UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549FORM 10-KFORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31,
19981999Commission File No. 001-11625
PENTAIR, INC.
(Exact(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
Minnesota 41-0907434 (State of incorporation) (I.R.S. Employer Identification Number)
1500 County Road B2 West, Suite 400,
Saint Paul, Minnesota55113-3105 (Address of principal executive offices) (Zip Code) (651) 636-7920
(Registrant’s telephone number, including area
code 651-636-7920code)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
Title of each class Name of each exchange on which registered 1) Common Stock, Par Value $.16 2/3 New York Stock Exchange 2) 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_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'sregistrant’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, 1999February 28, 2000 was$1.4$1.5 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'sRegistrant’s only class of common stock onMarch 1, 1999February 28, 2000 was42,700,169.48,484,325.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'sregistrant’s definitive Proxy Statement for the19992000 Annual Meeting of Shareholders are incorporated by reference in Part III of this Report.1
PART I
ITEM 1. BUSINESS
(a) General Development of the Business.
Pentair, Inc. (the
"Company"“Company” or"Pentair"“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'sPentair’s first entry into the water treatment industry.During 1996, the Company completed four
strategicacquisitions 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 strategicthree 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
3three 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 strategicthree 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 itssubsidiaries)subsidiaries; its US affiliates are now part of Pentair Electronic Packaging), a maker of custom and standard enclosures, subracks and systems.During 1999, Pentair made three acquisitions. In April, Pentair acquired WEB Tool and Manufacturing (WEB), a designer,
2
manufacturer and marketer of custom server subracks and chassis for datacom and telecom networking applications. In August, Pentair acquired the pressure vessel and pool equipment businesses of Essef Corporation. In September, Pentair acquired DeVilbiss Air Power Company, a manufacturer of compressors, generators and pressure washers. In addition, the Company is reviewing strategic alternatives for its industrial lubrication equipment business, Lincoln Industrial.
(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 Automotivethe tool businesses (Delta andCentury Manufacturing.Porter-Cable); and the equipment businesses (Century and the newly-acquired DeVilbiss Air Power Company). Products manufactured include woodworking machinery, portable power tools,lubricating and lifting equipment,battery charging and testing equipment, welding equipment, lubricating andwelding equipment.lifting equipment, air compressors, generators and pressure washers.The WFT segment includes the
Pentairpump and pool businesses (Pentair Pump Group and one of the newly-acquired Essef businesses), the water treatment businesses (Pentair Water Treatment which consists of Fleck Controls plus the remaining Essef business) and Lincoln Industrial. Products manufactured include pumps for wells and water treatment, sump pumps, pool and spa equipment such as valves, pumps, filters, lights and related equipment, valves and pressure vessels for watersofteners,treatment products and automated and manual lubricationsystems and equipment.systems.The EEE segment includes Hoffman Enclosures, Schroff, Pentair Electronic Packaging (a newly-integrated North American enclosures business, comprised of Schroff US, the newly-acquired WEB and the US affiliates of the former Walker Dickson business) 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 leadership 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'ssegment’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 eachsegment'ssegment’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.Segment Information:
(in thousands)
Segment Information: (in thousands)1999 PTE WFT EEE Other Totals 1998Net sales from external customers $841,325 $532,208 $564,045 $0 $1,937,578$ 1,068,669 $ 665,413 $ 633,671 $ 0 $ 2,367,753 Intersegment net sales 7,969 5,6725,155 4,158 0 (13,641)(9,313 ) 0 Depreciation and amortization expense 16,429 19,516 32,285 158 68,38822,392 30,827 35,258 168 88,645 Segment profit (loss) -— operating income108,242 71,353 51,753 (38,156) 193,192105,388 81,256 46,346 (18,659 ) 214,331 Segment assets 477,076 505,246 535,810 36,534 1,554,6661,112,983 1,016,604 546,426 126,953 2,802,966 Capital expenditures 21,830 13,027 17,320 1,666 53,843 199728,498 13,892 14,395 3,844 60,629 1998 Net sales from external customers $737,323 $397,286 $579,209 $125,238 $1,839,056$ 841,325 $ 532,208 $ 564,045 $ 0 $ 1,937,578 Intersegment net sales 9,743 6,693 157 (16,593)7,969 5,672 0 (13,641 ) 0 Depreciation and amortization expense 14,307 16,703 30,265 6,561 67,83616,429 19,516 32,285 158 68,388 Segment profit (loss) -— operating income84,355 45,987 53,313 (13,853) 169,80299,621 65,976 46,026 (18,431 ) 193,192 Segment assets 410,037 508,357 473,906 80,562 1,472,862477,076 505,246 535,810 36,534 1,554,666 Capital expenditures 22,947 8,492 43,815 2,207 77,461 199621,830 13,027 17,320 1,666 53,843 3
1997 PTE WFT EEE Other Totals Net sales from external customers $572,349 $316,167 $548,695 $129,854 $1,567,065$ 737,323 $ 397,286 $ 579,209 $ 125,238 $ 1,839,056 Intersegment net sales 10,340 6,085 103 (16,528)9,743 6,693 157 (16,593 ) 0 Depreciation and amortization expense 11,605 12,219 28,297 7,399 59,52014,307 16,703 30,265 6,561 67,836 Segment profit (loss) -— operating income60,556 44,445 59,592 (21,674) 142,91976,784 41,947 47,282 3,789 169,802 Segment assets 360,766 280,819 464,475 182,954 1,289,014410,037 508,357 473,906 80,562 1,472,862 Capital expenditures 15,270 10,701 40,522 5,153 71,64622,947 8,492 43,815 2,207 77,461 (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,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, welding accessories andweldingair compressors, portable generators and cold water pressure washers and 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,T-Tech, Century, Solar, Booster Pac, Cobra, Viper, Air America, Charge Air Pro, Ex-Cell andViper.Pro Air II.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 includeMarkets include: do-it-yourself(DIY)/homeshop; residential, commercial, and industrial construction; remodeling and cabinet, case good and furniture
makers. Service equipment markets includemakers; industrial fabrication and maintenance, automotive repair and vehicle maintenance, farm and industrial equipment; and aftermarket and retail channels for professional anddo-it- yourselfDIY automotive and body repair.Each of the businesses in the PTE segment faces a number of competitors, some of whom are larger and have more resources. Competition in the PTE segment has been intense and growing more so for the past few years, especially as these industries consolidate.
The toolIn most markets,have become extremely competitive, asonly a few large players remain, each having extensive product lines. TheCompany'sCompany’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 significantinfor thismarket.segment.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.
4
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 and composite and fiberglass storage tanks and filtration systems used in the manufacture of water softeners and filtration, deionization, and desalination systems; pool and spa equipment such as valves, pumps, filters, lights and related equipment; and automated and manual lubrication systems and equipment and 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, Structural, Wellmate, Codeline, Pac-Fab, Purex-Triton, Rainbow Lifegard, American, Compool, Kreepy Krauly, FIBERworks, SIATA, Lincoln, Lincoln Industrial and ORSCO.
Products are sold through various channels, including the
do-it- yourselfDIY market for retail sale through home centers and hardware stores, byspecially qualifiedspecially-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. In the pool market, the Company sells its products primarily to distributors and directly to installers. Sales of spa and jetted tub fittings and pumps are made primarily to OEMs with the balance to distributors.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 and assemblers who supply residential and commercial markets with standard and custom designed water softener products; pool and spa markets; 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 experiencedcontinues asignificanttrend toward consolidation,in 1997,evidenced in part by the acquisitions of Goulds PumpInc.by ITT Corporation and of the former General Signal Pump Group byPentair.Pentair, both in 1997. 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 byUnited StatesUS FilterCorporation's 1997Corporation’s 1998 acquisition of Culligan Water Technologies, Inc., both current(both customers ofthe Company'sPentair Water Treatment) and US Filter’s subsequent acquisition by Vivendi in 1999. No other water conditioning valvebusiness. There are two major independentsupplier in the water treatment market competes directly in both the valvesuppliers, includingand tank product markets as does theCompany, and a restricted number of small independent suppliers.Company. In addition,there are a number ofcaptive valve manufacturerswhose production is used tosupport their own sales of water conditioningsystems.systems in competition with customers of Pentair Water Treatment. Growth will come largely fromnicheproduct development, coordinated marketing programs, increased channel penetration and acquisitions of additional technologies.Each of the businesses in the WFT segment faces a number of competitors, some of which are larger, have more resources and
product development.are more vertically integrated. 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. In the pool and spa equipment market, there are a number of competitors with one that the Company considers its major competitor. The Company competes by offering a wide variety of innovative and high quality products which are competitively priced. Its existing distribution channels and reputation for quality also contribute to its continuing market penetration.5
Description of the Electrical and Electronic Enclosures Segment: Products; markets; competition
Products include metallic and composite enclosures
and cabinetsthat house and protect electrical and electronic controls, instruments, andcomponents,components. These enclosures include cabinets, cases, subracks and microcomputer packaging systems, as well as a full line of accessories including backplanes and powersupplies, and technical workstations.supplies. 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, Pentair Enclosures and Pentair
Enclosures.Electronic Packaging.Segment products are sold in three primary markets: electrical enclosures in North America, the channel which is primarily served 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- growingfaster-growing markets in the US and abroad both through acquisition (the former Walker Dickson and WEB), reorganization of certain businesses (Pentair Electronic Packaging) 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,environments; plant maintenance andrepair,repair; commercialconstructionconstruction; 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 communicationdatacom andtelecommunicationtelecom industries.Competition in product markets can be very intense, especially in electronic and ICT
markets.markets, where product design, prototyping, global supply and customer service are very significant factors. Finally, growth in the EEE segment will likely come fromdevelopment of distribution,continued channel penetration, growth in defined modification product offerings, product development, geographic expansion and acquisitions.CompetitionConsolidation, globalization and outsourcing are the most important trends in the faster-growing electronic enclosure business. The Company has made several acquisitions in the past few years in this area. The globalization of product demand increasingly requires world-wide local supply capability; no one competitor (including the EEE segment businesses) has successfully established that capability, although each of thethree product markets focusesmajor competitors in this market is actively pursuing geographic extension for customer support purposes. In addition to these competitors, there exists a large number of regional suppliers whose capabilities are focused more onprice, product features and innovation, service, quality and delivery.small runs of specialized build-to-print products.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 company-wide annual sales. No single new product constitutes a material amount of sales.
Raw materials.
The raw materials used in
Pentair'sPentair’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 significantdollaramount of selected products and components from Taiwan and China, the supply of which is also currently adequate.6
Patents, trademarks, licenses, franchises and concessions.
Pentair'sPentair’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
patentintellectual property 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 large part to holiday retail sales. Reflecting the somewhat seasonal impact of the PTE segment and the growing importance of home centerbusiness,retail sales, there is a buildup of inventory in the third quarter in anticipation of fourth quartershipments.shipments, and growth in receivables in the fourth and the following first quarter of each fiscal year. In the WFT segment, the pool and spa equipment business is strongly seasonal. Peak sales are in the March-July time period. There are advance sales in earlier months but with long receivables terms. The August 1999 acquisition date for Essef meant that 1999 calendar results for Pentair do not show the benefit of the peak season for this business.Dependence on limited number of customers.
The homecenters and mass retailers constitute the single most important distribution channel for the Company, however, 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'sCompany’s results of operations. The single largest customer of the Company as a whole accounted forapproximately 8%less than 10% of sales in1998.1999.Backlog.
As of December 31, 1999, the Company had approximately $235 million in order backlog; substantially all of which are expected to be fulfilled by the end of 2000. As of December 31, 1998, the Company had approximately $135 million in order backlog; substantially all of which were fulfilled by the end of 1999. The increase in backlog is largely due to 1999 acquisitions and long-term orders with OEMs for Enclosure products.
Production and sourcing is geared towards providing adequate inventories in order to meet customer forecast requirements and minimize customer back orders. Therefore, order rates and inventory management are more significant factors than backlogs. For most of the Company’s businesses, backlogs are an indication of near-term demand, but are generally subject to cancellation by the customer. Other than for some municipal water system pumps, the segments normally have few products with long lead times.
The natureWith the addition of thebusinesses emphasizes maintaining inventories sufficient to satisfy customer needs on a timely basis. Productionpool andsourcing is geared towards providing adequate inventoriesspa equipment products, certain advance sales are made inorder to minimize customer back orders. Accordingly, backlogs are not material to understandingthesales trends or manufacturing fluctuations of the segments.fourth quarter.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'sdevelopment.Pentair’s businesses have not historically undertaken any significant basic or applied research, since the products and processes
involved are moreinvolve traditionalandtechnologies which are well known to all competitors. As discussed above, however, each of the segments, especially PTE, undertakes extensive product development and design work in order tocontinuedrive improvements in features and manufacturing costs. Overall,Pentair'sPentair’s businesses spent over1.2%1.1% of sales on such development in 1999, 1998 and 1997. See also Note 1 of Notes to the Consolidated Financial Statements included in Item 8.7
Environmental
Mattersmatters.See
Management'sManagement’s Discussion and Analysis and Note 9 of Notes to the Consolidated Financial Statements included in Item 8.Employees.
As of December 31,
1998,1999, the Company and its subsidiaries employed approximately10,50013,900 personsworld-wide.worldwide. Total employees in the United States were approximately7,18010,935 of which1,6132,331 (21%) were represented by trade unions having collective bargainingagreements (22.5%).agreements.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 expiringin 1999: International Union of Electrical Workers-– Jonesboro, Arkansas (extended to April 3, 2002) approximately 250 employees.Contracts expiring in 2000: Teamsters Local 984 — Memphis, Tennessee (expires
4March 31, 2000) approximately 85 employees;GMP Local 45 — Ashland, Ohio (expires April
1999)1, 2000) approximately20570 employees; UAW Local 691 — St. Louis, Missouri (expires June 2, 2000) approximately 150 employees; Teamsters Local 848 – El Segundo, California (expires October 31, 2000) approximately 50 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:
Segment Geographic Information: Revenues Assets (In(In millions) 1999 1998 1997 19961999 1998 1997 1996United States $1,513.5 $1,275.5 $1,047.1 $1,076.7 $1,031.0 $761.9$ 1,863.5 $ 1,520.5 $ 1,400.8 $ 2,340.1 $ 1,062.7 $ 1,037.9 Canada 107.0 102.5 98.3 77.7 30.6 27.9 24.694.2 106.7 107.3 Germany 120.2 113.1 99.4 115.7 211.6 200.6 240.0163.6 184.5 194.0 Other Europe 191.7 135.1 164.5 136.0186.3 184.5 116.9 65.0Pacific Rim 46.0 38.1 49.5 38.9 14.7 15.9 14.518.8 16.3 16.8 Rest of World 39.4 28.3 26.6 21.80.0 0.0 0.0 Total $1,937.6 $1,713.8 $1,437.2 $1,518.1 $1,392.3$1,106.0$ 2,367.8 $ 1,937.6 $ 1,839.1 $ 2,803.0 $ 1,554.7 $ 1,472.9 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.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, 1999.26, 2000.Louis L. Ainsworth
5152Senior 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
5960Chairman since January 1993;
President andChief Executive Officer since August1992.1992; President August 1992 – November 1999.8
Richard J. Cathcart
5455Executive Vice President since February 1996; Executive Vice President, Corporate Development March 1995
- February— January 1996; Vice President, Business Development of Honeywell, Inc. 1994-— March 1995.Joseph R. Collins
5758Vice-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
4849Senior Vice President Corporate Development & Central Operating Services since September 1999; Vice President, Corporate Development October
1997;1997 – August 1999; General Manager of Sales Operations of GeneralElectric'sElectric’s Electrical Distribution and Control Division September 1994-— October 1997; General Manager Tektronix Test&& Measurement Division June 1992-— August 1994.Karen A. Durant
3940Vice 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 54David D. Harrison 52
Executive Vice President and Chief Financial Officer since March 2000; Executive Vice President and Chief Financial Officer of The Scotts Company, August
1996;1999 — February 2000; Executive Vice President and Chief Financial Officer ofHoffman EnclosuresColtec Industries, Inc.(subsidiary of Registrant) March 1994 - July 1996;, August 1996 – August 1999; Executive Vice President ofCorporate DevelopmentPentair, Inc. March 1995 – August1989 -1996 and Chief Financial Officer of Pentair, Inc. March 1994 – August 1996; Senior Vice President of Pentair, Inc. March 1994 — February 1995; Vice-President, Finance and Information Technology of the GE Canada Appliance Component subsidiary of General Electric, August 1992 — March 1994.Randall J. Hogan 44
President and Chief Operating Officer since December 1999; Executive Vice President March 1998 – November 1999; President of United Technologies’ Carrier Transicold Division 1995 – 1997; Vice President and General Manager Pratt & Whitney Turbo Power & Marine Division 1994 — 1995.
Debby S. Knutson
4445Vice President, Human Resources since September 1994; Assistant Vice President, Human Resources , August 1993
-— September 1994.Roy T. Rueb
5859Vice President, Treasurer since October 1986 and Secretary since June 1994.
James A. White
5354Executive 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
5682 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;TN (Porter-Cable); Kansas City, KS; Aurora, IL; Ashland, OH (Hydromatic); Moorpark, CA; Warwick, RI and in Europe — Betschdorf, France- Betschdorf, France.(Schroff).9
The number, type, location and estimated size of the
Company'sCompany’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)
Number and Nature of FacilitiesMfg.FacilitiesMfg. and Distribution Segment HQ & Mfg.DistributionSales/ServiceSquare& Mfg.Distribution Sales/Service Square Footage (000's) PTE 9 3 31 2,21010 4 34 2,497 WFT 23 18 12 9 15 2,2652,747 EEE 1721 5 32 2,56534 2,662 Other: Corporate Office1Office1 22
Locations of HQ, Manufacturing and Distribution Facilities North Segment America Europe Asia Africa PTE 1113 1 0 0 WFT 28 9 3 1 EEE 14 6 1 EEE 119 23 0 HQ Offices 1 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 a number of 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'sCompany’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'sthe 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 ofCompany'sCompany’s Cross Pointe Paper Corporation uncoated paper business in 1995 and the disposition of its Federal Cartridge Company ammunition business in 1997, the 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,February 28, 2000, the Company or its subsidiaries are defendants in approximately12711110
product liability lawsuits and have been notified of approximately
179191 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"(“Penwald”), a regulated insurance company wholly owned by the Company. See discussion in Item 7(Management's(Management’s Discussion&& Analysis- -Insurance— 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.Horizon Litigation. Twenty-eight separate lawsuits involving 29 primary plaintiffs, a class action and claims for indemnity by Celebrity, were brought against Essef Corporation and certain of its subsidiaries which concern alleged exposure to Legionnaires bacteria by passengers aboard the cruise ship M/V Horizon, a ship operated by Celebrity Cruise Lines. The lawsuits included a class action brought on behalf of all passengers aboard the ship during the relevant time period, individual “opt-out” passenger suits, and a suit by Celebrity Cruise Lines, Inc.
The claims against Essef and its involved subsidiaries, are based upon the allegation that Essef designed, manufactured and marketed two sand swimming pool filters that were installed as a part of the spa system on the Horizon, and allegations that the spa, and filters, contained bacteria that infected certain passengers on cruises from December, 1993 through July of 1994.
A settlement was reached in the class action litigation whereunder Essef agreed to pay monetary damages in the aggregate amount of $575,000 and Celebrity agreed to provide class members with coupons and other non-monetary consideration valued at approximately $1.2 million.
Essef and Celebrity have jointly attempted to resolve claims brought by “opt-out” plaintiffs. To date, eleven of these claims have been settled, for nominal amounts, leaving 18 primary plaintiffs. Essef and Celebrity have borne the cost of these settlements equally, subject to later allocation. The first trial for a primary plaintiff has been set to start on May 1, 2000.
Celebrity Cruises, Inc. is alleging that it has sustained economic damages due to loss of usage of the M/V Horizon while it was dry docked.
Claims asserted against Essef and the other defendants, in aggregate, exceed $200 million. However, trial counsel is optimistic that all of the pending suits will be resolved within available insurance coverage.
Essef’s insurance carriers are presently defending the Horizon litigations subject to a reservation of rights, and they have filed a Declaratory Judgment action to determine to what extent they have responsibility for making payments in the event Essef is found liable.
Patent Infringement Claims. In late 1998, The Black
&& Decker Corporation("(“Black& Decker"& Decker”), a competitor of the Company in its PTE segment, commenced litigation against theCompany'sCompany’s Porter-Cable business claiming patent infringement over the new Porter-Cable plate joiner. In order to minimize the likelihood of future claims, Porter-Cable changed the design of the plate joiner involved shortly after its introduction. 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 toPorter-Cable filed an appeal from the judgment, as itbelievesbelieved that there was no infringement of the Black&& Decker patent at issue. TheCompany understands that Black & Decker will likely alsoappealthis case. In order to minimize the liklihoodwas denied in January offuture claims, Porter-Cable changed the design of the plate joiner involved shortly after its introduction.2000.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.
11
PART II
Item 5. Market for
Registrant'sRegistrant’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".
1998(a) Market Information Pentair Common Stock is listed on the New York Stock Exchange under the symbol “PNR”.
1999 High Low Close First Quarter
Second Quarter
Third Quarter
Fourth Quarter$41 13/16
$48 7/8
$47 13/16
$41 1/8$31 5/16
$30 15/16
$40 1/8
$32 7/16$31 5/16
$45 5/16
$41 7/16
$38 1/2
1998 First Quarter
Second Quarter
Third Quarter
Fourth Quarter$45 9/16 $34 3/16 $44 3/4 Second Quarter
$45 3/4
$43
$41$34 3/16
$37 1/4$42 Third Quarter $43
$27 7/8
$30 7/16$44 3/4
$42
$32 1/4Fourth Quarter $41 $30 7/16
$39 13/161997 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(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.
(b) Holders of the Corporation’s Capital Stock As of December 31, 1999, there were 4,395 holders of record of the Corporation’s Common Stock. (c) Dividends In January 2000, the board of directors approved the cash dividend of $.16 per share quarterly for an indicated annual rate of $.64 per share. Pentair has now paid 96 consecutive quarterly dividends. 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:
1999 1998 1997First Quarter $.15 $.135$ .16 $ .15 Second Quarter .16 .15 .135Third Quarter .16 .15 .135Fourth Quarter .16 .15 .135TOTAL $.60 $.540$ .64 $ .60 (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.
(d) Annual Meeting of Stockholders The 2000 Annual Meeting of Shareholders of the Corporation is scheduled to be held on April 26, 2000 at 10:00 a.m. at the Lutheran Brotherhood Building, Minneapolis, Minnesota. 12
Item
6.Selected6. Selected Financial Data.SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATAPentair, Inc. and Subsidiaries (In(In millions, except per share data) 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989Income Statement Data Net Sales Professional Tools and Equipment 1,073.8 849.3 747.1 582.7 492.4 453.5 408.1Water and Fluid Technologies 669.6 537.9 404.0 322.3 237.5 210.6 184.4Electrical and Elec- tronicElectronic Enclosures633.7 564.0 579.4 548.8 542.5 460.5 236.7Other (13.6)(9.3 ) (13.6 ) 108.6 113.3 130.5 137.1 117.4Total 2,367.8 1,937.6 1,839.1 1,567.1 1,402.9 1,261.7 946.6 864.0 802.9 805.2 798.4Operating Income Professional Tools and Equipment 108.2 84.4 60.6 49.2 44.1 37.8105.4 99.6 76.8 54.7 44.2 Water and Fluid Technologies 71.4 46.0 44.4 25.1 17.5 10.281.3 66.0 41.9 41.2 22.7 Electrical and Elec- tronicElectronic Enclosures51.8 53.3 59.6 56.0 44.2 20.746.3 46.0 47.3 53.9 50.5 Other (38.2) (13.9) (21.7) (14.1) (0.2) (0.6)(18.7 ) (18.4 ) 3.8 (6.9 ) (1.2 ) Total 214.3 193.2 169.8 142.9 116.2 105.6 68.1 61.9 53.1 47.9 52.1Earnings before income taxes 166.5 170.9 158.4 124.6 101.7 83.5 55.1 47.7 38.4 31.6 35.2Income from con- tinuing operationsFrom:Continuing Operations 103.3 106.8 91.6 74.5 60.5 50.1 32.7 27.2 18.8 16.9 19.4Net incomeIncome (a)103.3 106.8 91.6 74.5 77.2 53.6 46.6 42.8 41.1 33.0 36.4Common Share Data EPS-DilutedEPS — Diluted (a)(b) 2.33 2.46 2.11 1.73 1.41 1.17 .76 .64 .47 .42 .50Cash Dividends .64 .60 .54 .50 .40 .36 .34 .32 .30 .29 .26Stock Dividends -- --Dividend %— — — 100 -- -- 50 -- -- -- --— Book Value 20.56 17.03 15.12 13.69 12.37 10.71 9.29 8.21 8.79 7.97 7.42Stock Price 38 1/2 39 13/16 35 15/16 321/32 1/4 24 7/8 21 3/8 16 1/2 13 3/16 13 7/16 8 1/4 9 3/16Market Capitalization 1,860 1,718 1,548 1,378 1,045 899 692 549 558 342 352Balance Sheet Data Preferred Equity (net) — 53.6 53.4 47.6 44.6 40.9 33.9 77.4 74.1 68.4 65.9Common Equity 993.2 655.8 577.2 516.2 458.3 391.1 336.9 260.0 275.7 247.8 241.0ROE %(a) 12.5 16.6 15.9 14.3 16.9 13.2 13.6 12.8 13.3 11.1 14.1Capital Expenditures 60.6 53.8 77.5 71.6 63.8 57.8 28.1 28.0 26.5 28.0 28.7Total Assets 2,803.0 1,554.7 1,472.9 1,289.0 1,252.5 1,161.1 863.1 769.5 698.4 696.5 708.9Long-Term Debt 857.3 288.0 294.5 279.9 219.9 408.5 236.7 209.3 191.2 217.5 243.4Total Debt 1,035.1 340.9 329.3 312.8 238.8 Long-Term Debt to Capital % 46 29 32 33 31 Total Debt to Capital % 51 33 34 36 32 [Additional columns below]
[Continued from above table, first column(s) repeated]
Pentair, Inc. and Subsidiaries (In millions, except per share data) 1994 1993 1992 1991 1990 Income Statement Data Net Sales Professional Tools and Equipment 453.5 408.1 Water and Fluid Technologies 210.6 184.4 Electrical and Electronic Enclosures 460.5 236.7 Other 137.1 117.4 Total 1,261.7 946.6 864.0 802.9 805.2 Operating Income Professional Tools and Equipment 39.5 33.7 Water and Fluid Technologies 15.4 8.4 Electrical and Electronic Enclosures 39.6 18.3 Other 11.1 7.7 Total 105.6 68.1 61.9 53.1 47.9 Earnings before income taxes 83.5 55.1 47.7 38.4 31.6 Income From: Continuing Operations 50.1 32.7 27.2 18.8 16.9 Net Income (a) 53.6 46.6 42.8 41.1 33.0 Common Share Data EPS — Diluted (a) (b) 1.17 .76 .64 .47 .42 Cash Dividends .36 .34 .32 .30 .29 Stock Dividend % — 50 — — — Book Value 10.71 9.29 8.21 8.79 7.97 Stock Price 21 3/8 16 1/2 13 3/16 13 7/16 8 1/4 Market Capitalization 899 692 549 558 342 Balance Sheet Data Preferred Equity (net) 40.9 33.9 77.4 74.1 68.4 Common Equity 391.1 336.9 260.0 275.7 247.8 ROE %(a) 13.2 13.6 12.8 13.3 11.1 Capital Expenditures 57.8 28.1 28.0 26.5 28.0 Total Assets 1,161.1 863.1 769.5 698.4 696.5 Long-Term Debt 408.5 236.7 209.3 191.2 217.5 Total Debt 412.1 237.5 214.3 198.2 226.7 Long-Term Debt to Capital % 49 39 38 35 41 44Total Debt to Capital % 49 39 39 36 42 All Share and Per Share Data adjusted for stock dividends. (a) 1992 - before the cumulative effects of accounting changes. (b) From continuing operations.
13
Item
7.Management's7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Management'sManagement’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
fourfive years, Pentair has divested its paper businesses (1995) and Federal Cartridge (1997) and has madetwelvefifteen acquisitions in its three core markets.Beginning in 1999, the cost of certain support services provided by the corporate office is no longer reflected in the “Other” segment and is allocated to the operating segments. As a result, the prior years segment information has been restated to conform to the 1999 presentation with no effect on previously reported total operating income, net income or shareholders’ equity.
Results of Operations
Professional Water and Electrical and Tools and Fluid Electronic (In(In thousands) Equipment Technologies Enclosures Other* Total NET SALES 1999 $ 1,073,824 $ 669,571 $ 633,671 $ (9,313 ) $ 2,367,753 1998 $849,294 $537,880 $564,045 $(13,641) $1,937,578849,294 537,880 564,045 (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 1,567,065OPERATING INCOME 1999** $ 105,388 $ 81,256 $ 46,346 $ (18,659 ) $ 214,331 1998 $108,242 $71,353 $51,753 $(38,156) $193,19299,621 65,976 46,026 (18,431 ) 193,192 1997 84,355 45,987 53,313 (13,853)76,784 41,947 47,282 3,789 169,802 1996 60,556 44,445 59,592 (21,674) 142,919OPERATING MARGIN % 1999** 9.8 12.1 7.3 — 9.1 1998 11.7 12.3 8.2 — 10.0 1997 10.3 10.4 8.2 — 9.2 *Other
* Other includes corporate leadership expenses, captive insurance company, intermediate financial companies, charges that do not relate to current operations, divested operations (Federal) and intercompany eliminations. ** Including net restructuring charge of $38 million taken in 1999. Before restructuring charge, operating income for the segments and for Pentair as a whole were: PTE — $122,170; WFT — $85,731; EEE — $63,089; and Pentair total — $252,331. CONSOLIDATED
1999 VERSUS 1998Consolidated net sales increased over 1998 levels to
current operations, divested operations (Federal)$2,367.8 million in 1999, or 22.2%, attributable in part to healthy markets as well as three acquisitions in 1999. Net sales in each of the three segments increased over 10% for the full year, with the largest increase posted by PTE. For the fourth quarter of 1999, sales growth accelerated dramatically, with consolidated net sales up 49.8% over the prior year quarter. This growth was significantly enhanced by the third-quarter acquisitions of the Essef andintercompany eliminations. CONSOLIDATEDDeVilbiss Air Power businesses, with WFT up 63.9% and PTE up 56.9%; while, excluding14
acquisitions, sales growth in the fourth quarter was over 9% for Pentair as a whole, with each of the three segments contributing impressive increases.
Operating income increased $21.1 million to $214.3 million in 1999, up 10.9% over 1998, after the restructuring charge, and increased by $59.1 million or 30.6% over 1998, excluding the charge. Operating income before acquisitions increased over 20% compared to 1998 performance. Return on sales was 9.1% after the restructuring charge and 10.7% excluding the charge. Profitability (before the charge) improved due to volume and other manufacturing efficiencies, material cost savings, offset in part by continuing pricing pressures, increasing employment costs, costs of special selling programs and other sales expenses. Gross profit margins declined to 31.0% in 1999 versus 31.3% in 1998, largely attributable to the 1999 acquisitions. Excluding acquisitions, gross margins improved by 130 basis points year-over-year. Research and development declined slightly in percentage terms to 1.1% from 1.2% of net sales in 1998. Selling, general and administrative expense (SG&A) as a percent of sales was 19.3% in 1999 as compared to 20.2% in 1998.
Fourth-quarter operating income increased 58.1% to $91.6 million over the same period in 1998; even without the benefit of the 1999 acquisitions, operating income for the quarter increased dramatically by over 30%. Return on sales in the quarter improved to 11.7%, largely as a result of the acquisitions, volume and other manufacturing efficiencies and material savings.
Interest expense was significantly higher in 1999 and in the fourth quarter as compared to the same periods in 1998, due primarily to much higher borrowings incurred in connection with the 1999 acquisitions.
The Company’s effective income tax rate was 38.0% in 1999, an increase from the comparable 1998 rate of 37.5%. A one percent improvement to 36.5% (reflected in the first two quarters) was more than offset by the impact of non-deductible goodwill incurred as a result of the acquisitions of the three businesses in 1999.
Net income decreased slightly to $103.3 million in 1999 from $106.8 million in 1998, including the $38 million ($24.1 million after-tax) restructuring charge in 1999. Net income before the charge was $127.4 million, or an increase of 19.3%. Net income in the fourth quarter was up 30.5% to $43.0 million. Full-year EPS was $2.33 compared to $2.46 in 1998 after the restructuring charge; excluding the restructuring charge, EPS increased 17.5% to $2.89. Fourth-quarter EPS in 1999 increased 18.4% from $.76 to $.90.
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)&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'sCompany’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%.15
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'sPentair’s chosen businesses excellent prospects for strong long-term performance. TheCompany'sCompany’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.ThePentairAccelerating Competitive Excellence (PACE) Projectisafocusing on implementation of its corporate-wide process redesign and cost savingsprogram implementedprograms initiated in 1998 which management believes will continue to improve operating efficiencies and therefore performance.Pentair began implementation in 1999 of a program to consolidate a number of its businesses into larger, more effective units which will be better positioned to compete in their respective markets. Pentair’s tool businesses, Porter-Cable and Delta, will consolidate their operations in the first quarter of 2000, following an earlier combination of their sales organizations. Also underway in 1999 and to be completed in 2000 is the consolidation of two service equipment businesses (Century and Lincoln Automotive), including the closing of one manufacturing facility. The tool businesses also have completed construction of a new 650,000 square foot warehouse facility in Jackson, Tennessee. The warehouse is expected to go into full operation in the first quarter of 2000, when two smaller warehouses for Delta and Porter-Cable will close.
The acquisition of Essef in August 1999 has increased the complexity and opportunities in the WFT businesses. Pentair has closed one of the acquired facilities and relocated manufacturing operations; over the next few quarters, Pentair intends to continue reorganization and consolidation of units in order to improve manufacturing efficiencies and financial performance.
In addition, the Company’s EEE segment combined five separate North American facilities into one business, Pentair Electronic Packaging, in order to focus on the high-growth custom and modified enclosure market for datacom and telecom products.
The Company continues to look for synergistic acquisitions in each of its business segments, in line with its pattern over the past
fourfive years. Of thepast twelvefifteen acquisitions made since 1994, most were smaller businesses or product lines, which fit with existing operations, offering new products or expanded geographic scope.Two,Three recent transactions in 1997 and 1999, however, were stand-alonestrategicacquisitions of large established businesses,that helped create Pentair's Watertwo in Pentair’s WFT segment (General Signal Pump Group andFluid Technologies segment.Essef) and one in its PTE segment (DeVilbiss Air Power Company). Pentair intends to continue to pursue smaller, bolt-on purchases, but will also carefully review larger targetswhichthat have the capability to significantly expand its current segments, or in appropriate cases,tothat 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 Automotivethe tool businesses (Delta andCentury Manufacturing.Porter-Cable); and the equipment businesses (Century and the newly-acquired DeVilbiss Air Power Company). Products manufactured include woodworking machinery, portable power16
tools, battery charging and testing equipment, welding equipment,
andlubricating and liftingequipment.equipment, air compressors, generators and pressure washers.1999 VERSUS 1998
Net sales increased substantially in 1999, from $849.3 million to $1,073.8 million, or 26.4%. Net sales in the fourth quarter increased 56.9%. The DeVilbiss Air Power Company acquisition accounted for a significant portion of the sales increase. The increase in internal growth in 1999 is attributable in large part to continued innovation and new product introductions by each of the businesses in this segment.
PTE operating income for the year increased to $105.4 million, after the restructuring charge, or 5.8%. Excluding the restructuring charge, operating income was $122.2 million, or an increase of 22.6%. For the fourth quarter, operating income for the segment was $50.8 million or 33.0% better than 1998, attributable to the DeVilbiss Air Power Company acquisition. Both full-year and fourth-quarter operating income for the segment was unfavorably impacted by two factors: one-time costs not covered by the restructuring charge incurred as a result of the consolidation of operations as well as severe competitive pressures for certain automotive and service products.
Segment return on sales (before restructuring charge) was down 30 basis points to 11.4% for the full year, although operating margins for the segment excluding acquisitions was comparable to the 11.7% recorded for 1998. Segment return on sales after the restructuring charge was 9.8%. For the fourth quarter, return on sales for the entire segment was 12.6% compared to 14.8% in the same period in 1998, attributable in part to the new acquisition.
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%11.7% in 1998 from11.3%10.3% 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 withcontinue to realize sales growthexpected to continue toin 2000, both as a result of the DeVilbiss Air Power Company acquisition and, more importantly, continued organic growth as a result of continued new product introductions and increased cross-selling of products, including acquired products, across all major distribution channels. Operations will be adversely impacted for the first half of 2000 as a result of continuing one-time costs for consolidations of segment business units and start-up costs at the new Jackson, Tennessee distribution center. Nonetheless, Pentair expects continued improvement in operating margins and income throughout thedouble digits due to product line expansionscoming year, as a result of the acquisition andcontinued cross marketing through multiple channelsofdistribution. Profits should increase due to process improvementsother manufacturing, purchasing andadditional rationalization activities.distribution efficiencies.WATER and FLUID TECHNOLOGIES
The WFT segment includes the
Pentairpump and pool businesses (Pentair Pump Group and one of the newly-acquired Essef businesses), the water treatment businesses (Pentair Water Treatment which consists of Fleck Controls plus the remaining Essef business) and Lincoln Industrial. Products manufactured include pumps for wells and water treatment, sump pumps, pool and spa equipment such as valves, pumps, filters, lights and related equipment, valves and pressure17
vessels for water
softeners,treatment products and automated and manual lubricationsystemssystems.1999 VERSUS 1998
Net sales increased substantially in 1999, from $537.9 million to $669.6 million, or 24.5%. The Essef acquisition accounted for the majority of the increase for the year. Net sales in the fourth quarter increased 63.9%, with organic growth accelerating to over 6% of prior-period sales.
WFT operating income for the year increased to $81.3 million, after the restructuring charge, or 23.2%. Excluding the restructuring charge, operating income was $85.7 million, or an increase of 29.9% and
equipment.excluding acquisitions, operating income increased nearly 20%. For the fourth quarter, operating income for the segment was $25.5 million or 50.5% better than 1998, while excluding acquisitions, operating income was up over 30% from the prior year. Both full-year and fourth-quarter operating income for the segment increased as a result of supply management initiatives and strong labor productivity.Segment return on sales (before restructuring charge) improved 50 basis points to 12.8% for the full year, although operating margins for the segment excluding acquisitions increased over 200 basis points over 1998. Segment return on sales after the restructuring charge was 12.1%. For the fourth quarter, return on sales for the entire segment was 12.1%, down from the year-earlier quarter which was 13.2%. This decrease is entirely attributable to the Essef acquisition; excluding acquisitions this segment’s return on sales for the period increased nearly 300 basis points.
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%12.3% in 1998 from11.4%10.4% in 1997. TheGroup'sGroup’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 ofOUTLOOK
As a
stronger U.S. dollar on the resultsresult of theEuropeanEssef acquisition, the WFT segment greatly expanded its product and geographic capabilities. The segment plans to focus more resources on its growth in overseas markets, especially by Pentair Water Treatment, while continuing to implement its operating improvement initiatives previously adopted and while integrating the newly acquired businesses into its ongoing operations.Operating income asAs apercentresult ofsales decreasedthe increasing importance of the water markets to11.4% 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 acrossthe segmentaddressing plant and product rationalization, process redesign, and production capacity. Profitability was also impacted byfollowing theweak European economy and the effects of a stronger U.S. dollar. OUTLOOK The WFT segment intends in 1999 to expandEssef acquisition, Pentair announced that it is investigating strategic alternatives for itspresence in global markets and broaden its product offerings. Volume efficiencies and productivity improvements are anticipated to continue to generate higher margins in core markets.Lincoln Industrial business.ELECTRICAL and ELECTRONIC ENCLOSURES
The EEE segment includes Hoffman Enclosures, Schroff, Pentair Electronic Packaging (a newly-integrated North American enclosures business, comprised of Schroff US, the newly-acquired WEB and the
newUS affiliates of the former Walker Dickson business) and 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.1999 VERSUS 1998
Net sales increased 12.3% in 1999, to $633.7 million, most of which is attributable to the 1998 acquisition of Walker
18
Dickson and the 1999 acquisition of WEB. Overall net sales in the fourth quarter increased 22.0%, with internal growth up nearly 15% from prior-period sales. The improvement in internal growth in the fourth quarter was largely attributable to expanded distribution in North America of standard electrical enclosure products and increased penetration into the faster-growing datacom and telecom product markets, as well as accelerating growth of standard electronic enclosures in Europe. Fourth quarter sales in local currency in Europe improved 18% quarter-over-quarter, although in US dollar terms the growth amounted to 8%.
EEE operating income for the year after the restructuring charge increased slightly to $46.3 million. Excluding the restructuring charge, however, operating income improved 37.1% and operating income, excluding acquisitions, increased over 45%. For the fourth quarter, operating income for the segment was $19.9 million or 149.9% better than 1998, while excluding acquisitions, operating income was up nearly 200% from the prior year.
Segment return on sales (before restructuring charge) improved significantly for the full year, from 8.2% to 10.0%, although operating margins for the segment excluding acquisitions increased nearly 360 basis points over 1998. Segment return on sales after the restructuring charge was 7.3%. For the fourth quarter, return on sales for the entire segment was 11.5%, up dramatically from the very weak year-earlier quarter which was only 5.6%. Excluding acquisitions, however, the increase was even stronger, which is largely attributable to vastly improved performance at the European enclosure businesses and to strong performance of all of the North American businesses.
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%8.2%, 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 1996OUTLOOK
Pentair plans to continue process improvement and reorganization at all of the businesses in the EEE
sales increasedsegment. While no further significant headcount reductions are currently planned, the expansion of the enclosure businesses around the world will be critical to the segment’s future success in the rapidly expanding datacom and telecom fields, especially in creating a world-wide capability to serve these markets, whether in the Americas, Europe or Asia.SPECIAL RESTRUCTURING CHARGE
In the first quarter of 1999, the Company recorded a special restructuring charge of $38.0 million ($24.1 million after-tax or $.56 per share). As shown below, $12.8 million has been spent or charged through December 31, 1999. The remaining balance is classified within Accrued Liabilities and Other Expenses on the balance sheet.
The restructuring plan comprises consolidation of certain operations, overhead reductions, and outsourcing of specific product lines in each of the Company’s three business segments. Pentair anticipates a reduction of approximately 1,050 jobs, as detailed below, offset by
$30.6 million or 5.6% including a 1997 acquisition. In addition,approximately 350 new jobs at other Pentair facilities in connection with consolidation and rationalization. The restructuring plan does not contemplate the Company exiting any of its current lines of business; the projects involved are designed to make the Company’s existing businesses more efficient.19
The Professional Tools and Equipment segment is consolidating North American
sales weredistribution operations and combining thehighestheadquarters of the two power tool businesses, Delta and Porter-Cable, inhistory and outpacedJackson, Tennessee. In theoverall growthservice equipment businesses, products are being outsourced to offshore manufacturers or transferred to other North American facilities. The Jonesboro, Arkansas manufacturing operation of Lincoln Automotive will be closed. These actions will result in themarkets served.termination of more than 600 employees. Restructuring charges for this segment amounted to $16.8 million, $10 million of which is attributable to employee terminations, and the balance of which relates to asset write-downs and other exit costs. Management estimates the benefits under the restructuring plan will be approximately $16 million in 2000 and $15 million in 2001.The
European operations, as measuredWater and Fluid Technologies segment has reduced the workforce at its Lincoln Industrial business and is outsourcing some product manufacturing, resulting inlocal 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 aheadcount reductions of approximately 100 employees. Lincoln Industrial plans to eliminate approximately 50 percent ofsales decreasedthe manufacturing space at its U.S. manufacturing facilities. The charge for this segment was $4.5 million, approximately $1.2 million of which relates to9.2%terminated employees, and the balance of which is attributable to demolition and other exit costs. Management estimates the benefits under the restructuring plan will be approximately $2 million in1997 from 10.9%2000 and $2 million in1996.2001.The Electrical and Electronic Enclosures segment reduced its workforce in Europe and adopted a plan to rationalize manufacturing at its North American facilities. These actions will result in the reduction of approximately 350 employees. This
was duesegment absorbed $16.7 million of the charge, largely related to employee terminations. Management estimates the benefits under the restructuring plan will be approximately $9 million in 2000 and $12 million in 2001.The components of the restructuring charge and related reserve balances remaining at December 31, 1999 were (in millions):
Personnel Asset Exit Costs Disposals Costs Total 1999 Restructuring Charge $ 27.5 $ 7.0 $ 3.5 $ 38.0 1999 Spending to Date Cash spending (9.4 ) (0.1 ) (0.1 ) (9.6 ) Non-cash spending (0.0 ) (2.9 ) (0.3 ) (3.2 ) Remaining Reserve $ 18.1 $ 4.0 $ 3.1 $ 25.2 “Personnel Costs” consists of severance, medical plan continuation, pension cash-outs, and outplacement per company policy for the 1,050 employees planned to be terminated. As of December 31, 1999, approximately 400 employees have been terminated (or in Europe are working under statutory notice periods).
“Asset Disposals” consists of the write-down of the carrying value of the Delta headquarters building which is held for resale and the write-off of special-use manufacturing and support assets which will no longer be needed and which will be scrapped or abandoned. The real estate held for resale is expected to be disposed of by mid-2000. All of these assets are currently classified as property, plant and equipment. No charge has been taken with respect to the
impactJonesboro real estate since the Company believes it will be able to be sold for book value within a reasonable period.“Exit Costs” consists of maintenance and security costs of surplus buildings until leases expire or demolition or disposal of certain buildings, including the Jonesboro building.
“Personnel Costs” and “Exit Costs” are cash costs and the “Asset Disposals” are primarily non-cash costs. Our currently anticipated schedule projects cash expenditures of $19 million in 2000 and $2 million in 2001. These requirements will be funded through cash from operations or borrowings under our existing credit facilities.
During 1999, restructuring benefits (largely personnel cost savings) of approximately $6 million were realized. Anticipated benefits are projected to be $26 million in 2000 and $30 million in 2001. The major components of anticipated benefits are
20
in reductions in labor costs and efficiencies in consolidating distribution and administrative functions.
The anticipated benefits noted above are net of the
weak European economy, with intense competition affecting pricing and product mixcosts ofsales. There were also strategic,adding 350 employees at other Pentair locations. The benefits do not, however, take into account one-time costsrelatedassociated with these restructuring plans. The Company anticipates that the associated one-time costs will amount tothe following: implementationapproximately $6 million, one-quarter ofa new world-wide business system; start-upwhich was incurred in 1999, with most of thenew 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 positionbalance to be incurred in theglobal enclosures marketfirst quarter of 2000. These costs are not included in the restructuring charge, since they relate to asset relocations, start-up costs andhas excellent prospects for growthtraining andprofitability improvement as the business positions itself to continue leadershiprecruiting of employees at other locations.Liquidity and Capital Resources
The Company incurred approximately $800 million of indebtedness 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 operations1999 in order tocontrol costs, improve productivitycomplete the acquisitions of Essef andrespond more flexiblyDeVilbiss Air Power. As a result of these borrowings, Pentair’s total debt toits customers. Actions to be taken will likely include some facility rationalization and headcount reductionscapital ratio at the end of the third quarter of 1999 was 63%. Following the successful common stock offering in October 1999 andbeyond. Liquidity and Capital Resources The Company's freeapplication of cash flow(cashfrom operationslessin the fourth quarter, the Company’s total debt to capitalexpenditures)ratio was$81.551% at December 31, 1999. This compares with a 33% total debt to capital ratio at the end of 1998. The Company has targeted a total debt to capital ratio in the range of 30% to 40% as appropriate for its financing needs and current business plans, although Pentair will exceed this target ratio from time-to-time as needed for operational purposes and/or acquisitions.Of the total indebtedness of the Company at the end of 1999, more than 85% (approximately $885 million, including $27.2 million in
1998, upcurrent maturities) is long-term and has an average life to maturity of 6 years. This long-term indebtedness has interest rates varying from$40.4 million in 1997. The Company is targeting continued growth in free cash flow as a percent4.0% to 9.0%, with an average interest rate ofsales through improved profitability and working capital ratios.7.22%. The Company believes that currently outstanding long-term indebtedness is and will continue to be adequate for its financing needs for the foreseeable future. The Company also believes that it will be able to obtain additional long-term indebtedness as its needs may increase or its current indebtedness matures.Short-term indebtedness (included in current maturities of long-term debt) stands at $150.6 million as of the end of 1999 with interest rates that range from 6.37% to 8.5%, with an average interest rate of 7.0%. The Company believes that it will generate substantial cash flow from operations and from any asset dispositions which will
continuebe used in part toexceed 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 madereduce current indebtedness duringthe 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 1997.2000. The Company hassufficient financing capacityno reason tocontinuebelieve that it would not be able to renew its currentacquisitionshort-term credit agreements, at the time of their expiration in August 2000. In addition, the Company has entered into a commercial paper programand to support its ongoing stock repurchase program. The stock repurchase is intended to offsetin January 2000 for thedilution caused by stock issuances under employee stock compensation plans. Significant acquisitions (above approximately $250 million) may require new or enlarged credit facilities. The Companyissuance of short-term notes at what it believesthese 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).are favorable interest rates.The Company expects capital spending in
19992000 to be in the$60 -$70$90-100 million range. Contemplated uses include computersystems,hardware and software, manufacturing cost reduction projects, new product development, e-business initiatives and reconfiguration of manufacturing facilities.The Company
raiseddeclared its anticipated19992000 quarterly dividendto 16 centsof $.16 per sharetoor 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'sCompany’s results of operations is not considered material given the current inflationary outlook.INSURANCE SUBSIDIARY
The
Company'sCompany’s captive insurance subsidiary provides a cost effective means of obtaining insurance coverage for general and product liability, product recall,workers'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'sPentair’s obligations relating to environmental matters are not expected to have a material impact on theCompany'sCompany’s operations, financial condition or operating results. Some subsidiaries face remediation21
of soil and groundwater as a result of
predecessors'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 theCompany'sCompany’s operations in either19981999 or1997,1998, and are not anticipated to be material in1999.2000.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
BackgroundThe Company pursued an extensive Year 2000
issue is theprogram in order to anticipate and correct Y2K computer problems. As a result ofcomputer 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 boththis program, the Companyandsuffered only very minor computer-related problems at any of itscustomers who rely on its products. Statebusinesses in early 2000, all ofReadiness The Company's businesseswhich havehad "Y2K Project" programs in placesinceas 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 hasbeenreviewing, 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 Issuecorrected.As a result of the numerous different
ISinformation systems used by businesses that the Company has acquiredin recentover the years and also as a result of changing business requirements, the Company has an ongoing development plan with scheduled replacements of hardware and software occurringin 1999over the past few years and continuing into the future throughout the organization. Year 2000 complianceiswas a by-product ofourthe Company’s information systems (IS) development plan. This plan calls for the installation or updating of new Enterprise Resource Planning (ERP) systems for its current manufacturing and headquarters locations designed to enable these facilities and the related businesses to operate more efficiently and to provide better management reporting. TheestimatedCompany has already installed its ERP systems in 22 locations. The Company’s remaining manufacturing locations and businesses will be converted to the new ERP system over the next few years as the information system development plan progresses.The costs specifically attributable to Year 2000 compliance, apart from other IS development activities, amounted to approximately $13 million. The cost associated with the total IS development plan over the five-year period from 1995 to 1999
is anticipatedwas approximately $60 million. The Company estimates that the cost tobe approximately $55 million, which is approximately 80% complete. The estimated cost specifically attributableconvert the remaining facilities and businesses toYear 2000 compliance, apart from other IS development activities, amountsthe new ERP systems will amount to approximately$10$10-12 millionof 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 completedandplanned 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 beYear 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 mitigatecompleted over theeffects of any noncompliance. Pentair believes that non-compliance with Year 2000 issues would likely result in some reduction of the Company's operationsnext three to four years for thefirst partCompany’s current businesses. Acquisition or establishment ofthe 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 itsnew business unitsa shutdownwould also require the conversion or updating ofsome 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-upERP systemsand 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 Euroastheir 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.necessary.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-termlong-22
term debt. The table below presents principal cash flows and related weighted average interest rates of the
Company'sCompany’s long-term debt at December 31,19981999 by expected maturity dates. Weighted average variable rates are based on implied forward rates in the yield curve at December 31,19981999 plus theCompany'sCompany’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 hedges net investments in significant foreign subsidiaries by borrowing in those subsidiaries’ functional currencies. The Company has also entered into foreign currency swap agreements, principally to Deutschemarks and Italian Lira, with major financial institutions to hedge
net assets infirm foreignsubsidiaries, principally those denominated in Deutschemarks, Canadian Dollars and Italian Lira.currency commitments. During1999,2000, the Company intends to redraft its agreements to convert to the Euro currency.See also Notes 6
&& 7 of Notes to Consolidated Financial Statements.
(in(in millions except percentages) Expected Maturity Date There-Fair 19992000 2001 2002 2003 after2004 Thereafter Total Value Long-Term Debt Fixed Rate $41.2 $22.8 $17.3 $2.3 $52.4 $51.2 $187.2 $205.7$ 27.2 $ 19.8 $ 6.2 $ 53.2 $ 49.5 $ 288.6 $ 444.5 $ 459.7 Average interest rate 6.9% 7.2% 7.3% 6.7% 6.7% 6.9% 6.9%7.21 % 7.30 % 6.94 % 6.69 % 6.74 % 7.74 % 7.44 % Variable Rate $11.7 $54.2 $83.4 $0.5 $0.4 $3.5 $153.7 $153.7$ 150.6 — — — $ 440.0 — $ 590.6 $ 590.6 Average interest rate 5.2% 5.4% 5.4% 5.2% 5.2% 5.4% 5.4%7.0 % — — — 7.0 % — 7.0 % Interest rate swaps Variable to Fixed -- -- -- $19.5 -- $55.0 $74.5 $(3.2)— — $ 19.5 $ 15.0 $ 20.0 $ 20.0 $ 74.5 $ 1.5 Average receive rate -- -- -- 5.3% -- 5.4% 5.3%— — 5.3 % 5.4 % 5.4 % 5.4 % 5.3 % Average pay rate -- -- -- 6.6% -- 6.6% 6.6%— — 6.6 % 6.6 % 6.6 % 6.6 % 6.6 % Forward exchange Agreements (1) Receive U.S. $ -- -- -- --— — — 50.0 -- $6.4— — $ 2.2 Pay Canadian $ -- -- -- --— — — 69.4 --— — Receive Canadian $ -- -- -- --— — — 69.4 -- $(12.3)— — $ 0.4 Pay Deutsche mark -- -- -- -- 88.0 --Deutschemark— — — 88.6 — — Receive Canadian $ -- --— 22.1 -- -- -- $(1.1)— — — — $ 2.3 Pay Deutsche mark -- --Deutschemark— 24.7 -- -- --— — — — Receive Canadian $ -- 1.8 -- -- -- -- $(0.2)1.6 — — — — — $ 0.1 Pay Deutsche mark --Deutschemark2.0 -- -- -- --— — — — — Receive Canadian $ -- -- --— — 14.9 -- -- $(2.6)— — — $ 0.3 Pay Italian Lira -- -- --— — 18,000.0 -- --— — — Total exchange loss $(9.8)gain$ 5.3 (1) The foreign exchange information is presented in local currency by maturity, however, the fair value is presented in
$U.S.US dollars.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; 4) implementation of plans; 5) anticipated savings; 6) results achieved from
23
acquisitions; and
4)7) statements preceded by"believes"“believes”,"anticipates"“anticipates”,"expects"“expects”,"estimates"“estimates”, “will” 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'sCompany’s principal geographic markets or fluctuations in exchange rates or interest 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 theCompany'sCompany’s customers; 3) operating factors, such as continued improvement in manufacturing and distribution activities and the achievement of related efficiencies,therein, andas well as 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 phasesintegration ofits 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.new businesses.The Company undertakes no obligation to revise any
forward- lookingforward-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 theCompany'sCompany’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 theCompany'sCompany’s financial condition and results of operations.Item
8.Financial8. 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
Consolidated Financial Statements Consolidated Statements of Income for Years Ended December 31, 1999, 1998 and 1997 Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Shareholders’ Equity for Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Comprehensive Income for Years Ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements Independent Auditors’ Report 24
CONSOLIDATED STATEMENTS OF INCOME
Pentair, Inc. and Subsidiaries
Years Ended December 31 (In(In thousands, except per share amounts) 1999 1998 1997 1996Net sales $1,937,578 $1,839,056 $1,567,065$ 2,367,753 $ 1,937,578 $ 1,839,056 Operating costs Cost of goods sold 1,632,723 1,330,310 1,290,798 1,098,064Selling, general and administrative 455,623 391,061 357,125 310,606Restructuring charge 38,000 0 0 Research and development 27,076 23,015 21,331 15,476Total operating costs 2,153,422 1,744,386 1,669,254 1,424,146Operating income 214,331 193,192 169,802 142,919Gain on sale of business 0 0 10,313 0Interest expense 49,475 24,020 22,261 19,537Interest income 1,673 1,772 528 1,220Income before income taxes 166,529 170,944 158,382 124,602Provision for income taxes 63,220 64,104 66,782 50,093Net Income 103,309 106,840 91,600 74,509Preferred dividend requirements 0 4,267 4,867 4,928Income available to common shareholders $102,573 $86,733 $69,581$ 103,309 $ 102,573 $ 86,733 Basic Earningsearnings perCommon Share $2.67 $2.28 $1.86common share$ 2.36 $ 2.67 $ 2.28 Diluted Earningsearnings perCommon Share $2.46 $2.11 $1.73common share$ 2.33 $ 2.46 $ 2.11 Average Common Sharescommon sharesOutstanding 43,803 38,444 37,989 Outstanding 38,444 37,989 37,491 Outstanding Assuming Dilutionassuming dilution44,287 43,149 43,067 42,752See Notes to Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEETS
Pentair, Inc. and Subsidiaries
(In thousands) December 31 (In thousands)1999 1998 1997Assets Current assets Cash and cash equivalents $ 66,228 $ 32,039 $34,340Accounts and notes receivable 587,211 396,062 369,220Inventories 425,935 278,581 266,409Deferred income taxes 55,984 30,397 23,401Other current assets 15,120 11,490 12,000Total current assets 1,150,478 748,569 705,370Property, plant and equipment Land and land improvements 21,768 15,699 Buildings 170,245 131,989 Machinery and equipment 509,419 419,418 Construction in progress 39,025 25,883 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 -— gross740,457 592,989 528,354Less accumulated depreciation 336,650 284,731 234,800Property, plant and equipment, net 403,807 308,258 293,554Goodwill, net 1,187,525 474,488 429,279 Deferred income taxes 0 12,110Other assets 61,156 23,351 32,549Total assets $1,554,666 $1,472,862$ 2,802,966 $ 1,554,666 Liabilities and Shareholders'Shareholders’ EquityCurrent liabilities Accounts and notes payable $155,962 $152,592$ 262,844 $ 155,962 Compensation and other benefits accruals 103,318 69,893 70,758Income taxes 21,363 7,111 15,158Accrued product claims and warranties 49,819 29,475 35,114Accrued rebates 19,905 19,682 21,658Accrued expenses and other liabilities 125,910 59,796 62,194Current maturities of long-term debt 177,788 52,874 34,703Total current liabilities 760,947 394,793 392,177Long-term debt 857,296 288,026 294,549Pensions and other retirement compensation 67,182 60,564 52,470Postretirement medical and other benefits 44,043 41,868 45,135Reserves -— insurance subsidiary22,885 29,441 32,313 Other liabilities 30,162 25,656Deferred income taxes 6,845 447 0Other liabilities 50,563 30,162 Commitments and Contingenciescontingencies (Notes 9 and 18)Preferred stock - at liquidation value Outstanding: 0 shares in 1999 and 1,534,919 shares in 1998 and 1,704,578 shares in 19970 53,638 59,696Unearned ESOP compensation 0 (6,315)0 Common stock - par value, $.16 2/3 Outstanding: 48,317,068 in 1999 and 38,503,587 in 1998 and 38,184,804 in 19978,053 6,417 6,365Additional paid-in capital 456,516 184,145 186,486Accumulated other comprehensive income (3,962) (5,085)(loss)(15,599 ) (3,962 ) Retained earnings 544,235 469,127 389,415Total shareholders'shareholders’ equity993,205 709,365 630,562Total liabilities and shareholders'shareholders’ equity$1,554,666 $1,472,862$ 2,802,966 $ 1,554,666 See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF
SHAREHOLDERS'SHAREHOLDERS’ EQUITYPentair, Inc. and Subsidiaries
Years Ended December 31 (In(In thousands) 1999 1998 1997 1996Preferred Stock Beginning Balance $59,696 $62,058 $65,656$ 53,638 $ 59,696 $ 62,058 Conversions into common (6,058) (2,362) (3,598)(53,638 ) (6,058 ) (2,362 ) Ending Balance 0 53,638 59,696 62,058Unearned ESOP Compensation $ 0 $(6,315) $(14,440)$ 0 $ (6,315 ) Common Stock -— ParBeginning Balance $ 6,417 $ 6,365 $ 6,287 $ 6,172Repurchase of common stock (58)(19 ) (58 ) 0 0Employee stock plans -— net58 34 48 69Issuance of common stock 917 0 0 Conversions into common 680 76 30 46Ending Balance 8,053 6,417 6,365 6,287Additional Paid in Capital Beginning Balance $186,486 $179,143 $169,832$ 184,145 $ 186,486 $ 179,143 Repurchase of common stock (12,315)(4,011 ) (12,315 ) 0 0Employee stock plans -— net9,861 3,993 5,019 5,770Issuance of common stock 213,563 0 0 Conversions into common 52,958 5,981 2,324 3,541Ending Balance 456,516 184,145 186,486 179,143Foreign Currency Translation Adjustment Beginning Balance $(2,612)$ (1,587 ) $ (2,612 ) $ 7,892 $10,964Current period change (13,027 ) 1,025 (10,504) (3,072)(10,504 ) Ending Balance (1,587) (2,612) 7,892(14,614 ) (1,587 ) (2,612 ) Unrealized Gains on Securities Beginning Balance $ 0 $ 0 $ 1,965 $ 1,090Current period change 0 (1,965) 8750 (1,965 ) Ending Balance 0 0 1,9650 Minimum Liability Pension Adjustment Beginning Balance $(2,473) $(1,804) $(1,034)$ (2,375 ) $ (2,473 ) $ (1,804 ) Current period change 1,390 98 (669) (770)(669 ) Ending Balance (2,375) (2,473) (1,804)(985 ) (2,375 ) (2,473 ) Retained Earnings Beginning Balance $389,415 $322,750 $271,249$ 469,127 $ 389,415 $ 322,750 Net Income 103,309 106,840 91,600 74,509Dividends Common (23,063) (20,513) (18,735)(28,201 ) (23,063 ) (20,513 ) Preferred (4,267) (4,867) (4,928)0 (4,267 ) (4,867 ) Tax Benefit of preferred dividends 0 202 445 655Ending Balance 544,235 469,127 389,415 322,750TOTAL SHAREHOLDERS'SHAREHOLDERS’ EQUITY$709,365 $630,562 $563,851$ 993,205 $ 709,365 $ 630,562 See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Pentair, Inc. and Subsidiaries
Years Ended December 31 (In(In thousands) 1999 1998 1997 1996Operating acitvitiesactivitiesNet income $106,840 $91,600 $74,509$ 103,309 $ 106,840 $ 91,600 Adjustments to reconcile to cash flow Restructuring charge 38,000 0 0 Depreciation 62,734 53,133 53,723 47,925Amortization of intangible assets 25,911 15,255 14,113 11,595Gain on sale of securities 0 (5,932)0 (5,932 ) Deferred income taxes (8,764 ) 5,730 (11,268) 484(11,268 ) Changes in assets and liabilities, net of effects of acquisitions and dispositions Receivables (25,788) (61,647) (16,791)(53,098 ) (25,788 ) (61,647 ) Inventories (4,539) (22,409) (16,345)(38,450 ) (4,539 ) (22,409 ) Other assets (28,270 ) 13,076 (6,946) (13,488)(6,946 ) Accounts payable 38,380 666 46,673 2,615Accrued compensation and benefits (2,229)17,684 (2,229 ) 12,157 (9,277)Income taxes (8,661) (14,081) 7,025(2,808 ) (8,661 ) (14,081 ) Accrued product claims and warranties 20,501 (5,443 ) 2,779 Accrued rebates 223 1,976 6,486 6,365Pensions and other retirement compensation 7,605 6,214 8,578 8,695Current and Long-term Insurance Reserves (7,864)long-term insurance reserves(6,556 ) (7,864 ) 2,902 6,211Other liabilities (18,496) 3,945 (7,818)(30,386 ) (13,053 ) 1,166 Cash From Operatingfrom operating activities146,015 135,313 117,894 101,705Investing activities Capital expenditures (53,843) (77,461) (71,646)(60,629 ) (53,843 ) (77,461 ) Proceeds from sale of businesses 0 13,001 112,000 100,000Payments for acquisition of businesses (68,384) (210,620) (195,917)(953,156 ) (68,384 ) (210,620 ) Construction funds held in escrow 1,787 719 7,055 (9,251)Purchase of marketable securities 0 (2,031) (15,966)0 (2,031 ) Proceeds from sale of marketable securities 0 0 48,727 6,274Cash provided by (used for) investing activities (108,507) (122,330) (186,506)(1,011,998 ) (108,507 ) (122,330 ) Financing activities Long-Term BorrowingsLong-term borrowings 501,909 72,967 107,353 91,528Payments of Long-Termlong-term debt(59,994 ) (65,340 ) (70,333 ) Proceeds from issuance of long-term bonds 250,000 0 0 Debt (65,340) (70,333) (15,425) Repurchaseissuance costs(2,430 ) 0 0 Bridge loan borrowings 450,000 0 0 Repayment of Stock (12,373)bridge loan borrowings(450,000 ) 0 0 Unearned ESOP compensation decrease 0 6,315 8,124 6,634Employee stock plans and other 9,919 4,227 5,514 6,483Proceeds from issuance of common stock 214,480 0 0 Repurchase of stock (4,030 ) (12,373 ) 0 Dividends (27,329) (25,380) (23,663)(28,201 ) (27,329 ) (25,380 ) Cash provided by (used for) financing activities (21,533)881,653 (21,533 ) 25,278 65,557Effects of currency exchange rate changes (7,574) (9,475) 5,56918,519 (7,574 ) (9,475 ) Increase (decrease) in cash and cash equivalents (2,301)34,189 (2,301 ) 11,367 (13,675)Cash and cash equivalents -— beginning of period32,039 34,340 22,973 36,648Cash and cash equivalents -— end of period$32,039 $34,340 $22,973$ 66,228 $ 32,039 $ 34,340 Supplemental Cash Flow Information: Cash payments for interest were
$24,470,000, $18,507,000,$43,152, $24,470, and$25,591,000$18,507 for the years ending December 31, 1999, 19981997and1996,1997, respectively. Cash payments for income taxes were$64,956,000, $73,374,000,$68,108, $64,956, and$38,127,000$73,374 for the years ending December 31, 1999, 1998 and 1997,and 1996,respectively.See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Pentair, Inc. and Subsidiaries
Years Ended December 31 (In(In thousands) 1999 1998 1997 1996Net Income $106,840 $91,600 $74,509$ 103,309 $ 106,840 $ 91,600 Other comprehensive income, net of tax: Foreign currency translation adjustments (13,027 ) 1,025 (10,504) (3,072)(10,504 ) Unrealized gains on securities: Unrealized holding gains arising during the period 0 0 1,891 906Less reclassification adjustment for (gains)/losses included in net income 0 (3,856) (31)0 (3,856 ) Minimum pension liability adjustment 1,390 98 (669) (770)(669 ) Other comprehensive income (loss)income(loss)(11,637 ) 1,123 (13,138) (2,967)(13,138 ) Comprehensive Income $107,963 $78,462 $71,542$ 91,672 $ 107,963 $ 78,462 Related Tax (Expense)/Benefit of Other Comprehensive Income: Foreign currency translation adjustments $(656) $6,716 $2,065$ 7,984 $ (656 ) $ 6,716 Unrealized gains on securities: Unrealized holding gains arising during the period 0 (1,018) (488)0 (1,018 ) Less reclassification adjustment for (gains)/losses included in net income 0 0 2,076 17Minimum pension liability (60(852 ) (60 ) 427 492See Notes to Consolidated Financial Statements.
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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.
Fiscal Year
Pentair has adopted a standard “4-4-5 week” accounting quarter for reporting in 1999. The duration of each quarter is approximately 13 weeks per quarter with the first three quarters always ending on a Saturday. The Company’s fiscal year ends on December 31.
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'sCompany’s wholly owned insurance subsidiary,,Penwald Insurance Company, insures Company general and product liability, product recall,workers'workers’ compensation, and auto liability risks.Reserves for policy claims ($
35,441,00028,885,000 with $22,885,000 noncurrent as of December 31, 1999 and $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)1998) are established based on actuarial projections of ultimate loss.In order to maximize investment earnings from insurance reserves, Penwald
nowhas 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 asavailable-for- saleavailable-for-sale in accordance with Statement of Financial Accounting Standards No. 115,"Accounting“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 ofshareholders'shareholders’ equity.The debt and securities investments were treated as operating assets of the insurance subsidiary and the related earnings ($2,864,000
and $1,824,000in1997,and 1996, respectively)1997) 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 1999, 1998,
1997,and19961997 was $25,911,000, $15,255,000,$14,113,000,and$11,160,000,$14,113,000, respectively. Accumulated amortization was$61,311,000$83,775,000, and$44,658,000$61,311,000 at December 31,19981999 and1997,1998, respectively. The Company periodically reviews goodwill to assess recoverability. The Company evaluates the recoverability by measuring the unamortized balance of such goodwill against estimated undiscounted 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, therewaswere noadjustmentadjustments to the carrying value of goodwill during any of the three years ended December 31,1998.1999.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
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the cost to sell. Based on evaluations performed, there
waswere noadjustmentadjustments to the carrying value of such assets during any of the three years ended December 31,1998.1999, except as included in the 1999 restructuring charge. See Note 3.Foreign Currency Translation
Translation gains or losses resulting from translating foreign currency financial statements are reported as a component of
shareholders'shareholders’ equity. Foreign currency transaction gains and losses are included in earnings as incurred.Revenue Recognition
Revenue from sales is
generallyrecognized 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'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'“Employers’ Disclosures about Pensions and Other PostretirementBenefits"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“Earnings perShare"Share”, Statement of Financial Accounting Standard (FAS) No. 130"Reporting“Reporting ComprehensiveIncome"Income”, and Statement of Financial Accounting Standard (FAS) No. 131"Disclosures“Disclosures about Segments of an Enterprise and RelatedInformation"Information”. The impact of these new standards on Pentair was immaterial.Prior year financial statements have been restated accordingly.
3.
Accounting DevelopmentsSpecial Restructuring ChargeIn
June 1998,theFinancial Accounting Standards Board issued Statementfirst quarter ofFinancial Accounting Standard No. 133, "Accounting1999, the Company recorded a special restructuring charge of $38.0 million ($24.1 million after-tax or $.56 per share). As shown below, $12.8 million has been spent or charged through December 31, 1999. The remaining balance is classified within Accrued Liabilities and Other Expenses on the balance sheet.The restructuring plan comprises consolidation of certain operations, overhead reductions, and outsourcing of specific product lines in each of the Company’s three business segments. Pentair anticipates a reduction of approximately 1,050 jobs, as detailed below, offset by approximately 350 new jobs at other Pentair facilities in connection with consolidation and rationalization. The restructuring plan does not contemplate the Company exiting any of its current lines of business;
31
the projects involved are designed to make the Company’s existing businesses more efficient.
The Professional Tools and Equipment segment is consolidating North American distribution operations and combining the headquarters of the two power tool businesses, Delta and Porter-Cable, in Jackson, Tennessee. In the service equipment businesses, products are being outsourced to offshore manufacturers or transferred to other North American facilities. The Jonesboro, Arkansas manufacturing operation of Lincoln Automotive will be closed. These actions will result in the termination of more than 600 employees. Restructuring charges for
Derivative Instrumentsthis segment amounted to $16.8 million, $10 million of which is attributable to employee terminations, andHedging Activities."the balance of which relates to asset write-downs and other exit costs. Management estimates the benefits under the restructuring plan will be approximately $16 million in 2000 and $15 million in 2001.The Water and Fluid Technologies segment has reduced the workforce at its Lincoln Industrial business and is outsourcing some product manufacturing, resulting in headcount reductions of approximately 100 employees. Lincoln Industrial plans to eliminate approximately 50 percent of the manufacturing space at its U.S. manufacturing facilities. The charge for this segment was $4.5 million, approximately $1.2 million of which relates to terminated employees, and the balance of which is attributable to demolition and other exit costs. Management estimates the benefits under the restructuring plan will be approximately $2 million in 2000 and $2 million in 2001.
The Electrical and Electronic Enclosures segment reduced its workforce in Europe and adopted a plan to rationalize manufacturing at its North American facilities. These actions will result in the reduction of approximately 350 employees. This segment absorbed $16.7 million of the charge, largely related to employee terminations. Management estimates the benefits under the restructuring plan will be approximately $9 million in 2000 and $12 million in 2001.
The components of the restructuring charge and related reserve balances remaining at December 31, 1999 were (in millions):
Personnel Asset Exit Costs Disposals Costs Total 1999 Restructuring Charge $ 27.5 $ 7.0 $ 3.5 $ 38.0 1999 Spending to Date
Cash spending(9.4 ) (0.1 ) (0.1 ) (9.6 ) Non-cash spending (0.0 ) (2.9 ) (0.3 ) (3.2 ) Remaining Reserve $ 18.1 $ 4.0 $ 3.1 $ 25.2 “Personnel Costs” consists of severance, medical plan continuation, pension cash-outs, and outplacement per company policy for the 1,050 employees planned to be terminated. As of December 31, 1999, approximately 400 employees have been terminated (or in Europe are working under statutory notice periods).
“Asset Disposals” consists of the write-down of the carrying value of the Delta headquarters building which is held for resale and the write-off of special-use manufacturing and support assets which will no longer be needed and which will be scrapped or abandoned. The real estate held for resale is expected to be disposed of by mid-2000. All of these assets are currently classified as property, plant and equipment. No charge has been taken with respect to the Jonesboro real estate since the Company believes it will be able to be sold for book value within a reasonable period.
“Exit Costs” consists of maintenance and security costs of surplus buildings until leases expire or demolition or disposal of certain buildings, including the Jonesboro building.
“Personnel Costs” and “Exit Costs” are cash costs and the “Asset Disposals” are primarily non-cash costs. Our currently anticipated schedule projects cash expenditures of $19 million in 2000 and $2 million in 2001. These requirements will be funded through cash from operations or borrowings under our existing credit facilities.
During 1999, restructuring benefits (largely personnel cost savings) of approximately $6 million were realized. Anticipated
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benefits are projected to be $26 million in 2000 and $30 million in 2001. The major components of anticipated benefits are in reductions in labor costs and efficiencies in consolidating distribution and administrative functions.
The anticipated benefits noted above are net of the costs of adding 350 employees at other Pentair locations. The benefits do not, however, take into account one-time costs associated with these restructuring plans. The Company
must adopt this standard no later than January 1,anticipates that the associated one-time costs will amount to approximately $6 million, one-quarter of which was incurred in 1999, with most of the balance to be incurred in the first quarter of 2000.The Company is reviewingThese costs are not included in therequirementsrestructuring charge, since they relate to asset relocations, start-up costs and training and recruiting ofthis standard, which are quite complex. Althoughemployees at other locations.4. Acquisitions/Divestitures
1999In 1999, the Company
expectspaid $953,156,000 to acquire 3 new businesses, all accounted for as purchase acquisitions with $755,395,000 of goodwill recorded during 1999 for these acquisitions. The goodwill life for the WEB acquisition is 25 years and the goodwill life for the Essef and DeVilbiss Air Power Company acquisitions is 40 years. The recorded fair value of the net assets acquired was based on preliminary estimates at the time of the acquisitions and may be revised as better information becomes available in 2000. Management does not believe thatthis standardthe final purchase price allocation willnotproduce materiallyaffect its financial positiondifferent results than those reflected herein.WEB Tool & Manufacturing, Inc.
On April 2, 1999, Pentair acquired all of the common stock of WEB Tool & Manufacturing, Inc. and related entities for approximately $62 million, which was financed through bank borrowings. WEB designs, manufactures, and markets custom server subracks and chassis for computer technology applications. The acquisition was accounted for as a purchase and accordingly, the results of operations
it has not yet determinedare included in theimpactconsolidated financial statements since the date of acquisition. The proforma effect of thisstandard on itsacquisition is not presented because it is not material to the Company’s consolidated financial statements.4. Acquisitions/DivestituresEssef Corporation
On August 10, 1999, Pentair acquired two businesses owned by Essef Corporation, Structural Fibers and Pac-Fab. A third business formerly owned by Essef, Anthony & Sylvan, was split off to Essef shareholders at the time of the acquisition. The acquisition price was $310 million plus approximately $120 million of Essef indebtedness which was required to be refinanced immediately. The Essef acquisition was accounted for using the purchase method of accounting and accordingly, the results of operations are included in the consolidated financial statements since the date of acquisition. Structural Fibers designs, manufactures and distributes products used in moving, treating and storing water, including pumps, storage tanks and filtration systems for residential, commercial, municipal and industrial customers. Pac-Fab manufactures pool and spa equipment, including valves, pumps, heaters and lights, used in residential and commercial applications.
DeVilbiss Air Power Company
On September 3, 1999, Pentair acquired all of the outstanding shares of Falcon Manufacturing, Inc., the parent company of DeVilbiss Air Power Company (Falcon Manufacturing, Inc. and DeVilbiss Air Power Company, together “DeVilbiss Air Power”). The acquisition price was approximately $460 million. The DeVilbiss Air Power acquisition was accounted for using the purchase method of accounting and accordingly, the results of operations are included in the consolidated financial statements since the date of acquisition. DeVilbiss Air Power Company manufactures air compressors, portable generators, pressure washers and accessories.
ProForma Financial Information for Essef and DeVilbiss Air Power Acquisitions The results of operations for the acquired Essef and DeVilbiss Air Power companies are included in the accompanying consolidated financial statements since the date of acquisition. Had the acquisitions occurred at January 1, 1998, unaudited proforma results for the full year 1998 would have been: net sales $2,621 million; net income $89 million and basic and diluted earnings per share $2.20 and $2.04 respectively. The unaudited proforma results for the full year 1999 would have been: net sales $2,927 million; net income $106 million and basic and diluted earnings per share $2.42 and $2.39 respectively.
The results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made at the beginning of 1998, or of the results which may occur in the future.
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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 formaproforma 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 formaproforma 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$13,000,000 for final closing adjustments.Federal'sFederal’s operating results are included in theCompany'sCompany’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 $17,575,000 in 1999 and $10,858,000 in
1998 and $12,446,000 in 1997.1998.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.
December 31 (In(In thousands) 1999 1998 1997Finished goods $147,780 $131,847$ 243,757 $ 147,780 Work in process 64,629 64,421 58,047Raw materials and supplies 117,549 66,380 76,515Total $278,581 $266,409$ 425,935 $ 278,581 If all LIFO inventories were valued at FIFO, aggregate inventory would have been
$281,950,000$428,057,000 and$269,653,000$281,950,000 at December 31, 1999 and 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:
December 31 (In(In thousands) 1999 1998 1997Revolving credit facilities, average interest rate of 4.87% $103,479 $102,1196.93%$ 590,612 $ 103,479 Private placement debt, due 19992000 to 2007, average interest rate of6.96%6.90%174,694 180,716 197,8587.85% Senior Notes due 2009 250,000 0 Other, due periodically to 2005, average interest rate 5.77%6.43%19,778 56,705 29,275Total 1,035,084 340,900 329,252Current maturities 177,788 52,874 34,703Total long-term debt $288,026 $294,549$ 857,296 $ 288,026 On September 2, 1999, the Company entered into two new revolving credit facilities aggregating $800 million; a new five-year $425 million revolving credit facility (the “$425 Million Revolver”) and a new 364-day $375 million revolving credit facility (the “$375 Million Revolver”) (collectively the “New Revolving Credit Facilities”). The New Revolving Credit Facilities replaced the Company’s $390 Million Credit Facilities. The $425 Million Revolver expires September 2, 2004 and the $375 Million Revolver expires on August 31, 2000. Inclusive of related facilities fees, the New Revolving Credit Facilities accrue interest at a floating rate based upon the rating of the Company’s long term senior unsecured debt assigned by Standard & Poor’s Ratings Group and Moody’s Investor Service, Inc., or if no rating is available, based on a
34
leverage ratio. Revolving credit facilities provide credit facilities which can be borrowed in US$, the Euro, Deutschemarks, French Francs, British Pounds Sterling or Canadian Dollars. The Company also has $101.4 million in other credit facility agreements of which, $86.4 million is uncommitted.
On October 5, 1999, Pentair sold $250,000,000 aggregate principal amount of its 7.85% Senior Notes due 2009. The net proceeds of approximately $248 million were used to refinance other indebtedness.
Current maturities of long-term debt include borrowings of $150,612,000 under the $375 Million Revolver. It is the Company’s intention to continually renew this credit facility.
At December 31,
1998,1999, $590,612,000 was outstanding under revolving creditfacility debtfacilities, which included$72,000,000$571,000,000 in U.S. dollars with an average current interest rate of5.43%7.00% and$31,479,000$19,612,000 in various foreign currencies with an average current local interest rate of4.10%5.58%. The weighted average credit facilities borrowing rates were 6.10% in 1999 and 4.99% in1998 and 4.87% in 1997.1998. 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$292,900,000 of the December 31,19981999 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,$177,788,000, $19,812,000, $6,241,000, $53,221,000, and$52,804,000$489,473,000 for the years19992000 to2003, respectively.2004, respectively with $288,549,000 due thereafter.7. Financial Instruments
The Company utilizes various derivatives such as interest rate swap agreements, currency swap agreements, and interest rate cap agreements. The Company also utilizes commodity swap agreements from time to time. 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. Derivatives used for hedging purposes must be designated as, and effective as, a hedge of an identified risk exposure at the inception of the contract. Accordingly, changes in the fair market value of the derivative contract must be highly correlated with the changes in the fair market value of the underlying hedged item both at the inception of the hedge and over the life of the hedge contract.
Foreign exchange contracts are accounted for as hedges to the extent they are designated as, and are effective as, hedges of firm or anticipated foreign currency commitments. Any foreign exchange contracts designated but no longer effective as a hedge are marked to market and the related gains and losses are recognized in earnings.
Interest rate contracts designated and effective as a hedge of underlying debt obligations are not marked-to-market, but cash flow from such contracts results in adjustments to interest expense recognized over the life of the underlying debt agreement. Gains and losses from terminated contracts are deferred and amortized over the remaining period of the original contract. Cash flows from such terminations are classified according to the underlying financial instrument the contract was designated to hedge. Open interest rate contracts are reviewed regularly to ensure that they remain effective as hedges of interest rate exposure.
The Company hedges its net investments in significant foreign subsidiaries by borrowing in those subsidiaries’ functional currencies. The Company has also entered into currency swap agreements, principally to Deutschemarks and Italian Lira, with major financial institutions to hedge firm foreign currency commitments. The notional amounts serve 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 and losses on contracts designated as hedges of net investments in foreign subsidiaries are recognized in shareholders’ equity as foreign currency translation adjustments. Gains and losses on contracts designated as hedges of identifiable foreign currency firm commitments are not recognized until the gains or losses of the related foreign currency transactions are recognized.
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
35
expense and credit risk is considered remote.
As of December 31,
1998,1999, the Company has swap agreements outstanding with an aggregate notional amount of$40,000,000$74,500,000 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 of54 years. Under the interest rate environment existing as of December 31,1998,1999, the net fair value of theCompany'sCompany’s swap agreements was a netliabilityasset of$3,235,000.$1,517,536.As of December 31,
1998,1999, 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.DEM-LIBOR.Foreign Exchange Risk Management
The Company has entered into currency swap agreements, principally to Deutschemarks and Italian Lira, with major financial institutions to hedge
net assets infirm foreignsubsidiaries, principally those denominated in Deutschemarks and Italian Lira.currency commitments. The original term of the currency swap agreements ranged from 3 to 6 years. As of December 31, 1999, the remaining swap agreements had a range to maturity of 6 months to 4 years. 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
(in thousands) 1999 1998 Notional amounts $ 128,431 $ 128,431 Gains 5,322 6,413 Losses 0 16,191 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.
1999 1998 1997Carrying Fair Carrying Fair (in(in thousands) Amount Value Amount Value Short-term debt $ 150,612 $ 150,612 $ 0 $ 0 Long-term debt $340,900 $350,332 $329,252 $339,450884,472 899,726 340,900 350,332 Interest rate swaps asset 0 (3,235)1,518 0 (550)(3,235 ) Cross-currency swaps asset 0 (9,778)5,322 0 349(9,778 ) Interest rate cap asset 0 (10)(120 ) 0 (121)(10 ) 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 $27,235,000, $22,655,000, and $15,737,000 in 1999, 1998 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,$29,356,000, $22,476,000, $16,509,000, $13,938,000 and$7,502,000$10,211,000 for the years19992000 to2003,2004, 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'sCompany’s financial position, liquidity, or future results of operations.36
10. Capital Stock
Preferred Stock
The twoclassesseries of preferred stock (par value-— $.10)are:were: $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 sharesarewere convertible into common stock andarewere 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
Series Series 1988 1990 Shares
Authorized300,000 2,500,000 Issued and outstanding 0 0 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
arewere automatically converted into common shares and distributed in that form, with fractional shares paid in cash.Subsequent to year-end, bothBoth Series 1988 and Series 1990 preferred stock classes were redeemed and all outstanding shares were converted to common stock on January 4, 1999 and January 15, 1999, respectively. Following shareholder approval in 1999, the two series of preferred stock were terminated and the authorized number of shares were added back to authorized but unissued shares of common or preferred stock.
Common Stock
At December 31,
1998,1999, the authorized stock of the Company consisted of122,200,000250 million shares ofCommon Stock withstock, of which no more that 15 million shares may be preferred stock issuable in the future, and of which the balance, net of outstanding preferred shares, may be shares of common stock, having a par value of $.16 2/3.Changes in outstanding common shares are summarized as follows (in thousands):
1999 1998 1997 1996Beginning Balance 38,504 38,185 37,717 37,035 Repurchase of stock (350) 0 0Employee stock plans -— net352 208 288 409Issuance of common stock 5,500 0 0 Repurchase of stock (117 ) (350 ) 0 Conversion of preferred stock 4,078 461 180 273Ending Balance 48,317 38,504 38,185 37,717On 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,In 1999, the Company had repurchased25,000117,000 shares under the new authorization.On October 5, 1999, Pentair sold 5,500,000 shares of its common stock in a firm underwriting. The net proceeds of approximately $215 million were used to reduce indebtedness.
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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'sCompany’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.
TheFrom 1990 to 1998, the employees
receivereceived 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 theCompany'sCompany’s balance sheet as unearned ESOP compensation. Gross compensation expense (i.e. the value of shares allocated toparticipants'participants’ accounts) was $7,092,000$7,081,000,and$5,561,000$7,081,000 in 19981997and1996,1997, respectively. The stock held by the ESOP is released for allocation to theparticipants'participants’ accounts as principal and interest is paid from dividends on unallocated shares ($517,000$1,140,000,and$1,679,000$1,140,000 in 19981997and1996,1997, respectively) and Company contributions. As of December 31, 1998, the loanhashad been reduced to zero since all shareshavehad been allocated to participant accounts as compensation and dividends. A separate frozen ESOPholdsheld the Series 1988 Preferred Stock.Subsequent to year-end, bothBoth 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.Beginning in 1999, the employees received Pentair common stock in lieu of certain cash compensation and cash for 401(k) matching contributions. Compensation expense for the value of the shares allocated to participants’ accounts was $3,934,000 in 1999.
13. Stock Incentive Plans
Omnibus Stock Incentive PlanIn April 1996, shareholders approved amendments to the Omnibus Stock Incentive Plan (the Plan) to authorize the issuance of additional shares of the
Company'sCompany’s common stock. The Plan extends to February 14, 2006. At December 31,1998,1999, there were2,419,7741,970,055 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 $7,329,000 in 1999, $6,100,000 in 1998, and $4,991,000 in
1997,and $4,909,000 in 1996.1997. 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
38
2008. At December 31,
1998,1999, there were395,973384,498 shares available for grant under the Directors Plan.Details of options for both plans are as follows:
Number Weighted Average of Shares Exercise Price 1996 Granted 398,278 $25.0000 Exercised 456,031 $14.0283 Forfeited 51,546 $22.2582Outstanding, end of year 1,347,759 $19.9397$ 19.9397 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 602,412 $16.5585 1997660,542 $ 20.2986 1998 Granted 372,314 $31.0791424,100 $ 35.7542 Exercised 342,077 $15.7225280,344 $ 18.4359 Forfeited 18,174 $29.332420,106 $ 29.6983 Outstanding, end of year 1,359,822 $23.92561,483,472 $ 28.4138 Exercisable, end of year 660,542 $20.2986 1998739,385 $ 23.7673 1999 Granted 424,100 $35.7542431,972 $ 39.5487 Exercised 280,344 $18.4359384,486 $ 21.4424 Forfeited 20,106 $29.69838,440 $ 34.3307 Outstanding, end of year 1,483,472 $28.41381,522,518 $ 33.2103 Exercisable, end of year 739,385 $23.7673710,468 $ 28.6699 Options Outstanding and Exercisable by Price Range as of December 31,
1998:1999:
Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price $17.75 94,424 0.06 $17.75 94,424 $17.75 $21.375$21.50 65,376 0.05 $ 21.5000 65,376 $ 21.5000 $25.00 288,688 1.06 $ 25.0000 288,688 $ 25.0000 $29.125 300 2.25 $ 29.1250 300 $ 29.1250 $31.00 297,324 2.06 $ 31.0000 199,839 $ 31.0000 $31.375 – 33.9375 32,907 2.46 $ 32.1978 19,600 $ 32.0209 $35.00 369,629 7.62 $ 35.0000 121,956 $ 35.0000 $37.50 7,500 9.13 $ 37.5000 0 $ 00.0000 $39.625 417,275 8.76 $ 39.6250 0 $ 00.0000 $40.4375 - $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$48.2543,519 8.23 $ 43.7154 14,709 $ 43.7413 $21.50 - $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$48.251,522,518 5.19 $ 33.2103 710,468 $ 28.6699 In accordance with generally accepted accounting principles, the Company has chosen to continue accounting for its plans using the
"intrinsic method"“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"“fair value” method as defined in Statement of Financial Accounting Standards (FAS) No. 123,"Accounting“Accounting for Stock-BasedCompensation"Compensation”, compensation expense would have been accrued and the effect on theCompany'sCompany’s income from continuing operations and earnings per39
share would have been as follows:
Years Ending December 31 (In(In thousands) 1999 1998 1997 1996Net Income As reported $106,840 $91,600 $74,509$ 103,309 $ 106,840 $ 91,600 Pro forma 100,519 104,875 89,900 73,120Basic EPS As reported $2.67 $2.28 $1.86$ 2.36 $ 2.67 $ 2.28 Pro forma 2.29 2.62 2.24 1.82Diluted EPS As reported $2.46 $2.11 $1.73$ 2.33 $ 2.46 $ 2.11 Pro forma 2.27 2.42 2.07 1.69The weighted average fair value of
each option grantoptions granted is estimated on the date of grant using the Black-Scholes option-pricing modeland represents the difference between the fair market value on the date of grant and the estimated market value on the exercise date. The model useswith the following weighted-average assumptions:
19881999 1998 1997 1996Volatility 31% 26% 25%34 % 31 % 26 % Risk-free interest rate 4.55% 5.5% 5.2%6.5 % 4.55 % 5.5 % Expected life (years) Plan 1.91 1.91 2.0 2.0Directors Plan 2.13 2.17 2.5 2.5Dividend yield 1.7% 1.7% 2.0%1.7 % 1.7 % 1.7 % The expected life was determined separately for each of the Omnibus Stock Incentive Plan and the Outside Directors Nonqualified Stock Option Plan, due to differing exercise patterns.
The fair value for all options as a group are determined using the Black-Scholes model. The number of shares for which the options are granted in a year is multiplies by the fair value of each option to arrive at the total fair value of all options granted.
The total fair value is amortized to expense over the three-year option vesting period in determining the proforma impact of the alternative method of determining the compensation cost of the options.
14. Provision for Income Taxes
The components of earnings before income taxes were as follows:
(In(In thousands) 1999 1998 1997 1996U.S. $147,339 $139,006 $89,833U.S $ 149,726 $ 147,339 $ 139,006 International 16,803 23,605 19,376 34,769 $170,944 $158,382 $124,602$ 166,529 $ 170,944 $ 158,382 The provisions for income taxes, excluding tax benefits credited directly to
shareholders'shareholders’ equity, were as follows:
(In(In thousands) 1999 1998 1997 1996Current U.S.(less foreign tax credits) $41,594 $60,640 $33,897$ 52,073 $ 41,594 $ 60,640 State 8,802 9,274 9,573 6,760International 11,109 7,506 7,837 8,962Current provision 71,984 58,374 78,050 49,609Deferred U.S.U.S(3,519 ) 4,415 (11,592) (4,687)(11,592 ) International (5,245 ) 1,315 324 5,171Deferred provision (8,764 ) 5,730 (11,268) 484(11,268 ) Total provision $64,104 $66,782 $50,093$ 63,220 $ 64,104 $ 66,782 40
A reconciliation of the statutory federal tax rate to the effective rate follows:
1999 1998 1997 1996Statutory federal income tax rate 35.0% 35.0% 35.0%35.0 % 35.0 % 35.0 % State and local income taxes, net of U.S. income tax benefit 3.4 3.9 3.6 3.3Incremental international tax rate (1.3 ) 0.0 0.6 1.6Non-deductible amortization of goodwill 3.1 1.4 1.6 2.0ESOP dividend benefit (0.8) (0.8) (0.9)(0.6 ) (0.8 ) (0.8 ) Other (2.0) (1.0) (0.8)(1.6 ) (2.0 ) (1.0 ) 38.0 37.5 39.0 40.2Incremental Tax -— gain on sale of business0.0 0.0 3.2 0.0Effective Rate 37.5% 42.2% 40.2%38.0 % 37.5 % 42.2 % The tax effect of the primary temporary differences giving rise to the
Company'sCompany’s deferred tax assets and liabilities at December 31,19981999 and19971998 are as follows:
(In(In thousands) 1999 1998 1997Deferred Tax Assets: Accounts receivable allowances $4,955 $4,737$ 7,995 $ 4,955 Retiree medical liability 18,140 17,244 17,480Warranty/product liability accruals 27,059 19,222 19,991Employee benefit accruals 28,071 21,280 20,098Other 21,081 10,120 10,829Gross deferred tax assets 102,346 72,821 73,135Deferred Tax Liabilities: Inventory allowances (5,252) (5,878)(321 ) (5,252 ) Accelerated depreciation (18,662) (16,886)(26,010 ) (18,662 ) Other (18,957) (14,860)(26,876 ) (18,957 ) Gross deferred tax liabilities (42,871) (37,624)(53,207 ) (42,871 ) Net Deferred Tax Assets $29,950 $35,511$ 49,139 $ 29,950 15. Pensions and Other Postretirement Benefits
Pension BenefitsThe 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'sCompany’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
Averageaverage 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%
Pension Benefits Other Benefits 1999 1998 1997 1999 1998 1997 Discount rate 7.75 % 6.75 % 7.0 % 7.75 % 6.75 % 7.0 % Expected return on plan assets 8.5 % 8.5 % 8.5 % Rate of compensation increase 5.0 % 5.0 % 5.0 % 41
For measurement purposes, an annual
ratesrate of8.649.62 percent(pre-65 benefits)for pre-65 and8.14 percent (post-65 benefits)post-65 benefits for increases in the per capita cost of covered health care benefits were assumed for1999.2000. The rate was assumed to decrease gradually to5.06.0 percent for 2019 and remain at that level thereafter.The components of net periodic benefit cost are as follows:
Pension Benefits Other Benefits (In(In thousands) 1999 1998 1997 19961999 1998 1997 1996Service cost $12,803 $11,058 $11,128 $479 $567 $630$ 13,410 $ 12,803 $ 11,058 $ 552 $ 479 $ 567 Interest cost 20,237 19,257 18,900 18,0232,256 2,175 2,794 2,921Expected return on plan assets (25,827) (22,685) (19,534)(27,635 ) (25,827 ) (22,685 ) 0 0 0 Amortization of transition asset (151) (181) (181)(151 ) (151 ) (181 ) 0 0 0 Amortization of prior service cost 1,085 1,932 602 685 (849) (1,076) (948)(990 ) (849 ) (1,076 ) Recognized net actuarial loss (814) (1,146) 450 (122)gain(3,309 ) (814 ) (1,146 ) (67 ) (122 ) 0 0 $7,200 $6,548 $10,571 $1,683 $2,285 $2,603$ 3,637 $ 7,200 $ 6,548 $ 1,751 $ 1,683 $ 2,285 A one-percentage point change in the assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- Point Increase Point Decrease (in(in thousands) Effect on total of service and interest cost $36.2 $(31.8)$ 33 $ (29 ) Effect on postretirement benefit obligation 435.2 (382.4)1,006 (857 )
Pension Benefits Other Benefits (In(In thousands) 1999 1998 19971999 1998 1997Change in benefit obligation Benefit obligation -–
beginning of year$298,989 $261,658 $32,325 $40,943$ 306,848 $ 298,989 $ 33,469 $ 32,325 Service cost 13,410 12,803 11,058552 479 567Interest cost 20,237 19,257 18,9012,256 2,175 2,794 Plan participants' contributionsAmendments 968 2,575 0 0 0 0 Amendments 2,575 838234 (7,788)Actuarial (gain) loss (120) 21,643(32,827 ) (120 ) (393 ) 347 (1,661)Acquisition 10,317 6,252 3,009 0 Disposition 0 (21,750 ) 0 Disposition (21,750)0 0 0Translation (gain) loss (3,884 ) 1,645 (3,079)0 0 Benefits paid (12,803) (12,030) (2,091) (2,530)(13,281 ) (12,803 ) (2,658 ) (2,091 ) Benefit obligation -–
end of year$306,848 $298,989 $33,469 $32,325$ 301,788 $ 306,848 $ 36,235 $ 33,469 Change in plan assets Fair value of plan assets -–
beginning of year$307,724 $272,280 $0 $0$ 322,968 $ 307,724 $ 0 $ 0 Actual return on plan assets 39,491 43,020 46,6550 0 Acquisition 9,888 5,727 0 0 Disposition 0 Disposition (21,750)(21,750 ) 0 0 0Employer contribution 1,297 1,050 8192,658 2,091 2,530 Plan participants' contributionsTranslation (gain) loss (179 ) 0 0 0 0Benefits paid (12,803) (12,030) (2,091) (2,530)(13,281 ) (12,803 ) (2,658 ) (2,091 ) Fair value of plan assets -–
end of year$322,968 $307,724 $0 $0$ 360,184 $ 322,968 $ 0 $ 0 Funded status 58,396 16,120 8,735 (33,469) (32,325)(36,235 ) (33,469 ) Net transition liability (asset) (155) (319)(26 ) (155 ) 0 0 Unrecognized net actuarial loss (59,138) (42,584) (6,569) (5,064)gain(102,978 ) (59,138 ) (4,727 ) (4,412 ) Unrecognized prior service cost 3,884 4,001 3,358 (4,412) (7,652)(5,579 ) (6,569 ) Net amount recognized $(39,172) $(30,810)$ (44,450)(40,724 ) $ (45,041)(39,172 ) $ (46,541 ) $ (44,450 ) 42
Amounts recognized in the balance sheet consist of: Prepaid benefit cost $6,956 $6,705 $0 $0$ 12,217 $ 6,956 $ 0 $ 0 Accrued benefit liability (50,908) (41,898) (44,450) (45,041)(55,969 ) (50,908 ) (46,541 ) (44,450 ) Intangible asset 1,429 907 3840 0 Deferred Tax 614 1,498 1,5260 0 Accumulated other comprehensive income 985 2,375 2,4730 0 Net amount recognized $(39,172) $(30,810)$ (44,450)(40,724 ) $ (45,041)(39,172 ) $ (46,541 ) $ (44,450 ) In 1999, Pentair acquired DeVilbiss Air Power Company. As part of that transaction, appropriate pension assets and liabilities for DeVilbiss Air Power Company employees were transferred into the Company’s pension plans.
In November 1997, Pentair divested the Federal Cartridge business. As part of that transaction, appropriate pension assets and liabilities for Federal Cartridge employees were transferred to the buyer’s pension fund. This pension asset transfer was not effected until 1998 following the necessary actuarial calculations; therefore this asset transfer did not match the fiscal period for the sale of Federal Cartridge.
At December 31,
1998,1999, for plans with assets less thanPBO,Projected Benefit Obligation (PBO), the aggregate PBO is$52.0$45.2 million and the aggregate assets are$5.9$0.2 million. For plans with assets less thanABO,Accumulated Benefit Obligation (ABO), the aggregate ABO is$40.7$39.8 million and the aggregate assets are$0.1 million.zero. The majority of the under funding is related to German pension plans, which are not commonly funded.At December 31,
1998, approximately 98% of the1999, plan assets areinvestedheld in trust and consist mainly of listed stocks and bonds or cash and short-term investments. Theremaining 2% of plan assets are invested in insurance contracts. The Company'sCompany’s own common stock accounted for11.2%10% 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 Automotivethe tool businesses (Delta andCentury Manufacturing.Porter-Cable); and the equipment businesses (Century and the newly-acquired DeVilbiss Air Power Company). Products manufactured include woodworking machinery, portable power tools,lubricating and lifting equipment,battery charging and testing equipment, welding equipment, lubricating andwelding equipment.lifting equipment, air compressors, generators and pressure washers. The WFT segment includes thePentairpump and pool businesses (Pentair Pump Group and one of the newly-acquired Essef businesses), the water treatment businesses (Pentair Water Treatment which consists of Fleck Controls plus the remaining Essef business) and Lincoln Industrial. Products manufactured include pumps for wells and water treatment, sump pumps, pool and spa equipment such as valves, pumps, filters, lights and related equipment, valves and pressure vessels for watersofteners,treatment products and automated and manual lubricationsystems and equipment.systems. The EEE segment includes Hoffman Enclosures, Schroff, Pentair Electronic Packaging (a newly-integrated North American enclosures business, comprised of Schroff US, the newly-acquired WEB and the US affiliates of the former Walker Dickson business) and Pentair EnclosuresU.K..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 leadership 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.Segment Information:
(in thousands) PTE WFT EEE Other Totals 1999 Net sales from external customers $ 1,068,669 $ 665,413 $ 633,671 $ 0 $ 2,367,753 Intersegment net sales 5,155 4,158 0 (9,313 ) 0 Depreciation and amortization expense 22,392 30,827 35,258 168 88,645 Segment profit (loss) — operating income 105,388 81,256 46,346 (18,659 ) 214,331 Segment assets 1,112,983 1,016,604 546,426 126,953 2,802,966 Capital expenditures 28,498 13,892 14,395 3,844 60,629 43
PTE WFT EEE Other Totals 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 99,621 65,976 46,026 (18,431 ) 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 76,784 41,947 47,282 3,789 169,802 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 Segment Geographic Information:
Revenues Assets (In millions) 1999 1998 1997 1999 1998 1997 United States $ 1,863.5 $ 1,520.5 $ 1,400.8 $ 2,340.1 $ 1,062.7 $ 1,037.9 Canada 107.0 102.5 98.3 94.2 106.7 107.3 Germany 120.2 113.1 99.4 163.6 184.5 194.0 Other Europe 191.7 135.1 164.5 186.3 184.5 116.9 Pacific Rim 46.0 38.1 49.5 18.8 16.3 16.8 Rest of World 39.4 28.3 26.6 0.0 0.0 0.0 Total $ 2,367.8 $ 1,937.6 $ 1,839.1 $ 2,803.0 $ 1,554.7 $ 1,472.9 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 US dollars.
In evaluating financial performance, management focuses on operating income as a
segment'ssegment’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 eachsegment'ssegment’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.
Segment Information: (in thousands) PTE WFT EEE Other Totals1998 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 71,646Segment Geographic Information:
Revenues Assets (In millions) 1998 1997 1996 1998 1997 1996United 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 $1,106.0Revenues 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)
(In17. Quarterly Financial Data (unaudited) (In thousands, except per share amounts) 19981999 1st 2nd 3rd 4th Total Net sales $464,965 $471,790 $476,780 $524,043 $1,937,578$ 470,493 $ 507,225 $ 604,918 $ 785,117 $ 2,367,753 Gross profit 144,810 146,370 147,626 168,462 607,268149,834 160,010 186,434 238,752 735,030 Operating income 43,889 44,698 46,661 57,944 193,1928,438 51,626 62,652 91,615 214,331 Net Income 23,709 24,414 25,796 32,921 106,8402,240 28,285 29,809 42,975 103,309 Earnings per common share Basic $.59 $.60 $.64 $.84 $2.67$ .05 $ .67 $ .70 $ .90 $ 2.36* Diluted .54 .56 .60 .76 2.46 1997.05 .66 .69 .90 2.33* 1998 1st 2nd 3rd 4th Total Net sales $411,139 $422,305 $482,089 $523,523 $1,839,056$ 464,965 $ 471,790 $ 476,780 $ 524,043 $ 1,937,578 Gross profit 125,951 128,951 142,290 151,066 548,258144,810 146,370 147,626 168,462 607,268 Operating income 37,479 38,568 42,757 50,998 169,80243,889 44,698 46,661 57,944 193,192 Net Income 19,417 20,484 22,207 29,492 91,60023,709 24,414 25,796 32,921 106,840 Earnings per common share Basic $.48 $.51 $.55 $.74 $2.28$ .59 $ .60 $ .64 $ .84 $ 2.67 Diluted .45 .47 .51 .68 2.11.54 .56 .60 .76 2.46 44
• For 1999, due to the issuance of Equity in the Fourth Quarter, the sum of the four quarters’ Earnings per Share does not equal the Total Year Earnings per Share. 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 pershare amounts presented for 1996 have been restated for the adoption of FAS 128.Share”. The following table reflects the calculation of basic and diluted earnings per share.
(In(In thousands) 1999 1998 1997 1996Earnings per share
NetIncome $106,840 $91,600 $74,509income$ 103,309 $ 106,840 $ 91,600 Preferred dividend requirements 0 4,267 4,867 4,928Income available to common shareholders 103,309 102,573 86,733 69,581Average common shares outstanding 43,803 38,444 37,989 37,491Basic Earningsearnings perCommon Share $2.67 $2.28 $1.86common share$ 2.36 $ 2.67 $ 2.28 Earnings per share -— assuming dilution Income available to common shareholders103,309 102,573 86,733 69,581Addback preferred dividend requirements due to conversion into common shares 0 4,267 4,867 4,928Elimination of tax benefit on preferred ESOP dividend due to conversion into common shares (1,436) (1,420) (1,333)0 (1,436 ) (1,420 ) Addition of tax benefit on ESOP dividend assuming conversion to common shares -— at common dividend rate0 830 740 644Income available to common shareholders assuming dilution 103,309 106,234 90,920 73,820Average common shares outstanding 43,803 38,444 37,989 37,491Dilutive impact of stock options outstanding 346 435 456 458Assumed conversion of preferred stock 138 4,270 4,622 4,803Weighted average shares and potentially dilutive shares outstanding 44,287 43,149 43,067 42,752Diluted Earningsearnings perCommon Share $2.46 $2.11 $1.73common share$ 2.33 $ 2.46 $ 2.11 45
20. Accounting Developments
In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The FASB subsequently issued SFAS No. 137 delaying the effective date for one year, to fiscal years beginning after June 15, 2000. The Company must adopt this standard no later than January 1, 2001. 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.46
Independent
Auditors'Auditors’ ReportTo 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,
19981999 and1997,1998, and the related consolidated statements of income,shareholders'shareholders’ equity, cash flows, and comprehensive income for each of the three years in the period ended December 31,1998.1999. 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 theCompany'sCompany’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,
19981999 and1997,1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31,19981999 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 LLPMinneapolis, Minnesota
January 29, 1999
February 2, 2000Item 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“Election ofDirectors"Directors” in the Pentair, Inc. Notice of Annual Meeting of Shareholders and Proxy Statement for the April19992000 annualshareholders'shareholders’ meeting (the"1999“2000 ProxyStatement"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“Election ofDirectors"Directors” and"Executive Compensation"“Executive Compensation” in the19992000 Proxy Statement is hereby incorporated by reference.Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information appearing under
"Security“Security Ownership of Management and BeneficialOwnership"Ownership” in the19992000 Proxy Statement is hereby incorporated by reference.47
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).
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, 1999, 1998 and 1997 Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Shareholders’ Equity for Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Comprehensive Income for Years Ended December 31, 1999, 1998 and 1997 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) Second Restated Articles of Incorporation as amended through June 14, 1999. (Incorporated by reference to Exhibit 3.1 to the Company’s Amendment 1 to Registration Statement on Form S-3 dated July 16, 1999). (3.2) 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). 48
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).
(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). 49
(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, 1998October 4, 1999 regardingthe 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 authorizationcompletion of a common stockrepurchase program.and a debt offering. 50
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
PENTAIR, INC.
(Registrant)
Dated: March 10, 2000, By /s/ David D. Harrison
David D. Harrison
Executive Vice President and Chief Financial OfficerPOWER 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- factattorney-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
By /s/ Winslow H. Buxton Dated: March 10, 2000 Winslow H. Buxton, Chairman and Chief Executive Officer, Director By /s/ William J. Cadogan Dated: March 10, 2000 William J. Cadogan, Director By /s/ Joseph R. Collins Dated: March 10, 2000 Joseph R. Collins, Vice Chairman, Director By /s/ Barbara B. Grogan Dated: March 10, 2000 Barbara B. Grogan, Director By /s/ Charles A. Haggerty Dated: March 10, 2000 Charles A. Haggerty, Director 51
By /s/ Harold V. Haverty Dated: March 10, 2000 Harold V. Haverty,
DirectorBy /s/ Quentin J. Hietpas Dated: March 10, 2000 Quentin J. Hietpas,
DirectorBy /s/ Randall J. Hogan Dated: March 10, 2000 Randall J. Hogan, President and Chief
Operating Officer, DirectorBy /s/ Stuart Maitland Dated: March 10, 2000 Stuart Maitland,
DirectorBy /s/ Augusto Meozzi Dated: March 10, 2000 Augusto Meozzi,
DirectorBy /s/ Richard M. Schulze Dated: March 10, 2000 Richard M. Schulze,
DirectorBy /s/ Karen E. Welke Dated: March 10, 2000 Karen E. Welke,
Director52
SCHEDULE II
-— VALUATION AND QUALIFYING ACCOUNTS AND RESERVESPENTAIR, INC. AND SUBSIDIARIES
(Thousands(Thousands of Dollars)
Balance (A) At Charged Changes Balance Beginning to Costs Add At End Description of Period and Expenses Deductions (Deduct) of Period Allowance for doubtful accounts Year Ended December 31 Balance (A) At Charged to Changes Balance Beginning Costs and Add At End Description of period Expenses Deductions (Deduct) of PeriodAllowance for1999 $ 10,858 $ 5,490 $ 2,918 $ 4,145 $ 17,575 1998 $12,446 $1,686 $4,068 $794 $10,858 doubtful accounts12,446 1,686 4,068 794 10,858 1997 7,348 2,406 1,687 4,379 12,446 1996 7,840 498 1,546 556 7,348(A) Primarily assumed or established in connection with acquisitions.
53