulated other comprehensive income (2,449) (5,085)
Retained earnings 442,816 389,415
Total shareholders' equity 679,541 630,562
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,505,341 $1,472,862
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PENTAIR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1998 1997
<S> <C> <C>
Cash provided by (used for)
Operating activities
Net income $73,919 $62,108
Adjustments to reconcile to cash flow:
Depreciation 41,192 41,769
Amortization 10,818 9,589
Gain on sale of securities 0 (5,932)
Deferred income taxes (1,010) (854)
Changes in assets and liabilities,
net of effects of acquisitions/dispositions
Accounts receivable (7,374) (60,754)
Inventories (20,490) (50,451)
Accounts payable (35,120) 19,901
Compensation and benefits (920) 11,930
Income taxes (10,566) (17,434)
Pensions and other
retirement compensation 3,917 4,343
Reserves - insurance subsidiary 2,210 3,388
Other assets/liabilities - net (15,778) 11,039
Cash provided by operating activities 40,798 28,642
Investing activities
Capital expenditures (29,717) (55,873)
Payments for acquisition of businesses (17,955) (210,651)
Proceeds from sale of businesses 13,001 0
Net proceeds from sales of marketable securities 0 46,696
Other 631 886
Cash used for investing activities (34,040) (218,942)
Financing activities
Borrowings 72,998 215,626
Debt payments (46,663) (11,398)
Repurchase of stock (12,372) 0
Unearned ESOP compensation decrease 2,925 2,970
Employee stock plans and other 2,704 2,754
Dividends paid (20,833) (19,012)
Cash provided by(used for)
financing activities (1,241) 190,940
Effects of currency exchange rate changes (6,063) 1,429
Increase(decrease) in cash
and cash equivalents (546) 2,069
Cash and cash equivalents
- beginning of period 34,340 22,973
- end of period $33,794 $25,042
</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, 1997, previously filed with
the Commission.
The results of operations for the nine months ended
September 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>
<CAPTION>
September 30 September 30
(In thousands except per share amounts) 1998 1997
Earnings per share
<S> <C> <C>
Net income $73,919 $62,108
Preferred dividend requirements 3,533 3,646
Income available to common shareholders 70,386 58,462
Weighted average shares outstanding 38,440 37,943
Basic Earnings per Common Share $1.83 $1.54
Earnings per share - assuming dilution
Income available to common shareholders 70,386 58,462
Add back preferred dividend requirements
due to conversion into common shares 3,533 3,646
Elimination of tax benefit on preferred
ESOP dividend due to conversion into
common shares (1,088) (1,114)
Addition of tax benefit on ESOP dividend
assuming conversion to common shares -
at common dividend rate 629 581
Income available to common
shareholders assuming dilution 73,460 61,575
Weighted average shares outstanding 38,440 37,943
Dilutive impact of stock options outstanding 462 437
Assumed conversion of preferred stock 4,327 4,647
Weighted average shares
and potentially dilutive shares outstanding 43,229 43,027
Diluted Earnings per Common Share $1.70 $1.43
</TABLE>
4. Comprehensive Income
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30
1998 1997
<S> <C> <C>
Net Income $73,919 $62,108
Other Comprehensive Income, net of tax:
Foreign Currency Translation Adjustments 2,578 (8,604)
Unrealized Gains on Securities 0 (1,965)
Minimum Pension Liability Adjustment 58 1,034
Total Comprehensive Income $76,555 $52,573
Three Months Ended September 30
1998 1997
Net Income $25,796 $22,207
Other Comprehensive Income, net of tax:
Foreign Currency Translation Adjustments 3,152 (2,178)
Unrealized Gains on Securities 0 (3,309)
Minimum Pension Liability Adjustment 0 0
Total Comprehensive Income $28,948 $16,720
</TABLE>
5. Inventories
<TABLE>
<CAPTION>
(In thousands) September 30, December 31,
1998 1997
<S> <C> <C>
Finished goods $157,601 $131,847
Work in process 63,159 58,047
Raw materials and supplies 70,056 76,515
Total $290,816 $266,409
</TABLE>
6. Property Plant and Equipment
<TABLE>
<CAPTION>
(In thousands) September 30, December 31,
1998 1997
<S> <C> <C>
Land and land improvements $14,864 $14,278
Buildings 124,768 119,996
Machinery and equipment 396,561 374,967
Construction in progress 27,409 19,113
Accumulated depreciation (276,494) (234,800)
Net Property Plant
and Equipment $287,108 $293,554
</TABLE>
7. The long-term debt is summarized as follows:
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
Revolving credit facilities $95,815 $102,119
Private placement debt 233,716 197,858
Other 29,542 29,275
TOTAL 359,073 329,252
Current maturities (76,084) (34,703)
Total long-term debt $282,989 $294,549
</TABLE>
Debt agreements contain various restrictive
covenants, including a limitation on the payment of
dividends and certain other restricted payments.
Under the most restrictive covenants, $148 million
of the September 30, 1998 retained earnings were
unrestricted for such purposes.
8. Capital Stock
Preferred - authorized 2,800,000
outstanding - Series 1988 103,318
outstanding - Series 1990 1,461,664
Common - authorized 122,200,000
outstanding 38,402,505
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 350,000 shares through
September 30, 1998.
9. Supplemental Statement of Cash Flows Information
The following is supplemental information relating
to the Statement of Cash Flows ($000's):
<TABLE>
<CAPTION>
Nine Months Ended September 30
1998 1997
<S> <C> <C>
Interest paid $17,098 $13,348
Income tax payments 50,277 52,045
</TABLE>
10. Reclassifications
Certain reclassifications have been made to prior
years' financial statements to conform to the
current year presentation.
11. Accounting Developments
In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company
must adopt this standard no later than January 1,
2000. The Company is reviewing the requirements of
this standard, which are quite complex. Although
the Company expects that this standard will not
materially affect its financial position and results
of operations, it has not yet determined the impact
of this standard on its financial statements.
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, 1998 and 1997
follows:
<TABLE>
<CAPTION>
Segment Information ($000s):
1998 - Nine Months PTE WFT EEE Other Total
<C> <S> <S> <S> <S> <S>
Net sales from
external customers $586,320 $404,496 $422,719 $0 $1,413,535
Intersegment net sales 5,034 4,800 0 (9,834) 0
Segment profit (loss)
- operating income 67,413 53,099 42,404 (27,668) 135,248
Segment assets 457,156 515,407 483,483 49,295 1,505,341
1997 - Nine Months
Net sales from
external customers $508,047 $264,216 $432,914 $110,356 $1,315,533
Intersegment net sales 7,320 5,093 0 (12,413) 0
Segment profit (loss)
- operating income 49,693 34,070 41,983 (6,942) 118,804
Segment assets 401,116 520,331 517,667 170,243 1,609,357
1998 - Third Quarter PTE WFT EEE Other Total
Net sales from
external customers $203,455 $134,130 $139,195 $0 $476,780
Intersegment net sales 1,664 1,348 0 (3,012) 0
Segment profit (loss)
- operating income 24,115 19,935 13,060 (10,449) 46,661
1997 - Third Quarter
Net sales from
external customers $182,085 $101,688 $146,301 $52,015 $482,089
Intersegment net sales 2,434 1,474 0 (3,908) 0
Segment profit (loss)
- - operating income 18,992 11,655 12,737 (627) 42,757
</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 $1,413.5 million
for the first nine months of 1998, representing a
7.5% increase over 1997. The growth 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 $135.2 million in
1998, up 13.8% over 1997, and operating income as a
percent of sales improved from 9.0% to 9.6%. Gross
profit margins increased in 1998 to 31.0% versus
30.2% in 1997. This is primarily due to internal
cost reduction efforts. Selling, general and
administrative expense (SG&A) as a percent of sales
was 21.5% in 1998 as compared to 21.2% in 1997,
largely due to lower than anticipated sales volumes.
Net income increased 19.0% over the nine-month
period of 1997. Earnings per share for the nine-
month period of 1998 of $1.70 was an increase of
18.9%.
Consolidated net sales declined to $476.8 million
for the third quarter of 1998, representing a 1.0%
decrease compared to the third quarter of 1997,
which included the seasonally strong sales of the
Federal cartridge business (divested in November,
1997), and a partial-quarter contribution of the
former General Signal pump businesses from August
23, 1997 forward. Excluding acquisitions and
divestitures, Pentair sales rose by 4.9% quarter-
over-quarter.
Operating income increased to $46.7 million in the
third quarter of 1998, up 9.1% over the comparable
quarter of 1997, and operating income as a percent
of sales improved from 8.9% to 9.8%. Third quarter
gross profit margins increased in 1998 to 31.0%
versus 29.5% in 1997. This is primarily due to
internal cost reduction efforts. Third quarter
selling, general and administrative expense (SG&A)
as a percent of sales was 21.2% in 1998 as compared
to 20.6% in 1997. Third quarter net income
increased 16.2% over the same quarter of 1997.
Earnings per share for the third quarter of 1998 of
$0.60 represented an increase of 17.6%. The third
quarter of 1998 is Pentair's 20th consecutive
quarter in which earnings per share improved over
the same quarter in prior years.
The effect of foreign currency translation for 1998
on Pentair's sales has been unfavorable, but not
material. The weakening of the Canadian dollar
unfavorably impacted earnings per share by
approximately $0.02 during the third quarter of
1998.
Professional Tools and Equipment Segment
This segment continued to perform extremely well as
a result of high demand from retail markets 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 $591.4 million for the first
nine months of 1998, representing a 14.7% increase
over 1997. Operating income increased to $67.4
million for the first nine months of 1998, up 35.7%
over 1997, and operating income as a percent of
sales improved from 9.6% to 11.4%.
Net sales increased to $205.2 million for the third
quarter of 1998, representing an 11.2% increase over
1997. Operating income increased to $24.1 million
for the third quarter of 1998, up 27.0% over the
comparable quarter of 1997, and operating income as
a percent of sales improved from 10.3% to 11.8%.
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
productivity and production capacity in the water
conditioning control valve business favorably
impacted the first nine months. As for overseas
markets, European sales continue to experience
double-digit growth over 1997.
Net sales increased to $409.3 million for the first
nine months of 1998, representing a 52.0% increase
over 1997. Excluding the effects of acquisitions,
sales grew 5.6% due to improving European markets
and increased penetration in distribution channels.
Operating income increased to $53.1 million for the
first nine months of 1998, up 55.9% over 1997, and
operating income as a percent of sales improved from
12.7% to 13.0%.
Net sales increased to $135.5 million for the third
quarter of 1998, representing a 31.3% increase over
1997. Operating income increased to $19.9 million
for the third quarter of 1998, up 71.0% over the
comparable quarter of 1997, and operating income as
a percent of sales improved from 11.3% to 14.7%.
Electrical and Electronic Enclosures Segment
Sales in the Electrical and Electronic Enclosure
segment were down five percent compared to the third
quarter of 1997. This shortfall was principally due
to lower automotive and machine tool capital
spending in North America. Despite this, global
margins improved due to aggressive cost controls.
Although most industrial markets have been soft for
the past 12 months, the EEE segment has had success
in targeted, high-growth markets. The EEE segment
throughout, but especially in North America, entered
into several key contracts with major telecom and
datacom customers in the third quarter as its
penetration of these markets gained momentum.
Net sales were $422.7 million for the first nine
months of 1998, representing a 2.4% decrease over
1997. Operating income increased to $42.4 million
for the first nine months of 1998, up 1.0% over
1997, and operating income as a percent of sales
improved from 9.7% to 10.0%.
Net sales of $139.2 million for the third quarter of
1998, decreased 4.9% from 1997. Operating income
increased to $13.1 million for the third quarter of
1998, up 2.5% over the comparable quarter of 1997,
and operating income as a percent of sales improved
from 8.7% to 9.4%.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was $40.8
million in 1998 compared to $28.6 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 $29.7 million in 1998
compared to $55.9 million in 1997. The Company had a
free cash flow of $11.1 million in 1998 compared to
a negative $27.2 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, while
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. 1997 included the seasonally
high accounts receivable of Federal Cartridge ($45
million approximately) which was divested in the fourth
quarter of 1997.
The percentage of long-term debt to total capital
was 29% at September 30, 1998 compared to 32% at
December 31, 1997. Current maturities of private
placement long-term debt will be funded with
revolving credit borrowings. Pentair believes that
cash flow from operations will continue to exceed
its needs for capital programs and smaller
acquisitions. The Company has significant financing
capacity to continue its acquisition program.
OUTLOOK
Pentair should continue to achieve relatively good
performance in the likely event of a slower but more
stable economic climate in 1999, due to limited
exposure in "at-risk" international markets,
operations in three diverse product and customer
markets, and its proven ability to take advantage of
cost containment programs, new product development,
multi-channel distribution, and the pursuit of value-
added acquisitions.
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 total 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.
YEAR 2000 ISSUE
Background
The Year 2000 Issue is the result of computer
programs and embedded computer chips orginally having
been designed and developed using two digits rather
than four digits to define the applicable year.
Any of the Company's internal use computer programs
and hardware as well as its products that are date-
sensitive may recognize a date using "00" as the
Year 1900 rather than the Year 2000. This could
result in a system failure or miscalculations
causing disruptions of operations, including, among
other things, a temporary inability to process
transactions or engage in normal business activities
for both the Company and its customers who rely on
its products.
State of Readiness
The Company has had its " Y2K Project" program in
place since 1995 to address Year 2000 issues in
critical business areas for its products,information
management systems, non-information systems with
embedded technology, suppliers and customers.The Company
has largely completed its review and compliance
planning for its critical information systems (IS).
Depending on the progress of its separate business units,
the Company is currently in or has completed the implementation
of required actions for compliance. It is anticipated that
the implementation and testing phases will be substantially
complete by the second quarter of 1999.
The Company is also in the process of reviewing and
replacing, where necessary, its other automated
communications and manufacturing systems. The Company
estimates that it will also substantially complete this
phase by the second quarter of 1999.
Very few of the Company's products are date-sensitive.
Any known date-sensitive products have been or will be
corrected or replaced by a new product.
The Company has certain integrated relationships with a
number of its suppliers and customers. These
include among others providers of energy,
telecommunications, raw materials and components,
financial institutions, managed care organizations
and large retail establishments. The Company has
been reviewing and continues to review with its
critical suppliers and major customers, the status
of their Year 2000 readiness. The Company's business
units have established plans for ongoing monitoring of
suppliers during 1999.
Costs to Address the Year 2000 Issue
As a result of the numerous different systems
used by businesses that the Company has acquired in
recent years and also as a result of changing business
requirements, the Company has an ongoing IS
development plan with scheduled replacements of systems
occurring throughout the organization. Year 2000
compliance is a by-product of our development plan.
The estimated cost associated with the total IS development plan
over the five-year period from 1995 to 1999 is anticipated
to be approximately $50 million. The estimated cost
specifically attributable to Year 2000 compliance amounts to
approximately $10 million, of which $6.5 million was spent
through September 30, 1998. Pentair has not deferred any
projects as a result of the implementation of the Y2K Project.
Risks Represented by the Year 2000 Issue
Pentair believes that completed and planned
modifications and conversions of its internal
systems and equipment will allow it to be Year 2000
compliant in a timely manner. However, there can be
no absolute assurance, in every single respect, that
the Company's internal systems or equipment or those
of third parties on which Pentair relies will be Year
2000 compliant in a timely manner or that the
Company's or third parties' contingency plans will
mitigate the effects of any noncompliance. The Year
2000 non-compliance of the systems or equipment of
Pentair or third parties would likely result in some
reduction of the Company's operations and could
have a material adverse effect on the Company's
business or consolidated financial statements.
Pentair believes that the most reasonably likely worst
case scenario would be its exposure to the risks of third
party non-compliance, however, the Company has no reason
to believe that its exposure to such risks is any
greater than the exposure to such risk that affects its
competitors generally.
Contingency Plans
Pentair has not yet developed Year 2000 specific
contingency plans. A full review will be done at
the end of the second quarter of 1999 to assess
issues related to internal non-compliance and
potential third party failures. Possible plans may
include arranging substitutes for energy, increasing
levels of inventory and developing alternate
sources of raw materials.
THE EURO CONVERSION
On January 1, 1999, eleven of the fifteen member
countries of the European Union (EU) will establish
fixed conversion rates through the European Central
Bank (ECB) between their existing local currencies
and the Euro, the EU's future single currency. The
participating countries have agreed to adopt the
Euro as their common legal currency on that date.
The Euro will then trade on currency exchanges and
be available for non-cash transactions.
Following introduction of the Euro, the local
currencies will remain legal tender between January
1, 1999 and January 1, 2002. During the transition
period, goods and services may be paid for using
either the Euro or the local currency under the EU's
"no compulsion, no prohibition" principle. If cross-
border payments are made in a local currency during
this transition period, the amount will first be
converted into the Euro and then converted from the
Euro into the second local currency at the rates
fixed by the ECB. Beginning no later than January
1, 2002, the participating countries will issue new
Euro-denominated bills and coins for use in cash
transactions. By no later than July 1, 2002, the
participating countries will withdraw all bills and
coins denominated in local currencies, making
conversion to the Euro complete.
The Company is in the process of reviewing the
Euro's impact on the Company's business and pricing
strategies. The Company has made significant
investments in its IS systems in Europe over the
past few years. The Company expects that it will be
able to manage customer orders, invoices, payments
and accounts in Euros and in local currencies
according to customer needs by January 1, 1999. The
Company has not developed contingency plans at this
time since the Company believes its IS systems are
ready for the Euro. The introduction of the Euro
is not expected to have a material impact on the
Company's overall currency risk or its ability to transact
business.
The Company does have derivatives outstanding beyond
January 1, 1999 in several of the European local
currencies. The Company uses derivatives in a
strategic manner to minimize interest rate and
foreign currency risk. The instruments are not
purchased as speculative investments. The Company
believes the impact of the introduction of the Euro
on the Company's derivative positions will not be
material.
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 hereof. 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.
Forward-Looking Statements
The preceding "Year 2000 Issue" and "Euro Conversion"
discussions contain various forward-looking statements,
which represent the Company's beliefs or expectations
regarding future events. When used in these discussions,
the words "believes", "anticipates", "expects", "estimates"
and similar expressions are intended to identify forward-
looking statements. Forward-looking statements include,
without limitation, the Company's expectations as to when
it will complete the remediation and testing phases of its
Year 2000 and Euro programs as well as contingency plans; its
estimated costs of achieving Year 2000 and Euro related readiness;
and the Company's belief that its internal systems and equipment
will be compliant in a timely manner. All forward-looking statements
involve a number of risks and uncertainties that could cause
the actual results to differ materially from the projected results.
Factors that may cause these differences include, but are not
limited to, the availability of qualified personnel and other
IS resources; the ability to identify and remediate all
date-sensitive computer coding or the ability to identify and
replace all embedded computer chips in affected systems or equipment;
and the actions of governmental agencies or other third parties with
respect to Year 2000 and Euro problems.
<PAGE>
PART II - OTHER INFORMATION
ITEM 5 - Other Information
Pentair, Inc. significantly expanded its position in
fast-growing electronic enclosure markets on October
30, 1998, when it acquired The Walker Dickson Group
Limited (WDG) of Edinburgh, Scotland. WDG designs,
manufactures and markets custom and standard
enclosures, subracks and systems for
telecommunications, computer networking and general
electronics applications. Pentair said that WDG's
anticipated annual sales are in the $40 to $50
million range; the purchase price is approximately
equal to one year's sales. Pentair also said WDG is
profitable and is expected to be accretive to
Pentair earnings in 1999. The cash transaction was
financed through bank borrowings.
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 September 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
November 13, 1998
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