UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File No. 001-11625
PENTAIR, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0907434
(State of incorporation) (I.R.S. Employer Identification Number)
1500 County Road B2 West, Suite 400, Saint Paul, Minnesota 55113-3105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
651-636-7920
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, Par Value
$.16 2/3 per share New York Stock Exchange
Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates
of the Registrant on March 1, 1999 was $1.4 billion. For
purposes of this calculation, all shares held by officers and
directors of the Registrant and by the trustees of employee stock
ownership plans (ESOPs) and pension plans of the Registrant and
subsidiaries were deemed to be shares held by affiliates.
The number of shares outstanding of Registrant's only class of
common stock on March 1, 1999 was 42,700,169.
The exhibit index as required by Item 601(a) of Regulation S-K is
included in Item 14 of Part IV of this report.
Documents Incorporated by Reference: Portions of the registrant's
definitive Proxy Statement for the 1999 Annual Meeting of
Shareholders are incorporated by reference in Part III of this
Report.
<PAGE>
PART I
ITEM 1. BUSINESS
(a) General Development of the Business.
Pentair, Inc. (the "Company" or "Pentair") was incorporated
in 1966 under the laws of Minnesota. In the past year,
the Company has not changed its form of organization
or mode of conducting business. The Company grows
through internal development and acquisitions. As in the past,
periodic dispositions of assets or business units are possible
when they no longer fit with the long-term strategies of the Company.
Effective January 1, 1994, the Company acquired the net assets
and the subsidiaries of Schroff GmbH (Schroff) from Fried. Krupp
AG Hoesch-Krupp. Schroff manufactures and sells enclosures,
cases, subracks and accessories for commercial electronic and
instrumentation applications.
In September 1994, Pentair announced that it was exploring
strategic alternatives for its paper businesses, including their
possible sale. In the second quarter of 1995, all of the Pentair
paper businesses were sold. On April 1, 1995 the Company sold
its Cross Pointe Paper Corporation subsidiary to Noranda Forest,
Inc. On June 30, 1995 the Company sold Niagara of Wisconsin
Paper Corporation, its 50% share of Lake Superior Paper
Industries (LSPI) joint venture and its 12% share of Superior
Recycled Fiber Industries (SRFI) to Consolidated Papers, Inc.
The sale of its paper businesses has permitted Pentair to focus
its commitments and resources on its industrial products
businesses, building upon the strong growth and leading market
positions these businesses have achieved.
Effective November 1, 1995, the Company acquired Fleck Controls,
Inc., a manufacturer of control valves, which are major
components in residential water softeners, and commercial and
industrial water conditioning systems. Fleck Controls was
Pentair's first entry into the water treatment industry.
During 1996, the Company completed four strategic acquisitions
that strengthened market positions throughout the world. In
January, Myers acquired Aplex to broaden its industrial pump
line. In June, Porter-Cable acquired FLEX, a German power tool
company. In November, the Company acquired Century
Manufacturing, a manufacturer that serves service equipment
markets, complementing its Lincoln Automotive subsidiary. In
December, Fleck Controls purchased SIATA, an Italian manufacturer
of water conditioning control equipment.
During 1997, the Company completed 3 strategic acquisitions. In
January, Schroff France acquired Transrack S.A., a maker of
complementary cases and enclosures. In July, Century
Manufacturing acquired P & F Technologies , a maker of
refrigerant recycling equipment. In August, Pentair acquired the
General Signal Pump Group in a significant acquisition designed
to create a critical mass in the water and wastewater pump
markets.
Also in 1997, in another strategic development, the Company
divested its Federal Cartridge sporting ammunition business.
In the fourth quarter of 1997, the Company realigned its
subsidiaries into 3 operating groups to reflect its growing focus
in its addressed markets: Professional Tools and Equipment, Water
and Fluid Technologies and Electrical and Electronic Enclosures.
Delta International, Porter-Cable, Lincoln Automotive and Century
Manufacturing make up the Professional Tools and Equipment
segment, which markets its products to professional users and
sophisticated individual users through similar channels. The
Water and Fluid Technologies segment consists of the Pentair Pump
Group, Fleck Controls, and Lincoln Industrial, all of which share
aspects of manufacturing process, applied technology, and
distribution channels. Pentair's Hoffman and Schroff enclosures
businesses comprise the Electrical and Electronic Enclosures
segment.
During 1998, the Company completed 3 strategic acquisitions. In
January, Pentair acquired ORSCO, Inc., a maker of oil lubrication
systems. In April, Century Manufacturing acquired the assets of
T-Tech Industries, a maker of automatic transmission fluid
exchangers and accessories. In October, Pentair acquired The
Walker Dickson Group Limited (now Pentair Enclosures U.K. and
its subsidiaries), a maker of custom and standard enclosures,
subracks and systems.
(b) Financial Information about Industry Segments.
Pentair has three reportable segments: Professional Tools
and Equipment (PTE), Water and Fluid Technologies (WFT), and
Electrical and Electronic Enclosures (EEE). The PTE segment
includes Delta International Machinery, Porter-Cable, Lincoln
Automotive and Century Manufacturing. Products manufactured
include woodworking machinery, portable power tools, lubricating
and lifting equipment, battery charging and testing equipment,
and welding equipment. The WFT segment includes the Pentair Pump
Group, Fleck Controls and Lincoln Industrial. Products
manufactured include pumps for wells and water treatment, sump
pumps, valves for water softeners, and automated and manual
lubrication systems and equipment. The EEE segment includes
Hoffman Enclosures, Schroff and Pentair Enclosures U.K. Products
manufactured include metallic and composite cases, subracks, and
cabinets that house and protect electrical and electronic
controls, instruments, and components. Other includes corporate
expenses, captive insurance company, intermediate financial
companies, charges that do not relate to current operations,
divested operations (Federal Cartridge), and intercompany
eliminations. Segment assets exclude all cash and cash
equivalents.
In evaluating financial performance, management focuses on
operating income as a segment's measure of profit or loss.
Operating income is before interest expense, interest income and
income taxes. Management uses a variety of balance sheet ratios
to measure the business. The primary focus is on maximizing the
return from each segment's assets, excluding cash and temporary
investments. The accounting policies of the segments are the same
as those described in the summary of significant accounting
policies (Note 1 of Notes to the Consolidated Financial Statements).
Most intersegment sales are component parts and are sold
at cost plus an equitable division of manufacturing
and marketing profits. The remaining intercompany sales are
finished product and are sold based on current market pricing to
third parties.
<TABLE>
<CAPTION>
Segment Information:
(in thousands) PTE WFT EEE Other Totals
1998
<S> <C> <C> <C> <C> <C>
Net sales from
external customers $841,325 $532,208 $564,045 $0 $1,937,578
Intersegment net sales 7,969 5,672 0 (13,641) 0
Depreciation and
amortization expense 16,429 19,516 32,285 158 68,388
Segment profit (loss)
- operating income 108,242 71,353 51,753 (38,156) 193,192
Segment assets 477,076 505,246 535,810 36,534 1,554,666
Capital expenditures 21,830 13,027 17,320 1,666 53,843
1997
Net sales from
external customers $737,323 $397,286 $579,209 $125,238 $1,839,056
Intersegment net sales 9,743 6,693 157 (16,593) 0
Depreciation and
amortization expense 14,307 16,703 30,265 6,561 67,836
Segment profit (loss)
- operating income 84,355 45,987 53,313 (13,853) 169,802
Segment assets 410,037 508,357 473,906 80,562 1,472,862
Capital expenditures 22,947 8,492 43,815 2,207 77,461
1996
Net sales from
external customers $572,349 $316,167 $548,695 $129,854 $1,567,065
Intersegment net sales 10,340 6,085 103 (16,528) 0
Depreciation and
amortization expense 11,605 12,219 28,297 7,399 59,520
Segment profit (loss)
- operating income 60,556 44,445 59,592 (21,674) 142,919
Segment assets 360,766 280,819 464,475 182,954 1,289,014
Capital expenditures 15,270 10,701 40,522 5,153 71,646
</TABLE>
(c) Narrative Description of Business.
Description of the Professional Tools and Equipment Segment:
Products; markets; competition
Products include: a full line of homeshop products, contractor
tools, general purpose stationary woodworking machinery, and
accessories; air-powered nailing products, portable electric
tools including saws, routers, sanders, grinders, drills, and
cordless tools; and lubricating tools and equipment, battery
charging and testing equipment, lifting equipment, portable power
supplies, refrigerant and coolant recyclers, automatic
transmission fluid exchangers, arc and MIG welders, plasma
cutters, and welding accessories.
The products are sold in the United States, Canada, and overseas
under the brand names Delta, Biesemeyer, Porter-Cable, FLEX,
Lincoln, Blackhawk Automotive, Marquette, Guardian, Pro-Arc, T-
Tech, Century, Solar, Booster Pac, Cobra, and Viper.
Products are sold through various channels, including networks of
independent industrial and warehouse distributors, home centers
and national retailers, hardware stores, and through mail order
and catalogues. Certain service equipment is sold under private
label programs. The explosive growth in the home center channel
in the last few years has resulted in a significant increase in
PTE tool sales through this channel. Nationwide, home centers
have become the primary channel for all sales of power and bench
top tools to end users. While warehouse distributors continue to
be the most significant channel for service equipment sales,
product entry into retail and home center stores has continued to
grow.
Tool markets include do-it-yourself(DIY)/homeshop; residential,
commercial, and industrial construction; remodeling and cabinet,
case good and furniture makers. Service equipment markets include
industrial fabrication and maintenance, automotive repair and
vehicle maintenance, farm and industrial equipment; and
aftermarket and retail channels for professional and do-it-
yourself automotive and body repair.
Competition in the PTE segment has been intense and growing more
so for the past few years, especially as these industries
consolidate. The tool markets have become extremely competitive,
as a few large players remain each having extensive product
lines. The Company's tool businesses are no longer perceived as
niche players, but have become significant general competitors,
even though their addressed market of professional users and
higher-end DIY customers does not extend into the larger general
consumer tool markets. Each of the businesses in the PTE segment
faces a number of competitors, many of whom are larger, have more
resources and are more fully integrated. Growth in these markets
should come from product development, continued penetration of
expanding market channels and acquisitions. Patents and
proprietary technology are becoming more significant in this
market.
Competition at the end-user level focuses primarily on brand
names, product performance and features, quality, service and,
most importantly, price. The competition for shelf space at home
centers and national retailers is particularly intense, demanding
continuing product innovation, special inventory and delivery
programs, after-sale service capability and competitive pricing.
The strategy of the businesses in the PTE segment is to be the
price/quality leader in its selected markets. Their success in
maintaining their respective positions in the marketplace is
largely due to continuing product feature innovations, new
products and outsourcing and other cost-reduction measures. As
leaders in their markets, these businesses are able to command
access for their products in the most important channels in the
face of growing competition.
Description of the Water and Fluid Technologies Segment:
Products; markets; competition
Products include: pumps for wells, sump pumps for residential
service, submersible non-clog and grinder pumps and systems for
residential, commercial, and municipal service, pumps for water
treatment and wastewater solid handling, fire pumps, and
reciprocating, turbine, submersible, and centrifugal pumps for
commercial and industrial services; a complete line of control
valves used in the manufacture of water softeners and filtration,
deionization, and desalination systems; and automated and manual
lubrication systems and equipment, pumps and pumping stations for
fluid transfer applications.
The products are sold in the United States, Canada, and overseas
under the brand names Myers, Aplex, Fairbanks Morse, Aurora,
Water Ace, Shur Dri, Hydromatic, Fleck, SIATA, Lincoln, Lincoln
Industrial, and ORSCO.
Products are sold through various channels, including the do-it-
yourself market for retail sale through home centers and hardware
stores, by specially qualified systems distributors with design,
installation and service capability, through industrial supply
and specialty distributors and stores, directly by internal sales
organizations, and through national catalog distribution.
Markets include wholesale and retail distribution to residential
users; commercial HVAC, plumbing, and fire pump markets;
municipal waste and water treatment facilities and industrial
companies; manufacturers who supply residential and commercial
markets with standard and custom designed water softener
products; and heavy industry (steel mills, cement plants, pulp
and paper, power plants), automobile manufacturers, commercial
vehicles, agriculture, construction equipment, food and beverage,
mining, printing, and general lubrication markets.
The water and waste water pump industry has experienced a
significant trend toward consolidation in 1997, evidenced in part
by the acquisitions of Goulds Pump, Inc. by ITT Corporation and
of the former General Signal Pump Group by Pentair. The latter
acquisition by the Company significantly expanded the number,
range and targeted markets of the Pentair Pump Group.
The Company continues to rationalize the product lines,
facilities and manufacturing operations of these businesses
to cut costs and increase efficiencies. The water treatment
industry is also experiencing rapid consolidation, as evidenced
by United States Filter Corporation's 1997 acquisition of Culligan
Water Technologies, Inc., both current customers of the Company's
water conditioning valve business. There are two major
independent valve suppliers, including the Company, and a
restricted number of small independent suppliers. In addition,
there are a number of captive valve manufacturers whose
production is used to support their own sales of water
conditioning systems. Growth will come largely from niche
acquisitions and product development.
Competition in the commercial and residential pump markets
focuses on brand names, product performance, quality and price.
While home center and national retailers are important for
residential lines of water and wastewater pumps, they are much
less important in commercial pump markets. In municipal pump
markets, competition focuses on performance to required
specification, service and price. Competition in the water
treatment component market focuses on product performance and
design, quality, delivery and price.
Description of the Electrical and Electronic Enclosures Segment:
Products; markets; competition
Products include metallic and composite enclosures and cabinets
that house electrical and electronic controls, instruments, and
components, cabinets, cases, subracks, microcomputer packaging
systems as well as a full line of accessories including
backplanes, power supplies, and technical workstations. Products
manufactured fall within two broad groups, standard and modified
standard products and custom-designed products.
The products are sold in the United States, Canada, and overseas
under the brand names Hoffman, Schroff, Transrack, Optima, Eraba,
Electronic Enclosures, and Pentair Enclosures.
Segment products are sold in three primary markets: electrical
enclosures in North America, the channel which is primarily
through industrial electrical distribution; electronic enclosures
throughout the world, sold primarily through electronic equipment
distributors and to original equipment manufacturers (OEMs); and
information and communication technology (ICT) products
throughout the world, marketed primarily to OEMs. The company is
increasingly focusing efforts on serving the latter two faster-
growing markets in the US and abroad both through acquisition and
through modified standard and custom-designed products.
Industrial markets include manufacturing industries in which
electrical and electronic controls require protection from harsh
factory floor environments, plant maintenance and repair,
commercial construction and electrical equipment manufacturers.
Commercial electronic markets include computer, test and
measurement, industrial control and factory automation, and
medical industries. Finally, ICT products are found in the LAN,
data communication and telecommunication industries.
Competition in product markets can be very intense, especially in
electronic and ICT markets. Finally, growth in the EEE segment
will likely come from development of distribution, growth in
defined modification product offerings, product development,
geographic expansion and acquisitions.
Competition in each of the three product markets focuses on
price, product features and innovation, service, quality and
delivery.
Information Regarding All Segments:
Status of new products.
The industries in which the segments participate are essentially
mature and do not experience the introduction of new products or
technologies that materially change the nature of the industry.
Nonetheless, new product development or improvement becomes more
important for sales growth and channel penetration. The Company
emphasizes product development in all its segments; products
introduced within the last five years average 30% of annual
sales. No single new product constitutes a material amount of
sales.
Raw materials.
The raw materials used in Pentair's manufacturing processes
include steel (bar and sheet), brass, copper, aluminum and
various other metals and plastics. Selected motors, castings,
plastic parts and components are also purchased. The supply of
all raw materials and components is currently adequate. The PTE
and WFT segments import a significant dollar amount of selected
products and components from Taiwan and China, the supply of
which is also currently adequate.
Patents, trademarks, licenses, franchises and concessions.
Pentair's businesses own a number of U.S. and foreign patents and
trademarks. They have been acquired over many years and relate
to many products and improvements. No single patent or trademark
is of material importance to any segment, though patent
protection is a significant competitive tool in each of the
segments.
Seasonal aspects and working capital items.
No material portion of Pentair's business is of a highly seasonal
nature. The PTE segment, however, has historically experienced
strong fourth quarter and weaker first quarter sales and
billings, due in part to holiday retail sales. Reflecting the
somewhat seasonal impact of the PTE segment and the growing
importance of home center business, there is a buildup of
inventory in the third quarter in anticipation of fourth quarter
shipments.
Dependence on limited number of customers.
The Company as a whole is not dependent on a single customer or
on a few customers. The loss of a limited number of customers
would not have a material adverse impact on the Company's results
of operations. The single largest customer of the Company as a
whole accounted for approximately 8% of sales in 1998.
Backlog.
Other than for some municipal water system pumps, the segments
normally have few products with long lead times. The nature of
the businesses emphasizes maintaining inventories sufficient to
satisfy customer needs on a timely basis. Production and
sourcing is geared towards providing adequate inventories in
order to minimize customer back orders. Accordingly, backlogs
are not material to understanding the sales trends or
manufacturing fluctuations of the segments.
Government contracts.
The Company has no significant portion of sales under federal
government contracts that may be subject to renegotiation of
profits or termination of contracts at the election of the
government.
Research and Development.
Pentair's businesses have not historically undertaken any
significant basic or applied research, since the products and
processes involved are more traditional and are well known to all
competitors. As discussed above, however, each of the segments,
especially PTE, undertakes extensive product development work in
order to continue improvements in features and costs. Overall,
Pentair's businesses spent over 1.2% of sales on such development
in 1998 and 1997. See also Note 1 of Notes to the Consolidated
Financial Statements included in Item 8.
Environmental Matters
See Management's Discussion and Analysis and Note 9 of Notes to
the Consolidated Financial Statements included in Item 8.
Employees.
As of December 31, 1998, the Company and its subsidiaries
employed approximately 10,500 persons world-wide. Total employees
in the United States were approximately 7,180 of which 1,613 were
represented by trade unions having collective bargaining
agreements (22.5%).
Labor contracts negotiated in 1998: IAM Local 1297 - Ashland,
Ohio (extended to 7 April 2003) approximately 330 employees; IAM
Local 9 - St. Louis, Missouri (extended to 30 April 2001)
approximately 160 employees; United Steelworkers of America Local
8630 - Tupelo, Mississippi (extended to 1 June 2001)
approximately 165 employees; Teamsters Local 984 - Memphis,
Tennessee (extended to 31 March 2000) approximately 85 employees;
UAW Local 1612 - Pennsauken, New Jersey (extended to 30 November
2001) approximately 50 employees.
Contracts expiring in 1999: International Union of Electrical
Workers - Jonesboro, Arkansas (expires 4 April 1999)
approximately 205 employees.
The Company considers its employee and labor relations to be
good and believes future contracts will be able to be negotiated
on terms beneficial to the businesses and their employees.
(d) Financial Information about Foreign Operations.
The Company operates primarily in North America, Europe and
Asia.
Segment Geographic Information:
<TABLE>
<CAPTION>
Revenues Assets
(In millions) 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
United States $1,513.5 $1,275.5 $1,047.1 $1,076.7 $1,031.0 $761.9
Canada 102.5 98.3 77.7 30.6 27.9 24.6
Germany 113.1 99.4 115.7 211.6 200.6 240.0
Other Europe 135.1 164.5 136.0 184.5 116.9 65.0
Pacific Rim 38.1 49.5 38.9 14.7 15.9 14.5
Rest of World 28.3 26.6 21.8 0.0 0.0 0.0
Total $1,937.6 $1,713.8 $1,437.2 $1,518.1 $1,392.3$1,106.0
</TABLE>
Revenues are attributed to countries based on location of
customer. Assets are based on the geographic location of the
subsidiary and have been translated into $U.S. dollars.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the executive officers of the Registrant.
Their term of office extends until the next annual meeting of the
Board of Directors, scheduled for April 28, 1999.
Louis L. Ainsworth 51
Senior Vice President and General Counsel since July 1997;
Shareholder and Officer of the law firm of Henson & Efron,
P.A., November 1985 - June 1997.
Winslow H. Buxton 59
Chairman since January 1993; President and Chief Executive
Officer since August 1992.
Richard J. Cathcart 54
Executive Vice President since February 1996; Executive Vice
President, Corporate Development March 1995 - February 1996; Vice
President, Business Development of Honeywell, Inc. 1994 - March
1995.
Joseph R. Collins 57
Vice-Chairman since November 1998; Executive Vice President March
1995 - October 1998; Acting Chief Financial Officer, June 1993 -
March 1994; Senior Vice President - Specialty Products August
1991 - February 1995.
George M. Danko 48
Vice President, Corporate Development since October, 1997;
General Manager of Sales Operations of General Electric's
Electrical Distribution and Control Division September 1994 -
October 1997; General Manager Tektronix Test & Measurement
Division June 1992 - August 1994.
Karen A. Durant 39
Vice President, Controller since September 1997; Controller
January 1996 - August, 1997; Assistant Controller September 1994
- - December 1995; Director of Financial Planning and Control of
Hoffman Enclosures Inc. (subsidiary of Registrant) October 1989 -
August 1994.
Randall J. Hogan 43
Executive Vice President since March 1998; President of United
Technologies' Carrier Transicold Division 1995 - 1997; Vice
President and General Manager Pratt & Whitney Turbo Power &
Marine Division 1994 - 1995.
Richard W. Ingman 54
Executive Vice President and Chief Financial Officer since August
1996; President of Hoffman Enclosures Inc. (subsidiary of
Registrant) March 1994 - July 1996; Vice President of Corporate
Development August 1989 - February 1994.
Debby S. Knutson 44
Vice President, Human Resources since September 1994; Assistant
Vice President, Human Resources , August 1993 - September 1994.
Roy T. Rueb 58
Vice President, Treasurer since October 1986 and Secretary since
June 1994.
James A. White 53
Executive Vice President since November 1998; Senior Vice
President, Professional Tools Businesses July 1997 - October
1998; President of Porter-Cable Corporation (subsidiary of
Registrant) December 1991 - June 1997.
There is no family relationship between any of the executive
officers or directors.
Item 2. Properties
The Company and its subsidiaries operate in 56 manufacturing
and distribution locations in North America, Europe and Asia.
The Company owns most of its facilities with the exception of
the following major facilities which are leased or leased under
special tax increment financing: in the United States - Mt.
Sterling, KY; Jackson, TN; Kansas City, KS; Aurora, IL; Ashland,
OH (Hydromatic) and in France - Betschdorf, France.
The number, type, location and estimated size of the Company's
properties are shown on the following charts, by segment.
(Professional Tools and Equipment - PTE; Water and Fluid
Technologies - WFT; Electrical and Electronic Enclosures - EEE)
<TABLE>
<CAPTION>
Number and Nature of FacilitiesMfg. and Distribution
Segment HQ & Mfg.DistributionSales/ServiceSquare Footage
(000's)
<S> <C> <C> <C> <C>
PTE 9 3 31 2,210
WFT 12 9 15 2,265
EEE 17 5 32 2,565
Other:
Corporate Office1 22
</TABLE>
<TABLE>
<CAPTION>
Locations of HQ, Manufacturing and Distribution Facilities
North
Segment America Europe Asia
<S> <C> <C> <C>
PTE 11 1 0
WFT 14 6 1
EEE 11 9 2
HQ Offices 1
</TABLE>
Management believes that its owned and leased facilities are well
maintained and suitable for the operations conducted.
Item 3. Legal Proceedings.
The Company or its subsidiaries have been made parties to actions
filed, or have been given notice of potential claims, relating to
the conduct of its business, including those pertaining to
product liability, environmental, safety and health, patent
infringement, and employment matters. Major matters that may
have an impact on the Company are discussed below. The Company
believes that the outcome of such legal proceedings and claims
will not have a material adverse effect on the Company's
financial position, liquidity, or future results of operations,
based on current circumstances known to the Company.
Environmental Claims. The Company and its current subsidiaries
have been named as defendants, targets or potentially responsible
parties (PRPs) in a small number of environmental cleanups, in
which the Company or its current or former business units have
generally been given de minimis status. None of these claims
have resulted to date in cleanup costs, fines, penalties or
damages in an amount material to Company's financial condition or
results of operations. The Company has disposed of a number of
businesses over the past ten years; in certain cases, such as the
disposition of Company's Cross Pointe Paper Corporation uncoated
paper business in 1995 and the disposition of its Federal Cartridge Company
ammunition business in 1997, Company has retained responsibility for
some or all environmental obligations and potential liability. The
Company has established what it believes to be, based on current
circumstances known to it, adequate accruals for potential
liabilities arising out of these retained responsibilities.
In addition to retained obligations relating to these disposed
operations, there are pending environmental issues concerning a
site in Jackson, Tennessee, on which the state environmental
agency has opened an investigation. The Company acquired the
site from Rockwell International Corporation, with whom the Company has
agreed on division of responsibility for remediation and other
future costs relating to the site. The Company does not believe,
however, that projected response costs, as currently known, will
result in material liability or material changes in operations.
Product Liability Claims. As of March 1, 1999, the Company
or its subsidiaries are defendants in approximately 127 product
liability lawsuits and have been notified of approximately 179
additional claims. The Company has had and currently has in
place insurance coverage it deems adequate for its needs. A
substantial number of these lawsuits and claims are insured and
accrued for by Penwald Insurance Company ("Penwald"), a
regulated insurance company wholly owned by the Company.
See discussion in Item 7 (Management's Discussion & Analysis
- -Insurance Subsidiary) and Item 8 (Note 1 of Notes to the
Consolidated Financial Statements - Insurance Subsidiary).
Accounting accruals covering the deductible portion of
liability claims not covered by Penwald have been established
and are reviewed on a regular basis. The Company has not
experienced unfavorable trends in either the severity or
frequency of product liability claims.
Patent Infringement Claims. In late 1998, The Black & Decker
Corporation ("Black & Decker"), a competitor of the Company
in its PTE segment, commenced litigation against the Company's
Porter-Cable business claiming patent infringement over the new
Porter-Cable plate joiner. At trial, Black & Decker sought
$14 million in compensatory damages and removal of the
plate joiner from the market. In late February 1999,
the jury found for Black & Decker on a limited number of
its claims and awarded $1 million in damages. Porter-
Cable intends to appeal from the judgment, as it believes that
there was no infringement of the Black & Decker patent at issue.
The Company understands that Black & Decker will likely also
appeal this case. In order to minimize the liklihood of future
claims, Porter-Cable changed the design of the plate joiner
involved shortly after its introduction.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter, no matter was submitted to a vote of
security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters.
(a) Market Information
Pentair Common Stock is listed on the New York Stock
Exchange under the symbol "PNR".
<TABLE>
<CAPTION>
1998 High Low Close
<S> <C> <C> <C>
First Quarter $45 9/16 $34 3/16 $44 3/4
Second Quarter $45 3/4 $37 1/4 $42
Third Quarter $43 $27 7/8 $32 1/4
Fourth Quarter $41 $30 7/16 $39 13/16
1997
First Quarter $31 3/4 $28 7/8 $28 7/8
Second Quarter $35 $27 1/2 $32 7/8
Third Quarter $37 1/2 $33 7/8 $36 7/8
Fourth Quarter $39 5/8 $34 1/8 $35 15/16
</TABLE>
(b) Holders of the Corporation's Capital Stock
As of December 31, 1998, there were 4,432 holders of
record of the Corporation's Common Stock.
(c) Dividends
In December 1998, the board of directors increased the
cash dividend to $.16 per share quarterly for an
indicated annual rate of $.64 per share. Pentair has now
paid 92 consecutive quarterly dividends, and in each year
since 1976, the amount of the dividend payment has
increased. See Note 6 of Notes to the Consolidated
Financial Statements for certain dividend restrictions.
Quarterly dividends per common share for the most recent
two years are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
First Quarter $.15 $.135
Second Quarter .15 .135
Third Quarter .15 .135
Fourth Quarter .15 .135
TOTAL $.60 $.540
</TABLE>
(d) Annual Meeting of Stockholders
The 1999 Annual Meeting of Shareholders of the
Corporation is scheduled to be held on April 28, 1999 at
10:00 a.m. at the Northland Inn & Conference Center,
Minneapolis, Minnesota.
Item 6.Selected Financial Data.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
Pentair, Inc. and Subsidiaries (In millions, except per share data)
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
Income Statement Data
Net Sales
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Professional Tools
and Equipment 849.3 747.1 582.7 492.4 453.5 408.1
Water and Fluid
Technologies 537.9 404.0 322.3 237.5 210.6 184.4
Electrical and Elec-
tronic Enclosures 564.0 579.4 548.8 542.5 460.5 236.7
Other (13.6) 108.6 113.3 130.5 137.1 117.4
Total 1,937.6 1,839.1 1,567.1 1,402.9 1,261.7 946.6 864.0 802.9 805.2 798.4
Operating Income
Professional Tools
and Equipment 108.2 84.4 60.6 49.2 44.1 37.8
Water and Fluid
Technologies 71.4 46.0 44.4 25.1 17.5 10.2
Electrical and Elec-
tronic Enclosures 51.8 53.3 59.6 56.0 44.2 20.7
Other (38.2) (13.9) (21.7) (14.1) (0.2) (0.6)
Total 193.2 169.8 142.9 116.2 105.6 68.1 61.9 53.1 47.9 52.1
Earnings before
income taxes 170.9 158.4 124.6 101.7 83.5 55.1 47.7 38.4 31.6 35.2
Income from con-
tinuing operations 106.8 91.6 74.5 60.5 50.1 32.7 27.2 18.8 16.9 19.4
Net income (a) 106.8 91.6 74.5 77.2 53.6 46.6 42.8 41.1 33.0 36.4
Common Share Data
EPS-Diluted (a)(b) 2.46 2.11 1.73 1.41 1.17 .76 .64 .47 .42 .50
Cash Dividends .60 .54 .50 .40 .36 .34 .32 .30 .29 .26
Stock Dividends -- -- 100 -- -- 50 -- -- -- --
Book Value 17.03 15.12 13.69 12.37 10.71 9.29 8.21 8.79 7.97 7.42
Stock Price 39 13/16 35 15/16 321/4 24 7/8 21 3/8 16 1/2 13 3/16 13 7/16 8 1/4 9 3/16
Market Capitalization 1,718 1,548 1,378 1,045 899 692 549 558 342 352
Balance Sheet Data
Preferred
Equity (net) 53.6 53.4 47.6 44.6 40.9 33.9 77.4 74.1 68.4 65.9
Common Equity 655.8 577.2 516.2 458.3 391.1 336.9 260.0 275.7 247.8 241.0
ROE %(a) 16.6 15.9 14.3 16.9 13.2 13.6 12.8 13.3 11.1 14.1
Capital Expenditures 53.8 77.5 71.6 63.8 57.8 28.1 28.0 26.5 28.0 28.7
Total Assets 1,554.7 1,472.9 1,289.0 1,252.5 1,161.1 863.1 769.5 698.4 696.5 708.9
Long-Term Debt 288.0 294.5 279.9 219.9 408.5 236.7 209.3 191.2 217.5 243.4
Debt to Capital % 29 32 33 31 49 39 38 35 41 44
</TABLE>
All Share and Per Share Data adjusted for stock dividends.
(a) 1992 - before the cumulative effects of accounting changes.
(b) From continuing operations.
Item 7.Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Management's Discussion and Analysis
Strategic Direction
Pentair grows its businesses through innovative marketing and
product design and intensive productivity improvement, coupled
with capital investment, and employee training and participation.
Pentair has chosen to focus these skills on its three core
markets of Professional Tools and Equipment (PTE), Water and
Fluid Technologies (WFT), and Electrical and Electronic
Enclosures (EEE). During the last four years, Pentair has
divested its paper businesses (1995) and Federal Cartridge (1997)
and has made twelve acquisitions in its three core markets.
Results of Operations
<TABLE>
<CAPTION>
Professional Water and Electrical and
Tools and Fluid Electronic
(In thousands) Equipment Technologies Enclosures Other* Total
NET SALES
<C> <C> <C> <C> <C> <C>
1998 $849,294 $537,880 $564,045 $(13,641) $1,937,578
1997 747,066 403,979 579,366 108,645 1,839,056
1996 582,689 322,252 548,798 113,326 1,567,065
OPERATING INCOME
1998 $108,242 $71,353 $51,753 $(38,156) $193,192
1997 84,355 45,987 53,313 (13,853) 169,802
1996 60,556 44,445 59,592 (21,674) 142,919
</TABLE>
*Other includes corporate expenses, captive insurance company,
intermediate financial companies, charges that do not relate to
current operations, divested operations (Federal) and intercompany
eliminations.
CONSOLIDATED
1998 VERSUS 1997
Consolidated net sales increased to $1,937.6 million in 1998,
representing a 5.4% increase over 1997(up over 13% excluding the
1997 sales of Federal Cartridge, divested in November 1997). PTE
and WFT posted double-digit growth rates, with the latter
including the full year effect of a 1997 pump business
acquisition. EEE segment experienced lower sales due to soft
capital spending environments in the U.S. and the overall German
and Asian economies.
Operating income increased to $193.2 million in 1998, up 13.8%
over 1997, which as a percent of sales improved from 9.2% to
10.0%. Profitability improved due to volume efficiencies,
favorable outsourcing opportunities, and manufacturing/purchasing
efficiencies resulting from the integration of acquired pump
businesses. Gross profit margins improved to 31.3% in 1998
versus 29.8% in 1997. Research and development expenses were
1.2% of net sales versus 1.2% in 1997. Selling, general and
administrative expense (SG&A) as a percent of sales was 20.2% in
1998 as compared to 19.4% in 1997. The Company continues to
incur costs to support major information system upgrades (which
are starting to be offset by the associated cost improvements)
and expenses were incurred to implement company-wide process
improvement and cost savings programs with benefits beginning in
1999.
Interest expense was higher in 1998 as compared to 1997 due to
slightly higher effective interest rates.
The Company's effective income tax rate was 37.5% in 1998. The
comparable 1997 tax rate (excluding the unusual tax impact on the
sale of Federal) was 39.0%.
Net income increased 16.6% to $106.8 million versus $91.6 million
in 1997. EPS of $2.46 in 1998 represented an increase of 16.6%
over 1997 EPS of $2.11. Excluding the $0.03 gain from the sale
of Federal in 1997, there was an 18.3 percent increase over 1997.
1997 VERSUS 1996
Consolidated net sales increased to $1,839.1 million in 1997,
representing a 17.4% increase over 1996. The double-digit growth
rate is attributable to additional strategic acquisitions and
continued growth in North America. Outside of North America,
difficult European markets and weak local currencies limited the
growth of sales in dollar terms.
Operating income increased to $169.8 million in 1997, up 18.8%
over 1996. Operating income as a percent of sales improved
slightly from 9.1% to 9.2%. Significant margin gains in most
existing businesses were nearly offset by the lower operating
margins of our recent acquisitions. Strategic investments were
made throughout all the operating segments to position the
Company for continued productivity gains, increased capacity and
improved customer service and satisfaction. Gross profit margins
were maintained, remaining nearly flat at 29.8% in 1997 versus
29.9% in 1996. Research and development expenses increased to
1.2% of net sales versus 1.0% in 1996 due to the increasing
stream of new products. Selling, general and administrative
expense (SG&A) as a percent of sales was 19.4% in 1997 as
compared to 19.8% in 1996. The Company continued to incur costs
to support major information system upgrades, which are starting
to be offset by the associated cost improvements.
Interest expense was higher in 1997 as compared to 1996 due to
slightly higher effective interest rates and higher average
outstanding debt levels in 1997, influenced by the acquisition of
the pump business in August and the sale of Federal in November.
Pentair sold its Federal Cartridge Company to Blount
International, Inc., in November 1997, realizing a $10.3 million
pre-tax gain. This gain was reduced by $9.1 million of taxes,
resulting in a net gain of $1.2 million, or $.03 per share.
Sales and operating income for Federal through the first 10
months of 1997 improved over the levels of their very difficult
1996.
Taxes on the gain from the sale of Federal were greater than the
Company's normal tax rate due to non-deductible goodwill created
as part of the original structure of the 1988 Federal-Hoffman
acquisition. The Company's effective income tax rate of 42.2%
includes this incremental tax from the gain on sale. The tax
rate excluding the gain on the sale of Federal was 39.0% as
compared to 40.2% in 1996.
Net income increased 22.9% to $91.6 million versus $74.5 million
in 1996. EPS of $2.11 in 1997 represented an increase of 22.0%
over 1996 EPS of $1.73. EPS without the gain from the sale of
Federal was $2.08, a 20 percent increase over 1996.
OUTLOOK
Pentair is focused on three core markets. This diversification
enables the Company to consistently improve results despite
difficult markets in one or another segment. Continuing demand
for power tools and service equipment, ever-rising needs for
clean water throughout the world, and the critical importance of
protecting sensitive electronics give Pentair's chosen businesses
excellent prospects for strong long-term performance. The
Company's basic operating strategies - ongoing cost containment,
new product development, multi-channel distribution, and the
pursuit of value-added acquisitions - drive the businesses in
both growing and softer economies. The Pentair Accelerating
Competitive Excellence (PACE) Project is a corporate-wide process
redesign and cost savings program implemented in 1998 which
management believes will improve operating efficiencies and
therefore performance.
The Company continues to look for synergistic acquisitions in
each of its business segments, in line with its pattern over the
past four years. Of the past twelve acquisitions, most were
smaller businesses or product lines, which fit with existing
operations, offering new products, or expanded geographic scope.
Two, however, were stand-alone strategic acquisitions of large
established businesses, that helped create Pentair's Water and
Fluid Technologies segment. Pentair intends to continue to
pursue smaller, bolt-on purchases, but will also carefully review
larger targets, which have the capability to significantly expand
its current segments, or in appropriate cases, to establish an
additional business segment.
SEGMENT DISCUSSION
Pentair operates in three segments: Professional Tools and
Equipment (PTE), Water and Fluid Technologies (WFT), and
Electrical and Electronic Enclosures (EEE).
PROFESSIONAL TOOLS and EQUIPMENT
The PTE segment includes Delta International Machinery, Porter-
Cable, Lincoln Automotive and Century Manufacturing. Products
manufactured include woodworking machinery, portable power tools,
battery charging and testing equipment, welding equipment, and
lubricating and lifting equipment.
1998 VERSUS 1997
PTE sales increased by $102.2 million or 13.7%. These businesses
continue to outperform their markets, upholding a performance
record that includes three consecutive years of double-digit
sales growth and five consecutive years of double-digit operating
income growth. The tool businesses continued to introduce
innovative new products such as a plate joiner and jigsaw and
expanded its offering of pneumatic nailers, staplers and
accessories. The service equipment business increased sales of
Booster Pacs and expanded its automotive offering with the product
line acquisition of T-Tech automatic transmission fluid
exchangers.
Operating income as a percent of sales increased to 12.7% in 1998
from 11.3% in 1997. Profitability increased in the tool business
due to favorable sourcing opportunities and volume efficiencies.
Profitability also increased in the service equipment business
due to productivity improvements and facility rationalizations.
1997 VERSUS 1996
PTE sales increased by $164.4 million or 28.2%. The full year
effect of 1996 acquisitions contributed to less than half of the
growth in sales. Substantial growth was achieved in the tool
business due to the introduction of new products, increased brand
awareness and continued expansion of the home center channel.
Operating income as a percent of sales increased to 11.3% in 1997
from 10.4% in 1996. Profitability improved across the entire
segment due to volume efficiencies, cost control activities and
continued productivity improvement.
OUTLOOK
The Professional Tools and Equipment segment is expected to
perform well in 1999 with sales growth expected to continue to be
in the double digits due to product line expansions and continued
cross marketing through multiple channels of distribution.
Profits should increase due to process improvements and
additional rationalization activities.
WATER and FLUID TECHNOLOGIES
The WFT segment includes the Pentair Pump Group, Fleck Controls
and Lincoln Industrial. Products manufactured include pumps for
wells and water treatment, sump pumps, valves for water
softeners, and automated and manual lubrication systems and
equipment.
1998 VERSUS 1997
WFT sales increased by $133.9 million or 33.1%, primarily due to
the full year effect of the 1997 pump business acquisitions;
internal growth accounted for approximately 5% of the sales
increase. Net revenues were adversely impacted in part by the
deliberate elimination in 1998 of the unprofitable sales from the
Layne & Bowler product line, acquired as part of the General
Signal pump acquisition in 1997.
Operating income as a percent of sales increased to 13.3% in 1998
from 11.4% in 1997. The Group's performance benefited from
improved performance at the water conditioning control valve
business, increased profitability at European operations, and
over $10 million worth of manufacturing and purchasing
efficiencies resulting from the integration of the acquired pump
businesses.
1997 VERSUS 1996
WFT sales increased by $81.7 million or 25.4%, primarily due to
acquisitions. In particular, 1997 results included 4 months of
operations from the pump businesses purchased from General
Signal. Otherwise, this segment experienced moderate growth,
dampened by the effects of a stronger U.S. dollar on the results
of the European operations.
Operating income as a percent of sales decreased to 11.4% in 1997
from 13.8% in 1996. 1997 acquisitions had lower margins than the
overall 1996 percentage for this segment. In addition, one plant
experienced temporary production difficulties in meeting customer
demand. Investments were made in 1997 across the segment
addressing plant and product rationalization, process redesign,
and production capacity. Profitability was also impacted by the
weak European economy and the effects of a stronger U.S. dollar.
OUTLOOK
The WFT segment intends in 1999 to expand its presence in global
markets and broaden its product offerings. Volume efficiencies
and productivity improvements are anticipated to continue to
generate higher margins in core markets.
ELECTRICAL and ELECTRONIC ENCLOSURES
The EEE segment includes Hoffman Enclosures, Schroff and the new
Pentair Enclosures U.K. acquisition. Products manufactured
include metallic and composite cases, subracks and cabinets that
house and protect electrical and electronic controls,
instruments, and components.
1998 VERSUS 1997
EEE sales decreased $15.3 million or 2.6%. Enclosures Americas
sales were lower in 1998 largely due to lower automotive and
machine tool capital spending. Enclosures Europe sales also
decreased due to slow sales of standard product throughout
Europe, while Enclosures Asia sales were below 1997 due to the
weak Asian economy. With the October 1998 acquisition of Pentair
Enclosures U.K., Pentair strengthened its position in markets
serving high-growth manufacturers in information and
communication technology markets.
Operating income as a percent of sales was flat at 9.2%, the same
overall profitability as 1997, despite a decrease in sales.
Enclosures Americas increased profits due to overhead reductions
and repositioning of the sales force to focus on high growth
customers and leverage modification capabilities. Enclosures
Europe earnings declined in part due to lower volumes and
unfavorable product mix throughout Europe. In addition, the
closing of one facility in France and resultant headcount
reductions were delayed by a lengthy government approval process
until the fourth quarter of 1998. Enclosures Asia profitability
decreased due to the weak Asian economy.
1997 VERSUS 1996
EEE sales increased by $30.6 million or 5.6% including a 1997
acquisition. In addition, North American sales were the highest
in history and outpaced the overall growth in the markets served.
The European operations, as measured in local currencies, also
experienced year-over-year sales growth despite a continued weak
economy in Europe. However, European sales (excluding
acquisitions), as measured in a stronger U.S. dollar, were less
than 1996.
Operating income as a percent of sales decreased to 9.2% in 1997
from 10.9% in 1996. This was due to the impact of the weak
European economy, with intense competition affecting pricing and
product mix of sales. There were also strategic, one-time costs
related to the following: implementation of a new world-wide
business system; start-up of the new 300,000-square-foot
production facility in Mt. Sterling, Kentucky; integration of the
Transrack acquisition including reorganization of the French
sales and marketing activities; the cost of employment reductions
in Europe; introduction of outdoor enclosures for the
telecommunications market; and start up of the North American
manufacture of a new flagship product, the ProLine enclosure.
OUTLOOK
The EEE segment holds a leading position in the global enclosures
market and has excellent prospects for growth and profitability
improvement as the business positions itself to continue
leadership in standard product markets and expand offering of
modified product. The recent acquisition of Pentair Enclosures
U.K. has increased the focus and ability to provide custom
products and serve the fast growing telecom and datacom
customers. The EEE segment is implementing a number of changes
in its operations in order to control costs, improve productivity
and respond more flexibly to its customers. Actions to be taken
will likely include some facility rationalization and headcount
reductions in 1999 and beyond.
Liquidity and Capital Resources
The Company's free cash flow (cash from operations less capital
expenditures) was $81.5 million in 1998, up from $40.4 million in
1997. The Company is targeting continued growth in free cash
flow as a percent of sales through improved profitability and
working capital ratios. The Company believes that cash flow from
operations will continue to exceed its needs for capital
programs, smaller acquisitions and dividends in the next year.
The Company's financial position was strengthened in 1998, even
taking into account the three acquisitions made during the year.
As of December 31, 1998, the long-term debt to total capital
ratio was 29 percent, compared to 32 percent at the end of 1997.
The Company has sufficient financing capacity to continue its
current acquisition program and to support its ongoing stock
repurchase program. The stock repurchase is intended to offset
the dilution caused by stock issuances under employee stock
compensation plans. Significant acquisitions (above
approximately $250 million) may require new or enlarged credit
facilities. The Company believes these facilities would be
available from various sources, if needed.
Pentair invests capital to maintain existing businesses,
implement productivity improvements, introduce new products and
develop new businesses. In the last five years, approximately
$325 million has been invested in Pentair's businesses (excluding
acquisitions).
The Company expects capital spending in 1999 to be in the $60 -$70
million range. Contemplated uses include computer systems, cost
reduction projects, new product development and reconfiguration
of manufacturing facilities.
The Company raised its anticipated 1999 quarterly dividend to 16
cents per share to an indicated annual rate of $.64 per share.
This is a 7% increase over 1998. Pentair has increased its
dividend payment each year since 1976. Since the first cash
dividend in 1976, dividends have increased at an average
annualized growth rate of 14%.
INFLATION
The impact of inflation on the Company's results of operations is
not considered material given the current inflationary outlook.
INSURANCE SUBSIDIARY
The Company's captive insurance subsidiary provides a cost
effective means of obtaining insurance coverage for general and
product liability, product recall, workers' compensation and auto
liability. The insurance subsidiary insures directly and
reinsures an admitted carrier. Loss reserves are established
based on actuarial projections of ultimate loss.
ENVIRONMENTAL MATTERS
Under current laws and regulations, Pentair's obligations
relating to environmental matters are not expected to have a
material impact on the Company's operations, financial condition
or operating results. Some subsidiaries face remediation of soil
and groundwater as a result of predecessors' or their own
previous disposal practices. In addition, Pentair subsidiaries
have been named as potentially responsible parties at a small
number of Superfund or other sites being studied or remediated.
Generally, the affected business has been deemed to be a
de minimis defendant or its share of remediation costs has not
been material to Pentair. Pentair contractually retained certain
obligations pertaining to environmental issues of discontinued
paper businesses and the divested sporting ammunition business.
Costs and capital expenditures related to environmental
obligations were not material to the Company's operations in
either 1998 or 1997, and are not anticipated to be material in
1999.
Pentair engages environmental professionals to perform periodic
audits of its facilities to assist Pentair in complying with the
various environmental laws and regulations faced by its
businesses. For purposes of maintaining appropriate reserves
against liabilities associated with environmental issues, whether
involving on- or off-site locations, Pentair management reviews
each individual site, taking into consideration the number of
parties involved with the site, the joint and several liability
imposed by certain environmental laws, the expected level of
contributions of the other parties, the nature and quantities of
wastes involved, the expected method and extent of remediation,
the estimated professional expenses involved and the time period
over which any costs would be incurred. Based on this
evaluation, reserves are established when loss amounts are
probable and reasonably estimable. Insurance recoveries are
recorded only when claims for recovery are settled.
YEAR 2000
Background
The Year 2000 issue is the result of computer programs and
embedded computer chips originally 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's businesses have had "Y2K Project" programs in
place since as long ago as 1995 to address Year 2000 problems in
critical business areas for 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).
Certain of the Company's larger businesses have completed the
implementation of required actions for compliance; the balance of
the business units are in the process of implementation. In many
cases, implementation includes installation of new Enterprise
Resource Planning ("ERP") systems designed to enable these
businesses to operate more efficiently and to provide better
management reporting. Pentair anticipates that implementation
and testing phases will be substantially complete throughout
the company by the third 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
complete this phase by the second quarter of 1999.
None of the Company's products are believed to be date dependent.
The Company has close working relationships with a large number
of suppliers and customers. These include, among others, utility
and telecommunication providers, raw materials and components
suppliers, and 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 IS 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 development plan with scheduled replacements of hardware
and software occurring in 1999 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 $55 million, which is approximately 80% complete.
The estimated cost specifically attributable to Year 2000
compliance, apart from other IS development activities, amounts
to approximately $10 million, of which $8 million had been spent
through December 31, 1998. Pentair has not deferred any
significant IS 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 assurance that the Company's systems or equipment, nor
those of third parties on which Pentair relies, will be Year 2000
compliant , in all material respects, in a timely manner. Nor
can Pentair give any assurance that its own or third parties'
contingency plans will mitigate the effects of any noncompliance.
Pentair believes that non-compliance with Year 2000 issues would
likely result in some reduction of the Company's operations for
the first part of the year 2000, which could have a material
adverse effect on the Company's businesses or their financial
condition. Based on its assessments to date, Pentair believes it
will not experience any material disruption as a result of Y2K
issues in internal manufacturing processes, information
processing, interfacing with major customers or processing orders
and billing. However, if critical utility service providers
experience difficulties, which affect Pentair, or its business
units, a shutdown of some or all operations at individual
facilities could occur. Pentair is developing contingency plans
to provide for continuity of processing (in the event of a Y2K
disruption) which will be based on the outcome of its Y2K
compliance reviews and the results of third party verification
efforts. Assuming no major disruption in service from utility
companies or similar critical third-party providers, Pentair
believes that it will be able to manage its Year 2000 transition
without material effect on Pentair's results of operations or
financial condition.
The most reasonably likely worst case scenario of failure by
Pentair or its suppliers or customers to resolve Year 2000 issues
would be a temporary slowdown or cessation of manufacturing
operations at one or more of Pentair's facilities, and/or a
temporary inability on the part of Pentair to timely process
orders and to deliver finished products to customers. Delays in
meeting customer orders would reduce or delay sales and affect
the timing of billings to and payments received from customers
and could result in complaints, charges or claims, or temporarily
increasing working capital.
Contingency Plans
Pentair's businesses are in the process of developing Year 2000
contingency plans, based on their review of their internal and
external compliance progress. A full review will be done
following the end of the second quarter of 1999 to assess
Pentair's vulnerability to internal non-compliance and potential
third-party failures and actions which can be taken to reduce
unfavorable impacts. Possible plans may include arranging
alternative or additional suppliers and service providers,
increasing inventory levels, providing additional back-up systems
and replacing or upgrading equipment and software.
THE EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the
European Union (EU) established fixed conversion rates through
the European Central Bank (ECB) between their existing local
currencies and the Euro, the EU's single currency. The
participating countries have agreed to adopt the Euro as their
common legal currency on that date; the Euro now trades on
currency exchanges and be available for non-cash transactions.
The Company is reviewing the Euro's impact on the Company's
business and pricing strategies. The Company's European business
units have made the necessary investments in their IS systems in
order to be able to handle transactions in Euros, as requested.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to various market risks, including changes
in pricing of raw materials and sourced components, foreign
currency exchange rates and interest rates. Market risk is the
potential loss arising from adverse changes in market rates and
prices, such as foreign currency exchange and interest rates.
The Company enters into financial instruments to manage and
reduce the impact of some of these risks. The Company does not
enter into derivatives or other financial instruments for trading
or speculative purposes.
The Company is exposed to cash flow and fair value risk arising
out of changes in interest rates with respect to its long-term
debt. The table below presents principal cash flows and related
weighted average interest rates of the Company's long-term debt
at December 31, 1998 by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the
yield curve at December 31, 1998 plus the Company's borrowing
spread. Implied forward rates should not be considered a
predictor of actual future interest rates.
The Company has entered into interest rate swap agreements with
major financial institutions to exchange variable rate interest
payment obligations for fixed rate obligations without the
exchange of the underlying principal amounts.
The Company has also entered into foreign currency swap
agreements with major financial institutions to hedge net assets
in foreign subsidiaries, principally those denominated in
Deutschemarks, Canadian Dollars and Italian Lira. During 1999,
the Company intends to redraft its agreements to convert to the
Euro currency.
See also Notes 6 & 7 of Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
(in millions except percentages)
Expected Maturity Date There- Fair
1999 2000 2001 2002 2003 after Total Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Debt
Fixed Rate $41.2 $22.8 $17.3 $2.3 $52.4 $51.2 $187.2 $205.7
Average interest rate 6.9% 7.2% 7.3% 6.7% 6.7% 6.9% 6.9%
Variable Rate $11.7 $54.2 $83.4 $0.5 $0.4 $3.5 $153.7 $153.7
Average interest rate 5.2% 5.4% 5.4% 5.2% 5.2% 5.4% 5.4%
Interest rate swaps
Variable to Fixed -- -- -- $19.5 -- $55.0 $74.5 $(3.2)
Average receive rate -- -- -- 5.3% -- 5.4% 5.3%
Average pay rate -- -- -- 6.6% -- 6.6% 6.6%
Forward exchange
Agreements (1)
Receive U.S.$ -- -- -- -- 50.0 -- $6.4
Pay Canadian $ -- -- -- -- 69.4 --
Receive Canadian $ -- -- -- -- 69.4 -- $(12.3)
Pay Deutsche mark -- -- -- -- 88.0 --
Receive Canadian $ -- -- 22.1 -- -- -- $(1.1)
Pay Deutsche mark -- -- 24.7 -- -- --
Receive Canadian $ -- 1.8 -- -- -- -- $(0.2)
Pay Deutsche mark -- 2.0 -- -- -- --
Receive Canadian $ -- -- -- 14.9 -- -- $(2.6)
Pay Italian Lira -- -- -- 18,000.0 -- --
Total exchange loss $(9.8)
</TABLE>
(1) The foreign exchange information is presented in local
currency by maturity, however, the fair value is presented in
$U.S.
NOTIFICATION REGARDING FORWARD-LOOKING INFORMATION
It should be noted that certain statements herein which are not
historical facts, including without limitation those regarding 1)
the timeliness of product introductions and deliveries; 2)
expectations regarding market growth and developments; 3)
expectations for growth and profitability; and 4) statements
preceded by "believes", "anticipates", "expects", "estimates" or
similar expressions are forward-looking statements. Because such
statements involve risks and uncertainties, actual results may
differ materially from the results currently expected by the
Company.
Factors that could cause such differences include, but are not
limited to, 1) general economic conditions, such as the rate of
economic growth in the Company's principal geographic markets or
fluctuations in exchange rates; 2) industry conditions, such as
the strength of product demand, the intensity of competition,
pricing pressures, the acceptability of new product
introductions, the introduction of new products by competitors,
changes in technology or the ability of the Company to source
components from third parties without interruption and at
reasonable prices and the financial condition of the Company's
customers; 3) operating factors, such as continued improvement in
manufacturing activities and the achievement of related
efficiencies therein, and inventory risks due to shifts in market
demand; and, 4) the expectations, uncertainties, costs and risks
associated with Year 2000 issues, such as the Company's
expectations as to when it will complete the remediation and
testing phases of its Year 2000 programs as well as contingency
plans; its estimated costs of achieving Year 2000 readiness; and
the Company's belief that its internal systems and equipment will
be compliant in a timely manner. Factors that may cause these
differences include, but are not limited to, the availability of
qualified personnel and other IT 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
problems.
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.
Item 8.Financial Statements and Supplementary Data.
The following consolidated financial statements of the
Corporation and its subsidiaries are included herein as indicated
below:
Consolidated Financial Statements
Consolidated Statements of Income
for Years Ended December 31, 1998, 1997 and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Cash Flows
for Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Comprehensive Income
for Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Pentair, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31
(In thousands,
except per share amounts) 1998 1997 1996
<S> <C> <C> <C>
Net sales $1,937,578 $1,839,056 $1,567,065
Operating costs
Cost of goods sold 1,330,310 1,290,798 1,098,064
Selling, general and administrative 391,061 357,125 310,606
Research and development 23,015 21,331 15,476
Total operating costs 1,744,386 1,669,254 1,424,146
Operating income 193,192 169,802 142,919
Gain on sale of business 0 10,313 0
Interest expense 24,020 22,261 19,537
Interest income 1,772 528 1,220
Income before income taxes 170,944 158,382 124,602
Provision for income taxes 64,104 66,782 50,093
Net Income 106,840 91,600 74,509
Preferred dividend requirements 4,267 4,867 4,928
Income available to common shareholders $102,573 $86,733 $69,581
Basic Earnings per Common Share $2.67 $2.28 $1.86
Diluted Earnings per Common Share $2.46 $2.11 $1.73
Average Common Shares
Outstanding 38,444 37,989 37,491
Outstanding Assuming Dilution 43,149 43,067 42,752
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
Pentair, Inc. and Subsidiaries
<TABLE>
<CAPTION>
December 31
(In thousands) 1998 1997
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 32,039 $34,340
Accounts and notes receivable 396,062 369,220
Inventories 278,581 266,409
Deferred income taxes 30,397 23,401
Other current assets 11,490 12,000
Total current assets 748,569 705,370
Property, plant and equipment
Land and land improvements 15,699 14,278
Buildings 131,989 119,996
Machinery and equipment 419,418 374,967
Construction in progress 25,883 19,113
Property, plant and equipment - gross 592,989 528,354
Less accumulated depreciation 284,731 234,800
Property, plant and equipment, net 308,258 293,554
Goodwill 474,488 429,279
Deferred income taxes 0 12,110
Other assets 23,351 32,549
Total assets $1,554,666 $1,472,862
Liabilities and Shareholders' Equity
Current liabilities
Accounts and notes payable $155,962 $152,592
Compensation and other benefits accruals 69,893 70,758
Income taxes 7,111 15,158
Accrued product claims and warranties 29,475 35,114
Accrued rebates 19,682 21,658
Accrued expenses and other liabilities 59,796 62,194
Current maturities of long-term debt 52,874 34,703
Total current liabilities 394,793 392,177
Long-term debt 288,026 294,549
Pensions and other retirement compensation 60,564 52,470
Postretirement medical and other benefits 41,868 45,135
Reserves - insurance subsidiary 29,441 32,313
Other liabilities 30,162 25,656
Deferred income taxes 447 0
Commitments and Contingencies
(Notes 9 and 18)
Preferred stock - at liquidation value
Outstanding: 1,534,919 shares in 1998 and
1,704,578 shares in 1997 53,638 59,696
Unearned ESOP compensation 0 (6,315)
Common stock - par value, $.16 2/3
Outstanding: 38,503,587 in 1998 and
38,184,804 in 1997 6,417 6,365
Additional paid-in capital 184,145 186,486
Accumulated other comprehensive income (3,962) (5,085)
Retained earnings 469,127 389,415
Total shareholders' equity 709,365 630,562
Total liabilities and shareholders' equity $1,554,666 $1,472,862
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Pentair, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Preferred Stock
Beginning Balance $59,696 $62,058 $65,656
Conversions into common (6,058) (2,362) (3,598)
Ending Balance 53,638 59,696 62,058
Unearned ESOP Compensation $ 0 $(6,315) $(14,440)
Common Stock - Par
Beginning Balance $ 6,365 $ 6,287 $ 6,172
Repurchase of common stock (58) 0 0
Employee stock plans - net 34 48 69
Conversions into common 76 30 46
Ending Balance 6,417 6,365 6,287
Additional Paid in Capital
Beginning Balance $186,486 $179,143 $169,832
Repurchase of common stock (12,315) 0 0
Employee stock plans - net 3,993 5,019 5,770
Conversions into common 5,981 2,324 3,541
Ending Balance 184,145 186,486 179,143
Foreign Currency Translation Adjustment
Beginning Balance $(2,612) $ 7,892 $10,964
Current period change 1,025 (10,504) (3,072)
Ending Balance (1,587) (2,612) 7,892
Unrealized Gains on Securities
Beginning Balance $ 0 $ 1,965 $ 1,090
Current period change 0 (1,965) 875
Ending Balance 0 0 1,965
Minimum Liability Pension Adjustment
Beginning Balance $(2,473) $(1,804) $(1,034)
Current period change 98 (669) (770)
Ending Balance (2,375) (2,473) (1,804)
Retained Earnings
Beginning Balance $389,415 $322,750 $271,249
Net Income 106,840 91,600 74,509
Dividends
Common (23,063) (20,513) (18,735)
Preferred (4,267) (4,867) (4,928)
Tax Benefit of preferred dividends 202 445 655
Ending Balance 469,127 389,415 322,750
TOTAL SHAREHOLDERS' EQUITY $709,365 $630,562 $563,851
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Pentair, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Operating acitvities
Net income $106,840 $91,600 $74,509
Adjustments to reconcile to cash flow
Depreciation 53,133 53,723 47,925
Amortization of intangible assets 15,255 14,113 11,595
Gain on sale of securities 0 (5,932) 0
Deferred income taxes 5,730 (11,268) 484
Changes in assets and liabilities,
net of effects of acquisitions
and dispositions
Receivables (25,788) (61,647) (16,791)
Inventories (4,539) (22,409) (16,345)
Other assets 13,076 (6,946) (13,488)
Accounts payable 666 46,673 2,615
Accrued compensation and benefits (2,229) 12,157 (9,277)
Income taxes (8,661) (14,081) 7,025
Accrued rebates 1,976 6,486 6,365
Pensions and other
retirement compensation 6,214 8,578 8,695
Current and Long-term Insurance
Reserves (7,864) 2,902 6,211
Other liabilities (18,496) 3,945 (7,818)
Cash From Operating activities 135,313 117,894 101,705
Investing activities
Capital expenditures (53,843) (77,461) (71,646)
Proceeds from sale of businesses 13,001 112,000 100,000
Payments for acquisition of businesses (68,384) (210,620) (195,917)
Construction funds held in escrow 719 7,055 (9,251)
Purchase of marketable securities 0 (2,031) (15,966)
Proceeds from sale of marketable
securities 0 48,727 6,274
Cash provided by (used for)
investing activities (108,507) (122,330) (186,506)
Financing activities
Long-Term Borrowings 72,967 107,353 91,528
Payments of Long-Term Debt (65,340) (70,333) (15,425)
Repurchase of Stock (12,373) 0 0
Unearned ESOP compensation decrease 6,315 8,124 6,634
Employee stock plans and other 4,227 5,514 6,483
Dividends (27,329) (25,380) (23,663)
Cash provided by (used for)
financing activities (21,533) 25,278 65,557
Effects of currency exchange rate changes (7,574) (9,475) 5,569
Increase (decrease) in cash
and cash equivalents (2,301) 11,367 (13,675)
Cash and cash equivalents
- beginning of period 34,340 22,973 36,648
Cash and cash equivalents
- end of period $32,039 $34,340 $22,973
</TABLE>
Supplemental Cash Flow Information: Cash payments for interest
were $24,470,000, $18,507,000,and $25,591,000 for the years
ending December 31, 1998, 1997 and 1996, respectively. Cash
payments for income taxes were $64,956,000, $73,374,000,and
$38,127,000 for the years ending December 31, 1998, 1997 and
1996, respectively.
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Pentair, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Net Income $106,840 $91,600 $74,509
Other comprehensive income, net of tax:
Foreign currency translation adjustments 1,025 (10,504) (3,072)
Unrealized gains on securities:
Unrealized holding gains arising during
the period 0 1,891 906
Less reclassification adjustment for
(gains)/losses included in net income 0 (3,856) (31)
Minimum pension liability adjustment 98 (669) (770)
Other comprehensive income (loss) 1,123 (13,138) (2,967)
Comprehensive Income $107,963 $78,462 $71,542
Related Tax (Expense)/Benefit of Other
Comprehensive Income:
Foreign currency translation adjustments $(656) $6,716 $2,065
Unrealized gains on securities:
Unrealized holding gains arising
during the period 0 (1,018) (488)
Less reclassification adjustment for
(gains)/losses included in net income 0 2,076 17
Minimum pension liability (60 427 492
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pentair, Inc. and Subsidiaries
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include Pentair, Inc. and
its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Cash Equivalents
The Company considers all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is
computed using the straight-line method. Estimated useful lives
are: land improvements - 5 to 20 years, buildings - 5 to 50
years, and machinery and equipment - 3 to 15 years.
Insurance Subsidiary
The Company's wholly owned insurance subsidiary , Penwald
Insurance Company, insures general and product liability, product
recall, workers' compensation, and auto liability risks.
Reserves for policy claims ($35,441,000 with $29,441,000
noncurrent as of December 31, 1998 and $43,305,000 with
$32,313,000 noncurrent as of December 31, 1997) are established
based on actuarial projections of ultimate loss.
In order to maximize investment earnings from insurance reserves,
Penwald now has a long-term receivable from Pentair (established
in July, 1997) in lieu of its former marketable securities
portfolio. The intercompany receivable is interest bearing and
payable on demand and eliminated in consolidation. Prior to July
1997, the insurance subsidiary invested in marketable securities
including debt and equity securities classified as available-for-
sale in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." Debt and equity securities classified as
available-for-sale were carried at fair value on the balance
sheet with unrealized gains and losses reported in a component of
shareholders' equity.
The debt and securities investments were treated as operating
assets of the insurance subsidiary and the related earnings
($2,864,000, and $1,824,000 in 1997,and 1996, respectively) were
recorded as a reduction of the insurance component of cost of
sales. The 1997 gain on sale of securities from the liquidation
of the portfolio ($5,932,000) was recorded as other income and
included as a reduction of selling, general and administrative
costs.
Goodwill
The excess purchase price paid over the fair value of net assets
of businesses acquired is amortized on a straight-line basis over
periods ranging from 25 to 40 years. The amortization recorded
for 1998, 1997,and 1996 was $15,255,000, $14,113,000, and
$11,160,000, respectively. Accumulated amortization was
$61,311,000 and $44,658,000 at December 31, 1998 and 1997,
respectively. The Company periodically reviews goodwill to
assess recoverability. The Company evaluates the recoverability
by measuring the unamortized balance of such goodwill against
estimated future cash flows. If events or changes in
circumstances indicated that the carrying amount of such asset
might not be recoverable, the asset would be adjusted to the
present value of the estimated future cash flows. Based on
evaluations performed, there was no adjustment to the carrying
value of goodwill during any of the three years ended December
31, 1998.
Long-Lived Assets
Pentair evaluates the carrying value of long-lived assets. When
the carrying value exceeds the projected undiscounted cash flows
from the assets, an impairment is recognized to reduce the
carrying value to the fair market value. Losses on long-lived
assets to be disposed of are determined in a similar manner,
except that the fair market values are reduced for the cost to
sell. Based on evaluations performed, there was no adjustment
to the carrying value of such assets during any of the three
years ended December 31, 1998.
Foreign Currency Translation
Translation gains or losses resulting from translating foreign
currency financial statements are reported as a component of
shareholders' equity. Foreign currency transaction gains and
losses are included in earnings as incurred.
Revenue Recognition
Revenue from sales is generally recognized at the time the
product is shipped.
Product Warranty Costs
Provision for estimated warranty costs is recorded at the time of
sale and periodically adjusted to reflect actual experience.
Research and Development
Research and development expenditures are expensed as incurred.
Development activities generally relate to creating new products,
improving or creating variations of existing products, or
modifying existing products to meet new applications.
Earnings per Common Share
Basic earnings per common share is computed by dividing net
income, after deducting preferred stock dividends, by the
weighted 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 weighted 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 of 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. See also Note 19.
Reclassifications
Certain reclassifications have been made to prior years'
financial statements to conform to the current year presentation.
2. Adoption of New Accounting Standards
In 1998, the Company adopted the following new accounting
standard: Statement of Financial Accounting Standard (FAS) No.
132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits". FAS 132 revises and standardizes
disclosures for pensions and other postretirement benefits. See
Note 15.
In 1997, the Company adopted the following 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". The impact
of these new standards on Pentair was immaterial.
Prior year financial statements have been restated accordingly.
3. 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.
4. Acquisitions/Divestitures
1998
In 1998, the Company paid $68,384,000 to acquire 3 new
businesses, all accounted for as purchase acquisitions with
$34,479,000 of goodwill recorded during 1998 for these
acquisitions. The pro forma effect of these acquisitions is not
deemed material to the Company.
1997
In 1997, the Company paid $210,620,000 to acquire 3 new
businesses, all accounted for as purchase acquisitions with
$180,348,000 of goodwill recorded during 1997 for these
acquisitions. The pro forma effect of these acquisitions is not
deemed material to the Company.
In 1997, the Company sold its Federal Cartridge business for
$112,000,000 cash plus receivables approximating $16,000,000 for
final closing adjustments. Federal's operating results are
included in the Company's results through October 31, 1997. The
gain on the sale was $1,221,000 after income tax expense of
$9,092,000. Tax expense for the transaction was extraordinarily
high due to non-deductible goodwill. The transaction added 3
cents to diluted earnings per share in 1997.
1996
In 1996, the Company paid $75,185,000 to acquire 4 new
businesses, all accounted for as purchase acquisitions with
$33,176,000 of goodwill recorded during 1996 for these
acquisitions. The pro forma effect of these acquisitions is not
deemed material to the Company.
5. Balance Sheet Information
Accounts receivable are stated net of allowances for doubtful
accounts of $10,858,000 in 1998 and $12,446,000 in 1997.
Inventories are stated at the lower of cost or market. All non-US
companies use the first-in, first-out - FIFO and moving average
methods. The US companies use the last-in, first-out - LIFO
method.
<TABLE>
<CAPTION>
December 31
(In thousands) 1998 1997
<S> <C> <C>
Finished goods $147,780 $131,847
Work in process 64,421 58,047
Raw materials and supplies 66,380 76,515
Total $278,581 $266,409
</TABLE>
If all LIFO inventories were valued at FIFO, aggregate inventory
would have been $281,950,000 and $269,653,000 at December 31,
1998 and 1997, respectively.
6. Long-Term Debt and Credit Facilities
Revolving credit facilities with seven banks provide credit
facilities of US $390,000,000 which can be borrowed in US$, any
other G7 currency or the Euro where applicable. G7 currencies
include any of Deutschemarks, French Francs, British Pounds
Sterling, Japanese Yen, Canadian Dollars, or Italian Lira. The
Company must pay a commitment fee ranging from .100 to .150 of 1%
per annum on the total amount of the credit facility. The rate
is assessed pursuant to a sliding scale based on the Company's
debt to total capital ratio as calculated quarterly. Borrowings
under the revolving credit facility mature on June 30, 2001. The
Company also has in place a $50,000,000 uncommitted multi-
currency credit facility which is used primarily for European
overdraft funding and a $35 million temporary uncommitted credit
facility used to fund an acquisition.
Debt is summarized as follows:
<TABLE>
<CAPTION>
December 31
(In thousands) 1998 1997
<S> <C> <C>
Revolving credit facilities, average
interest rate of 4.87% $103,479 $102,119
Private placement debt, due 1999
to 2007, average interest rate
of 6.96% 180,716 197,858
Other, due periodically to 2005,
average interest rate 5.77% 56,705 29,275
Total 340,900 329,252
Current maturities 52,874 34,703
Total long-term debt $288,026 $294,549
</TABLE>
At December 31, 1998, outstanding revolving credit facility debt
included $72,000,000 in U.S. dollars with an average current
interest rate of 5.43% and $31,479,000 in various foreign
currencies with an average current local interest rate of 4.10%.
The weighted average credit facilities borrowing rates were 4.99%
in 1998 and 4.87% in 1997. See also interest rate swap
agreements at Note 7.
Various debt agreements have restrictions relating to minimum net
worth, certain financial ratios, and dividends and certain other
restricted payments. Under the most restrictive covenants,
$161,695,000 of the December 31, 1998 retained earnings were
unrestricted for such purposes. The Company has remained in
compliance with these covenants.
Total long-term debt maturities, excluding revolving credit
facilities, are $52,874,000, $56,183,000, $18,002,000,
$2,787,000, and $52,804,000 for the years 1999 to 2003,
respectively.
7. Financial Instruments
The Company utilizes various derivatives such as interest rate
swap agreements, currency swap agreements, and interest rate cap
agreements. The Company uses these derivatives in a strategic
manner to minimize interest rate and foreign currency risk. The
instruments are not purchased as speculative investments.
Interest Rate Risk Management
The Company has entered into interest rate swap agreements with
major financial institutions to exchange variable rate interest
payment obligations for fixed rate obligations without the
exchange of the underlying principal amounts in order to manage
interest rate exposures. Net payments or receipts under the
agreements are recorded as adjustments to interest expense and
credit risk is considered remote.
As of December 31, 1998, the Company has swap agreements
outstanding with an aggregate notional amount of $40,000,000 that
expire in varying amounts through June 2005. The Company also
has in place forward starting swap agreements, which activate in
June 1999, with an aggregate notional amount of $34,500,000. The
swap agreements have a fixed interest rate of 6.56% and an
average remaining maturity of 5 years. Under the interest rate
environment existing as of December 31, 1998, the net fair value
of the Company's swap agreements was a net liability of
$3,235,000.
As of December 31, 1998, the Company has one interest rate cap
agreement outstanding. It is a 35,000,000 Deutschemark cap that
expires in November 2001 with a capped interest rate of 7.29% DEM-
LIBOR.
Foreign Exchange Risk Management
The Company has entered into currency swap agreements with major
financial institutions to hedge net assets in foreign
subsidiaries, principally those denominated in Deutschemarks and
Italian Lira. The notional amounts set forth in the table below
serve solely as a basis for the calculation of interest payments
which are exchanged over the life of the swap transaction and are
equal to the amount of foreign currency or dollar principal
exchanged at maturity. Gains or losses are deferred and are
recognized in income as part of the related transaction.
Deferred unrealized gains and losses, based on dealer-quoted
prices, are presented in the following table:
(in thousands) 1998 1997
Notional amounts $128,431 $128,431
Gains 6,413 3,433
Losses 16,191 3,084
Fair Value of Financial Instruments
The estimated fair value of long-term debt represents the present
value of debt service at rates currently available to the Company
for issuance of debt with similar terms. The fair value of
interest rate swap agreements and currency swap agreements were
estimated based on quotes obtained from dealers for those or
similar instruments. Except for those listed, all other
financial instruments are carried at amounts that approximate
estimated fair value.
<TABLE>
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
<S> <C> <C> <C> <C>
Long-term debt $340,900 $350,332 $329,252 $339,450
Interest rate swaps 0 (3,235) 0 (550)
Cross-currency swaps 0 (9,778) 0 349
Interest rate cap 0 (10) 0 (121)
</TABLE>
Fair values for the cross-currency swaps are based on the
termination of these agreements.
The Company also utilizes commodity swap agreements from time to
time. At December 31, 1998, the net fair value of the commodity
swaps was a net liability of $170,000.
8. Lease Commitments
Rent expense related to operating leases amounted to $22,655,000,
$15,737,000, and $11,400,000 in 1998, 1997 and 1996,
respectively. The majority of the lease commitments are for
information systems equipment and buildings.
Future minimum rental payments under all operating leases are
$20,215,000, $15,638,000, $11,618,000, $8,482,000, and $7,502,000
for the years 1999 to 2003, respectively.
9. Commitments and Contingencies
Various lawsuits, claims and proceedings have been or may be
instituted or asserted against the Company relating to the
conduct of its businesses, including those pertaining to product
liability, environmental, safety and health, and employment
matters. The Company records liabilities when loss amounts are
determined to be probable and reasonably estimable. Insurance
recoveries are recorded only when claims for recovery are
settled. Although the outcome of litigation cannot be predicted
with certainty and some lawsuits, claims or proceedings may be
disposed of unfavorably to the Company, management believes,
based on facts presently known, that the outcome of such legal
proceedings and claims will not have a material adverse effect on
the Company's financial position, liquidity, or future results of
operations.
10. Capital Stock
Preferred Stock
The two classes of preferred stock (par value - $.10) are: $7.50
Callable Cumulative Convertible Preferred Stock, Series 1988; and
8% Callable Cumulative Voting Convertible Preferred Stock, Series
1990 at December 31, 1998. Both issues were held by ESOPs
(see Note 12). The preferred shares are convertible into
common stock and are redeemable, in whole or in part, at the
option of the Company on or after the dates indicated below,
and at redemption prices declining to the original price per
share after ten years.
Series Series
1988 1990
Shares
Authorized 300,000 2,500,000
Issued and outstanding 103,318 1,431,601
Liquidation value $100.00 $30.25
Conversion
Price of common $10.66 to $13.34 $13.11
Shares of common 9.375 to 7.5 2.3077
Early redemption date January 1991 March 1994
Upon the retirement or other termination of an ESOP participant,
the shares of preferred stock (Series 1988 and 1990) in which he
or she is vested are automatically converted into common shares
and distributed in that form, with fractional shares paid in
cash.
Subsequent to year-end, both Series 1988 and Series 1990
preferred stock classes were redeemed and all shares were
converted to common stock on January 4, 1999 and January 15,
1999, respectively.
Common Stock
At December 31, 1998, the authorized stock of the Company consisted
of 122,200,000 shares of Common Stock with a par value of $.16 2/3.
Changes in outstanding common shares are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Beginning Balance 38,185 37,717 37,035
Repurchase of stock (350) 0 0
Employee stock plans - net 208 288 409
Conversion of preferred stock 461 180 273
Ending Balance 38,504 38,185 37,717
</TABLE>
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. The Company
completed the repurchase of 350,000 shares in 1998.
On December 14, 1998, the Company announced that the Pentair
board had authorized the Company to repurchase on an annual basis
up to 400,000 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. As of March 11, 1999, the Company had
repurchased 25,000 shares under the new authorization.
11. Share Rights Plan
The Company has a Share Rights Plan for its shareholders. Each
Right entitles the registered holder to purchase from the Company
one common share at a price of $80.00, subject to adjustment.
Such rights only become exercisable ten business days after a
person or group acquires beneficial ownership of, or commences a
tender or exchange offer for, 15 percent or more of the Company's
common stock.
The Company can redeem the rights for $.01 per right. The Rights
will expire on July 31, 2005, unless the Rights are earlier
redeemed or exchanged by the Company.
12. Employee Stock Ownership Plan (ESOP)
The Company has an Employee Stock Ownership Plan (ESOP) covering
non-bargaining and some bargaining U.S. employees. The employees
receive Series 1990 Preferred Stock in lieu of cash 401(k)
matching contributions and other cash compensation.
To finance the plan, the ESOP borrowed $56,500,000 from the
Company and exchanged it for 1,867,768 shares of Callable
Cumulative Voting Convertible Preferred Stock, Series 1990 at
$30.25 per share. The unpaid balance of the twenty-year, 8.75%
loan was included in the Company's balance sheet as unearned ESOP
compensation.
Gross compensation expense (i.e. the value of shares allocated to
participants' accounts) was $7,092,000, $7,081,000, and
$5,561,000 in 1998, 1997 and 1996, respectively. The stock held
by the ESOP is released for allocation to the participants'
accounts as principal and interest is paid from dividends on
unallocated shares ($517,000, $1,140,000, and $1,679,000 in 1998,
1997 and 1996, respectively) and Company contributions. As of
December 31, 1998, the loan has been reduced to zero since all
shares have been allocated to participant accounts as
compensation and dividends.
A separate frozen ESOP holds the Series 1988 Preferred Stock.
Subsequent to year-end, both Series 1988 and Series 1990
preferred stock classes were redeemed and all shares were
converted to common stock on January 4, 1999 and January 15,
1999, respectively.
13. Stock Incentive Plans
Omnibus Stock Incentive Plan
In April 1996, shareholders approved amendments to the Omnibus
Stock Incentive Plan (the Plan) to authorize the issuance of
additional shares of the Company's common stock. The Plan
extends to February 14, 2006. At December 31, 1998, there were
2,419,774 shares available for grant under the Plan.
The Plan allows for the granting of nonqualified stock options,
incentive stock options, restricted stock, rights to restricted
stock, incentive compensation units (ICUs), stock appreciation
rights, performance shares and performance units.
Restricted Shares, Rights to Restricted Stock and ICUs
Restrictions on the restricted shares, rights to restricted stock
and ICUs generally expire in the third, fourth and fifth years
after issuance. Beginning with 1993 grants, ICU restrictions
will expire at the end of three years. The value of each ICU is
based on the increase in book value of common stock during the
restriction period and is payable when the restrictions lift.
Compensation expense consists of (a) amortization of the market
value of the stock on the date of award over the period in which
the restrictions lapse, and (b) the annual increase in ICU value.
Compensation expense was $6,100,000 in 1998, $4,991,000 in
1997,and $4,909,000 in 1996. The Company records incremental tax
benefits resulting from the program as additional paid-in
capital.
Options
Options are granted to purchase shares at not less than fair
market value of shares on date of grant. Options have expiration
dates of five or ten years from date of grant.
Outside Directors Nonqualified Stock Option Plan
The Outside Directors Nonqualified Stock Option Plan (the
Directors Plan) allows for the granting of nonqualified stock
options. Options are granted to purchase shares at not less than
fair market value of shares on date of grant. Options generally
expire after five years but may expire up to ten years from date
of grant. The Directors Plan extends to January 2008. At
December 31, 1998, there were 395,973 shares available for grant
under the Directors Plan.
Details of options for both plans are as follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
<S> <C> <C>
1996
Granted 398,278 $25.0000
Exercised 456,031 $14.0283
Forfeited 51,546 $22.2582
Outstanding, end of year 1,347,759 $19.9397
Exercisable, end of year 602,412 $16.5585
1997
Granted 372,314 $31.0791
Exercised 342,077 $15.7225
Forfeited 18,174 $29.3324
Outstanding, end of year 1,359,822 $23.9256
Exercisable, end of year 660,542 $20.2986
1998
Granted 424,100 $35.7542
Exercised 280,344 $18.4359
Forfeited 20,106 $29.6983
Outstanding, end of year 1,483,472 $28.4138
Exercisable, end of year 739,385 $23.7673
</TABLE>
Options Outstanding and Exercisable by Price Range
as of December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
<C> <C> <C> <C> <C> <C>
$17.75 94,424 0.06 $17.75 94,424 $17.75
$21.375 - $21.50 290,485 1.05 $21.50 290,485 $21.50
$25.00 339,354 2.06 $25.00 229,902 $25.00
$29.125 - $33.9375 341,409 3.06 $31.00 124,575 $31.00
$35.00 374,825 9.06 $35.00 0 $00.00
$40.4375 - $45.125 42,975 9.25 $43.70 0 $00.00
$17.75 - $45.125 1,483,472 3.88 $28.41 739,385 $23.7673
</TABLE>
In accordance with generally accepted accounting principles, the
Company has chosen to continue accounting for its plans using the
"intrinsic method" in accordance with Accounting Principles Board
Opinion No. 25 which requires no compensation expense to be
recorded for the issuance of stock options when exercise prices
are equal to market value on the date of grant. Had compensation
cost for the plans been determined using the "fair value" method
as defined in Statement of Financial Accounting Standards (FAS)
No. 123, "Accounting for Stock-Based Compensation", compensation
expense would have been accrued and the effect on the Company's
income from continuing operations and earnings per share would
have been as follows:
<TABLE>
<CAPTION>
Years Ending December 31
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Net Income As reported $106,840 $91,600 $74,509
Pro forma 104,875 89,900 73,120
Basic EPS As reported $2.67 $2.28 $1.86
Pro forma 2.62 2.24 1.82
Diluted EPS As reported $2.46 $2.11 $1.73
Pro forma 2.42 2.07 1.69
</TABLE>
The weighted average fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model
and represents the difference between the fair market value on
the date of grant and the estimated market value on the exercise
date. The model uses the following weighted-average assumptions:
<TABLE>
<CAPTION>
1988 1997 1996
<S> <C> <C> <C>
Volatility 31% 26% 25%
Risk-free interest rate 4.55% 5.5% 5.2%
Expected life (years)
Plan 1.91 2.0 2.0
Directors Plan 2.17 2.5 2.5
Dividend yield 1.7% 1.7% 2.0%
</TABLE>
14. Provision for Income Taxes
The components of earnings before income taxes were as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
U.S. $147,339 $139,006 $89,833
International 23,605 19,376 34,769
$170,944 $158,382 $124,602
</TABLE>
The provisions for income taxes, excluding tax benefits credited
directly to shareholders' equity, were as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Current
U.S.(less foreign tax credits) $41,594 $60,640 $33,897
State 9,274 9,573 6,760
International 7,506 7,837 8,962
Current provision 58,374 78,050 49,609
Deferred
U.S. 4,415 (11,592) (4,687)
International 1,315 324 5,171
Deferred provision 5,730 (11,268) 484
Total provision $64,104 $66,782 $50,093
</TABLE>
A reconciliation of the statutory federal tax rate to the
effective rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Statutory federal
income tax rate 35.0% 35.0% 35.0%
State and local income taxes,
net of U.S. income tax benefit 3.9 3.6 3.3
Incremental international tax rate 0.0 0.6 1.6
Non-deductible amortization of goodwill 1.4 1.6 2.0
ESOP dividend benefit (0.8) (0.8) (0.9)
Other (2.0) (1.0) (0.8)
37.5 39.0 40.2
Incremental Tax -
gain on sale of business 0.0 3.2 0.0
Effective Rate 37.5% 42.2% 40.2%
</TABLE>
The tax effect of the primary temporary differences giving rise
to the Company's deferred tax assets and liabilities at December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
<S> <C> <C>
Deferred Tax Assets:
Accounts receivable allowances $4,955 $4,737
Retiree medical liability 17,244 17,480
Warranty/product liability accruals 19,222 19,991
Employee benefit accruals 21,280 20,098
Other 10,120 10,829
Gross deferred tax assets 72,821 73,135
Deferred Tax Liabilities:
Inventory allowances (5,252) (5,878)
Accelerated depreciation (18,662) (16,886)
Other (18,957) (14,860)
Gross deferred tax liabilities (42,871) (37,624)
Net Deferred Tax Assets $29,950 $35,511
</TABLE>
15. Pensions and Other Postretirement Benefits
Pension Benefits
The Company has several non-contributory defined benefit employee
pension plans covering substantially all employees of its U.S.
and certain non-U.S. subsidiaries. Employees covered under the
bargaining plans are eligible to participate at the time of
employment and the benefits are based on a fixed amount for each
year of service. Employees covered under the non-bargaining
pension plans are eligible to participate upon the attainment of
age 21 and the completion of one year of service; and benefits
are based upon final average salary and years of service. All
employees are fully vested in the plans after 5-7 years of
service. The Company's funding policy is to make contributions
as required by applicable regulations.
Other Benefits
The Company provides certain health care and life insurance
benefits for retired employees. Employees become eligible for
these benefits if they meet minimum age and service requirements
and are eligible for pension benefits.
Weighted Average assumptions as of December 31:
Pension Benefits Other Benefits
1998 1997 1996 1998 1997 1996
Discount rate 6.75% 7.0% 7.5% 6.75% 7.0% 7.5%
Expected return on plan assets 8.5% 8.5% 8.5%
Rate of compensation increase 5.0% 5.0% 5.0%
For measurement purposes, annual rates of 8.64 percent (pre-65
benefits) and 8.14 percent (post-65 benefits) for increases in
the per capita cost of covered health care benefits were assumed
for 1999. The rate was assumed to decrease gradually to 5.0
percent for 2019 and remain at that level thereafter.
The components of net periodic benefit cost are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
(In thousands) 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Service cost $12,803 $11,058 $11,128 $479 $567 $630
Interest cost 19,257 18,900 18,023 2,175 2,794 2,921
Expected return on plan assets (25,827) (22,685) (19,534) 0 0 0
Amortization of transition asset (151) (181) (181) 0 0 0
Amortization of prior service cost 1,932 602 685 (849) (1,076) (948)
Recognized net actuarial loss (814) (1,146) 450 (122) 0 0
$7,200 $6,548 $10,571 $1,683 $2,285 $2,603
</TABLE>
A one-percentage point change in the assumed health care cost
trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
Point Increase Point Decrease
(in thousands)
<S> <C> <C>
Effect on total of service
and interest cost $36.2 $(31.8)
Effect on postretirement
benefit obligation 435.2 (382.4)
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
(In thousands) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation -
beginning of year $298,989 $261,658 $32,325 $40,943
Service cost 12,803 11,058 479 567
Interest cost 19,257 18,901 2,175 2,794
Plan participants' contributions 0 0 0 0
Amendments 2,575 838 234 (7,788)
Actuarial (gain) loss (120) 21,643 347 (1,661)
Acquisition 6,252 0 0 0
Disposition (21,750) 0 0 0
Translation (gain) loss 1,645 (3,079) 0 0
Benefits paid (12,803) (12,030) (2,091) (2,530)
Benefit obligation -
end of year $306,848 $298,989 $33,469 $32,325
Change in plan assets
Fair value of plan assets -
beginning of year $307,724 $272,280 $0 $0
Actual return on plan assets 43,020 46,655 0 0
Acquisition 5,727 0 0 0
Disposition (21,750) 0 0 0
Employer contribution 1,050 819 2,091 2,530
Plan participants' contributions 0 0 0 0
Benefits paid (12,803) (12,030) (2,091) (2,530)
Fair value of plan assets -
end of year $322,968 $307,724 $0 $0
Funded status 16,120 8,735 (33,469) (32,325)
Net transition liability (asset) (155) (319) 0 0
Unrecognized net actuarial loss (59,138) (42,584) (6,569) (5,064)
Unrecognized prior service cost 4,001 3,358 (4,412) (7,652)
Net amount recognized $(39,172) $(30,810)$(44,450)$(45,041)
Amounts recognized in the balance sheet consist of:
Prepaid benefit cost $6,956 $6,705 $0 $0
Accrued benefit liability (50,908) (41,898) (44,450) (45,041)
Intangible asset 907 384 0 0
Deferred Tax 1,498 1,526 0 0
Accumulated other
comprehensive income 2,375 2,473 0 0
Net amount recognized $(39,172) $(30,810)$(44,450)$(45,041)
</TABLE>
At December 31, 1998, for plans with assets less than PBO, the
aggregate PBO is $52.0 million and the aggregate assets are $5.9
million. For plans with assets less than ABO, the aggregate ABO
is $40.7 million and the aggregate assets are $0.1 million. The
majority of the under funding is related to German pension plans,
which are not commonly funded.
At December 31, 1998, approximately 98% of the plan assets are
invested in listed stocks and bonds or cash and short-term
investments. The remaining 2% of plan assets are invested in
insurance contracts. The Company's own common stock accounted
for 11.2% of plan assets.
16. Disclosure about Segments of an Enterprise and Related
Information
Pentair Inc. has three reportable segments: Professional Tools
and Equipment (PTE), Water and Fluid Technologies (WFT), and
Electrical and Electronic Enclosures (EEE). The PTE segment
includes Delta International Machinery, Porter-Cable, Lincoln
Automotive and Century Manufacturing. Products manufactured
include woodworking machinery, portable power tools, lubricating
and lifting equipment, battery charging and testing equipment,
and welding equipment. The WFT segment includes the Pentair Pump
Group, Fleck Controls and Lincoln Industrial. Products
manufactured include pumps for wells and water treatment, sump
pumps, valves for water softeners, and automated and manual
lubrication systems and equipment. The EEE segment includes
Hoffman Enclosures, Schroff and Pentair Enclosures U.K..
Products manufactured include metallic and composite cases,
subracks, and cabinets that house and protect electrical and
electronic controls, instruments, and components. Other includes
corporate expenses, captive insurance company, intermediate
financial companies, charges that do not relate to current
operations, divested operations (Federal Cartridge), and
intercompany eliminations. Segment assets exclude all cash and
cash equivalents.
In evaluating financial performance, management focuses on
operating income as a segment's measure of profit or loss.
Operating income is before interest expense, interest income and
income taxes. Management uses a variety of balance sheet ratios
to measure the business. The primary focus is on maximizing the
return from each segment's assets, excluding cash and temporary
investments. The accounting policies of the segments are the same
as those described in the summary of significant accounting
policies (Note 1). Most intersegment sales are component parts
and are sold at cost plus an equitable division of manufacturing
and marketing profits. The remaining intercompany sales are
finished product and are sold based on current market pricing to
third parties.
<TABLE>
<CAPTION>
Segment Information:
(in thousands) PTE WFT EEE Other Totals
<S> <C> <C> <C> <C> <C>
1998
Net sales from external customers $841,325 $532,208 $564,045 $ 0 $1,937,578
Intersegment net sales 7,969 5,672 0 (13,641) 0
Depreciation and amortization expense 16,429 19,516 32,285 158 68,388
Segment profit (loss)
- operating income 108,242 71,353 51,753 (38,156) 193,192
Segment assets 477,076 505,246 535,810 36,534 1,554,666
Capital expenditures 21,830 13,027 17,320 1,666 53,843
1997
Net sales from external customers $737,323 $397,286 $579,209 $125,238 $1,839,056
Intersegment net sales 9,743 6,693 157 (16,593) 0
Depreciation and amortization expense 14,307 16,703 30,265 6,561 67,836
Segment profit (loss)
- operating income 84,355 45,987 53,313 (13,853) 169,802
Segment assets 410,037 508,357 473,906 80,562 1,472,862
Capital expenditures 22,947 8,492 43,815 2,207 77,461
1996
Net sales from external customers $572,349 $316,167 $548,695 $129,854 $1,567,065
Intersegment net sales 10,340 6,085 103 (16,528) 0
Depreciation and amortization expense 11,605 12,219 28,297 7,399 59,520
Segment profit (loss)
- operating income 60,556 44,445 59,592 (21,674) 142,919
Segment assets 360,766 280,819 464,475 182,954 1,289,014
Capital expenditures 15,270 10,701 40,522 5,153 71,646
</TABLE>
Segment Geographic Information:
<TABLE>
<CAPTION>
Revenues Assets
(In millions) 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
United States $1,513.5 $1,275.5 $1,047.1 $1,076.7 $1,031.0 $761.9
Canada 102.5 98.3 77.7 30.6 27.9 24.6
Germany 113.1 99.4 115.7 211.6 200.6 240.0
Other Europe 135.1 164.5 136.0 184.5 116.9 65.0
Pacific Rim 38.1 49.5 38.9 14.7 15.9 14.5
Rest of World 28.3 26.6 21.8 0.0 0.0 0.0
Total $1,937.6 $1,713.8 $1,437.2 $1,518.1 $1,392.3 $1,106.0
</TABLE>
Revenues are attributed to countries based on location of
customer. Assets are based on the geographic location of the
subsidiary and have been translated into $U.S. dollars.
17. Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
1998 1st 2nd 3rd 4th Total
<S> <C> <C> <C> <C> <C>
Net sales $464,965 $471,790 $476,780 $524,043 $1,937,578
Gross profit 144,810 146,370 147,626 168,462 607,268
Operating income 43,889 44,698 46,661 57,944 193,192
Net Income 23,709 24,414 25,796 32,921 106,840
Earnings per common share
Basic $.59 $.60 $.64 $.84 $2.67
Diluted .54 .56 .60 .76 2.46
1997 1st 2nd 3rd 4th Total
Net sales $411,139 $422,305 $482,089 $523,523 $1,839,056
Gross profit 125,951 128,951 142,290 151,066 548,258
Operating income 37,479 38,568 42,757 50,998 169,802
Net Income 19,417 20,484 22,207 29,492 91,600
Earnings per common share
Basic $.48 $.51 $.55 $.74 $2.28
Diluted .45 .47 .51 .68 2.11
</TABLE>
18. Disclosure of Risks and Uncertainties
Pentair, Inc. is engaged principally in the design, engineering,
and manufacturing of various industrial products. The
diversified businesses manufacture woodworking equipment, power
tools, vehicle service equipment, pumps, water conditioning
control valves, industrial lubrication systems and material
dispensing equipment, and enclosures for electrical and
electronic equipment.
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The Company has retained certain obligations of discontinued and
divested businesses. Based on evaluations by management and
environmental professionals, amounts for currently estimable and
probable risks or obligations have been accrued.
Although the individual subsidiaries deal with major customers
throughout North America and Europe, Pentair as a whole has
mitigated any significant impact or potential risk of
concentration of customers or products, or in certain markets or
geographic areas. This is due to the diversified nature of the
Company and its product lines.
19. Earnings Per Share
In 1997, the Company adopted Statement of Financial Accounting
Standards (FAS) No. 128, "Earnings per Share". Earnings per
share amounts presented for 1996 have been restated for the
adoption of FAS 128. The following table reflects the
calculation of basic and diluted earnings per share.
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Earnings per share
Net Income $106,840 $91,600 $74,509
Preferred dividend requirements 4,267 4,867 4,928
Income available to common shareholders 102,573 86,733 69,581
Average common shares outstanding 38,444 37,989 37,491
Basic Earnings per Common Share $2.67 $2.28 $1.86
Earnings per share - assuming dilution
Income available to common shareholders 102,573 86,733 69,581
Addback preferred dividend requirements due to
conversion into common shares 4,267 4,867 4,928
Elimination of tax benefit on preferred ESOP
dividend due to conversion into common shares (1,436) (1,420) (1,333)
Addition of tax benefit on ESOP dividend
assuming conversion to common shares -
at common dividend rate 830 740 644
Income available to common shareholders
assuming dilution 106,234 90,920 73,820
Average common shares outstanding 38,444 37,989 37,491
Dilutive impact of stock options outstanding 435 456 458
Assumed conversion of preferred stock 4,270 4,622 4,803
Weighted average shares
and potentially dilutive shares outstanding 43,149 43,067 42,752
Diluted Earnings per Common Share $2.46 $2.11 $1.73
</TABLE>
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders of Pentair, Inc.:
We have audited the accompanying consolidated balance sheets of
Pentair, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, shareholders'
equity, cash flows and comprehensive income for each of the three
years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at
Item 14. These financial statements and financial statement
schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Pentair, Inc. and subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set
forth therein.
Deloitte & Touche LLP
Minneapolis, Minnesota
January 29, 1999
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information regarding nominees and directors appearing under
"Election of Directors" in the Pentair, Inc. Notice of Annual
Meeting of Shareholders and Proxy Statement for the April 1999
annual shareholders' meeting (the "1999 Proxy Statement") is
hereby incorporated by reference. Information regarding
executive officers is set forth in Item 1 of Part I of this
report.
Item 11. Executive Compensation.
Information appearing under "Election of Directors" and
"Executive Compensation" in the 1999 Proxy Statement is hereby
incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information appearing under "Security Ownership of Management and
Beneficial Ownership" in the 1999 Proxy Statement is hereby
incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
No relationships or transactions existed or occurred during the
last year that require disclosure under Item 13.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements and Exhibits.
1. List of Financial Statements
The following consolidated financial statements of Pentair,
Inc. and subsidiaries are included in Item 8 or Part II:
Consolidated Statements of Income for
Years Ended December 31, 1998, 1997 and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Cash Flows for
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Comprehensive Income for
Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. List of Financial Statement Schedules
The following financial statement schedules of Pentair, Inc.
and subsidiaries are included herein.
Schedule II- Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulations of the Commission are not
required under the related instructions or inapplicable and,
therefore, have been omitted.
3. List of Exhibits
The following exhibits are either included in this report or
incorporated by reference as indicated below:
Exhibit
Number Description
(3.1) Restated Articles of Incorporation as amended through
April 19, 1995. (Incorporated by reference to Exhibit
3.1 to the Company's Form 10-Q for the quarter ended
June 30, 1995).
(3.2) Resolution Establishing and Designating $7.50 Callable
Cumulative Convertible Preferred Stock, Series 1988, as
a series of Preferred Stock of Pentair, Inc.
(Incorporated by reference to Exhibit 4.1 to Amendment
No. 1 to the Company's Current Report on Form 8-K filed
December 30, 1988).
(3.3) Resolution Establishing and Designating 8% Callable
Cumulative Voting Convertible Preferred Stock, Series
1990, as a series of Preferred Stock of Pentair, Inc.
(Incorporated by reference to Exhibit 4 to the
Company's Current Report on Form 8-K filed March 21,
1990).
(3.4) Second Amended and Superseding By-Laws as amended
through July 21, 1995. (Incorporated by reference to
Exhibit 3.2 to the Company's Form 10-Q for the quarter
ended June 30, 1995).
(4.1) Rights Agreement as of July 21, 1995 between Norwest
Bank N.A. and Pentair, Inc. (Incorporated by reference
to Exhibit 4.1 to the Company's Form 10-Q for the
quarter ended June 30, 1995).
The Corporation agrees to furnish a copy of any other documents
with respect to long-term debt instruments of the Corporation and
its subsidiaries upon request.
(10.1) * Company's Supplemental Employee Retirement Plan
effective June 16, 1988. (Incorporated by reference to
Exhibit 10.10 to the Company's Annual Report on Form 10-
K for the year ended December 31, 1989).
(10.2) * Company's Omnibus Stock Incentive Plan as Amended
and Restated. (Incorporated by reference to Exhibit
10.1 to the Company's Form 10-Q for the quarter ended
March 31, 1996).
(10.3) * Company's Management Incentive Plan as amended to
January 12, 1990. (Incorporated by reference to Exhibit
10.17 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1989).
(10.4) * Employee Stock Purchase and Bonus Plan as amended
and restated effective January 1, 1992. (Incorporated
by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1991).
(10.5) * Company's Flexible Perquisite Program as amended
to January 1, 1989. (Incorporated by reference to
Exhibit 10.20 to the Company's Annual Report on Form 10-
K for the year ended December 31, 1989).
(10.6) * Form of 1986 Management Assurance Agreement
(Revised 1990) between the Company and certain key
employees. (Incorporated by reference to Exhibit 10.22
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1989).
(10.7) * Fourth Amended and Restated Compensation Plan for
Non-Employee Directors. (Incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-
K for the year ended December 31, 1996).
(10.8) * Pentair, Inc. Outside Directors Nonqualified Stock
Option Plan dated January 15, 1998. (Incorporated by
reference to Exhibit 10.8 to the Company's Form 10-K
for the year ended December 31, 1997).
(10.9) * Pentair, Inc. Deferred Compensation Plan effective
January 1, 1993. (Incorporated by reference to Exhibit
10.21 to the Company's Form 10-K for the year ended
December 31, 1992).
(10.10) * Pentair, Inc. Non-Qualified Deferred Compensation
Plan effective January 1, 1996. (Incorporated by
reference to Exhibit 10.17 to the Company's Form 10-K
for the year ended December 31, 1995).
(10.11) * Trust Agreement for Pentair, Inc. Non-Qualified
Deferred Compensation Plan between Pentair, Inc. And
State Street Bank and Trust Company. (Incorporated by
reference to Exhibit 10.18 to the Company's Form 10-K
for the year ended December 31, 1995).
(10.12) Loan and Stock Purchase Agreement dated March 7, 1990
between the Company and the Pentair, Inc. Employee
Stock Ownership Plan Trust, acting through State Street
Bank and Trust Company, as Trustee. (Incorporated by
reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed March 21, 1990).
(10.13) $56,499,982 Promissory Note dated March 7, 1990 of the
Pentair, Inc. Employee Stock Ownership Plan Trust,
acting through State Street Bank and Trust Company, as
Trustee, to the Company. (Incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-
K filed March 21, 1990).
(10.14) * Executive Officer Performance Plan. (Incorporated by
reference to Exhibit 10.14 to the Company's Form 10-K
for the year ended December 31, 1997).
(21) Subsidiaries of Registrant. (filed herewith)
(23) Consent of Deloitte & Touche LLP. (filed herewith)
(24) Power of Attorney. (see Signature Page)
(27) Financial Data Schedule. (filed herewith)
* Denotes management contract or compensatory plan.
EXHIBIT INDEX
Exhibit
Number Description
(21) Subsidiaries of Registrant.
(23) Consent of Deloitte & Touche LLP.
(24) Power of Attorney (see Signature Page).
(27) Financial Data Schedule.
Exhibit 27 has been excluded from the printed version.
(b) Reports on Form 8-K.
A report on Form 8-K was filed on November 19, 1998 regarding the
election of Joseph R. Collins to the board of directors of
Pentair, Inc.
A report on Form 8-K was filed on December 14, 1998 regarding
authorization of a stock repurchase program.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PENTAIR, INC.
(Registrant)
Dated: March 12, 1999 By /s/ Richard W. Ingman
Richard W. Ingman
Executive Vice President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned
directors of Pentair, Inc., a Minnesota corporation, hereby
constitute and appoint Louis L. Ainsworth his/her attorney-in-
fact and agent, with full power of substitution, for the purpose
of signing on his/her behalf as a director of Pentair, Inc. the
Annual Report on Form 10-K, to be filed with the Securities and
Exchange Commission within the next sixty days, and to file the
same, with all exhibits thereto and other supporting documents,
with the Commission, granting unto such attorney-in-fact, full
power and authority to do and perform any and all acts necessary
or incidental to the performance and execution of the powers
herein expressly granted.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has also been signed by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
By /s/ Winslow H. Buxton Dated: March 12, 1999
Winslow H. Buxton,
Chairman, President and
Chief Executive Officer,
Director
By /s/ George N. Butzow Dated: March 12, 1999
George N. Butzow,
Director
By /s/ William J. Cadogan Dated: March 12, 1999
William J. Cadogan,
Director
By /s/ Joeseph R. Collins Dated: March 12, 1999
Joseph R. Collins,
Vice Chairman, Director
By /s/ Barbara B. Grogan Dated: March 12, 1999
Barbara B. Grogan,
Director
By /s/ Charles A. Haggerty Dated: March 12, 1999
Charles A. Haggerty,
Director
By /s/ Harold V. Haverty Dated: March 12, 1999
Harold V. Haverty,
Director
By /s/ Quentin J. Hietpas Dated: March 12, 1999
Quentin J. Hietpas,
Director
By /s/ Walter Kissling Dated: March 12, 1999
Walter Kissling,
Director
By /s/ Richard M. Schulze Dated: March 12, 1999
Richard M. Schulze,
Director
By /s/ Karen E. Welke Dated: March 12, 1999
Karen E. Welke,
Director
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES
PENTAIR, INC. AND SUBSIDIARIES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Year Ended
December 31
Balance (A)
At Charged to Changes Balance
Beginning Costs and Add At End
Description of period Expenses Deductions (Deduct) of Period
<C> <C> <C> <C> <C> <C> <C>
Allowance for 1998 $12,446 $1,686 $4,068 $794 $10,858
doubtful accounts 1997 7,348 2,406 1,687 4,379 12,446
1996 7,840 498 1,546 556 7,348
</TABLE>
(A) Primarily assumed or established in connection with
acquisitions.
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE REGISTRANT
Listed below are the subsidiares of Pentair,
Inc., all of which are either directly or
indirectly 100% owned as of December 31, 1998,
except as otherwise noted.
Aplex Industries, Inc. United States
Biesemeyer Manufacturing Corporation United States
Century Manufacturing Co. United States
Delta International Machinery Corp. United States
Electronic Enclosures, Inc. United States
Eraba Engineering Limited United Kingdom
Eraba Holdings Limited United Kingdom
Eraba Limited United Kingdom
EuroPentair, GmbH Germany
Fleck Controls, Inc. United States
Fleck Europe, SAS France
Flex Elektrowerkzeuge GmbH Germany
Hoffman Enclosures Inc. United States
Hoffman Enclosures (Mex), LLC Mexico
Hoffman Engineering, S.A. de C.V. de SrL Mexico
Hoffman Engineering Co Limited United Kingdom
Hoffman-Schroff PTE Ltd. Singapore
HS Systems. Inc. United States
Lincoln Automotive Company United States
Lincoln Czech Republic Czech Republic
Lincoln GmbH Germany
Lincoln Industrial Corporation United States
Lincoln U.K. Ltd. United Kingdom
McNeil (Ohio) Corporation United States
Nekvets Limited United Kingdom
Optima Enclosures Limited United Kingdom
Optima Holdings Limited United Kingdom
ORSCO Inc. United States
Pentair FSC Corporation Virgin Islands(U.S.)
Pentair Asia, PTE Ltd. Singapore
Pentair Canada, Inc. Canada
Pentair Enclosures U.K. Ltd. United Kingdom
Pentair Financial Services Ireland Ireland
Pentair Halifax, Inc. Canada
Pentair Nova Scotia Co. Canada
Pentair Pump Group Inc. United States
Pentair U.K. Ltd. United Kingdom
Penwald Insurance Company United States
Porter-Cable Corporation United States
Schroff Scandinavia AB Sweden
Schroff S.r.L. Italy
Schroff Inc. United States
Schroff S.A. France
Schroff Co. Ltd. Taiwan
Schroff K.K. Japan
Schroff U.K. Ltd. United Kingdom
Schroff, GmbH Germany
SIATA S.p.A. Italy
The Telestack Co. United States
Transrack S.A. France
Walker Dickson Inc. United States
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by
reference in Registration Statements
No. 33-36256, 33-38534, 33-42268,
33-45012, 333-12561, and 333-62475
of Pentair, Inc. on Form S-8 of our
report dated January 29, 1999
appearing in this Annual Report
on Form 10-K of Pentair, Inc. for
the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
March 10, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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