UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 | | |
| | | For the Fiscal Year Ended December 31, 20052006 | | |
orOR
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 | | |
Commission file number 1-11625
Pentair, Inc.
(Exact name of Registrant as specified in its charter)
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| Minnesota | | 41-0907434 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification number) |
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5500 Wayzata Boulevard, Suite 800,
Golden Valley, Minnesota
(Address of principal executive offices) | | 55416-1259
(Zip code) |
Registrant’s telephone number, including area code:(763) 545-1730
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Name of each exchange on which registered |
Common Shares, $0.162/3 par value | | | New York Stock Exchange | |
| Preferred Share Purchase Rights | | | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in PART III of thisForm 10-K or any amendment to thisForm 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined inRule 12b-2 of the Act). Large accelerated filer þ Accelerated filer o Non-accelerated filer o
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þ Large accelerated filer o Accelerated filer o Non-accelerated filer | |
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). Yes o No þ
Aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of $42.62$34.19 per share as reported on the New York Stock Exchange on July 2, 20051, 2006 (the last day of Registrant’s most recently completed second quarter): $4,077,996,205$3,256,840,095
The number of shares outstanding of Registrant’s only class of common stock on February 17, 200616, 2007 was 101,456,370.99,893,254.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the company’sRegistrant’s definitive proxy statement for its annual meeting to be held on May 4, 2006,3, 2007, are incorporated by reference in thisForm 10-K in response to Part III, ITEM 10, 11, 12, 13 and 14.
Pentair, Inc.
��
Annual Report onForm 10-K
For the Year Ended December 31, 20052006
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PART I
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ItemITEM 1. | BusinessBUSINESS |
GENERAL
Pentair, Inc. is a focused diversified industrial manufacturing company comprised of two operating segments: Water and Technical Products. Our Water Group is a global leader in providing innovative products and systems used worldwide in the movement, storage, treatment, storage and enjoyment of water. Our Technical Products Group, formerly referred to as our Enclosures Group, is a leader in the global enclosures market,and thermal management markets, designing and manufacturing standard, modified and custom enclosures that house and protect sensitive electronics and electrical components; thermal management products; and accessories.
Pentair Strategy
Our basic operating strategies include:strategy is to achieve benchmark Return on Invested Capital (ROIC) performance for diversified industrial manufacturing companies by:
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| • | Thebuilding operational excellence through the Pentair Integrated Management System (PIMS) consisting of strategy deployment, lean enterprise, and IGNITE, which is our process to drive organic growth; |
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| • | driving long-term growth in sales, income and cash flows, driven bythrough internal growth initiatives and acquisitions; |
| • | developing new products and enhancing existing products; |
| • | new product development and ongoing product enhancement; |
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| • | focus onpenetrating attractive growth markets, particularly international; |
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| • | expanding multi-channel distribution; and |
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| • | proactiveproactively managing our business portfolio, management of our businesses, including consideration of new business platforms. |
Pentair Financial Objectives
Our long-term financial objectives are to:
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| • | Achieve 5-8% annual organic sales growth, plus acquisitions |
| • | Achieve benchmark financial performance: |
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• Achieve benchmark financial performance: | | |
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| | • | | EBIT Margin | | 14% |
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| | • | | Return on Invested Capital (ROIC)(pre-tax) | | 20% |
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| | • | | Free Cash Flow (FCF) | | 100% conversion of net income |
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| | • | | EPS Growth | | 10+% (sales growth plus margin expansion) |
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| | • | | Debt/Total Capital | | £40% |
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| • | Achieve 5% annual productivity improvement on core business cost
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Unless the context otherwise indicates, references herein to “Pentair”, the “Company,” and such words as “we,” “us,” and “our” include Pentair, Inc. and its subsidiaries. Pentair is a Minnesota corporation that was incorporated in 1966.
BUSINESS AND PRODUCTS
Business segment and geographical financial information is contained in ITEM 8, Note 14 of the Notes to Consolidated Financial Statements, included in thisForm 10-K.
WATER GROUP
Our Water Group is a global leader in providing innovative products and systems used worldwide in the movement, storage, treatment, storage, and enjoyment of water. Our Water Group offers a broad array of products and systems to multiple markets and customers. The core competencies of our Water Group center around flow and filtration. We have identified a target water industrymarket totaling $50$60 billion,
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with our current primary focus on three markets: Pump (approximately 40% of segmentgroup sales), Filtration (approximately 30% of group sales), and Pool & Spa (approximately 30% of segment sales), and Filtration (approximately 30% of segmentgroup sales).
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Pump Market
We address the Pump market with products ranging from light duty diaphragm pumps to high-flow turbine pumps and solid handling pumps designed for water and wastewater applications, and agricultural spraying, as well as pressure tanks for residential applications. Applications for our broad range of products include pumps for residential and municipal wells, water treatment, wastewater solids handling, pressure boosting, engine cooling, fluid delivery, circulation, and transfer.
Brand names for the Pump market include STA-RITE®, Myers®, Flotec®, Aurora®, Hypro®, Hydromatic®, Fairbanks Morsetm, Flotec®, Hypro®, Water Ace®, Berkeley®, Aermotortm, Water Ace®, Layne & Bowler®, Simer®, Verti-line®, Sherwood®, SherTech®, Diamond®, FoamPro®, Ongatm, Nocchitm, Shur-Dri®, SHURflo®, Edwards®, JUNG PUMPEN®, oxynaut®, and EdwardsJUNG®.
Filtration Market
We address the Filtration market with control valves, tanks, filter systems, filter cartridges, pressure vessels, and specialty dispensing pumps providing flow solutions for specific end-user market applications including residential, commercial, foodservice, industrial, recreation vehicles, marine, and aviation. Filtration products are used in the manufacture of water softeners; filtration, deionization, and desalination systems; and industrial, commercial and residential water filtration applications.
Brand names for the Filtration market include Everpure®, SHURflo®, Fleck®, CodeLine®, Structuraltm, Pentek®, SIATAtm, WellMatetm, American Plumber®, Armor®, OMNIFILTER®, Park Internationaltm, Fibredynetm, and Krystil Klear®.
Pool & Spa Market
We address the Pool & Spa market with a complete line of commercial and residential pool/spa equipment and accessories including pumps, filters, heaters, lights, automatic controls, automatic pool cleaners, commercial deck equipment, barbeque deck equipment, aquatic pond products and accessories, pool tile and interior finishing surfaces, maintenance equipment, spa/jetted tub hydrotherapy fittings, and pool/spa accessories. Applications for our pool products include commercial and residential pool and spa construction, maintenance, repair, service, and retail.service.
Brand names for the Pool & Spa market include Pentair Pool Products®, Pentair Water Pool and Spatm, National Pool Tile Group®, Pentair Aquatics®, STA-RITE®, Paragon Aquatics®, Pentair Spa & Bathtm, Kreepy Krauly®, Compool®, WhisperFlo®, PoolShark®, Legendtm, Rainbowtm, Ultra Jet®, Vico®, FIBERworks®, and IntelliTouchtm.
Filtration Market
We address the Filtration market with control valves, filtration components, tanks, pressure vessels, and specialty dispensing pumps providing flow solutions for specific end-user market applications including residential, commercial, foodservice, recreation vehicles, marine, and aviation. Filtration products are used in the manufacture of water softeners; filtration, deionization, and desalination systems; and industrial and residential water filtration applications.
Brand names for the Filtration market include Fleck®, SIATAtm, CodeLineand Acu-Trol®, Structuraltm, WellMatetm, American Plumber®, Armor®, Everpure®, Pentek®, OMNIFILTER®, Park Internationaltm, SHURflo®, and Fibredynetm.
Customers
Our Water Group distributes its products through wholesale distributors, retail distributors, original equipment manufacturers, and home centers. Information regarding significant customers in our Water Group is contained in ITEM 8, Note 14 of the Notes to Consolidated Financial Statements, included in thisForm 10-K.
Seasonality
We experience seasonal demand in a number of markets within our Water Group. End userEnd-user demand for pool/spapool equipment follows warm weather trends and is at seasonal highs from MarchApril to July.August. The magnitude of the sales spike is partially mitigated by effective use of the distribution channel by employing some advance sales “early buy” programs (generally including extended payment termsand/or additional discounts). Demand for residential and agricultural water systems is also impacted by weather patterns, particularly related toby heavy flooding and droughts.
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Competition
Our Water Group faces numerous domestic and international competitors, some of which have substantially greater resources. Consolidation, globalization, and outsourcing are continuing trends in the water industry. Competition in 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 for commercial pumps. For municipal pumps, competition
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focuses on performance to meet required specifications, service, and price. Competition in water treatment and filtration components focuses on product performance and design, quality, delivery, and price. For pool and spa equipment, there are a significant number of competitors.competition focuses on brand names, product performance, quality, and price. We compete by offering a wide variety of innovative and high-quality products, which are competitively priced. We believe our distribution channels and reputation for quality also contribute to our continuing industry penetration.
TECHNICAL PRODUCTS GROUP
Our Technical Products Group formerly referred to as our Enclosures Group, is a global leader in the global enclosures market that designs, manufactures, and thermal management markets, designing and manufacturing standard, modified, and custom enclosures that house and protect sensitive controls,electronics and electrical components; thermal management products; and accessories. We have identified a target market in excess of $30 billion. Our Technical Products Group focuses its business portfolio on four primary industries: Commercial &and Industrial (55% of segmentgroup sales), Telecom and Datacom (25% of segmentgroup sales), Electronics (15% of segmentgroup sales), and Networking (5% of segmentgroup sales). The primary brand names for the Technical Products Group are: Hoffman®, Schroff®, Pentair Electronic Packagingtm, and Taunustm. The thermal businesses we acquired in December 2005 go to market under four brand names:, McLean®, Electronic Solutionstm, Birtchertm, and Aspen Motiontm. Products and related accessories of the Technical Products Group include metallic and composite enclosures, cabinets, cases, subracks, backplanes, heat exchangers, and blowers. Applications served include industrial machinery, data communications, networking, telecommunications, test and measurement, automotive, medical, security, defense, and general electronics.
Customers
Our Technical Products Group distributes its products through original equipment manufacturers, electrical and data contractors, and electrical and electronic components distributors.distributors, and original equipment manufacturers. Information regarding significant customers in our Technical Products Group is contained in ITEM 8, Note 14 of the Notes to Consolidated Financial Statements, included in thisForm 10-K.
Seasonality
Our Technical Products Group is not significantly impacted by seasonal demand fluctuations.
Competition
Competition in the technical products markets can be intense, particularly in telecom and datacom markets, where product design, prototyping, global supply, price competition, and customer service are significant factors. Our Technical Products Group has continued to focus on cost control and improving profitability on a sequential quarter to quarter basis.profitability. Recent growth in the Technical Products Group is a result of acquisitions, overall market growth, new product development, continued channel penetration, growth in targeted market segments, new product development,and geographic expansion, acquisitions, and overall market growth.expansion. Consolidation, globalization, and outsourcing are visible trends in the technical products marketplace and typically play to the strengths of a large and globally positioned supplier. We believe our Technical Products Group has the broadest array of enclosures products available for commercial and industrial uses.
Business segment and geographical financial information is contained in ITEM 8, Note 14 of the Notes to Consolidated Financial Statements, included in thisForm 10-K.
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RECENT DEVELOPMENTS
Growth of Our Businessour business
We continually look at each of our businesses to determine whether they fit with our evolving strategic vision. Our primary focus is on businesses with strong fundamentals and growth opportunities, especially in international markets. We seek growth through product and service innovation, market expansion, and acquisitions. Acquisitions have played an important part in the growth of our business, and we expect acquisitions will continue to be an important part of our growth in the future.future growth.
Acquisitions
On December 11, 2006 we entered into an agreement to acquire all of the share capital of Jung Pumpen GmbH, a German-based manufacturer of municipal and residential wastewater pumps and related products, subject to German Federal Cartel Office approval. The acquisition was completed on February 2, 2007 for approximately $227 million, net of cash acquired of $13 million, excluding transaction costs and subject to a post-closing net asset value adjustment.
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On December 1, 2005,April 12, 2006, we acquired, McLean Thermal Management, Aspen Motion Technologies, and Electronic Solutions businesses from APW, Ltd. (collectively, “Thermal”) for $140.0 million, including a cash payment of $138.9 million and transaction costs of $1.1 million. These businesses provide thermal management solutions and integration services to the telecommunications, data communications, medical, and security markets as part of our Technical Products Group.Water Group, the assets of Geyer’s Manufacturing & Design Inc. and FTA Filtration, Inc. (together “Krystil Klear”), two privately-held companies, for $15.5 million in cash. Krystil Klear expands our industrial filtration product offering to include a full range of steel and stainless steel tanks which house filtration solutions. Goodwill recorded as part of the initial purchase price allocation was $93.7$9.2 million, all of which is tax deductible. Preliminary estimates of identifiable intangible assets acquired as part of the acquisition were $18.9 million, including definite-lived intangibles, such as proprietary technology and customer relationships, of $9.8 million with a weighted average amortization period of 10.0 years. We continue to evaluate the purchase price allocation for the ThermalKrystil Klear acquisition, including intangible assets, contingent liabilities, plant rationalization costs, and property, plant and equipment. We expect to revise the purchase price allocation as better information becomes availableavailable.
During 2006, we completed several other small acquisitions totaling $14.2 million in 2006.cash and notes payable, adding to both our Water and Technical Products Groups. Total goodwill recorded as part of the initial purchase price allocations was $7.9 million, of which $2.9 million is tax deductible. We continue to evaluate the purchase price allocations for these acquisitions and expect to revise the purchase price allocations as better information becomes available.
On December 1, 2005, we acquired, as part of our Technical Products Group, the McLean Thermal Management, Aspen Motion Technologies, and Electronic Solutions businesses from APW, Ltd. (collectively, “Thermal”) for $143.9 million, including a cash payment of $140.6 million and transaction costs of $3.3 million. These businesses provide thermal management solutions and integration services to the telecommunications, data communications, medical, and security markets. Final goodwill recorded as part of the purchase price allocation was $71.1 million, all of which is tax deductible. Final identifiable intangible assets acquired as part of the acquisition were $45.6 million, including definite-lived intangibles, such as proprietary technology and customer relationships, of $23.1 million with a weighted average amortization period of approximately 12 years.
On February 23, 2005, we acquired, as part of our Water Group, certain assets of Delta Environmental Products, Inc. and affiliates (collectively, “DEP”), a privately-held company, for $10.3 million, including a cash payment of $10.0 million, transaction costs of $0.2 million, and debt assumed of $0.1 million. The DEP product line addressesaddressees the water and wastewater markets and is part of our Water Group. Goodwillmarkets. Final goodwill recorded as part of the initial purchase price allocation was $9.3$7.2 million, all of which is tax deductible.
Effective July 31, 2004, we completed the acquisition of all of the shares of capital stock of WICOR, Inc. (“WICOR”) from Wisconsin Energy Corporation (“WEC”) for $874.7 million, including a cash payment of $871.1 million, transaction costs of $11.2 million, and debt assumed of $21.6 million, less a favorable final purchase price adjustment of $14.0 million and less cash acquired of $15.2 million. This includes an additional $0.4 million in transaction costs recorded in the first three quarters of 2005. WICOR manufacturesmanufactured water system, filtration, and pool equipment products primarily under the STA-RITE®, SHURflo® and Hypro® brands.
On December 31, 2003, we acquired all of the common stock of Everpure, Inc. (“Everpure”), from United States Filter Corporation, a unit of Veolia Environnement, for $218.9 million in cash, less cash acquired of $5.5 million and transaction costs of $2.2 million. Everpure is a leading global provider of water filtration products for the commercial and consumer sectors.
During 2003, we also completed four product line acquisitions in our Water Group for total consideration of $21.4 million in cash including transaction costs: Hydrotemp Manufacturing Co., Inc., Letro Products, Inc. and certain assets of TwinPumps, Inc., and K&M Plastics, Inc.
Also refer to ITEM 7, Management’s Discussion and Analysis, and ITEM 8, Note 2 of the Notes to Consolidated Financial Statements, included in thisForm 10-K.
Discontinued Operations/Divestituresoperations/divestitures
Effective after the close of business on October 2, 2004, we completed the sale of our former Tools Group to The Black & Decker Corporation (“BDK”). In January 2006, pursuant to the purchase agreement for the sale of our former Tools Group, we completed the repurchase of a manufacturing facility in Suzhou, China from BDK for approximately $796.8 million in cash, including a $21.8 million interim$5.7 million. We recorded no gain or loss on the repurchase. In March 2006, we completed an outstanding net asset value increase, subjectarbitration with BDK relating to post-closing adjustments. The Tools Group was comprised of the Porter-Cable®, Delta®, DeVilbiss Air Power, Oldham Saw, and FLEX® brands, among others. We used the proceeds from the Tools Group sale and borrowings under our credit facility to repay, on October 4, 2004, an
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$850 million bridge facility used to acquire WICOR. In the fourth quarter of 2004, we recorded a loss on the disposal of the Tools Group of $6.0 million, net of a tax provision of $9.0 million. In July 2005, we paid $10.4 million to BDK in purchase price adjustments related tofor the sale of our former Tools Group. We currently have an outstanding dispute withThe decision by the arbitrator constituted a final resolution of all disputes between BDK overand us regarding the net asset value. We paid the final net asset value purchase price adjustment pursuant to the purchase agreement of $16.1 million plus interest of $1.1 million in March 2006, resulting in an incremental pre-tax loss on disposal of discontinued operations of $3.4 million, or $1.6 million net of tax. In the Tools Group and may be required to repay additional proceeds. We believe our accrual at December 31, 2005 is an adequate reserve amount for any potential liability. We expect resolution of this matter in the firstthird quarter of 2006.2006, we resolved a prior year tax item that resulted in a $1.4 million income tax benefit related to our former Tools Group.
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In 2001, we completed the sale of theour former Service Equipment businesses (Century Mfg. Co./Lincoln Automotive Company) to Clore Automotive, LLC for total consideration of $18.2 million and we completed the sale of Lincoln Industrial to affiliates of The Jordan Company LLC (Jordan), other investors, and members of management of Lincoln Industrial for total consideration of $78.4 million, including the retention of a preferred stock interest. In January 2003, we paid $2.4 million for a final adjustment to the selling price related to the disposition of Lincoln Industrial, which was offset by a previously established reserve.LLC. In the fourth quarter of 2003, we reported an additional loss from discontinued operations of $2.9 million primarily due to a reduction in estimated proceeds related to exiting the remaining two remaining facilities. In March 2006, we exited a leased facility from our former Service Equipment business resulting in a net cash outflow of $2.2 million and an immaterial gain from disposition.
Also refer to ITEM 7, Management’s Discussion and Analysis, and ITEM 8, Note 3 of the Notes to Consolidated Financial Statements, included in thisForm 10-K.
INFORMATION REGARDING ALL BUSINESS SEGMENTS
Backlog
Our backlog of orders from continuing operations as of December 31 by segment was:
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| | | 2005 | | 2004 | | $ Change | | % Change | | |
| In thousands | | | 2006 | | 2005 | | $ change | | % change | |
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| Water | | $ | 165,737 | | | $ | 172,607 | | | $ | (6,870 | ) | | | (4.0 | %) | | $ | 238,191 | | | $ | 165,737 | | | $ | 72,454 | | | | 43.7 | % |
| Technical Products | | | 106,587 | | | | 75,151 | | | | 31,436 | | | | 41.8 | % | | | 100,205 | | | | 106,587 | | | | (6,382 | ) | | | (6.0 | )% |
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| Total | | $ | 272,324 | | | $ | 247,758 | | | $ | 24,566 | | | | 9.9 | % | | $ | 338,396 | | | $ | 272,324 | | | $ | 66,072 | | | | 24.3 | % |
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The $6.9$72.5 million decreaseincrease in Water Group backlog was primarily due to better than anticipated fourth quarter 2006 early buy orders in our pool business that are scheduled to ship in the timingfirst quarter of filtration2007, growth in Asian markets, and pool product orders.increased backlog for pumps used in municipal market applications. The $31.4$6.4 million increasedecrease in Technical Products Group backlog reflectsreflected a decline in orders from the acquisition of the thermal management businesses from APW, as well as order growth in the Group’s Asian businesses, particularly China.telecommunications market and data communications projects which have reached end-of-life. Due to the relatively short manufacturing cycle and general industry practice for the majority of our businesses, backlog, which typically represents approximately 30 days of shipments, is not deemed to be a significant item for our business.item. A substantial portion of our revenues result from orders received and product sold in the same month. We expect that most of our backlog at December 31, 20052006 will be filled in 2006.2007.
Research and Developmentdevelopment
We conduct research and development activities in our own facilities, which consist primarily of the development of new products, product applications, and manufacturing processes. Research and development expenditures during 2006, 2005, and 2004 and 2003 were $58.1 million, $46.0 million, $31.5 million, and $22.9$31.5 million, respectively.
Environmental
Environmental matters are discussed in ITEM 3, ITEM 7, and in ITEM 8, Note 15 of the Notes to Consolidated Financial Statements, included in thisForm 10-K.
Raw Materialsmaterials
The principal materials used in the manufacturing of our products are electric motors, mild steel, stainless steel, electronic components, plastics (resins, fiberglass, epoxies), and paint (powder and liquid). In addition to the purchase of raw materials, we purchase some finished goods for distribution through our sales channels.
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The materials used in the various manufacturing processes are purchased on the open market, and the majority are available through multiple sources and are in adequate supply. We have not experienced any significant work stoppages to-date due to shortages of materials. We have certain long-term commitments, principally price commitments, for the purchase of various component parts and raw materials and believe that it is unlikely that any of these agreements would be terminated prematurely. Alternate sources of supply at competitive prices are available for most materials for which long-term commitments exist, and we believe that the termination of any of these commitments would not have a material adverse effect on operations.
Certain commodities, such as steelmetals and resin, are subject to market and duty-driven price fluctuations. We manage these fluctuations through several mechanisms, including long-term agreements withescalator/de-escalator clauses. Prices for raw materials, such as steel, carbon,metals and resins, may continue to trend higher in the future.
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Intellectual Propertyproperty
Patents, non-compete agreements, proprietary technologies, customer relationships, trade marks, trade names, and brand names are important to our business. However, we do not regard our business as being materially dependent upon any single patent, non-compete agreement, proprietary technology, customer relationship, trade mark, trade name, or brand name.
Patents, patent applications, and license agreements will expire or terminate over time by operation of law, in accordance with their terms or otherwise. We do not expect the termination of patents, patent applications, and license agreements to have a material adverse effect on our financial position, results of operations or cash flows.
Employees
As of December 31, 2005, Pentair, Inc. and its subsidiaries2006, we employed an aggregate of approximately 14,70014,800 people worldwide. Total employees in the United States were approximately 10,700,9,100, of whom approximately 900 are represented by six different trade unions having collective bargaining agreements. Generally, labor relations have been satisfactory.
Captive Insurance Subsidiary
We insure certain general and product liability, property, workers’ compensation, and automobile liability risks through our regulated wholly-owned captive insurance subsidiary, Penwald Insurance Company (Penwald)(“Penwald”). Reserves for policy claims are established based on actuarial projections of ultimate losses. Accruals with respect to liabilities insured by third parties, such as liabilities retainedarising from acquired businesses,pre-1992 pre-Penwald liabilities and those of certain foreign operations, are established without regard to the availability of insurance.
Matters pertaining to Penwald are discussed in ITEM 3 and ITEM 8, Note 1 of the Notes to Consolidated Financial Statements, included in thisForm 10-K.
Available Informationinformation
We make available free of charge (other than an investor’s own Internet access charges) through our Internet website (http://www.pentair.com)www.pentair.com) our Annual Report onForm 10-K, Quarterly Reports onForm 10-Q, Current Reports onForm 8-K, and if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Reports of beneficial ownership filed by our directors and executive officers pursuant to Section 16(a) of the Securities Exchange Act of 1934 are also available on our website. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report onForm 10-K.
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ItemITEM 1A. | Risk FactorsRISK FACTORS |
You should carefully consider the following risk factors and warnings before making an investment decision. If any of the risks described below actually occur, our business, financial condition, results of operations or prospects could be materially adversely affected. In that case, the price of our securities could decline and you could lose all or part of your investment. You should also refer to the other information set forth in this document.
Demand for our products will be affected by general economic conditions.
Demand for our residentialWe compete globally in varied markets. Among these, the most significant are North American industrial and commercial products is influenced by many economic conditions, including but not limited to new construction activitymarkets (for both the Water and Technical Products Groups) and the levelNorth American residential market (for the Water Group). Economic conditions in the United States affect the robustness of repair and remodeling activity. The level of new construction and repair and remodeling activity is affected by a number ofour North American markets; important factors beyond our control, such asinclude the overall strength of the economy (includingand our customers’ confidence in the economy by our customers),economy; industrial and municipal capital spending; the strength of the residential and commercial real estate markets, institutional building activity,markets; the age of existing housing stock,stock; unemployment rates,rates; availability of consumer financingfinancing; and, interest rates. Any declines in newNew construction for residential housing or commercial construction starts or demand for replacement building and home improvement products may adversely impact us,activity fell dramatically in 2006, which reduced revenue growth in our Water Group, especially in the pool and there can be nospa and pump markets we address. We cannot give any assurance that any such adverse effects would not be material and wouldwe will not continue for an indeterminate period of time.to encounter
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weakness in these markets. Further, while we attempt to minimize our exposure to economic or market fluctuations by serving a balanced mix of end markets and geographic regions, we cannot assure you that a significant or sustained downturn in a specific end market or geographic region would not have a material adverse effect on us.
Our businesses operate in highly competitive markets, so we may be forced to cut prices or to incur additional costs.
Our businesses generally face substantial competition in each of their respective markets. Competition may force us to cut prices or to incur additional costs to remain competitive. We compete on the basis of product design, quality, availability, performance, customer service and price. Present or future competitors may have greater financial, technical or other resources which could put us at a disadvantage in the affected business or businesses. We cannot assure you that these and other factors will not have a material adverse effect on our future results of operations.
Our inability to sustain consistent organic growth could adversely affect our financial performance.
In 2006 and 2005, our organic growth was generated in part from expanding international sales, entering new distribution channels, and introducing new products. To grow more rapidly than our end markets, we will have to continue to expand our geographic reach, further diversify our distribution channels, continue to introduce new products, and increase sales of existing products to our customer base. We may not be able to successfully meet those challenges, which could adversely affect our ability to sustain consistent organic growth. If we are unable to sustain consistent organic growth, we will be less likely to meet our stated revenue growth targets, which could adversely affecttogether with any resulting impact on our net income growth, and, in turn,would likely adversely affect the market price of our stock.
Our inability to complete or successfully complete and integrate acquisitions could adversely affect our financial performance.
A significant percentage of our net sales growth in 20052006 and 20042005 was generated as a result of acquisitions completed during thosein 2004 or subsequent periods, including our acquisition of WICOR and Everpure.the Thermal businesses. We may not be able to sustain this level of growth from acquisition activity in the future. We intend to continue to evaluate strategic acquisitions primarily in our current business segments, and we may consider acquisitions outside of these segments as well. Our ability to expand through acquisitions is subject to various risks, including the following:
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| • | increased competition for acquisitions, especially in the water industry; |
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| • | higher acquisition prices; |
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| • | lack of suitable acquisition candidates in targeted product or market areas; |
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| • | diversion of management time and attention to acquisitions and acquired businesses; |
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| • | inability to integrate acquired businesses effectively or profitably; and |
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| • | inability to achieve anticipated synergies or other benefits from acquisitions. |
Acquisitions could have a material adverse effect on our operating results, particularly in the fiscal quarters immediately following the acquisitions, while we attempt to integrate operations of the acquired businesses into our operations. Once integrated, acquired operations may not achieve the levels of profitability originally anticipated.
Material cost and other inflation could adversely affect our results of operations.
We are experiencing material cost and other inflation in a number of our businesses. We are striving for greater productivity improvements and implementing selective increases in selling prices to help mitigate cost increases in base materials such as steel, resins, ocean freightmetals and fuel,other costs such as pension, health care and insurance. We also
9
are continuing to implement our excellence in operations initiatives in order to continuously reduce our costs. We cannot assure you, however, that these actions will be successful to managein managing our costs or increaseincreasing our productivity. Continued cost inflation or failure of our initiatives to generate cost savings or improve productivity may negatively impact our results of operations.
Seasonality of sales and weather conditions may adversely affect our financial results.
We experience seasonal demand in a number of markets within our Water Group. End-user demand for pool/spapool equipment follows warm weather trends and is at seasonal highs from MarchApril to July.August. The magnitude of the sales spike is partially mitigated by effective use of the distribution channel by employing some advance sales “early buy” programs (generally including extended payment termsand/or additional discounts). Demand for residential and agricultural water systems is also impacted by waterweather patterns, particularly related toby heavy flooding and droughts. We cannot assure you that seasonality and weather conditions will not have a material adverse effect on our results of operations.
Intellectual property challenges may hinder product development and marketing.
Patents, non-compete agreements, proprietary technologies, customer relationships, trade marks, trade names, and brand names are important to our business. Intellectual property protection, however, may not preclude competitors from developing products similar to ours or from challenging our names or products. Over the past few years, we have noticed an increasing tendency for participants in our markets to use conflicts over and challenges to intellectual property as a means to compete. Patent and trademark challenges increase our costs to develop, engineer and market our products.
Our results of operations may be negatively impacted by litigation.
Our business exposes us to potential litigation, especially product liability suits that are inherent in the design, manufacture, and sale of our products.products, such as the Horizon litigation discussed in ITEM 3 of this annual report onForm 10-K. While we currently maintain what we believe to be suitable product liability insurance, we cannot be assuredassure you that we will be able to maintain this insurance on acceptable terms or that this insurance will provide adequate protection against potential liabilities. In addition, we self-insure a portion of product liability claims. A series of successful claims against us could materially and adversely affect our product reputation, and our financial condition, results of operations, and cash flows.
We may be required to make payments in respect of businesses that we have sold.
We have sold a number of businesses over the last ten years, including the sale of our former Tools Group to BDK in October 2004. In this and other dispositions, we typically agree to indemnify the buyers with respect to certain matters relating to the businesses that we have sold, and we may from time to time be required to make payments to the buyers under those indemnities. To the extent we are required to make any
9
such payments in the future, those payments could be substantial, which could require us to borrow additional amounts at unfavorable borrowing terms and cause a significant decrease in our liquidity, both of which could severely harm our business.
The availability and cost of capital could have a negative impact on our continued growth.
Our plans to continue our growth in our chosen markets will require additional capital for future acquisitions, capital expenditures for existing businesses, growth of working capital, and continued international and regional expansion. In the past, we have financed our growth primarily through debt financings.financing. Any significant future acquisitions will require us to expand our debt financing resources or to issue equity securities. Our financial results may be adversely affected if interest costs under our debt financings are higher than the income generated by acquisitions or other internal growth. In addition, future acquisitions could be dilutive to your equity investment if we issue additional stock to fund acquisitions. We cannotThere can be assuredno assurance that we will be able to issue equity securities or to obtain future debt financing at favorable terms. Without sufficient financing, we will not be able to pursue our growth strategy, which will limit our growth and revenues in the future.
Our international operations are subject to foreign market and currency fluctuation risks.
We expect the percentage of our sales outside of North America to increase in the future. Over the past few years, the economies of manysome of the foreign countries in which we do business have had slower growth than the U.S. economy. The European Union currently accounts for the majority of our foreign sales and income. Ourincome, in which our most significant European market is Germany, whereGermany. In addition, we have a significant and growing business in the capital goods market has been very slow.Asia-Pacific area. We cannot predict how changing European market conditions in these regions will impact our financial results.
10
We are also exposed to the risk of fluctuation of foreign currency exchange rates which may affect our financial results. As of December 31, 2005,2006, we held immaterial positions in foreign exchange-forward contracts.
We are exposed to political, economic and other risks that arise from operating a multinational business.
Sales outside of North America, including export sales from North American businesses, accounted for approximately 22%23% of our net sales in 2005.2006. Further, certainmost of our businesses obtain some raw materials and finished goods from foreign suppliers. Accordingly, our business is subject to the political, economic and other risks that are inherent in operating in numerous countries. These risks include:
| | |
| • | the difficulty of enforcing agreements and collecting receivables through foreign legal systems; |
| |
| • | trade protection measures and import or export licensing requirements; |
| |
| • | tax rates in certain foreign countries that exceed those in the U.S. and the imposition of withholding requirements on foreign earnings; |
| |
| • | the possibility of terrorist action against us or our operations; |
|
| • | the imposition of tariffs, exchange controls or other restrictions; |
| |
| • | difficulty in staffing and managing widespread operations and the application of foreigninnon-U.S. labor regulations; markets; |
| |
| • | the protection of intellectual property in foreign countries may be more difficult; |
| |
| • | required compliance with a variety of foreign laws and regulations; and |
| |
| • | changes in general economic and political conditions in countries where we operate, particularly in emerging markets. |
Our business success depends in part on our ability to anticipate and effectively manage these and other risks. We cannot assure you that these and other factors will not have a material adverse effect on our international operations or on our business as a whole.
10
We are exposed to potential environmental liabilities and litigation.
Compliance with environmental regulations could require us to dischargesatisfy environmental liabilities, increase the cost of manufacturing our products or otherwise adversely affect our business, financial condition and results of operations. We are subject to federal, state, local and foreign laws and regulations governing public and worker health and safety and the indoor and outdoor environment. Any violations of these laws by us could cause us to incur unanticipated liabilities that could harm our operating results and cause our business to suffer. We are also required to comply with various environmental laws and maintain permits, some of which are subject to discretionary renewal from time to time, for many of our businesses, and we could suffer if we are unable to renew existing permits or to obtain any additional permits that we may require.
We have been named as defendants, targets, or potentially responsible parties (PRPs)(“PRP”) in a number of environmentalclean-ups relating to our current or former business units. We have disposed of a number of businesses over the last tenin recent years and, in certain cases, we have retained responsibility and potential liability for certain environmental obligations. We have received claims for indemnification from certain purchasers. We may be named as a PRP at other sites in the future for existing business units, as well as both divested and acquired businesses.
We cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmentalclean-up costs and liabilities will not exceed the amount of our current reserves.
11
Provisions of our Restated Articles of Incorporation, Bylaws and Minnesota law could deter takeover attempts.
Anti-takeover provisions in our charter documents, under Minnesota law, and in our shareholder rights plan could prevent or delay transactions that our shareholders may favor.
Our Restated Articles of Incorporation and Bylaws include provisions relating to the election, appointment and removal of directors, as well as shareholder notice and shareholder voting requirements which could delay, prevent or make more difficult a merger, tender offer, proxy contest or other change of control. In addition, our common share purchase rights could cause substantial dilution to a person or group that attempts to acquire us, which could deter some acquirers from making takeover proposals or tender offers. Also, the Minnesota Business Corporations Act contains control share acquisition and business combination provisions which could delay, prevent or make more difficult a merger, tender offer, proxy contest or other change of control. Our shareholders might view any such a transaction as being in their best interests since the transaction could result in a higher stock price than the current market price for our common stock.
| |
ItemITEM 1B. | Unresolved Staff CommentsUNRESOLVED STAFF COMMENTS |
None.
| |
ItemITEM 2. | PropertiesPROPERTIES |
Our principal executive office is in leased premises located in Golden Valley, Minnesota. OurWe carry out our Water Group manufacturing operations are carried out at approximately 2524 plants located throughout the United States and at 2219 plants located in 1110 other countries. In addition, our Water Group has 5467 distribution facilities and 17 sales offices located in numerous countries throughout the world. OurWe carry out our Technical Products Group manufacturing operations are carried out at approximately 8 plants located throughout the United States and 89 plants located in 67 other countries. In addition, our Technical Products Group has 911 distribution facilities and 2831 sales offices located in numerous countries throughout the world.
We believe that our production facilities are suitable for their purpose and are adequate to support our businesses.
11
| |
ItemITEM 3. | Legal ProceedingsLEGAL PROCEEDINGS |
We have been made parties to a number of actions filed or have been given notice of potential claims relating to the conduct of our business, including those pertaining to commercial disputes, product liability, environmental, safety and health, patent infringement, and employment matters.
We comply with the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 5,Accounting for Contingencies, and related guidance, and record liabilities for an estimated loss from a loss contingency where the outcome of the matter is probable and can be reasonably estimated. Factors that are considered when determining whether the conditions for accrual have been met include the (a) nature of the litigation, claim, or assessment, (b) progress of the case, including progress after the date of the financial statements but before the issuance date of the financial statements, (c) opinions of legal counsel, and (d) management’s intended response to the litigation, claim, or assessment. Where the reasonable estimate of the probable loss is a range, we record the most likely estimate of the loss. When no amount within the range is a better estimate than any other amount, however, the minimum amount in the range is accrued. Gain contingencies are not recorded until realized.
While we believe that a material adverse impact on our consolidated financial position, results of operations, or cash flows from any such future charges is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future adverse ruling or unfavorable development could result in future charges that could have a material adverse impact. We do and will continue to periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential
12
impact on our consolidated financial position, results of operations, and cash flows for the proceedings and claims described in “Legal Proceedings” could change in the future.
Environmental
We have been named as defendants, targets, or potentially responsible parties (PRPs)(“PRP”) in a small number of environmentalclean-ups, in which our current or former business units have generally been givende minimisstatus. To date, none of these claims have resulted inclean-up costs, fines, penalties, or damages in an amount material to our financial position or results of operations. We have disposed of a number of businesses over the last tenin recent years and in certain cases, such as the disposition of the Cross Pointe Paper Corporation uncoated paper business in 1995, the disposition of the Federal Cartridge Company ammunition business in 1997, the disposition of Lincoln Industrial in 2001, and the disposition of the Tools Group in 2004, we have retained responsibility and potential liability for certain environmental obligations. We have received claims for indemnification from purchasers both of the paper business and the ammunition businessthese businesses and have established what we believe to be adequate accruals for potential liabilities arising out of retained responsibilities. We settled some of the claims in 2005 and 2003 andprior years; to date our recorded accrual wasaccruals have been adequate.
In addition, there are pendingongoing environmental issues at a limited number of sites, including one site acquired in the acquisition of Essef Corporation in 1999, which relatesrelate to operations no longer carried out at that site.the sites. We have established what we believe to be adequate accruals for remediation costs at this and otherthese sites. We do not believe that projected response costs will result in a material liability.
We may be named as a PRP at other sites in the future, for both divested and acquired businesses. When itthe outcome of the matter is probable and it is possible to provide reasonable estimates of our liability with respect to environmental sites, provisions have been made in accordance with generally accepted accounting principles in the United States. As of December 31, 2006 and 2005, and 2004, our undiscounted reserves for such environmental liabilities were approximately $5.6 million and $6.4 million, and $9.4 million, respectively, measured on an undiscounted basis.respectively. We cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmentalclean-up costs and liabilities will not exceed the amount of our current reserves.
12
Product Liability Claimsliability claims
We are subject to various product liability lawsuits and personal injury claims. A substantial number of these lawsuits and claims are insured and accrued for by Penwald, our captive insurance subsidiary. See discussion in ITEM 1 and ITEM 8, Note 1 of the Notes to Consolidated Financial Statements — Insurance subsidiary. Penwald records a liability for these claims based on actuarial projections of ultimate losses. For all other claims, accruals covering the claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are adjusted periodically as additional information becomes available. We have not experienced significant unfavorable trends in either the severity or frequency of product liability lawsuits or personal injury claims.
Horizon Litigationlitigation
Twenty-eight separate lawsuits involving 29 primary plaintiffs, a class action, and claims for indemnity by Celebrity Cruise Lines, Inc. (Celebrity)(“Celebrity”) were brought against Essef Corporation (Essef)(“Essef”) and certain of its subsidiaries prior to our acquisition of Essef in August 1999. Celebrity has alleged that it had sustained economic damages due to loss of use of the M/V Horizon while it was dry-docked.
The claims against Essef and its involved subsidiaries were 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 cruise ship, and allegations that the spa and filters contained Legionnaire’s disease bacteria that infected certain passengers on cruises from December 1993April 1994 through July 1994.
The individual and class claims by passengers were tried and resulted in an adverse jury verdict finding liability on the part of the Essef defendants (70%) and Celebrity and its sister company, Fantasia (together 30%).
After expiration of post-trial appeals, we paid all outstanding punitive damage awards of $7.0 million in the Horizon cases, plus interest of approximately $1.6 million, in January 2004. We had reserved for the amount of punitive damages awarded at the time of the Essef acquisition. A reserve for the $1.6 million interest cost was recorded in 2003. All of the personal injury cases have now been resolved through either settlement or trial.judgment.
13
The only remaining unresolved claims in this case arewere those brought by Celebrity for damages resulting from the outbreak. Celebrity filed an amended complaint seeking attorney fees and costs for prior litigation as well asout-of-pocket losses, lost profits, and loss of business enterprise value. Discovery commenced lateOn June 28, 2006, a jury returned a verdict against the Essef defendants in 2004,the total amount of $193.0 million for its claims forout-of-pocket expenses ($10.4 million), lost profits ($47.6 million) and lost enterprise value ($135.0 million). The verdict was completedexclusive of pre-judgment interest and attorneys’ fees.
On January 17, 2007, the Court ruled on our post-trial motions, granting judgment in August 2005.our favor as a matter of law with respect to Celebrity’s claimsclaim for damages exceed $185lost enterprise value ($135.0 million). The Court also granted a new trial with respect to lost profits ($47.6 million). In addition, the Court denied without prejudice our claim for contribution to reduce Celebrity’s recovery by 30% to account for its contributory negligence, with leave to renew the motion following retrial.
Celebrity’s claim for lost profits at trial amounted to approximately $60.3 million. Assuming mattersWe believe that actual lost profits suffered, if any, are substantially less. In a new trial, there remain questions of causation, standing, contribution and proof are decided against it, Essef’s experts believe thatof damages should amount to no more than approximately $16 to $25 million. Dispositive motions in this matter were filed in August 2005, which were decided in December 2005. Celebrity’s motion for indemnity from Essef for payments made by Celebrity for passenger claims of approximately $2.3 million was denied. Essef’s motion for dismissal of certain damage claims was denied without prejudice to renewal in conjunction with both parties’ motions to exclude certain expert testimony. We expect these motions to be adjudicated in March 2006. Trial has been scheduled for April 24, 2006.determined. We believe our reserves for any liability to Celebrity are adequate and intend to vigorously defend against theseCelebrity’s claims. We cannot predict whether Celebrity will appeal the ruling on lost enterprise value, nor whether and to what extent Essef may eventually be found liable on Celebrity’s claims.
Several issues have not been decided by the Court, including whether Celebrity is entitled to recovery of its attorneys’ fees and related costs in the passenger claims phase of the case ($4.1 million), and, with respect to pre-judgment interest, the length of the interest period and the rate of interest on any eventual judgment. We have assessed the impact of the ruling on our previously established reserves for this matter and, based on information available at this time, have not changed our reserves following this ruling, except to take into account quarterly interest accruals.
We believe that any judgment we pay in this matter would be tax-deductible in the year paid or in subsequent years. In addition to the impact of any loss on this matter on our earnings per share when recognized, we may need to borrow funds from our banks or other sources to pay any judgment finally determined after exhaustion of all appeals. We expect that we would have available adequate funds to allow us to do so, based on discussions with our lending sources and our estimates of the results of our business operations over the foreseeable future.
| |
ItemITEM 4. | Submission of Matters to a Vote of Security HoldersSUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
1314
EXECUTIVE OFFICERS OF THE REGISTRANT
Current executive officers of Pentair, their ages, current position, and their business experience during at least the past five years are as follows:
| | | | | |
Name | | Age | | Current Position and Business Experience |
| |
| Randall J. Hogan | | 5051 | | Chief Executive Officer since January 2001 and Chairman of the Board effective May 1, 2002; President and Chief Operating Officer, December 1999 — December 2000; Executive Vice President and President of Pentair’s Electrical and Electronic Enclosures Group, March 1998 — December 1999; United Technologies’ 1994 — 1997:Technologies Carrier Transicold President 1995 — 1997; Pratt & Whitney Industrial Turbines Vice President and General Manager 1994 — 1995; General Electric various executive positions 1988 — 1994; McKinsey & Company consultant 1981 — 1987. |
| Richard J. Cathcart | | 6162 | | Vice Chairman of Pentair since February 2005; President and Chief Operating Officer of Water Technologies segmentGroup January 2001 — January 2005; Executive Vice President and President of Pentair’s Water Technologies Group, February 1996 — December 2000; Executive Vice President, Corporate Development, March 1995 — January 1996. |
David D. Harrison | | 58 | | Executive Vice President and Chief Financial Officer since February 2000; Executive Vice President and Chief Financial Officer of The Scotts Company, August 1999 — February 2000; Executive Vice President and Chief Financial Officer of Coltec Industries, August 1996 — August 1999; Executive Vice President and Chief Financial Officer of Pentair, Inc., March 1994 — July 1996; Senior Executive with General Electric Technical Services organization, January 1990 — March 1994. Various executive positions with General Electric Plastics/Borg-Warner Chemicals1972-1990. |
| Michael V. Schrock | | 5354 | | President and Chief Operating Officer since September 2006; President and Chief Operating Officer of Filtration and Technical Products, since October 2005;2005 — September 2006; President and Chief Operating Officer of Enclosures October 2001 — September 2005; President, Pentair Water Technologies — Americas, January 2001 — October 2001; President, Pentair Pump and Pool Group, August 2000 — January 2001; President, Pentair Pump Group, January 1999 — August 2000; Vice President and General Manager, Aurora, Fairbanks Morse and Pentair Pump Group International, March 1998 — December 1998; Divisional Vice President and General Manager, Honeywell Inc., 1994 — 1998. |
Charles M. BrownDavid D. Harrison* | | 4759 | | Executive Vice President and Chief OperatingFinancial Officer of Pump and Pool Operations since April 2005; President Pentair Tools Group Integration with The Black and Decker Corporation August 2004February 2000 — March 2005;February 2007 ; Executive Vice President and Chief OperatingFinancial Officer of The Scotts Company, August 1999 — February 2000; Executive Vice President and Chief Financial Officer of Coltec Industries, August 1996 — August 1999; Executive Vice President and Chief Financial Officer of Pentair, Tools Group August 2003Inc., March 1994 — August 2004; President of Aqua Glass CorporationJuly 1996; Senior Executive with General Electric Technical Services organization, January 1990 — March 1996 — August 2003;1994. Various executive positions with General Electric Plastics/Borg-Warner Chemicals1972-1990. |
| John L. Stauch* | | 42 | | Executive Vice President since February 2007; Chief Financial Officer of Marketing for Delta Faucet May 1993the Automation and Control Systems unit of Honeywell International Inc., July 2005 — March 1996.February 2007; Vice President, Finance and Chief Financial Officer of the Sensing and Controls unit of Honeywell International Inc., January 2004 — July 2005; Vice President, Finance and Chief Financial Officer of the Automation & Control Products unit of Honeywell International Inc., July 2002 — January 2004; Chief Financial Officer and IT Director of PerkinElmer Optoelectronics, a unit of PerkinElmer, Inc., April 2000 — April 2002; Various executive, investor relations and managerial finance positions with Honeywell International Inc. and its predecessor AlliedSignal Inc., 1994 — 2000. |
| Louis L. Ainsworth | | 5859 | | Senior Vice President and General Counsel since July 1997 and Secretary since January 2002; Shareholder and Officer of the law firm of Henson & Efron, P.A., November 1985 — June 1997. |
15
| | | | |
Name | | Age | | Current Position and Business Experience |
|
| Jack J. Dempsey | | 4445 | | President, Filtration Division and Senior Vice President, Operations, since May 2006; Senior Vice President of Operations and Technology, effective April 2005;2005 — May 2006; Director, McKinsey and Company July 1999 — March 2005; Prior McKinsey and Company experience: Principal, July 1993 — June 1999, Consultant, August 1987 — June 1993; Chase Manhattan Bank, various retail banking roles September 1983 — August 1985. |
Frederick S. Koury | | 45 | | Senior Vice President, Human Resources, since August 2003; Vice President of Human Resources of the Victoria’s Secret Stores unit of Limited Brands, September 2000 — August 2003; PepsiCo, Inc., various executive positions, June 1985 — September 2000. |
14
| | | | |
Name
| | Age
| | Current Position and Business Experience
|
|
| Karen A. Durant | | 4647 | | Senior Vice President of Finance and Analysis since January 2006; Vice President of Finance and Controller April 2002 — December 2005; Vice President, Controller, September 1997 — March 2002; Controller, January 1996 — August 1997; Assistant Controller, September 1994 — December 1995; Director of Financial Planning and Control of Hoffman Enclosures Inc. (subsidiary of Pentair), October 1989 — August 1994; various finance and accounting positions with Honeywell Inc.,1981-1989. |
| Frederick S. Koury | | 46 | | Senior Vice President, Human Resources, since August 2003; Vice President of Human Resources of the Victoria’s Secret Stores unit of Limited Brands, September 2000 — August 2003; PepsiCo, Inc., various executive positions, June 1985 — September 2000. |
| Michael G. Meyer | | 4748 | | Vice President of Treasury and Tax since April 2004; Treasurer, January 2002 — March 2004; Assistant Treasurer, September 1994 — December 2001. Various executive positions with Federal-Hoffman, Inc. (former subsidiary of Pentair), August 1985 — August 1994. |
| | |
| * | | David D. Harrison will retire from Pentair at the end of February 2007. He will be succeeded by John L. Stauch as Chief Financial Officer. |
1516
PART II
| |
ItemITEM 5. | Market for Registrant’s Common Stock, Related Security Holder Matters and Issuer Purchases of Equity SecuritiesMARKET FOR REGISTRANT’S COMMON STOCK, RELATED SECURITY HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Pentair’sOur common stock is listed for trading on the New York Stock Exchange and trades under the symbol “PNR.” As of December 31, 2005,2006, there were 3,9223,907 shareholders of record.
The high, low, and closing sales price for our common stock and the dividends declared for each of the quarterly periods for 20052006 and 20042005 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2006 | | 2005 | |
| | | 2005 | | 2004 | | | First | | Second | | Third | | Fourth | | First | | Second | | Third | | Fourth | |
| | | First | | Second | | Third | | Fourth | | First | | Second | | Third | | Fourth | | | |
| |
| High | | $ | 44.32 | | | $ | 46.03 | | | $ | 45.17 | | | $ | 38.41 | | | $ | 29.60 | | | $ | 33.64 | | | $ | 35.03 | | | $ | 44.03 | | | $ | 41.90 | | | $ | 41.55 | | | $ | 34.43 | | | $ | 33.49 | | | $ | 44.32 | | | $ | 46.03 | | | $ | 45.17 | | | $ | 38.41 | |
| Low | | $ | 38.39 | | | $ | 37.45 | | | $ | 36.11 | | | $ | 30.80 | | | $ | 22.52 | | | $ | 28.48 | | | $ | 30.90 | | | $ | 34.27 | | | $ | 34.01 | | | $ | 32.05 | | | $ | 25.69 | | | $ | 26.25 | | | $ | 38.39 | | | $ | 37.45 | | | $ | 36.11 | | | $ | 30.80 | |
| Close | | $ | 39.14 | | | $ | 42.62 | | | $ | 36.50 | | | $ | 34.52 | | | $ | 29.60 | | | $ | 32.95 | | | $ | 35.03 | | | $ | 43.56 | | | $ | 40.75 | | | $ | 34.19 | | | $ | 26.19 | | | $ | 31.40 | | | $ | 39.14 | | | $ | 42.62 | | | $ | 36.50 | | | $ | 34.52 | |
| Dividends declared | | $ | 0.130 | | | $ | 0.130 | | | $ | 0.130 | | | $ | 0.130 | | | $ | 0.105 | | | $ | 0.105 | | | $ | 0.110 | | | $ | 0.110 | | | $ | 0.14 | | | $ | 0.14 | | | $ | 0.14 | | | $ | 0.14 | | | $ | 0.13 | | | $ | 0.13 | | | $ | 0.13 | | | $ | 0.13 | |
Pentair has paid 120124 consecutive quarterly dividends and has increased dividends each year for 30 consecutive years.
Stock Performance Graph
The following information under the caption “Stock Performance Graph” in this ITEM 5 of this Annual Report onForm 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.
The following graph sets forth the cumulative total shareholder return on our common stock for the last five years, assuming the investment of $100 on December 31, 2001 and the reinvestment of all dividends since that date to December 31, 2006. The graph also contains for comparison purposes the S&P 500 Index and the S&P MidCap 400 Index, assuming the same investment level and reinvestment of dividends.
By virtue of its market capitalization, Pentair is a component of the S&P MidCap 400 Index. On May 17, 2004,the basis of our Boardsize and diversity of Directors approvedbusinesses, we have not found a2-for-1 stock split readily identifiable peer group. We believe the S&P MidCap 400 Index is an appropriate comparison. We have evaluated other published indices, but have determined that the results are skewed by significantly larger companies included in the form ofindices. We believe such a 100 percent stock dividend payable on June 8, 2004, to shareholders of record as of June 1, 2004. All share and per share information presented in thisForm 10-K has been retroactively restated to reflect the effect of this stock split.comparison would not be meaningful.
17
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Base Period
| | | INDEXED RETURNS
| |
| | | December
| | | Years Ending December 31: | |
| Company/Index | | 2001 | | | 2002 | | | 2003 | | | 2004 | | | 2005 | | | 2006 | |
| | |
| |
PENTAIR INC | | | 100 | | | | 96.46 | | | | 130.29 | | | | 252.02 | | | | 202.42 | | | | 187.17 | |
S&P 500 INDEX | | | 100 | | | | 77.90 | | | | 100.25 | | | | 111.15 | | | | 116.61 | | | | 135.03 | |
S&P MIDCAP 400 INDEX | | | 100 | | | | 85.49 | | | | 115.94 | | | | 135.05 | | | | 152.00 | | | | 167.69 | |
Purchases of Equity Securities
The following table provides information with respect to purchases made by Pentair of common stock during the fourth quarter of 2005:2006:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | (c)
| | | (d)
| |
| | | | | | | | | Total Number of
| | | Approximate Dollar
| |
| | | (a)
| | | | | | Shares Purchased
| | | Value of Shares
| |
| | | Total Number
| | | (b)
| | | as Part of Publicly
| | | that may yet be
| |
| | | of Shares
| | | Average Price
| | | Announced Plans
| | | Purchased Under
| |
Period | | Purchased | | | Paid per Share | | | or Programs | | | the Plans or Programs | |
| |
| October 2-October 29, 2005 | | | 3,861 | | | $ | 35.99 | | | | 100,000 | | | $ | 21,872,220 | |
| October 30-November 27, 2005 | | | 22,595 | | | $ | 36.67 | | | | 655,663 | | | $ | 0 | |
| November 28-December 31, 2005 | | | 1,637 | | | $ | 36.92 | | | | — | | | $ | 0 | |
| | | | | | | | | | | | | | | | | |
Total | | | 28,093 | | | | | | | | 755,663 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | (a) | | | (b) | | | (c) | | | (d) | |
| | | | | | | | | Total Number of
| | | Dollar Value of
| |
| | | | | | | | | Shares Purchased
| | | Shares that
| |
| | | Total Number
| | | | | | as Part of Publicly
| | | May Yet Be
| |
| | | of Shares
| | | Average Price
| | | Announced Plans
| | | Purchased Under the
| |
| Period | | Purchased | | | Paid per Share | | | or Programs | | | Plans or Programs | |
| | |
| |
| October 1-October 28, 2006 | | | 348,916 | | | $ | 27.94 | | | | 336,000 | | | $ | 40,640,979 | |
| October 29-November 25, 2006 | | | 18,495 | | | $ | 33.04 | | | | — | | | $ | 40,640,979 | |
| November 26-December 31, 2006 | | | 14,452 | | | $ | 31.58 | | | | — | | | $ | 40,640,979 | |
| |
| |
Total | | | 381,863 | | | | | | | | 336,000 | | | | | |
| | |
| (a) | | The purchases in this column include only thoseshares repurchased as part of our publicly announced programs and in addition, 12,916 shares for the period October 1-October 28, 2006, 18,495 shares for the period October 29-November 25, 2006 and 14,452 shares for the period November 26-December 31, 2006 deemed surrendered to us by participants in our Omnibus Stock Incentive Plan and the Outside Directors Nonqualified Stock Option Plan (the “Plans”) to satisfy the exercise price or withholding of tax obligations related to the exercise of stock options and non-vested shares. |
|
| (b) | | The average price paid in this column includes shares repurchased as part of our publicly announced programs and shares deemed surrendered to us by plan participants in the Plans to satisfy the exercise price or withholding of tax obligations related to the exercise price of employee stock options.options and non-vested shares. |
| |
(b) | | The average price paid in this column includes only those shares deemed surrendered to us by plan participants to satisfy the exercise price or withholding of tax obligations related to the exercise price of employee stock options. |
|
| (c) | | The number of shares in this column represents the number of shares repurchased as part of our publicly announced planprograms to repurchase up to $25$100 million of our common stock annually.in 2006. |
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| | |
|
| (d) | | In December 2004, our2005, the Board of Directors authorized the developmentrepurchase of a program and process to annually repurchase shares of our common stock up to a maximum dollar limit of $25 million. There is no expiration associated withmillion of our common stock. On July 28, 2006, the Board of Directors increased our repurchase authorization granted.to $50 million, and on September 28, 2006, the Board of Directors further increased our repurchase authorization to $100 million. As of December 31, 20052006, we had repurchased 755,663purchased 1,986,026 shares for $25$59.4 million pursuant to these programs during 2006. In December 2006, the Board of Directors authorized the continuation of the repurchase program in 2007 with a maximum dollar limit of $40.6 million. This authorization expires on December 31, 2007. As of February 16, 2007, we had not repurchased any additional shares under this program, the average price paid per share was $33.08. |
|
| | From January 1, 2006 to February 17, 2006, no shares have been repurchased pursuant to this programplan and, accordingly, we have the authority in 2007 to repurchase shares up to a maximum dollar limit of $25 million during the remainder$40.6 million. In 2005 and 2004, respectively, we repurchased 755,663 shares and 105,500 shares of 2006.our common stock under similar authorizations. |
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| |
Item 6. | Selected Financial Data |
ITEM 6. SELECTED FINANCIAL DATA
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Years Ended December 31 | |
| | | | | 2005(1) | | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | 2000 | | | 1999 | | | 1998 | |
| | | | | (Dollars in thousands, except per-share data) | |
| |
Statement of operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net sales | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Water | | $ | 2,131,505 | | | $ | 1,563,394 | | | $ | 1,060,303 | | | $ | 932,420 | | | $ | 882,615 | | | $ | 898,247 | | | $ | 579,236 | | | $ | 438,810 | |
| | | Technical
Products | | | 815,074 | | | | 714,735 | | | | 582,684 | | | | 556,033 | | | | 689,820 | | | | 777,725 | | | | 657,500 | | | | 586,829 | |
| | | Other | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total | | | 2,946,579 | | | | 2,278,129 | | | | 1,642,987 | | | | 1,488,453 | | | | 1,572,435 | | | | 1,675,972 | | | | 1,236,736 | | | | 1,025,639 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales growth | | | 29.3 | % | | | 38.7 | % | | | 10.4 | % | | | (5.3 | )% | | | (6.2 | )% | | | 35.5 | % | | | 20.6 | % | | | (0.7 | )% |
| Cost of goods sold | | | 2,098,558 | | | | 1,623,419 | | | | 1,196,757 | | | | 1,107,212 | | | | 1,163,001 | | | | 1,199,122 | | | | 883,737 | | | | 747,976 | |
| Gross profit | | | 848,021 | | | | 654,710 | | | | 446,230 | | | | 381,241 | | | | 409,434 | | | | 476,850 | | | | 352,999 | | | | 277,663 | |
Margin % | | | 28.8 | % | | | 28.7 | % | | | 27.2 | % | | | 25.6 | % | | | 26.0 | % | | | 28.5 | % | | | 28.5 | % | | | 27.1 | % |
| Selling, general and administrative | | | 478,907 | | | | 376,015 | | | | 253,088 | | | | 230,994 | | | | 266,229 | | | | 267,518 | | | | 231,100 | | | | 191,358 | |
| Research and development | | | 46,042 | | | | 31,453 | | | | 22,932 | | | | 18,952 | | | | 15,941 | | | | 18,138 | | | | 11,927 | | | | 8,986 | |
| Restructuring charge | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Water | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | Technical
Products | | | — | | | | — | | | | — | | | | — | | | | 38,427 | | | | (1,625 | ) | | | 16,743 | | | | — | |
| | | Other | | | — | | | | — | | | | — | | | | — | | | | 1,678 | | | | 21,018 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total | | | — | | | | — | | | | — | | | | — | | | | 40,105 | | | | 19,393 | | | | 16,743 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Water | | | 267,138 | | | | 197,310 | | | | 143,962 | | | | 126,559 | | | | 109,792 | | | | 120,732 | | | | 73,362 | | | | 56,264 | |
| | | Technical
Products | | | 109,229 | | | | 87,844 | | | | 51,094 | | | | 29,942 | | | | 1,857 | | | | 96,268 | | | | 46,346 | | | | 46,026 | |
| | | Other | | | (53,295 | ) | | | (37,912 | ) | | | (24,846 | ) | | | (25,206 | ) | | | (25,444 | ) | | | (45,197 | ) | | | (26,480 | ) | | | (24,971 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total | | | 323,072 | | | | 247,242 | | | | 170,210 | | | | 131,295 | | | | 86,205 | | | | 171,803 | | | | 93,228 | | | | 77,319 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Margin % | | | 11.0 | % | | | 10.9 | % | | | 10.4 | % | | | 8.8 | % | | | 5.5 | % | | | 10.3 | % | | | 7.5 | % | | | 7.5 | % |
| Net interest expense | | | 44,989 | | | | 37,210 | | | | 26,395 | | | | 28,412 | | | | 40,325 | | | | 46,435 | | | | 30,467 | | | | 16,698 | |
| (Gain) loss on sale of investment | | | (5,435 | ) | | | — | | | | — | | | | — | | | | 2,985 | | | | — | | | | — | | | | — | |
| Provision for income taxes | | | 98,469 | | | | 73,008 | | | | 45,665 | | | | 27,884 | | | | 12,147 | | | | 41,580 | | | | 21,406 | | | | 20,495 | |
| Income from continuing operations | | | 185,049 | | | | 137,024 | | | | 98,150 | | | | 74,999 | | | | 30,748 | | | | 83,788 | | | | 41,355 | | | | 40,126 | |
| Income (loss) from discontinued operations, net of tax | | | — | | | | 40,248 | | | | 46,138 | | | | 54,903 | | | | 26,768 | | | | (27,872 | ) | | | 61,954 | | | | 66,714 | |
| Loss on disposal of discontinued operations, net of tax | | | — | | | | (6,047 | ) | | | (2,936 | ) | | | — | | | | (24,647 | ) | | | — | | | | — | | | | — | |
| Cumulative effect of accounting change, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | (29 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | 185,049 | | | | 171,225 | | | | 141,352 | | | | 129,902 | | | | 32,869 | | | | 55,887 | | | | 103,309 | | | | 106,840 | |
| Preferred dividends | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (4,267 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income available to common shareholders | | | 185,049 | | | | 171,225 | | | | 141,352 | | | | 129,902 | | | | 32,869 | | | | 55,887 | | | | 103,309 | | | | 102,573 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
17
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dollars in thousands,
| | Dollars in thousands,
| | Years ended December 31 | |
| except per-share data | | except per-share data | | 2006 | | 2005(1) | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | 1999 | |
| | | | |
| | |
Statement of operations | | Statement of operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net sales | | | Water | | $ | 2,155,225 | | | $ | 2,131,505 | | | $ | 1,563,394 | | | $ | 1,060,303 | | | $ | 932,420 | | | $ | 882,615 | | | $ | 898,247 | | | $ | 579,236 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Technical
Products | | | 999,244 | | | | 815,074 | | | | 714,735 | | | | 582,684 | | | | 556,033 | | | | 689,820 | | | | 777,725 | | | | 657,500 | |
| | | | | Years Ended December 31 | | |
| | | | | 2005(1) | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | 1999 | | 1998 | | |
| | | | Total | | | 3,154,469 | | | | 2,946,579 | | | | 2,278,129 | | | | 1,642,987 | | | | 1,488,453 | | | | 1,572,435 | | | | 1,675,972 | | | | 1,236,736 | |
| | | |
| | | |
Sales growth | | Sales growth | | | 7.1 | % | | | 29.3 | % | | | 38.7 | % | | | 10.4 | % | | | (5.3 | %) | | | (6.2 | %) | | | 35.5 | % | | | 20.6 | % |
| Cost of goods sold | | Cost of goods sold | | | 2,248,219 | | | | 2,098,558 | | | | 1,623,419 | | | | 1,196,757 | | | | 1,107,212 | | | | 1,163,001 | | | | 1,199,122 | | | | 883,737 | |
| Gross profit | | Gross profit | | | 906,250 | | | | 848,021 | | | | 654,710 | | | | 446,230 | | | | 381,241 | | | | 409,434 | | | | 476,850 | | | | 352,999 | |
Margin % | | Margin % | | | 28.7 | % | | | 28.8 | % | | | 28.7 | % | | | 27.2 | % | | | 25.6 | % | | | 26.0 | % | | | 28.5 | % | | | 28.5 | % |
| Selling, general and administrative | | Selling, general and administrative | | | 541,209 | | | | 478,907 | | | | 376,015 | | | | 253,088 | | | | 230,994 | | | | 266,229 | | | | 267,518 | | | | 231,100 | |
| Research and development | | Research and development | | | 58,055 | | | | 46,042 | | | | 31,453 | | | | 22,932 | | | | 18,952 | | | | 15,941 | | | | 18,138 | | | | 11,927 | |
| Restructuring charge | | | Technical
Products | | | — | | | | — | | | | — | | | | — | | | | — | | | | 38,427 | | | | (1,625 | ) | | | 16,743 | |
| | | | Other | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,678 | | | | 21,018 | | | | — | |
| | | |
| | | |
| | | | Total | | | — | | | | — | | | | — | | | | — | | | | — | | | | 40,105 | | | | 19,393 | | | | 16,743 | |
| | | |
| | | |
| Operating income | | | Water | | | 212,498 | | | | 267,138 | | | | 197,310 | | | | 143,962 | | | | 126,559 | | | | 109,792 | | | | 120,732 | | | | 73,362 | |
| | | | Technical
Products | | | 148,905 | | | | 109,229 | | | | 87,844 | | | | 51,094 | | | | 29,942 | | | | 1,857 | | | | 96,268 | | | | 46,346 | |
| | | | Other | | | (54,417 | ) | | | (53,295 | ) | | | (37,912 | ) | | | (24,846 | ) | | | (25,206 | ) | | | (25,444 | ) | | | (45,197 | ) | | | (26,480 | ) |
| | | |
| | | |
| | | | Total | | | 306,986 | | | | 323,072 | | | | 247,242 | | | | 170,210 | | | | 131,295 | | | | 86,205 | | | | 171,803 | | | | 93,228 | |
| | | |
| | | |
Margin % | | Margin % | | | 9.7 | % | | | 11.0 | % | | | 10.9 | % | | | 10.4 | % | | | 8.8 | % | | | 5.5 | % | | | 10.3 | % | | | 7.5 | % |
| Net interest expense | | Net interest expense | | | 51,881 | | | | 44,989 | | | | 37,210 | | | | 26,395 | | | | 28,412 | | | | 40,325 | | | | 46,435 | | | | 30,467 | |
| (Gain) loss on sale of investment | | (Gain) loss on sale of investment | | | (364 | ) | | | (5,435 | ) | | | — | | | | — | | | | — | | | | 2,985 | | | | — | | | | — | |
| Provision for income taxes | | Provision for income taxes | | | 71,702 | | | | 98,469 | | | | 73,008 | | | | 45,665 | | | | 27,884 | | | | 12,147 | | | | 41,580 | | | | 21,406 | |
| Income from continuing operations | | Income from continuing operations | | | 183,767 | | | | 185,049 | | | | 137,024 | | | | 98,150 | | | | 74,999 | | | | 30,748 | | | | 83,788 | | | | 41,355 | |
| Income (loss) from discontinued operations, net of tax | | Income (loss) from discontinued operations, net of tax | | | — | | | | — | | | | 40,248 | | | | 46,138 | | | | 54,903 | | | | 26,768 | | | | (27,872 | ) | | | 61,954 | |
| Loss on disposal of discontinued operations, net of tax | | Loss on disposal of discontinued operations, net of tax | | | (36 | ) | | | — | | | | (6,047 | ) | | | (2,936 | ) | | | — | | | | (24,647 | ) | | | — | | | | — | |
| Cumulative effect of accounting change, net of tax | | Cumulative effect of accounting change, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (29 | ) | | | — | |
| | | |
| | | |
| Net income | | Net income | | $ | 183,731 | | | $ | 185,049 | | | $ | 171,225 | | | $ | 141,352 | | | $ | 129,902 | | | $ | 32,869 | | | $ | 55,887 | | | $ | 103,309 | |
| | | | | (Dollars in thousands, except per-share data) | | |
| Common share data* | Common share data* | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common share data* | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic EPS — continuing operations | Basic EPS — continuing operations | | | 1.84 | | | | 1.38 | | | | 1.00 | | | | 0.76 | | | | 0.31 | | | | 0.86 | | | | 0.47 | | | | 0.52 | | Basic EPS — continuing operations | | $ | 1.84 | | | $ | 1.84 | | | $ | 1.38 | | | $ | 1.00 | | | $ | 0.76 | | | $ | 0.31 | | | $ | 0.86 | | | $ | 0.47 | |
| Basic EPS — discontinued operations | Basic EPS — discontinued operations | | | — | | | | 0.34 | | | | 0.44 | | | | 0.56 | | | | 0.02 | | | | (0.29 | ) | | | 0.71 | | | | 0.87 | | Basic EPS — discontinued operations | | | — | | | | — | | | | 0.34 | | | | 0.44 | | | | 0.56 | | | | 0.02 | | | | (0.29 | ) | | | 0.71 | |
| | | | | | | | | | | | | | | | | | | | |
| | | |
| Basic EPS — net income | Basic EPS — net income | | | 1.84 | | | | 1.72 | | | | 1.44 | | | | 1.32 | | | | 0.33 | | | | 0.57 | | | | 1.18 | | | | 1.39 | | Basic EPS — net income | | $ | 1.84 | | | $ | 1.84 | | | $ | 1.72 | | | $ | 1.44 | | | | 1.32 | | | $ | 0.33 | | | $ | 0.57 | | | $ | 1.18 | |
| | | |
| | | | | | | | | | | | | | | | | | | | |
| Diluted EPS — continuing operations | Diluted EPS — continuing operations | | | 1.80 | | | | 1.35 | | | | 0.99 | | | | 0.75 | | | | 0.31 | | | | 0.86 | | | | 0.47 | | | | 0.46 | | Diluted EPS — continuing operations | | $ | 1.81 | | | $ | 1.80 | | | $ | 1.35 | | | $ | 0.99 | | | $ | 0.75 | | | $ | 0.31 | | | $ | 0.86 | | | $ | 0.47 | |
| Diluted EPS — discontinued operations | Diluted EPS — discontinued operations | | | — | | | | 0.33 | | | | 0.43 | | | | 0.56 | | | | 0.02 | | | | (0.29 | ) | | | 0.70 | | | | 0.77 | | Diluted EPS — discontinued operations | | | — | | | | — | | | | 0.33 | | | | 0.43 | | | | 0.56 | | | | 0.02 | | | | (0.29 | ) | | | 0.70 | |
| | | | | | | | | | | | | | | | | | | | |
| | | |
| Diluted EPS — net income | Diluted EPS — net income | | | 1.80 | | | | 1.68 | | | | 1.42 | | | | 1.31 | | | | 0.33 | | | | 0.57 | | | | 1.17 | | | | 1.23 | | Diluted EPS — net income | | $ | 1.81 | | | $ | 1.80 | | | $ | 1.68 | | | $ | 1.42 | | | $ | 1.31 | | | $ | 0.33 | | | $ | 0.57 | | | $ | 1.17 | |
| | | |
| | | | | | | | | | | | | | | | | | | | |
| Cash dividends declared per common share | Cash dividends declared per common share | | | 0.52 | | | | 0.43 | | | | 0.41 | | | | 0.37 | | | | 0.35 | | | | 0.33 | | | | 0.32 | | | | 0.30 | | Cash dividends declared per common share | | | 0.56 | | | | 0.52 | | | | 0.43 | | | | 0.41 | | | | 0.37 | | | | 0.35 | | | | 0.33 | | | | 0.32 | |
| Stock dividends declared per common share | Stock dividends declared per common share | | | — | | | | 100 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Stock dividends declared per common share | | | — | | | | — | | | | 100 | % | | | — | | | | — | | | | — | | | | — | | | | — | |
| Market value per share (December 31) | Market value per share (December 31) | | | 34.52 | | | | 43.56 | | | | 22.85 | | | | 17.28 | | | | 18.26 | | | | 12.09 | | | | 19.25 | | | | 19.91 | | Market value per share (December 31) | | | 31.40 | | | | 34.52 | | | | 43.56 | | | | 22.85 | | | | 17.28 | | | | 18.26 | | | | 12.09 | | | | 19.25 | |
| | | | | | | | | | | | | | | | | | | | |
| | | |
| | |
| (1) | | In 2005 we early adopted SFAS 123R retroactively to January 1, 2005 and2005. The incremental impact of SFAS 123R to the results of operations for 2006 and 2005 include after tax expense of $9.9 million and $12.0 million, respectively, or ($0.10) and ($0.12) diluted EPS.EPS, respectively. |
| |
| * | | All share and per share information presented in thisForm 10-K havehas been retroactively restated to reflect the effect of a 100% stock dividend in 2004. |
18
20
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Years Ended December 31 | | |
| | | | | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | 1999 | | 1998 | | |
Dollars in thousands,
| | Dollars in thousands,
| | Years ended December 31 | |
| except per-share data | | except per-share data | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | 1999 | |
| | | | | (Dollars in thousands, except per-share data) | | | |
| |
Balance sheet data | Balance sheet data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounts receivable, net | Accounts receivable, net | | | 423,847 | | | | 396,459 | | | | 251,475 | | | | 223,778 | | | | 229,455 | | | | 284,674 | | | | 247,404 | | | | 160,796 | | Accounts receivable, net | | $ | 422,134 | | | $ | 423,847 | | | $ | 396,459 | | | $ | 251,475 | | | $ | 223,778 | | | $ | 229,455 | | | $ | 284,674 | | | $ | 247,404 | |
| Inventories | Inventories | | | 349,312 | | | | 323,676 | | | | 166,862 | | | | 165,389 | | | | 178,464 | | | | 208,267 | | | | 179,073 | | | | 132,620 | | Inventories | | | 398,857 | | | | 349,312 | | | | 323,676 | | | | 166,862 | | | | 165,389 | | | | 178,464 | | | | 208,267 | | | | 179,073 | |
| Property, plant and equipment, net | Property, plant and equipment, net | | | 311,839 | | | | 336,302 | | | | 233,106 | | | | 236,322 | | | | 231,615 | | | | 248,576 | | | | 265,027 | | | | 212,493 | | Property, plant and equipment, net | | | 330,372 | | | | 311,839 | | | | 336,302 | | | | 233,106 | | | | 236,322 | | | | 231,615 | | | | 248,576 | | | | 265,027 | |
| Goodwill | Goodwill | | | 1,718,207 | | | | 1,620,404 | | | | 997,183 | | | | 843,243 | | | | 743,499 | | | | 786,984 | | | | 800,937 | | | | 442,322 | | Goodwill | | | 1,718,771 | | | | 1,718,207 | | | | 1,620,404 | | | | 997,183 | | | | 843,243 | | | | 743,499 | | | | 786,984 | | | | 800,937 | |
| Total assets | Total assets | | | 3,253,755 | | | | 3,120,575 | | | | 2,780,677 | | | | 2,514,450 | | | | 2,372,198 | | | | 2,644,025 | | | | 2,706,516 | | | | 1,484,207 | | Total assets | | | 3,364,979 | | | | 3,253,755 | | | | 3,120,575 | | | | 2,780,677 | | | | 2,514,450 | | | | 2,372,198 | | | | 2,644,025 | | | | 2,706,516 | |
| Total debt | Total debt | | | 752,614 | | | | 736,105 | | | | 806,493 | | | | 735,085 | | | | 723,706 | | | | 913,974 | | | | 1,035,084 | | | | 340,721 | | Total debt | | | 744,061 | | | | 752,614 | | | | 736,105 | | | | 806,493 | | | | 735,085 | | | | 723,706 | | | | 913,974 | | | | 1,035,084 | |
| Shareholders’ equity | Shareholders’ equity | | | 1,555,610 | | | | 1,447,794 | | | | 1,261,478 | | | | 1,105,724 | | | | 1,015,002 | | | | 1,010,591 | | | | 990,771 | | | | 707,628 | | Shareholders’ equity | | | 1,669,999 | | | | 1,555,610 | | | | 1,447,794 | | | | 1,261,478 | | | | 1,105,724 | | | | 1,015,002 | | | | 1,010,591 | | | | 990,771 | |
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Other data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Debt/total capital | Debt/total capital | | | 32.6 | % | | | 33.7 | % | | | 39.0 | % | | | 39.9 | % | | | 41.6 | % | | | 47.5 | % | | | 51.1 | % | | | 32.5 | % | Debt/total capital | | | 30.8 | % | | | 32.6 | % | | | 33.7 | % | | | 39.0 | % | | | 39.9 | % | | | 41.6 | % | | | 47.5 | % | | | 51.1 | % |
| Depreciation | Depreciation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Water | | | 35,978 | | | | 35,842 | | | | 26,751 | | | | 20,517 | | | | 19,478 | | | | 19,472 | | | | 19,157 | | | | 15,453 | |
| | | | Technical
Products | | | 19,617 | | | | 19,318 | | | | 19,408 | | | | 19,721 | | | | 19,026 | | | | 23,008 | | | | 20,701 | | | | 26,846 | |
| | | Water | | | 35,842 | | | | 26,751 | | | | 20,517 | | | | 19,478 | | | | 19,472 | | | | 19,157 | | | | 15,453 | | | | 9,163 | | | Other | | | 1,304 | | | | 1,405 | | | | 904 | | | | 571 | | | | 73 | | | | 561 | | | | 2,633 | | | | 167 | |
| | | Technical
Products | | | 19,318 | | | | 19,408 | | | | 19,721 | | | | 19,026 | | | | 23,008 | | | | 20,701 | | | | 26,846 | | | | 26,453 | | |
| | | Other | | | 1,405 | | | | 904 | | | | 571 | | | | 73 | | | | 561 | | | | 2,633 | | | | 167 | | | | 158 | | |
| | | | | | | | | | | | | | | | | | | | Total | | | 56,899 | | | | 56,565 | | | | 47,063 | | | | 40,809 | | | | 38,577 | | | | 43,041 | | | | 42,491 | | | | 42,466 | |
| | | Total | | | 56,565 | | | | 47,063 | | | | 40,809 | | | | 38,577 | | | | 43,041 | | | | 42,491 | | | | 42,466 | | | | 35,774 | | |
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| Goodwill amortization (1) | Goodwill amortization (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Goodwill amortization(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Water | | | — | | | | — | | | | — | | | | — | | | | 18,560 | | | | 18,074 | | | | 12,714 | | | | 7,793 | | | Water | | | — | | | | — | | | | — | | | | — | | | | — | | | | 18,560 | | | | 18,074 | | | | 12,714 | |
| | | Technical
Products | | | — | | | | — | | | | — | | | | — | | | | 8,273 | | | | 9,088 | | | | 8,413 | | | | 5,832 | | | Technical
Products | | | — | | | | — | | | | — | | | | — | | | | — | | | | 8,273 | | | | 9,088 | | | | 8,413 | |
| | | Other | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | |
| | | | | | | | | | | | | | | | | | | |
| | | Total | | | — | | | | — | | | | — | | | | — | | | | 26,833 | | | | 27,162 | | | | 21,127 | | | | 13,625 | | | Total | | | — | | | | — | | | | — | | | | — | | | | — | | | | 26,833 | | | | 27,162 | | | | 21,127 | |
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| Tax effect of goodwill amortization(1) | | | — | | | | — | | | | — | | | | — | | | | (3,861 | ) | | | (3,768 | ) | | | (3,453 | ) | | | (2,441 | ) | |
| Diluted EPS effect of goodwill amortization(1) | | | — | | | | — | | | | — | | | | — | | | | 0.24 | | | | 0.25 | | | | 0.20 | | | | 0.13 | | |
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Tax effect of goodwill amortization(1) | | Tax effect of goodwill amortization(1) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3,861 | ) | | | (3,768 | ) | | | (3,453 | ) |
Diluted EPS effect of goodwill amortization(1) | | Diluted EPS effect of goodwill amortization(1) | | | | | | | | | | | | | | | | | | | | | | | 0.24 | | | | 0.25 | | | | 0.20 | |
| Other amortization | Other amortization | | | 15,995 | | | | 7,501 | | | | 377 | | | | 434 | | | | — | | | | 8 | | | | — | | | | — | | Other amortization | | | 18,197 | | | | 15,995 | | | | 7,501 | | | | 377 | | | | 434 | | | | — | | | | 8 | | | | — | |
| Net cash provided by operating activities | Net cash provided by operating activities | | | 247,858 | | | | 264,091 | | | | 262,939 | | | | 270,794 | | | | 232,334 | | | | 184,947 | | | | 144,296 | | | | 120,872 | | Net cash provided by operating activities | | | 231,611 | | | | 247,858 | | | | 264,091 | | | | 262,939 | | | | 270,794 | | | | 232,334 | | | | 184,947 | | | | 144,296 | |
| Capital expenditures — continuing operations | Capital expenditures — continuing operations | | | 62,471 | | | | 43,107 | | | | 29,004 | | | | 24,346 | | | | 37,008 | | | | 42,238 | | | | 23,694 | | | | 18,590 | | Capital expenditures — continuing operations | | | 51,078 | | | | 62,471 | | | | 43,107 | | | | 29,004 | | | | 24,346 | | | | 37,008 | | | | 42,238 | | | | 23,694 | |
| Capital expenditures — discontinued operations | Capital expenditures — discontinued operations | | | — | | | | 5,760 | | | | 14,618 | | | | 32,350 | | | | 16,660 | | | | 25,803 | | | | 29,977 | | | | 24,745 | | Capital expenditures — discontinued operations | | | — | | | | — | | | | 5,760 | | | | 14,618 | | | | 32,350 | | | | 16,660 | | | | 25,803 | | | | 29,977 | |
| Capital expenditures — continuing and discontinued operations | Capital expenditures — continuing and discontinued operations | | | 62,471 | | | | 48,867 | | | | 43,622 | | | | 56,696 | | | | 53,668 | | | | 68,041 | | | | 53,671 | | | | 43,335 | | Capital expenditures — continuing and discontinued operations | | | 51,078 | | | | 62,471 | | | | 48,867 | | | | 43,622 | | | | 56,696 | | | | 53,668 | | | | 68,041 | | | | 53,671 | |
| Employees of continuing operations | Employees of continuing operations | | | 14,700 | | | | 12,900 | | | | 9,000 | | | | 8,600 | | | | 8,700 | | | | 9,900 | | | | 8,700 | | | | 6,500 | | Employees of continuing operations | | | 14,800 | | | | 14,700 | | | | 12,900 | | | | 9,000 | | | | 8,600 | | | | 8,700 | | | | 9,900 | | | | 8,700 | |
| Days sales outstanding in receivables(2) | | | 54 | | | | 52 | | | | 54 | | | | 58 | | | | 65 | | | | 65 | | | | 58 | | | | 59 | | |
| Days inventory on hand(2) | | | 70 | | | | 62 | | | | 59 | | | | 64 | | | | 72 | | | | 64 | | | | 67 | | | | 73 | | |
Days sales outstanding in receivables(2) | | Days sales outstanding in receivables(2) | | | 54 | | | | 54 | | | | 52 | | | | 54 | | | | 58 | | | | 65 | | | | 65 | | | | 58 | |
Days inventory on hand(2) | | Days inventory on hand(2) | | | 76 | | | | 70 | | | | 62 | | | | 59 | | | | 64 | | | | 72 | | | | 64 | | | | 67 | |
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| (1) | | Effective January 1, 2002 we adopted SFAS No. 142,Goodwill and Other Intangible Assets. This standard requires goodwill and intangible assets deemed to have an indefinite life no longer be amortized. This standard did not require restatement of prior period amounts to be consistent with the current year presentation and therefore, we have not made any adjustments to the historical financial information presented. However, we have provided supplemental tax and diluted EPS information as we believe it is necessary to the understanding of our financial performance trend. Our accounting policy prior to the adoption of SFAS No. 142 was to amortize goodwill on a straight-line basis over the estimated future periods to be benefited, principally between 25 and 40 years. |
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| (2) | | Calculated using a13-month average. |
In 2005, we adopted SFAS 123R,Share Based Payment, which requires the fair value of stock options to be expensed. We did not restate prior period amounts to be consistent with the current year presentation and therefore we have not made any adjustments to prior year information presented. The after tax expense impact of adoption was $12.0 million or ($0.12) diluted EPS.
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In 2004, we divested our Tools Group. Our financial statements have been restated to reflect the Tools Group as a discontinued operation for all periods presented. The 2004 results reflect a pre-tax gain on the sale of the Tools Group of $3.0 million ($6.0 million loss after tax).
In 2002, capital expenditures from discontinued operations included $23.0 million for the acquisition of a previously leased facility.
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In 2000, we discontinued our Equipment segment (Century Mfg. Co./Lincoln Automotive and Lincoln Industrial businesses). Our financial statements have been restated to reflect the Equipment segment as a discontinued operation for all periods presented. The 2001 results reflected a pre-tax loss on the sale of these businesses of $36.3 million ($24.6 million loss after tax).
In 2001, we adopted SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, resulting in an increase to other assets and other noncurrent liabilities of $7.5 million and $0.8 million, respectively, and a cumulative transition adjustment of $6.7 million in OCI. The transition adjustment relates to our hedging activities through December 31, 2000. Prior to the adoption of SFAS No. 133, financial instruments designated as hedges were not recorded in the financial statements, but cash flows from such contracts were recorded as adjustments to earnings as the hedged items affected earnings.
In 2001, cost of goods sold included $1.0 million related to the 2001 restructuring charge for our Technical Products segment.
In 2000, we discontinued our Equipment segment (Century Mfg. Co./Lincoln Automotive and Lincoln Industrial businesses). Our financial statements have been restated to reflect the Equipment segment as a discontinued operation for all periods presented. The 2001 results reflected a pre-tax loss on the sale of these businesses of $36.3 million ($24.6 million loss after tax).
In 2000, operations reflected a non-cash pre-tax cumulative effect of accounting change related to revenue recognition that reduced income by $0.03 million, net of tax.
Our accounting policy prior to the adoption of SFAS No. 142 was to amortize goodwill on a straight-line basis over the estimated future periods to be benefited, principally between 25 and 40 years.
Reference should be made to the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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ItemITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of OperationsMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” or the negative thereof or similar words. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results. They can be affected by assumptions we might make or by known or unknown risks or uncertainties. Consequently, we cannot guarantee any forward-looking statements. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties.
The following factors and those discussed in ITEM 1A, Risk Factors, of thisForm 10-Kmay impact the achievement of forward-looking statements:
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| • | changes in general economic and industry conditions, such as: |
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| | • | the strength of product demand;demand and the markets we serve; |
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| | • | the intensity of competition, including that from foreign competitors; |
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| | • | pricing pressures; |
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| | • | market acceptance of new product introductions and enhancements; |
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| | • | the introduction of new products and enhancements by competitors; |
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| | • | our ability to maintain and expand relationships with large customers; |
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| | • | our ability to source raw material commodities from our suppliers without interruption and at reasonable prices; |
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| | • | our ability to source components from third parties, in particular from foreign manufacturers, without interruption and at reasonable prices; and |
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| | • | the financial condition of our customers; |
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| • | our ability to successfully limit damages arising out of the Horizon litigation; |
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| • | our ability to identify, complete, and integrate acquisitions successfully and to realize expected synergies on our anticipated timetable; |
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| • | changes in our business strategies, including acquisition, divestiture, and restructuring activities; |
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| • | domestic and foreign governmental and regulatory policies; |
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| • | general economic and political conditions, such as political instability, the rate of economic growth in our principal geographic or product markets, or fluctuations in exchange rates; |
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| • | changes in operating factors, such as continued improvement in manufacturing activities and the achievement of related efficiencies, cost reductions, and inventory risks due to shifts in market demand and costs associated with moving production overseas; |
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| • | unanticipated developments that could occur with respect to contingencies such as litigation, intellectual property matters, product liability exposures and environmental matters; |
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| • | our ability to continue to successfully generate savings from our excellence in operations initiatives consisting of lean enterprise, supply management and cash flow practices; |
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| • | unanticipated developments that could occur with respect to contingencies such as litigation, intellectual property matters, product liability exposures and environmental matters; |
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| • | our ability to accurately evaluate the effects of contingent liabilities such as taxes,tax, product liability, environmental, and other claims; and |
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| • | our ability to access capital markets and obtain anticipated financing under favorable terms; and |
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| • | other risks specifically discussed under the heading “Risk Factors” under Part I of this report.terms. |
The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. We assume no obligation, and disclaim any duty, to update the forward-looking statements in this report.
Overview
We are a focused diversified industrial manufacturing company comprised of two operating segments: Water and Technical Products. Our Water Group is a global leader in providing innovative products and systems used worldwide in the movement, storage, treatment, storage, and enjoyment of water. Our Technical Products Group is a global leader in the global enclosures market that designs, manufactures, and thermal management markets, designing and manufacturing standard, modified, and custom enclosures that house and protect sensitive controls,electronics and electrical components; thermal management products; and accessories. In 2006,2007, we expect our Water Group and Technical Products Group are forecasted to generate approximately 70 percent70% and 30 percent30% of total revenues, respectively.
Our Water Group has progressively become a more important part of our business portfolio with sales increasing from $100approximately $125 million in 1995 to approximately $2.1$2.2 billion in 2005.2006. We believe the water industry is structurally attractive as a result of a growing demand for clean water and the large global market size (of which we have identified a target industry segmentmarket totaling $50$60 billion). Our vision is to becomebe a leading global provider of innovative products and systems used in the movement, storage, treatment, storage, and enjoyment of water.
As of July 31, 2004, we continued the expansion of our global footprint in the water equipment industry through the acquisition of WICOR, a manufacturer of pumps, filtration, and pool equipment marketed primarily under the STA-RITE®, SHURflo®, and Hypro® brands. We initially funded the payment of the purchase price and related fees and expenses of the WICOR acquisition with an $850 million committed line of credit (the “Bridge Facility”) and through additional borrowings available under our existing credit facility. We used the proceeds from the Tools Group sale to repay, on October 4, 2004, the $850 million Bridge Facility.
We realized $36 million in synergies net of integration costs in the first full year of ownership with respect to the WICOR acquisition via key initiatives including facility rationalizations, lean enterprise, material cost savings, and administrative cost savings. We also expect to achieve significant working capital reductions, net fixed asset reductions, and revenue synergies from cross-selling opportunities during the first two years of ownership as a result of the acquisition. Integration of the former WICOR businesses proceeded as expected during 2005 with 17 facilities closed or consolidated to date.
Our Technical Products Group operates in a large global market with significant potential for growth in industry segments such as defense, security, medical, and networking. We believe we have the largest enclosures industrial and commercial distribution network in North America and the highest enclosures brand recognition in the industry.industry in North America. From mid-2001 through mid-2003,2003, the Technical Products Group experienced significantly lower sales volumes as a result of severely reduced capital spending in the industrial and commercial markets and over-capacity and weak demand in the datacom and telecom markets. InFrom 2004 and 2005,through 2006, sales volumes increased due to the addition of new distributors, new products, and higher demand in all targeted markets. In addition, through the success of our PIMSPentair Integrated Management System (“PIMS”) initiatives, we have increased Technical ProductsProducts’ segment operating margins for sixteento our goal of 15% and achieved 17 consecutive quarters.quarters ofyear-over-year operating margin expansion.
Key Trends and Uncertainties
The following trends and uncertainties affected our financial performance in 20052006 and maywill likely impact our results in the future:
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| • | In 2005, we achievedThe housing market and new pool starts slowed dramatically in the first quarter of 2006 and shrank in the last three quarters of the year. We believe that construction of new homes and new pools starts in North America affects approximately six percent25% of the sales growth on a proforma basis, assuming we had acquired WICOR at the beginning of 2004, excluding the recent Thermal acquisition, and excluding the effects of foreign currency translation. |
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| • | We plan to drive strategic growth initiatives in both our Water Group, especially for our pool and Technical Products platforms, with particular emphasisspa businesses. The impact of this downturn reduced our expected revenues in 2006 and will likely continue to have an uncertain impact on international growth.our revenues in 2007. |
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| • | We experience seasonal demand in a number of markets within our Water Group. End-user demand for pool equipment follows warm weather trends and is at seasonal highs from April to August. The magnitude of the sales spike is partially mitigated by employing some advance sales “early buy” programs (generally including extended payment termsand/or additional discounts). Demand for residential and agricultural water systems is also impacted by economic conditions and weather patterns, particularly by heavy flooding and droughts. |
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| • | We expect our operations to continue to benefit from our PIMS initiative: includinginitiatives which include strategy deployment; lean enterprise with special focus on sourcing and supply management, cash flow management, and lean operations; and IGNITE, our process to drive organic growth. |
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| • | We are experiencing material cost and other inflation in a number of our businesses. We are striving for greater productivity improvements and implementing selective increases in selling prices to help mitigate cost increases in base materials such as steel, resins, ocean freightmetals and fuel,other costs such as pensions, health care and insurance. |
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| • | We have a long-term goal to consistently generate free cash flow that equals or exceeds 100% of our net income. Free cash flow, which we define as cash flow from operating activities less capital expenditures, including both continuing and discontinued operations, plus proceeds from sale of property and equipment, exceeded $200 million for the fourth consecutive year in 2005 and is expected to be approximately $200was $181 million in 2006. See our discussion ofOther financial measuresunder the caption “Liquidity and Capital Resources” of this report. |
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| • | In 2005, weWe experienced unfavorable foreign currency effects on net sales in the first quarter of 2006 and favorable foreign currency effects in the first halfsecond, third and fourth quarters of the year and unfavorable in the second half of the year.2006. Overall, we experienced a slightly favorable foreign currency effect on net sales in 2005.2006. Our currency effect is primarily for the U.S. dollar against the Euro,euro, which may or may not trend favorably in the future. |
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| • | We expect our overallThe effective tax rate for 2006 was 28.1% due in part to be 36 percent in 2006. As a partfavorable resolution of our acquisitionprior tax years and international strategies, we are pursuing rate reduction opportunities, which could improvehigher utilization of foreign tax credits. We continue to actively pursue initiatives to reduce our effective tax rate. |
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| • | As anticipated, our Water Group operating income margins The tax rate in each ofany quarter can be affected positively or negatively by adjustments that are required to be reported in the first two quarters of 2005 were lower compared to the prior year comparable periods due to the lower former WICOR operating margins versus Pentair Water operating margins. In the thirdspecific quarter of 2005, the Water Group’s operating margins crossed overresolution. We expect our full year effective tax rate in 2007 to be between 35% and both the third and fourth quarter operating margins were higher than the same quarters in 2004. In the future, we intend to drive margins in the expanded Water Group toward a goal of 15 percent, while capturing growth opportunities. |
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| • | We experience seasonal demand in a number of markets within our Water Group. End-user demand for pool/spa equipment follows warm weather trends and is at seasonal highs from March to July. The magnitude of the sales spike is partially mitigated by effective use of the distribution channel by employing some advance sales programs (generally including extended payment termsand/or additional discounts)36%. Demand for residential and agricultural water systems is also impacted by weather patterns particularly related to heavy flooding and droughts. |
Outlook
In 2006,2007, our operating objectives include the following:
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| • | Continue to use PIMS to drive the three key elements of our strategy: operating excellence international expansion,through lean enterprise initiatives, with special focus on sourcing and growth, both organicsupply management, cash flow management, and acquired;lean operations; |
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| • | Continue the integration of the WICOR and Thermal acquisitions and realize identified synergistic opportunities; |
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| • | Continue proactive talent management process building competenciesdevelopment, particularly in international management and other key functional areas; |
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| • | Achieve significant organic sales growth (in excess of market growth)growth rates), particularly in international markets; and |
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| • | Continue to make strategic acquisitions to grow and expand our existing platforms in our Water and Technical Products segments.Groups. |
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OurThe ability to achieve our operating objectives will depend, to a certain extent, on factors outside our control. See “Risk Factors” under Part I of this report.
RESULTS OF OPERATIONS
Net Salessales
The components of the net sales change were:
| | | | | | | | | | | | | | | | | |
| | | 2005 vs. 2004 | | 2004 vs. 2003 | | |
| Percentages | | | 2006 vs. 2005 | | 2005 vs. 2004 | |
| | | (Percentages) | | | |
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| Volume | | | 25.8 | | | | 34.8 | | | | 4.4 | | | | 25.8 | |
| Price | | | 3.1 | | | | 1.9 | | | | 2.5 | | | | 3.1 | |
| Currency | | | 0.4 | | | | 2.0 | | | | 0.2 | | | | 0.4 | |
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| Total | | | 29.3 | | | | 38.7 | | | | 7.1 | | | | 29.3 | |
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The 7.1 percent increase in consolidated net sales in 2006 from 2005 was primarily the result of:
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| • | an increase in sales volume due to our acquisitions, primarily the December 1, 2005 acquisition of the McLean Thermal Management, Aspen Motion Technologies, and Electronic Solutions businesses from APW, Ltd. (collectively, “Thermal”); and |
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| • | organic sales growth of approximately two percent (excluding the effects of acquisitions and foreign currency exchange), which includes selective increases in selling prices to mitigate inflationary cost increases. |
The 29.3 percent increase in consolidated net sales in 2005 from 2004 was primarily the result of:
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| • | an increase in sales volume driven by our July 31, 2004 acquisition of WICOR, February 23, 2005 acquisition of DEP and December 1, 2005 acquisition of thermal management businesses from APW;Thermal; |
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| • | proformapro forma sales growth from continuing operations of approximately six percent, assuming we had acquired WICOR at the beginning of 2004, excluding the recent Thermal acquisition, and excluding the effects of foreign currency translation; |
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| • | selective increases in selling prices in our Water and Technical Products segmentsGroups to mitigate inflationary cost increases; and |
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| • | favorable foreign currency effects as the weaker U.S. dollar increased the U.S. dollar value of foreign sales. |
The 38.7 percent increase in consolidated net sales in 2004 from 2003 was primarily the result of:
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| • | an increase in sales volume driven by our July 31, 2004 acquisition of WICOR and our December 31, 2003 acquisition of Everpure; |
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| • | organic sales growth from continuing operations of approximately 14 percent, removing the effects of acquisitions and excluding foreign currency exchange; |
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| • | selective increases in selling prices in our Water and Technical Products segments to mitigate inflationary cost increases; and |
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| • | favorable foreign currency effects as the weaker U.S. dollar increased the U.S. dollar value of foreign sales.effects. |
Sales by segment and theyear-over-year changes were as follows:
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| | | | | | | | | 2005 vs. 2004 | | 2004 vs. 2003 | | | | | | | | | 2006 vs. 2005 | | 2005 vs. 2004 | |
| | | 2005 | | 2004 | | 2003 | | $ Change | | % Change | | $ Change | | % Change | | |
| In thousands | | | 2006 | | 2005 | | 2004 | | $ change | | % change | | $ change | | % change | |
| | | (In thousands) | | | |
| |
| Water | | $ | 2,131,505 | | | $ | 1,563,394 | | | $ | 1,060,303 | | | $ | 568,111 | | | | 36.3% | | | $ | 503,091 | | | | 47.4% | | | $ | 2,155,225 | | | $ | 2,131,505 | | | $ | 1,563,394 | | | $ | 23,720 | | | | 1.1% | | | $ | 568,111 | | | | 36.3% | |
| Technical Products | | | 815,074 | | | | 714,735 | | | | 582,684 | | | | 100,339 | | | | 14.0% | | | | 132,051 | | | | 22.7% | | | | 999,244 | | | | 815,074 | | | | 714,735 | | | | 184,170 | | | | 22.6% | | | | 100,339 | | | | 14.0% | |
| | | | | | | | | | | | | | | | | |
| | | |
| Total | | $ | 2,946,579 | | | $ | 2,278,129 | | | $ | 1,642,987 | | | $ | 668,450 | | | | 29.3% | | | $ | 635,142 | | | | 38.7% | | | $ | 3,154,469 | | | $ | 2,946,579 | | | $ | 2,278,129 | | | $ | 207,890 | | | | 7.1% | | | $ | 668,450 | | | | 29.3% | |
| | | | | | | | | | | | | | | | | |
| | | |
Water
The 1.1 percent increase in Water segment sales in 2006 from 2005 was primarily the result of:
| |
| • | organic sales growth of approximately one percent (excluding foreign currency exchange), which includes selective increases in selling prices to mitigate inflationary cost increases; |
| | |
| • | strong pump sales in our commercial markets; |
|
| • | increased sales in Europe driven by higher pump and filtration sales; |
|
| • | sales growth in emerging markets in Asia-Pacific; |
|
| • | sales growth of filtration products in our foodservice, commercial, and industrial markets; and |
| |
| • | favorable foreign currency effects. |
These increases were partially offset by:
| |
| • | lower sales of pool and spa products due to softening of the U.S. residential housing market and inventory draw-downs by pool distribution customers to position themselves for the softening market. |
The 36.3 percent increase in Water segment sales in 2005 from 2004 was primarily the result of:
| | |
| • | an increase in sales volume driven by our July 31, 2004 acquisition of WICOR and our February 23, 2005 acquisition of DEP; |
24
| | |
| |
| • | selective increases in selling prices to mitigate inflationary cost increases; |
| |
| • | sales growth on a proformapro forma basis (assuming we had acquired WICOR at the beginning of 2004 and excluding the recent Thermal acquisition and favorable foreign currency exchange) of approximately four percent for the year; |
| |
| • | an increase in sales of pool and spa equipment due to market share gains, favorable weather conditions, and successful early buy programs; |
| |
| • | growth in international markets; and |
| |
| • | favorable foreign currency effects. |
26
Technical Products
The 47.422.6 percent increase in WaterTechnical Products segment sales in 20042006 from 20032005 was primarily the result of:
| |
| • | an increase in sales volume due to our December 1, 2005 acquisition of the Thermal businesses; |
|
| • | organic sales growth of approximately six percent (excluding acquisitions and foreign currency exchange), which includes selective increases in selling prices to mitigate inflationary cost increases: |
| | |
| | • | an increaseincreased sales in our commercial and industrial markets; |
|
| • | increased sales volume driven by our July 31, 2004 acquisition of WICORin European test and our December 31, 2003 acquisition of Everpure;measurement and telecom markets; |
| |
| | • | higher organic growth for pool and spa equipment by capturing a larger share of the increasing spend on the home environment, primarily through the expansion of our product offerings, including the introduction of several new innovative products and product systems; |
|
| • | strong sales of pumps for residential water systems and sump pumps, somewhatin Asia driven by North American weather patterns, combined with strong demand for commercialkey OEM programs in China and engineered pumping systems; |
|
| • | significant growth in international markets; |
|
| • | an increasestronger sales in the sales of water filtration products including residentialtelecom and industrial tankssemiconductor markets in Japan; and valves in the U.S. and European markets, which was driven particularly in the first half of 2004 by rebounding economic conditions consistent with increased housing starts and the low interest rate environment; |
| |
|
| • | favorable foreign currency effects;effects. |
These increases were partially offset by:
| |
| • | lower sales to North American telecom businesses due to weaker markets conditions, customer consolidation and certain key projects reachingend-of-life; and |
| |
| • | selective increaseslower sales in selling pricesdata markets related to mitigate inflationary cost increases.OEM projects that reachedend-of-life or were transitioned to our Asian operations. |
Technical Products
The 14.0 percent increase in Technical Products segment sales in 2005 from 2004 was primarily the result of:
| | |
| • | Growthgrowth in new products including Advanced Telecommunications Computing Architecture (ATCA), slide rails for datacom applications and a new cabinet line targeted toward the telecom and electronic markets; |
| |
| • | improved service and delivery resulting in increased sales volume in North America with strong sales in commercial and medical industry segments; |
| |
| • | selective increases in selling prices to mitigate inflationary cost increases; |
| |
| • | an increase in sales volume driven by our December 1, 2005 acquisition of thermal management businesses from APW, Ltd;the Thermal businesses; |
| |
| • | higher sales in China; and |
| |
| • | favorable foreign currency effects. |
Gross profit
| | | | | | | | | | | | | |
| In thousands | | 2006 | | % of sales | | 2005 | | % of sales | | 2004 | | % of sales |
| |
| |
| Gross profit | | $906,250 | | 28.7% | | $848,021 | | 28.8% | | $654,710 | | 28.7% |
| |
| |
| Percentage point change | | | | (0.1) pts | | | | 0.1 pts | | | | |
The 22.70.1 percentage point decrease in gross profit as a percent increase in Technical Products segmentof sales in 20042006 from 20032005 was primarily the result of:
| | |
| • | higher sales dueinflationary increases related to the addition of new distributors, new products,material, labor and higher demand from established industrial markets, as well as security, medical, networking, and commercial markets;freight costs; |
| |
| • | increased reserves for inventory and warranty expenses in our Water Group due to the effects of the U.S. residential housing market downturn on the spa and bath markets and new pool starts, and also due to inventory reserves established for pump motors that we no longer expect to need; |
|
| • | some recovery in North American telecomlower sales of pool and datacom demand;spa products related to the U.S. residential housing market downturn; and |
|
| • | operating inefficiencies related to product moves and plant consolidations. |
25
These decreases were partially offset by:
| | |
| • | an increase in European sales volume due to new customers and improved business activity at large OEMs, particularly in the test and measurement, automation and control, and telecom markets, offset by a slowing European economy; |
|
| • | selective increases in selling prices in our Water and Technical Products Groups to mitigate inflationary cost increases, principally for steel;increases; |
27
| |
| • | savings generated from our PIMS initiatives including lean and supply management practices; |
|
| • | cost leverage from increased sales volume in our Technical Products Group; and |
| |
| • | favorable foreign currency effects.absence ofstart-up costs in new water facilities (incurred in 2005). |
Gross Profit
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | % of
| |
| | | 2005 | | | % of Sales | | 2004 | | | % of Sales | | 2003 | | | Sales | |
| | | (In thousands) | |
| |
| Gross profit | | $ | 848,021 | | | 28.8% | | $ | 654,710 | | | 28.7% | | $ | 446,230 | | | | 27.2% | |
| | | | | | | | | | | | | | | | | | | | | |
| Percentage point change | | | | | | 0.1 pts | | | | | | 1.5 pts | | | | | | | | |
The 0.1 percentage point increase in gross profit as a percent of sales in 2005 from 2004 was primarily the result of:
| | |
| • | selective increases in selling prices in our Water and Technical Products segmentsGroups to mitigate inflationary cost increases; |
| |
| • | savings generated from our PIMS initiatives including lean enterprise and supply management practices; |
| |
| • | cost leverage from our increase in sales volume; and |
| |
| • | synergy benefits, net of integration costs, related to the acquisition of the former WICOR businesses. |
These increases were partially offset by:
| | |
| • | inflationary cost increases in our Water and Technical Products segments;Groups; |
| |
| • | lower margins associated with our July 31, 2004 acquisition of WICOR; and |
| |
| • | operating inefficiencies related to WICOR product moves, plant consolidations, andstart-up costs in new water facilities. |
Selling, general and administrative (SG&A)
| | | | | | | | | | | | | |
| In thousands | | 2006 | | % of sales | | 2005 | | % of sales | | 2004 | | % of sales |
| |
| |
| SG&A | | $541,209 | | 17.2% | | $478,907 | | 16.2% | | $376,015 | | 16.5% |
| |
| |
| Percentage point change | | | | 1.0 pts | | | | (0.3) pts | | | | |
The 1.51.0 percentage point increase in gross profitSG&A expense as a percent of sales in 20042006 from 20032005 was primarily the result of:
| | |
| • | cost leverage from our increasehigher selling, general and administrative expense to fund investments in sales volume; |
|
| • | savings generated from our key initiatives, supply management and PIMS; |
|
| • | selective increases in selling pricesfuture growth in our Water Group, including personnel and Technical Products segments to mitigate inflationary cost increases; |
|
| • | lower costs as a result of engineered cost reductions throughout Pentair;business infrastructure, with an emphasis on growth in our international markets; and |
| |
| • | higher gross margins associated withseverance costs in our December 31, 2003 acquisitionWater Group and at our corporate headquarters, and increased reserves for accounts receivable due to the effects of Everpure.the U.S. residential housing market downturn on the spa and bath markets and new pool starts in our Water Group. |
These increases were partially offset by:
| | |
| • | lower initial gross margins associated withcost leverage from our July 31, 2004 acquisition of WICOR; and |
|
| • | the expensing of fair market value inventory adjustments related to inventory acquiredincrease in sales volume in the Everpure and WICOR transactions.Technical Products Group. |
26
Selling, General and Administrative (SG&A)
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | % of
| |
| | | 2005 | | | % of Sales | | 2004 | | | % of Sales | | 2003 | | | Sales | |
| | | (In thousands) | |
| |
| SG&A | | $ | 478,907 | | | 16.2% | | $ | 376,015 | | | 16.5% | | $ | 253,088 | | | | 15.4% | |
| | | | | | | | | | | | | | | | | | | | | |
| Percentage point change | | | | | | (0.3) pts | | | | | | 1.1 pts | | | | | | | | |
The 0.3 percentage point decrease in SG&A expense as a percent of sales in 2005 from 2004 was primarily the result of:
| | |
| • | favorable cost leverage from the combined larger company of Pentair and the former WICOR businesses. |
These decreases arewere partially offset by:
| | |
| • | adoption of SFAS 123R which requires us to record expense for the fair value of stock-based compensation; |
| |
| • | investments made to support future growth; and |
| |
| • | higher amortization of intangibles due to acquisitions and amortization of a tax strategy-based investment. |
28
Research and development (R&D)
| | | | | | | | | | | | | |
| In thousands | | 2006 | | % of sales | | 2005 | | % of sales | | 2004 | | % of sales |
| |
| |
| R&D | | $58,055 | | 1.8% | | $46,042 | | 1.6% | | $31,453 | | 1.4% |
| |
| |
| Percentage point change | | | | 0.2 pts | | | | 0.2 pts | | | | |
The 1.10.2 percentage point increase in SG&AR&D expense as a percent of sales in 20042006 from 20032005 was primarily the result of:
| | |
| • | increased selling expenses and management incentives due to strong sales growth in 2004; |
|
| • | increased amounts of sales incentives, including volume-based rebates, which are recorded as a reduction of net sales; |
|
| • | higher SG&A expense associated with our December 31, 2003 acquisition of Everpure; |
|
| • | cost of outside support for integration planning and communicationsadditional investments related to the WICOR acquisition; |
|
| • | expenses related to the consolidation of certain pump related facilitiesnew product development initiatives in our Water segment; |
|
| • | higher corporate governance costs, including Sarbanes-Oxley compliance and external audit fees, and increased general insurance costs; |
|
| • | less favorable foreign currency effects than in the prior comparable period;Technical Products Groups; and |
| |
| • | investments made to support future growth.proportionately higher R&D spending in the acquired Thermal businesses. |
Research and Development (R&D)
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | % of
| |
| | | 2005 | | | % of Sales | | 2004 | | | % of Sales | | 2003 | | | Sales | |
| | | (In thousands) | |
| |
| R&D | | $ | 46,042 | | | 1.6% | | $ | 31,453 | | | 1.4% | | $ | 22,932 | | | | 1.4% | |
| | | | | | | | | | | | | | | | | | | | | |
| Percentage point change | | | | | | 0.2 pts | | | | | | 0.0 pts | | | | | | | | |
The 0.2 percentage point increase in R&D expense as a percent of sales in 2005 from 2004 was primarily the result of:
| | |
| • | increased spending for new product and new markets, especially for water filtration. |
Operating income
Water
| | | | | | | | | | | | | |
| In thousands | | 2006 | | % of sales | | 2005 | | % of sales | | 2004 | | % of sales |
| |
| |
| Operating income | | $212,498 | | 9.9% | | $267,138 | | 12.5% | | $197,310 | | 12.6% |
| |
| |
| Percentage point change | | | | (2.6) pts | | | | (0.1) pts | | | | |
The unchanged R&D expense2.6 percentage point decrease in Water segment operating income as a percent of net sales in 20042006 from 20032005 was primarily the result of:
| |
| • | inflationary increases related to material, labor, and freight costs; |
| |
| • | lower sales of pool and spa products related to the U.S. residential housing market downturn; |
|
| • | planned investments in new products and new customers, reinforcing international talent, and implementing a unified business infrastructure in Europe; |
|
| • | unfavorable product mix; |
|
| • | increased spending forinventory, warranty, and accounts receivable reserves and severance costs due to the effects of the U.S. residential housing market downturn on the spa and bath markets and new pool starts; and |
|
| • | manufacturing inefficiencies resulting from plant and product development initiatives that paced with the increase in sales.line moves. |
27
Operating IncomeThese decreases were partially offset by:
Water
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | % of
|
| | | 2005 | | % of Sales | | 2004 | | % of Sales | | 2003 | | Sales |
| | | (In thousands) |
| |
| Operating income | | $ | 267,138 | | | 12.5% | | $ | 197,310 | | | 12.6% | | $ | 143,962 | | | | 13.6% | |
| | | | | | | | | | | | | | | | | | | | | |
| Percentage point change | | | | | | (0.1) pts | | | | | | (1.0) pts | | | | | | | | |
| |
| • | selective increases in selling prices to mitigate inflationary cost increases; and |
|
| • | savings realized from continued success of PIMS, including lean and supply management activities. |
The 0.1 percentage point declinedecrease in Water segment operating income as a percent of net sales in 2005 from 2004 was primarily the result of:
| | |
| • | lower initial margins associated with our July 31, 2004 acquisition of WICOR during the first half of 2005; |
| |
| • | inflationary cost increases for certain production materials; |
| |
| • | operating inefficiencies related to WICOR product moves, plant consolidations, andstart-up costs associated with new water facilities; |
29
| |
| • | adoption of SFAS 123R which requires us to record expense for the fair value of stock-based compensation; and |
| |
| • | investments made to support future growth. |
These decreases were partially offset by:
| | |
| • | synergy benefits, net of integration costs, related to the acquisition of the former WICOR businesses; |
| |
| • | favorable operating leverage provided by supply management savings and productivity gains from higher sales volume; and |
| |
| • | selective increases in selling prices to mitigate inflationary cost increases. |
Technical Products
| | | | | | | | | | | | | |
| In thousands | | 2006 | | % of sales | | 2005 | | % of sales | | 2004 | | % of sales |
| |
| |
| Operating income | | $148,905 | | 14.9% | | $109,229 | | 13.4% | | $87,844 | | 12.3% |
| |
| |
| Percentage point change | | | | 1.5 pts | | | | 1.1 pts | | | | |
The 1.5 percentage point increase in Technical Products segment operating income as a percent of net sales in 2006 from 2005 was primarily the result of:
| |
| • | leverage gained on volume expansion through market share growth; |
|
| • | savings realized from the continued success of PIMS, including lean and supply management activities; and |
|
| • | selective increases in selling prices to mitigate inflationary cost increases. |
The 1.0 percentage point decline in Water segment operating income as a percent of net sales in 2004 from 2003 was primarily the result of:
| | |
| • | lower initial margins associated with our July 31, 2004 acquisition of WICOR; |
|
| • | inflationary costThese increases particularly as it related to the costs of motors and resins; |
|
| • | cost of outside support for integration planning and communications related to the WICOR acquisition; |
|
| • | the expensing of fair market value inventory adjustments related to inventory acquired in the Everpure and WICOR transactions; and |
|
| • | expenses related to factory capacity rationalization. |
These decreases were partially offset by:
| | |
| • | favorable operating leverage provided by supply management savingsinflationary increases related to materials, labor and productivity gains from higher sales volume; |
|
| • | selective increases in selling prices to mitigate inflationary cost increases; and |
|
| • | higher margins associated with our December 31, 2003 acquisition of Everpure.freight costs. |
28
Technical Products
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | % of
|
| | | 2005 | | % of Sales | | 2004 | | % of Sales | | 2003 | | Sales |
| | | (In thousands) |
| |
| Operating income | | $ | 109,229 | | | | 13.4% | | | $ | 87,844 | | | | 12.3% | | | $ | 51,094 | | | | 8.8% | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Percentage point change | | | | | | | 1.1 pts | | | | | | | | 3.5 pts | | | | | | | | | |
The 1.1 percentage point increase in Technical Products segment operating income as a percent of net sales in 2005 from 2004 was primarily the result of:
| | |
| • | selective increases in selling prices to mitigate inflationary cost increases; |
| |
| • | leverage gained on volume expansion through new product sales and market share growth; and |
| |
| • | savings from the continued success of PIMS, including lean enterprise and supply management activities. |
These increases were partially offset by:
| | |
| • | material cost inflation, primarily aluminum and steel; and |
| |
| • | adoption of SFAS 123R which requires us to record expense for the fair value of stock-based compensation. |
Net interest expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In thousands | | 2006 | | | 2005 | | | Difference | | | % change | | | 2005 | | | 2004 | | | Difference | | | % change | |
| | |
| |
| Net interest expense | | $ | 51,881 | | | $ | 44,989 | | | $ | 6,892 | | | | 15.3% | | | $ | 44,989 | | | $ | 37,210 | | | $ | 7,779 | | | | 20.9% | |
| |
| |
The 3.5 percentage point15.3 percent increase in Technical Products segment operating income as a percent of net salesinterest expense from continuing operations in 20042006 from 20032005 was primarily the result of:
| | |
| • | leverage gained on volume expansion;increases in interest rates; |
| |
| • | savings fromhigher average outstanding debt in 2006 primarily as a result of the continued success of PIMS, including lean enterpriseacquired Thermal businesses and supply management activities; |
|
| • | selective increasesan increase in selling prices to mitigate inflationary cost increases;inventory; and |
| |
| • | incremental interest expense related to the absencepayments made in connection with the final resolution of expenses associatedthe net asset value dispute with downsizing includedThe Black and Decker Corporation (“BDK”) in the comparable prior period.first quarter of 2006. |
30
These increases were partially offset by:
| | |
| • | material cost inflation, primarily steel.favorable adjustments to interest expense related to the favorable settlement of prior years’ federal tax returns in the second and third quarters of 2006. |
Net Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | Difference | | % Change | | 2004 | | 2003 | | Difference | | % Change |
| | | (In thousands) |
| |
| Net interest expense | | $ | 44,989 | | | $ | 37,210 | | | $ | 7,779 | | | | 20.9% | | | $ | 37,210 | | | $ | 26,395 | | | $ | 10,815 | | | | 41.0% | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The 20.9 percent increase in interest expense from continuing operations in 2005 from 2004 was primarily the result of:
| | |
| • | a portion of interest expense in 2004 wasbeing allocated to discontinued operations for our former Tools Group versus all the interest expense in 2005 being attributed to continuing operations; and |
| |
| • | higher interest rates in 2005. |
Provision for income taxes
| | | | | | | | | | | | | |
| In thousands | | 2006 | | | 2005 | | | 2004 | |
| | |
| |
| Income from continuing operations before income taxes | | $ | 255,469 | | | $ | 283,518 | | | $ | 210,032 | |
| Provision for income taxes | | | 71,702 | | | | 98,469 | | | | 73,008 | |
| Effective tax rate | | | 28.1 | % | | | 34.7 | % | | | 34.8 | % |
The 41.0 percent increase6.6 percentage point decrease in interest expensethe tax rate in 2006 from continuing operations in 2004 from 20032005 was primarily the result of:
| | |
| • | higher debt levels resulting from utilization of foreign tax credits; |
|
| • | the Everpurefavorable settlement in 2006 of prior years’ federal tax returns; and WICOR acquisitions, including the Bridge Facility financing, partially offset by operating cash flows. |
|
| • | an unfavorable settlement in 2005 for a routine tax exam for prior years in Germany. |
29
Provision for Income TaxesThese decreases were partially offset by:
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | (In thousands) | |
| |
| Income from continuing operations before income taxes | | $ | 283,518 | | | $ | 210,032 | | | $ | 143,815 | |
| Provision for income taxes | | | 98,469 | | | | 73,008 | | | | 45,665 | |
| Effective tax rate | | | 34.7 | % | | | 34.8 | % | | | 31.8 | % |
| |
| • | a favorable settlement in 2005 related to prior years’ federal tax returns; and |
|
| • | a favorable adjustment in 2005 related to the filing of our 2004 federal tax return. |
The 0.1 percentage point decrease in the tax rate in 2005 from 2004 was primarily the result of:
| | |
| • | a favorable benefit of $1.4 million related to R&D tax credits; |
| |
| • | a favorable settlement of an IRS audit for the periods1998-2001 resulting in a release of2005 related to prior years’ federal tax contingency reserves in the amount of $1.3 million;returns; |
| |
| • | a favorable adjustment of $1.0 millionin 2005 related to the filing of theour 2004 Federalfederal tax return; and |
| |
| • | a benefit related to the deduction for qualified production activities. |
These decreases were partially offset by:
| | |
| • | an anticipated unfavorable settlement of $3.2 million recordedin 2005 for a routine tax examination of prior years in Germany; and |
| |
| • | higher effective tax rate in 2005 due to the non-deductibility of certain SFAS 123R expenses related to stock options. |
The 3.0 percentage point increase in the tax rate in 2004 from 2003 was primarily the result of:
| | |
| • | increased operating income coupled with the relatively fixed nature of many of our tax savings programs; |
|
| • | the mix of our 2004 U.S. and foreign earnings; and |
|
| • | our July 31, 2004 acquisition of WICOR which results in a higher effective tax rate. |
We expect our full year effective tax rate in 20062007 to be 36 percent.between 35% and 36%. We will continue to pursue tax rate reduction opportunities.
LIQUIDITY AND CAPITAL RESOURCES
Cash requirements for working capital, capital expenditures, equity investments, acquisitions, debt repayments, and dividend payments are generally funded from cash generated from operations, availability under existing committed revolving credit facilities, and in certain instances, public and private debt and equity offerings. In 2005,2006, we invested $151$29 million in acquisitions, repurchased $59 million of our stock, paid $53$57 million in dividends, and repurchased $25 million of our stock; and increaseddecreased our debt by only $17$9 million.
We experience seasonal cash flows primarily due to seasonal demand in a number of markets within our Water segment.Group. End-user demand for pool/spapool equipment follows warm weather trends and is at seasonal highs from March April
31
to July.August. The magnitude of the sales spike is partially mitigated by effective use of the distribution channel by employing some advance sales “early buy” programs (generally including extended payment termsand/or additional discounts). Demand for residential and agricultural water systems is also impacted by weather patterns, particularly related toby heavy flooding and droughts.
30
The following table presents selected working capital measurements calculated from our monthly operating results based on a13-month moving average:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31
| | December 31
| | December 31
| | | December 31
| | December 31
| | December 31
| |
| | | 2005 | | 2004 | | 2003 | | |
| Days | | | 2006 | | 2005 | | 2004 | |
| | | (Days) | | | |
| |
| Days of sales in accounts receivable | | | 54 | | | | 52 | | | | 54 | | | | 54 | | | | 54 | | | | 52 | |
| Days inventory on hand | | | 70 | | | | 62 | | | | 59 | | | | 76 | | | | 70 | | | | 62 | |
| Days in accounts payable | | | 56 | | | | 57 | | | | 54 | | | | 56 | | | | 56 | | | | 57 | |
Operating Activitiesactivities
Cash provided by operating activities was $231.6 million in 2006, or $16.2 million lower compared with the same period in 2005. The decrease in cash provided by operating activities was due primarily to working capital increases related to increased inventory levels and decreases in various accruals. The increase in days inventory on hand as of December 31, 2006 compared to December 31, 2005 was attributable to increased inventory levels to support product moves and plant rationalizations, inventory to support product sourced from low cost countries, higher value of inventories due to rising raw material input costs, and due to the purchase of additional submersible pump motors for competitive reasons. In the future, we expect our working capital ratios to improve as we complete our facility rationalization activities and capitalize on our PIMS initiatives.
Cash provided by operating activities was $247.9 million in 2005, or $16.2 million lower compared with the same period in 2004. The decrease in cash provided by operating activities iswas due to working capital increases related to increased sales volume, the rationalization of Water segmentGroup operations, and increases in various customer rebates. The increased days of sales in accounts receivable as of December 31, 2005 compared to December 31, 2004 iswas the result of the differences in sales terms offered by the former WICOR business compared to the terms offered by our former Tools Group and the sale of approximately a $22.0 million interest in a pool of accounts receivable to a third-party financial institution in 2004. The increased days inventory on hand as of December 31, 2005 compared to December 31, 2004 was driven by the increased inventory levels attributable to increased sourcing out of Asia, higher value of inventories due to rising raw material input costs, and inventory redundancies associated with theramp-up of new facilities and the wind-down of old facilities. The working capital ratios as of December 31, 2005 versus December 31, 2004 have increased, primarily for the same reasons. In the future, we expect our working capital ratios to improve as we are able to capitalize on the anticipated success of our post-acquisition integration activities and PIMS initiatives.
Cash provided by operating activities was $264.1 million in 2004, or $1.2 million higher compared with the same period in 2003. The increase in net cash provided by operating activities was primarily attributable to an increase in net income offset by higher levels of inventory due to inventory builds to support customers during product transfers and plant consolidation activities in Water. The WICOR acquisition hasalso increased our working capital ratios, primarily inventory days, which will continue until our post-acquisition integration activities are farther along and our PIMS initiatives are better established.days.
In December 2006 and 2004, we sold an approximateapproximately $30.0 million and $22.0 million, interest in a poolrespectively, of accounts receivable to a third-party financial institution to mitigate accounts receivable concentration risk because we did not offer or the credit risk associated withcustomer did not take advantage of the receivable balance of a large customer.early pay discounts and to provide additional financing capacity. In compliance with Statement of Financial Accounting StandardsSFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, sales of accounts receivable are reflected as a reduction of accounts receivable in the consolidated balance sheetsour Consolidated Balance Sheets and the proceeds are included in the cash flows from operating activities in our Consolidated Statements of Cash Flows. In 2006, a loss in the consolidated statementamount of cash flows. As$0.8 million related to the sale of accounts receivable is included in the line item Gain on sale of assets, netin our Consolidated Statements of Income. In 2004, no gain or loss was recorded as the estimated present value of the receivables sold approximated the carrying amount, no gain or loss was recorded in 2004. The Accounts Receivable Purchase Agreement was not renewed in 2005.amount.
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Investing Activitiesactivities
Capital expenditures in 2006, 2005, and 2004 and 2003 were $51.1 million, $62.5 million and $48.9 million (including $43.1 million for continuing operations) and $43.6 million (including $29.0 million for continuing operations), respectively. We anticipate capital expenditures for fiscal 20062007 to be approximately $80$70 to $85$80 million, primarily for expansion ofcapacity expansions in our low cost country manufacturing facilities, implementation of a unified business systems infrastructure in Europe, selective increases in equipment capacity, new product development, and general maintenance capital.
On April 12, 2006, we acquired, as part of our Water Group, the assets of Geyer’s Manufacturing & Design Inc. and FTA Filtration, Inc. (together “Krystil Klear”), two privately held companies, for $15.5 million in cash. Krystil Klear expands our industrial filtration product offering to include a full range of steel and stainless steel tanks which house filtration solutions.
During 2006, we completed several other small acquisitions totaling $14.2 million in cash and notes payable, adding to both our Water and Technical Products Groups.
In January 2006, pursuant to the purchase agreement for the sale of our former Tools Group, we completed the repurchase of a manufacturing facility in Suzhou, China from BDK for approximately $5.7 million. We recorded no gain or loss on the repurchase. In March 2006, we completed an outstanding net asset value arbitration with BDK relating to the purchase price for the sale of our former Tools Group. The decision by the arbitrator constituted a final resolution of all disputes between BDK and us regarding the net asset value. We paid the final net asset value purchase price adjustment pursuant to the purchase agreement of $16.1 million plus interest of $1.1 million in March 2006, resulting in an incremental pre-tax loss on disposal of discontinued operations of $3.4 million or $1.6 million net of tax. In the third quarter of 2006, we resolved a prior year tax item that resulted in a $1.4 million income tax benefit related to our former Tools Group. Also in March 2006, we exited a leased facility from our former Service Equipment business resulting in a net cash outflow of $2.2 million and an immaterial gain from disposition.
During 2006, we made investments in and loans to certain joint ventures in the amount of $7.5 million.
Cash proceeds from the sale of property and equipment of $17.1 million in 2005 was primarily related to the sale of three facilities.facilities for our Water Group.
On December 1, 2005, we acquired, McLeanas part of our Technical Products Group, the Thermal Management, Aspen Motion Technologies and Electronic Solutions businesses from APW for approximately $140.0$143.9 million, including a cash payment of
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$138.9 $140.6 million and transaction costs of $1.1$3.3 million. These businesses provide thermal management solutions and integration services to the telecommunications, data communications, medical and security marketsmarkets.
On February 23, 2005, we acquired, as part of our Technical ProductsWater Group, certain assets of DEP, a privately held company, for $10.3 million, including a cash payment of $10.0 million, transaction costs of $0.2 million, plus debt assumed of $0.1 million. The DEP product line addresses the water and wastewater markets and is part of our Water Group.
In the third quarter 2005, we paid $10.4 million in post-closing purchase price adjustments related to the October 2004 sale of our former Tools Group to The Black & Decker Corporation.BDK.
In April 2005, we sold our interest in the stock of LN Holdings Corporation for cash consideration of $23.6 million, resulting in a pre-tax gain of $5.2 million and an after tax gain of $3.3 million. The terms of the sale agreement establishestablished two escrow accounts totaling $14 million to be used for payment of any potential adjustments to the purchase price, transaction expenses, and indemnification for certain losses such as environmental claims. In December 2005, we received $0.2M$0.2 million from the escrow accounts which increased our gain from the sale. During 2006 we received $1.2 million from the escrow accounts which also increased our gain from the sale. Any remaining escrow balances are to be distributed by April 2008 to the former shareholders in accordance with their ownership percentages. Any funds received from settlement of escrows in future periods will be accounted for as additional gain on the sale of this interest.
On February 23, 2005, we acquired certain assets of DEP, a privately held company, for $10.3 million, including a cash payment of $10.0 million, transaction costs of $0.2 million, plus debt assumed of $0.1 million. The DEP product line addresses the water and wastewater markets and is part of our Water Group.
Effective after the close of business October 2, 2004, we completed the sale of our Tools Group to BDK for approximately $796.8 million in cash, including a $21.8 million interim net asset value increase, subject to post-closing adjustments.
Effective July 31, 2004, we completed the acquisition of all of the shares of capital stock of WICOR from Wisconsin Energy Corporation for $874.7 million, including a cash payment of $871.1 million, transaction costs of $11.2 million, and debt assumed of $21.6 million, less a favorable final purchase price adjustment of $14.0 million;
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$14.0 million, and less cash acquired of $15.2 million. This includes an additional $0.4 million in transaction costs recorded in the first three quarters of 2005.
On April 5, 2004, we acquired all of the remaining stock of the Tools Group’s Asian joint venture for $21.8 million in cash, $6.4 million of which was paid following the sale of the Tools Group. The level of return on sales targets achieved in the second quarter of 2004 required a payment of $0.9 million, which was recorded as an increase to goodwill. The acquisition included cash acquired of $6.2 million and debt assumed of $9.0 million. The investment in the Tools Group’s Asian joint venture business was sold as part of the Tools Group to BDK.
In the second quarter ofDuring 2004, we paid $3.9 million in purchase price adjustments related to the December 31, 2003 acquisition of Everpure. The adjustment primarily related to the final determination of closing date net assets.
In the first quarter of 2004, we We also paid $2.3 million for acquisition fees which were primarily related to the December 31, 2003 acquisitionEverpure acquisition.
Effective after the close of Everpure.business October 2, 2004, we completed the sale of our Tools Group to BDK for approximately $796.8 million in cash, including a $21.8 million interim net asset value increase, subject to post-closing adjustments.
Financing Activitiesactivities
Net cash used for financing activities was $117.8 million, $43.8 million in 2005 compared toand $137.8 million in 2004.2006, 2005 and 2004, respectively. Financing activities includedconsisted primarily of draw downs and repayments on our revolving credit facilities to fund our operations in the normal course of business, dividend payments, share repurchases, and cash received from stock option exercises.
We have a multi-currency revolving Credit Facility (the “Credit Facility”) of $800 million expiring on March 4, 2010. We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We use the Credit Facility asback-up liquidity to support 100% of commercial paper outstanding. As of December 31, 2006, we had $208.9 million of commercial paper outstanding that matures within 49 days. All of the commercial paper was classified as long-term as we have the intent and the ability to refinance such obligations on a long-term basis under the Credit Facility.
In March 2005, we amended and restated our multi-currency revolving Credit Facility, increasing the size of the facility from $500 million to $800 million with a term of five years. The interest rate on the loans under the $800 million Credit Facility is LIBOR plus 0.625%. Interest rates and fees on the Credit Facility vary based on our credit ratings.
We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We use the Credit Facility asback-up liquidity to support 100% of commercial paper
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outstanding. As of December 31, 2005, we had $144.7 million of commercial paper outstanding that matured within 54 days. All of the commercial paper was classified as long-term as we have the intent and the ability to refinance such obligations on a long-term basis under the Credit Facility. Availability under our Credit Facility at December 31, 2005, including outstanding commercial paper, was approximately $543.0 million.
Effective following the close of business on July 31, 2004, we completed the acquisition of WICOR. We funded the payment of the purchase price and related fees and expenses of the WICOR acquisition with an $850 million committed line of credit (“the Bridge FacilityFacility”) and through additional borrowings available under our existing Credit Facility. The interest rate on the Bridge Facility and loans under the Credit Facility during the period of the Bridge Facility was LIBOR plus 1.375%.
On October 4, 2004, we received approximately $796.8 million of proceeds from the sale of our Tools Group to BDK. As required under the terms of the Bridge Facility, we used the proceeds from the Tools Group sale and additional borrowings under the Credit Facility to pay off the Bridge Facility. Following payment of the Bridge Facility and based on our existing credit ratings, the interest rate on loans under the Credit Facility decreased to LIBOR plus 1.125%.
We were in compliance with all debt covenants as of December 31, 2006.
In addition to the Credit Facility, we have $25 million of uncommitted credit facilities, under which we had nodrawn $14.0 million in borrowings as of December 31, 2005.2006.
Our current credit ratings are as follows:
| | | | | | | | | |
| | Long-Term Debt
| | Current Rating
|
Rating Agency | | Long-Term Debt Rating
| | Current Rating Outlook
|
| |
| Standard & Poor’s | | | BBB | | | | Stable | |
| Moody’s | | | Baa3 | | | | Stable | |
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We believe the potential impact of a downgrade in our financial outlook is currently not significant to our liquidity exposure or cost of debt. A credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program. The credit rating takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. On the other hand, theThe ratings outlook also highlights the potential direction of a short or long-term rating. It focuses on identifiable events and short-term trends that cause ratings to be placed under observation by the respective Rating Agencies. A change in rating outlook does not mean a rating change is inevitable. Prior changes in our ratings outlook have had no immediate impact on our liquidity exposure or on our cost of debt.
We issue short-term commercial paper notes that are currently not rated by Standard & Poor’s or Moody’s. Even though our short-term commercial paper is unrated, we believe a downgrade in our long-term debt rating could have a negative impact on our ability to continue to issue unrated commercial paper.
We do not expect that a one rating downgrade of our long-term debt by either Standard & Poor’s or Moody’s would substantially affect our ability to access the long term debt capital markets. However, depending upon market conditions, the amount, timing and pricing of new borrowings could be adversely affected. If both of our long-term debt ratings were downgraded to below BBB-/Baa3, our flexibility to access the term debt capital markets would be reduced. In the event of a downgrade of our long-term debt rating, the cost of borrowing and fees payable under our Credit Facility and $35 million private placement fixed rate note could increase. While the Credit Facility has a pricing grid based in part on credit ratings, we do not have any agreements under which the obligations are accelerated in the event of a ratings downgrade.
As of December 31, 2005,2006, our capital structure consisted of $752.6$744.1 million in total indebtedness and $1,555.6$1,670.0 million in shareholders’ equity. The ratio ofdebt-to-total capital at December 31, 20052006 was 32.6 percent,30.8% , compared with 33.7 percent32.6% at December 31, 2004.2005. Our targeteddebt-to-total capital ratio is 40 percent40% or less.
We expect to continue to have cash requirements to support working capital needs and capital expenditures, to pay interest and service debt, and to pay dividends to shareholders. In order to meet these cash
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requirements, we intend to use available cash and internally generated funds, and to borrow under our committed and uncommitted credit facilities.
We paid dividends in 20052006 of $53.1$56.6 million, compared with $53.1 million in 2005 and $43.1 million in 2004 and $40.5 million in 2003.2004. We anticipate continuing the practice of paying dividends on a quarterly basis.
In December 2004,2005, the Board of Directors authorized the developmentrepurchase of a program and process to repurchase shares of our common stock up to a maximum dollar limit of $25.0$25 million of our common stock annually. There is no expiration associatedstock. On July 28, 2006, the Board of Directors increased our repurchase authorization to $50 million, and on September 28, 2006, the Board of Directors further increased our repurchase authorization to $100 million. As of December 31, 2006, we had purchased 1,986,026 shares for $59.4 million pursuant to these programs during 2006. The Board of Directors authorized the continuation of the repurchase program in 2007 with thea maximum dollar limit of $40.6 million. This authorization granted. In 2005, we repurchased 755,663 shares at $25 million under this plan.expires on December 31, 2007. As of February 17, 2006,16, 2007, we had not repurchased any additional shares under this plan and, accordingly, we have the authority in 20062007 to repurchase shares up to a maximum dollar limit of $25$40.6 million. In 20042005 and 2003,2004, respectively, we repurchased 105,500755,663 shares and 80,000105,500 shares of our common stock under similar plans.authorizations.
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The following summarizes our significant contractual obligations that impact our liquidity:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period | | | Payments Due by Period | |
| | | | | | | | | | | | | More than
| | | | | | | | | | | | | | | More than
| | | |
| | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | 5 Years | | Total | | |
| In thousands | | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | 5 Years | | Total | |
| | | (In thousands) | | | |
| |
| Long-term debt obligations | | $ | 2,971 | | | $ | 37,910 | | | $ | 156 | | | $ | 250,129 | | | $ | 257,034 | | | $ | 200,041 | | | $ | 748,241 | | | $ | 22,188 | | | $ | 1,546 | | | $ | 251,150 | | | $ | 269,066 | | | $ | 75 | | | $ | 200,036 | | | $ | 744,061 | |
| Interest obligations on fixed-rate debt | | | 27 | | | | 26 | | | | 25 | | | | 15 | | | | 5 | | | | 13 | | | | 111 | | | | 26 | | | | 25 | | | | 25 | | | | 5 | | | | 5 | | | | 10 | | | | 96 | |
| Capital lease obligations | | | 214 | | | | 132 | | | | 135 | | | | 80 | | | | — | | | | — | | | | 561 | | | | 175 | | | | 141 | | | | 50 | | | | 19 | | | | — | | | | — | | | | 385 | |
| Operating lease obligations, net of sublease rentals | | | 25,830 | | | | 20,571 | | | | 16,812 | | | | 13,812 | | | | 11,633 | | | | 22,555 | | | | 111,213 | | | | 27,973 | | | | 22,969 | | | | 17,528 | | | | 12,790 | | | | 11,751 | | | | 9,017 | | | | 102,028 | |
| Purchase obligations | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | |
| Other long-term liabilities | | | 4,802 | | | | 4,034 | | | | 2,392 | | | | 1,594 | | | | 317 | | | | — | | | | 13,139 | | | | 2,868 | | | | 1,226 | | | | 719 | | | | 317 | | | | — | | | | — | | | | 5,130 | |
| | | |
| | | | | | | | | | | | | | | | | |
| Total contractual cash obligations, net | | $ | 33,844 | | | $ | 62,673 | | | $ | 19,520 | | | $ | 265,630 | | | $ | 268,989 | | | $ | 222,609 | | | $ | 873,265 | | | $ | 53,230 | | | $ | 25,907 | | | $ | 269,472 | | | $ | 282,197 | | | $ | 11,831 | | | $ | 209,063 | | | $ | 851,700 | |
| | | | | | | | | | | | | | | | | |
| | | |
In addition to the summary of significant contractual obligations, we will incur annual interest expense on outstanding variable rate debt. As of December 31, 2005,2006, variable interest rate debt, including the effects of derivative financial instruments, was $357.0$247.9 million at a weighted average interest rate of 4.8%5.7%.
A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on us that specifies all significant terms. The purchase obligation amounts do not represent our total anticipated future purchases, but represent those purchases for which we are contractually obligated. As of December 31, 2005, we did not have any purchase obligations requiring cash outflows of $1 million or greater per year.
We expect to make contributions in the range of $5$15 million to $10$20 million to our pension plans in 2006.2007. The 2007 expected contributions will equal or exceed our minimum funding requirements.
Other Financial Measuresfinancial measures
In addition to measuring our cash flow generation or usage based upon operating, investing, and financing classifications included in the consolidated statementsConsolidated Statements of cash flows,Cash Flows, we also measure our free cash flow and our conversion of net income. We have a long-term goal to consistently generate free cash flow that equals or exceeds 100% conversion of net income. Free cash flow and conversion of net income are non-GAAP financial measures that we use to assess our cash flow performance and have a long-term goal to consistently generate free cash flow that equals or exceeds 100 percent conversion of net income.performance. We believe free cash flow and conversion of net income are important measures of operating performance because they provide us and our investors a measurement of cash generated from operations that is available to pay dividends and repay debt. In addition, free cash flow and conversion of net income are used as a criterion to measure and pay compensation-based incentives. Our measure of free cash flow and conversion of net income may not be comparable to similarly titled measures reported by other companies. The following table is a reconciliation of free cash flow and a
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calculation of the conversion of net income with cash flows from continuing and discontinued operating activities:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended December 31 | | | Twelve Months Ended December 31 | |
| | | 2005 | | 2004 | | 2003 | | |
| In thousands | | | 2006 | | 2005 | | 2004 | |
| | | | | (In thousands) | | | | | |
| |
| Cash flow provided by operating activities | | $ | 247,858 | | | $ | 264,091 | | | $ | 262,939 | | | $ | 231,611 | | | $ | 247,858 | | | $ | 264,091 | |
| Capital expenditures | | | (62,471 | ) | | | (48,867 | ) | | | (43,622 | ) | | | (51,078 | ) | | | (62,471 | ) | | | (48,867 | ) |
| Proceeds from sale of property and equipment | | | 17,111 | | | | — | | | | — | | | | 684 | | | | 17,111 | | | | — | |
| | | | | | | | | |
| | | |
| Free cash flow | | | 202,498 | | | | 215,224 | | | | 219,317 | | | | 181,217 | | | | 202,498 | | | | 215,224 | |
| Net income | | | 185,049 | | | | 171,225 | | | | 141,352 | | | | 183,731 | | | | 185,049 | | | | 171,225 | |
| | | | | | | | | |
| | | |
| Conversion of net income | | | 109 | % | | | 126 | % | | | 155 | % | | | 99 | % | | | 109 | % | | | 126 | % |
| | | | | | | | | |
| | | |
In 2006, we expect2007, our objective is to generate free cash flow to approximate $200 million.that equals or exceeds 100% of net income.
Off-Balance Sheet ArrangementsOff-balance sheet arrangements
At December 31, 2005,2006, we had no off-balance sheet financing arrangements.
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COMMITMENTS AND CONTINGENCIES
Environmental
We have been named as defendants, targets, or potentially responsible parties (PRPs)(“PRP”) in a small number of environmentalclean-ups, in which our current or former business units have generally been givende minimisstatus. To date, none of these claims have resulted inclean-up costs, fines, penalties, or damages in an amount material to our financial position or results of operations. We have disposed of a number of businesses over the last tenin recent years and in certain cases, such as the disposition of the Cross Pointe Paper Corporation uncoated paper business in 1995, the disposition of the Federal Cartridge Company ammunition business in 1997, the disposition of Lincoln Industrial in 2001, and the disposition of the Tools Group in 2004, we have retained responsibility and potential liability for certain environmental obligations. We have received claims for indemnification from purchasers both of the paper business and the ammunition businessthese businesses and have established what we believe to be adequate accruals for potential liabilities arising out of retained responsibilities. We settled some of the claims in 2005 and 2003 andprior years; to date our recorded accruals werehave been adequate.
In addition, there are pendingongoing environmental issues at a limited number of sites, including one site acquired in the acquisition of Essef Corporation in 1999, that relateswhich relate to operations no longer carried out at that site.the sites. We have established what we believe to be adequate accruals for remediation costs at this and otherthese sites. We do not believe that projected response costs will result in a material liability.
We may be named as a PRP at other sites in the future, for both divested and acquired businesses. When itthe outcome of the matter is probable and it is possible to provide reasonable estimates of our liability with respect to environmental sites, provisions have been made in accordance with generally accepted accounting principles in the United States. As of December 31, 2006 and 2005, and 2004, our undiscounted reserves for such environmental liabilities were approximately $5.6 million and $6.4 million, and $9.4 million, respectively, measured on an undiscounted basis.respectively. We cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmentalclean-up costs and liabilities will not exceed the amount of our current reserves.
Stand-By LettersStand-by letters of Creditcredit
In the ordinary course of business, predominantly for contracts and bids involving municipal pump products, we are required to commit to bonds that require payments to our customers for any non-performance. The outstanding face value of the bonds fluctuates with the value of our projects in process and in our backlog. In addition, we issue financial stand-by letters of credit to secure our performance to third parties under self-insurance programs and certain legal matters. As of December 31, 2006 and 2005, the outstanding value of these instruments totaled $59.6 million and $38.8 million. As of December 31, 2004, the outstanding value of these instruments
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totaled $64.9 million, which included a $38.9 million stand-by letter of credit pertaining to an indemnified legal matter that was resolved in our favor during 2005, eliminating the bond requirement.respectively.
NEW ACCOUNTING STANDARDS
See ITEM 8, Note 1 of the Notes to Consolidated Financial Statements for information pertaining to recently adopted accounting standards or accounting standards to be adopted in the future.
CRITICAL ACCOUNTING POLICIES
We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are more fully described in ITEM 8, Note 1 of the Notes to our consolidated financial statements.Consolidated Financial Statements. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry, and information available from other outside sources, as appropriate. We consider an accounting estimate to be critical if:
| | |
| • | it requires us to make assumptions about matters that were uncertain at the time we were making the estimate; and |
| |
| • | changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations. |
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Our critical accounting estimates include the following:
Impairment of Goodwill
The fair value of each of our reporting units was estimated using a discounted cash flow approach. The test for impairment requires us to make several estimates about projected future cash flows and appropriate discount rates. If these estimates change, we may incur charges for impairment of goodwill. During the fourth quarter of 2005,2006, we completed our annual impairment test of goodwill and determined there was no impairment.
Impairment of Long-lived Assets
We review the recoverability of long-lived assets to be held and used, such as property, plant and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced for the cost to dispose of the assets. The measurement of impairment requires us to estimate future cash flows and the fair value of long-lived assets.
Pension
We sponsor domestic and foreign defined-benefit pension and other post-retirement plans. The amounts recognized in our consolidated financial statements related to our defined-benefit pension and other post-retirement plans are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates, rate of increase in future compensation levels, and health care cost trend rates. These assumptions are updated annually and are disclosed in ITEM 8, Note 11 to the Notes to Consolidated Financial Statements. Changes to these assumptions will affect pension expense.
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In December 2006, we adopted SFAS No. 158,Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R)(“SFAS 158”). SFAS 158 requires that we recognize the overfunded or underfunded status of our defined benefit and retiree medical plans as an asset or liability in our 2006 year-end balance sheet, with changes in the funded status recognized through comprehensive income in the year in which they occur.
Discount Raterate
The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to payments from a stream of AA or higher bonds available in the marketplace, adjusted to eliminate the effects of call provisions. This produced a discount rate for our U.S. plans of 5.75 percent6.00% in 2006 and 5.75% in 2005 and 2004 and 6.25 percent in 2003.2004. The discount rates on our foreign plans ranged from 2.00% to 5.15% in 2006, 2.00% to 4.90% in 2005 versus a range ofand 2.00% to 5.25% in 2004. There are no other known or anticipated changes in our discount rate assumption that will impact our pension expense in 2006.2007.
Expected Raterate of Returnreturn
TheOur expected rate of return on plan assets in 2006 equaled 8.5%, which remained unchanged from 2005 and 2004. The expected rate of return is designed to be a long-term assumption that may be subject to considerableyear-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical ten-year compounded annual return of 9.0 percent,returns, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader longer-term market indices. In 2005,2006, the pension plan assets yielded a positive return of 4.2 percent,12.3%, compared to positive returns of 17.6 percent in 2004 and 24.8 percent in 2003. Our expected rate of return4.2% in 2005 equaled 8.5 percent, which remained unchanged from 2004 and 2003.17.6% in 2004. In 2006, our expected return on plan assets was lower than our actual return on plan assets while in 2005 our expected return on plan assets was higher than our actual return on plan assets while in 2004 our expected return on plan assets was lower than our actual return on plans assets, theassets. The significant difference between our expected return on plan assets compared to our actual return on plan assets in 2005 and 2004 iswas primarily attributable to the fluctuations
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of the Pentairour common stock during 2005 which approximates 10% of the respective years.plan assets. There are no known or anticipated changes in our return assumption that will impact our pension expense in 2006.2007.
We base our determination of pension expense or income on a market-related valuation of assets which reducesyear-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market-related value of assets. Since the market-related value of assets recognizes gains or losses over afive-year-period, the future value of assets will be impacted as previously deferred gains or losses are recorded.
Pension-Related Adjustments to Equity
In 2003, the financial markets recovered and resulted in a positive return on plan assets of 24.8 percent which eliminated $20.9 million of the 2002 $29.2 million charge to shareholders’ equity. The charge did not impact earnings. In 2004, our discount rate was lowered from 6.25 percent to 5.75 percent. However, the change in the discount rate assumption was offset by higher than anticipated returns on assets and thus, did not significantly affect our shareholders’ equity. In 2005, the lower discount rate for our foreign plans and the lower return on plan assets resulted in an after-tax charge to equity of $5.7 million.
Net Periodic Benefit Cost
Total net periodic pension benefit cost was $20.0 million in 2005, $19.2 million in 2004, and $15.7 million in 2003. Total net periodic pension benefit cost is expected to be approximately $24.5 million in 2006. The increasing trend in net periodic pension cost from 2003 forward is largely driven by the decrease in the discount rates and by actual returns on plan assets. The net periodic pension benefit cost for 2006 has been estimated assuming a discount rate of 5.75 percent and an expected return on plan assets of 8.5 percent.
Unrecognized Pension Losses
As of our December 31, 2005 measurement date, our pension plans have $93.4 million of cumulative unrecognized losses. To the extent the unrecognized loss exceeds 10% of the projected benefit obligation, it will be amortized into expense each year on a straight-line basis over the remaining expected future-working
37
lifetime of active participants (currently approximating 12 years). The amount included in pension expense for loss amortization in 2005 was $2.8 million.
See ITEM 8, Note 11 of the Notes to Consolidated Financial Statements for further information regarding pension plans.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
| |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Riskrisk
Market risk is the potential economic loss that may result from adverse changes in the fair value of financial instruments. We are exposed to various market risks, including changes in interest rates and foreign currency rates. We use derivative financial instruments to manage or reduce the impact of some of these risks. Counterparties to all derivative contracts are major financial institutions, thereby minimizing the risk of credit loss. All instruments are entered into for other than trading purposes. The major accounting policies and utilization of these instruments is described more fully in ITEM 8, Note 1 of the Notes to Consolidated Financial Statements.
Our derivatives and other financial instruments consist of long-term debt (including current portion), short-term borrowing, interest rate swaps, and foreign exchange-forward contracts. The net market value of these financial instruments combined is referred to below as the net financial instrument position. As of December 31, 20052006 and December 31, 2004,2005, the net financial instrument position was a liability of $769.0$753.6 million and $766.5$769.0 million, respectively.
Interest Rate Riskrate risk
Our debt portfolio, including swap agreements, as of December 31, 2005,2006 was primarily comprised of debt predominantly denominated in U.S. dollars (99%(97%). This debt portfolio is composedcomprised of 52%53% fixed-rate debt and 48%47% variable-rate debt, not considering the effects of our interest rate swaps. Taking into account the variable to fixed rate swap agreement we entered with an effective date of April 2006, our debt portfolio would beis comprised of 66%67% fixed-rate debt and 34%33% variable-rate debt. Changes in interest rates have different impacts on the fixed and variable-rate portions of our debt portfolio. A change in interest rates on the fixed portion of the debt portfolio impacts the net financial instrument position but has no impact on interest incurred or cash flows. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows but does not impact the net financial instrument position.
Based on the variable-rate debt included in our debt portfolio, including the interest rate swap agreements, as of December 31, 2005,2006, a 100 basis point increase or decrease in interest rates would result in a $3.5$2.5 million increase or decrease in interest incurred.
Foreign Currency Riskcurrency risk
We are exposed to market risks related to fluctuations in foreign exchange rates because some sales transactions, and the assets and liabilities of our foreign subsidiaries, are denominated in foreign currencies, primarily the euro. We held immaterial positions in foreign exchange-forward contracts as of December 31, 2005.2006. We do not expect the effect of foreign exchange rates to have a material impact on our operations.
3839
ItemITEM 8. Financial Statements and Supplementary DataFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
Management of Pentair, Inc. and its subsidiaries (“the Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inRules 13a-15(f) and15d-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005.2006. In making this assessment, management used the criteria for effective internal control over financial reporting described inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2005,2006, the Company’s internal control over financial reporting was effective based on those criteria. Management has excluded from its assessment the internal control over financial reporting at the thermal management businesses acquired from APW, Ltd. on December 1, 2005 and whose financial statements reflect total assets and total revenues constituting five percent and one percent, respectively, of the related consolidated financial statement amounts of the Company as of and for the year ended December 31, 2005.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting for December 31, 2005.2006. That attestation report is set forth immediately following the report of Deloitte & Touche LLP on the financial statements included herein.
| | | |
Randall J. Hogan
| | David D. Harrison |
| Chairman and Chief Executive Officer | | David D. Harrison
Executive Vice President and Chief Financial Officer |
3940
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Pentair, Inc.:
We have audited management’s assessment, included in the accompanying Management’s Reportmanagement’s report on Internal Control Over Financial Reporting, that Pentair, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2005,2006, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from their assessment the internal control over financial reporting at the thermal management businesses acquired from APW, Ltd. on December 1, 2005, and whose financial statements reflect total assets and revenues constituting 5 percent and 1 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2005. Accordingly, our audit did not include the internal control over financial reporting at the thermal management business. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s Board of Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005,2006, is fairly stated, in all material respects, based on the criteria established in the COSO Framework. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005,2006, based on the criteria established in the COSO Framework.
41
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule listed in the Index at ITEM 15 as of and for the year ended December 31, 2005,2006, of the Company, and our report dated February 27, 2006,26, 2007, expressed an unqualified opinion on those consolidated financial statements and financial statement schedule and included an explanatory paragraph relating to the Company’s change in 2005changes in its method of accounting for defined benefit pension and postretirement benefit plans in 2006 and stock-based compensation.compensation in 2005.
Minneapolis, Minnesota
February 27, 200626, 2007
4042
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Pentair, Inc.:
We have audited the accompanying consolidated balance sheets of Pentair, Inc. and subsidiaries (the “Company”) as of December 31, 20052006 and 2004,2005, and the related consolidated statements of income, cash flows, and changes in shareholders’ equity for each of the three years in the period ended December 31, 2005.2006. Our audits also included the financial statement schedule listed in the Index at ITEM 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 the Company at December 31, 20052006 and 2004,2005, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 2005,2006, in conformity with accounting principles generally accepted in the United States of America. 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.
As discussed in Notes 1 and 11 to the consolidated financial statements, in 2006, the Company changed its method of accounting for defined benefit pension and postretirement benefit plans and as discussed in Notes 1 and 13 to the consolidated financial statements, in 2005, the Company changed its method of accounting for stock-based compensation to conform to Statement of Financial Accounting Standards No. 123(R),Share-Based Payment.compensation.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005,2006, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 200626, 2007, expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Minneapolis, Minnesota
February 27, 200626, 2007
4143
Pentair, Inc. and Subsidiaries
Consolidated Statements of Income
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31 | | | Years ended December 31 | |
| | | 2005 | | 2004 | | 2003 | | |
| In thousands, except per-share data | | | 2006 | | 2005 | | 2004 | |
| | | (In thousands, except per-share data) | | | |
| |
| Net sales | | $ | 2,946,579 | | | $ | 2,278,129 | | | $ | 1,642,987 | | | $ | 3,154,469 | | | $ | 2,946,579 | | | $ | 2,278,129 | |
| Cost of goods sold | | | 2,098,558 | | | | 1,623,419 | | | | 1,196,757 | | | | 2,248,219 | | | | 2,098,558 | | | | 1,623,419 | |
| | | | | | | | | |
| | | |
| Gross profit | | | 848,021 | | | | 654,710 | | | | 446,230 | | | | 906,250 | | | | 848,021 | | | | 654,710 | |
| Selling, general and administrative | | | 478,907 | | | | 376,015 | | | | 253,088 | | | | 541,209 | | | | 478,907 | | | | 376,015 | |
| Research and development | | | 46,042 | | | | 31,453 | | | | 22,932 | | | | 58,055 | | | | 46,042 | | | | 31,453 | |
| | | | | | | | | |
| | | |
| Operating income | | | 323,072 | | | | 247,242 | | | | 170,210 | | | | 306,986 | | | | 323,072 | | | | 247,242 | |
| Gain on sale of investment | | | 5,435 | | | | — | | | | — | | |
| Gain on sale of assets, net | | | | 364 | | | | 5,435 | | | | — | |
| Interest income | | | 576 | | | | 721 | | | | 386 | | | | 745 | | | | 576 | | | | 721 | |
| Interest expense | | | 45,565 | | | | 37,931 | | | | 26,781 | | | | 52,626 | | | | 45,565 | | | | 37,931 | |
| | | | | | | | | |
| | | |
| Income from continuing operations before income taxes | | | 283,518 | | | | 210,032 | | | | 143,815 | | | | 255,469 | | | | 283,518 | | | | 210,032 | |
| Provision for income taxes | | | 98,469 | | | | 73,008 | | | | 45,665 | | | | 71,702 | | | | 98,469 | | | | 73,008 | |
| | | |
| | | | | | | | | |
| Income from continuing operations | | | 185,049 | | | | 137,024 | | | | 98,150 | | | | 183,767 | | | | 185,049 | | | | 137,024 | |
| Income from discontinued operations, net of tax | | | — | | | | 40,248 | | | | 46,138 | | | | — | | | | — | | | | 40,248 | |
| Loss on disposal of discontinued operations, net of tax | | | — | | | | (6,047 | ) | | | (2,936 | ) | | | (36 | ) | | | — | | | | (6,047 | ) |
| | | | | | | | | |
| | | |
| Net income | | $ | 185,049 | | | $ | 171,225 | | | $ | 141,352 | | | $ | 183,731 | | | $ | 185,049 | | | $ | 171,225 | |
| | | |
| | | | | | | | | |
Earnings per common share | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 1.84 | | | $ | 1.38 | | | $ | 1.00 | | | $ | 1.84 | | | $ | 1.84 | | | $ | 1.38 | |
| Discontinued operations | | | — | | | | 0.34 | | | | 0.44 | | | | — | | | | — | | | | 0.34 | |
| | | | | | | | | |
| | | |
| Basic earnings per common share | | $ | 1.84 | | | $ | 1.72 | | | $ | 1.44 | | | $ | 1.84 | | | $ | 1.84 | | | $ | 1.72 | |
| | | |
| | | | | | | | | |
Diluted | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 1.80 | | | $ | 1.35 | | | $ | 0.99 | | | $ | 1.81 | | | $ | 1.80 | | | $ | 1.35 | |
| Discontinued operations | | | — | | | | 0.33 | | | | 0.43 | | | | — | | | | — | | | | 0.33 | |
| | | | | | | | | |
| | | |
| Diluted earnings per common share | | $ | 1.80 | | | $ | 1.68 | | | $ | 1.42 | | | $ | 1.81 | | | $ | 1.80 | | | $ | 1.68 | |
| | | |
| | | | | | | | | |
Weighted average common shares outstanding | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 100,665 | | | | 99,316 | | | | 97,876 | | | | 99,784 | | | | 100,665 | | | | 99,316 | |
| Diluted | | | 102,618 | | | | 101,706 | | | | 99,620 | | | | 101,371 | | | | 102,618 | | | | 101,706 | |
See accompanying notes to consolidated financial statements.
4244
Pentair, Inc. and Subsidiaries
Consolidated Balance Sheets
| | | | | | | | | | | | | | | | | |
| | | December 31 | | | December 31 | |
| | | 2005 | | 2004 | | |
| | | (In thousands, except
| | |
| In thousands, except share and per-share data | | | 2006 | | 2005 | |
| | | share and per-share data) | | | |
| |
ASSETS | ASSETS | ASSETS |
Current assets | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 48,500 | | | $ | 31,495 | | | $ | 54,820 | | | $ | 48,500 | |
| Accounts and notes receivable, net of allowance of $31,053 and $35,968, respectively | | | 423,847 | | | | 396,459 | | |
| Accounts and notes receivable, net of allowance of $34,254 and $31,053, respectively | | | | 422,134 | | | | 423,847 | |
| Inventories | | | 349,312 | | | | 323,676 | | | | 398,857 | | | | 349,312 | |
| Deferred tax assets | | | 48,971 | | | | 49,074 | | | | 50,578 | | | | 48,971 | |
| Prepaid expenses and other current assets | | | 24,394 | | | | 24,433 | | | | 31,239 | | | | 24,394 | |
| | | | | | | |
| | | |
| Total current assets | | | 895,024 | | | | 825,137 | | | | 957,628 | | | | 895,024 | |
Property, plant and equipment, net | | | 311,839 | | | | 336,302 | | | | 330,372 | | | | 311,839 | |
| | | | | | |
Other assets | | | | | | | | | | | | | | | | |
| Non-current assets of discontinued operations | | | — | | | | 393 | | |
| Goodwill | | | 1,718,207 | | | | 1,620,404 | | | | 1,718,771 | | | | 1,718,207 | |
| Intangibles, net | | | 266,533 | | | | 258,126 | | | | 287,011 | | | | 266,533 | |
| Other | | | 62,152 | | | | 80,213 | | | | 71,197 | | | | 62,152 | |
| | | | | | | |
| | | |
| Total other assets | | | 2,046,892 | | | | 1,959,136 | | | | 2,076,979 | | | | 2,046,892 | |
| | | |
| | | | | | | |
Total assets | | $ | 3,253,755 | | | $ | 3,120,575 | | | $ | 3,364,979 | | | $ | 3,253,755 | |
| | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY |
Current liabilities | | | | | | | | | | | | | | | | |
| Short-term borrowings | | | $ | 14,563 | | | $ | — | |
| Current maturities of long-term debt | | $ | 4,137 | | | $ | 11,957 | | | | 7,625 | | | | 4,137 | |
| Accounts payable | | | 207,320 | | | | 195,289 | | | | 206,286 | | | | 207,320 | |
| Employee compensation and benefits | | | 95,552 | | | | 104,821 | | | | 88,882 | | | | 95,552 | |
| Current pension and post-retirement benefits | | | | 7,918 | | | | — | |
| Accrued product claims and warranties | | | 43,551 | | | | 42,524 | | | | 44,093 | | | | 43,551 | |
| Current liabilities of discontinued operations | | | 192 | | | | 192 | | | | — | | | | 192 | |
| Income taxes | | | 17,518 | | | | 27,395 | | | | 22,493 | | | | 17,518 | |
| Accrued rebates and sales incentives | | | 45,374 | | | | 41,618 | | | | 39,419 | | | | 45,374 | |
| Other current liabilities | | | 111,026 | | | | 103,083 | | | | 90,003 | | | | 111,026 | |
| | | | | | | |
| | | |
| Total current liabilities | | | 524,670 | | | | 526,879 | | | | 521,282 | | | | 524,670 | |
Other liabilities | | | | | | | | | |
| Long-term debt | | | 748,477 | | | | 724,148 | | | | 721,873 | | | | 748,477 | |
| Pension and other retirement compensation | | | 152,780 | | | | 135,356 | | | | 207,676 | | | | 152,780 | |
| Post-retirement medical and other benefits | | | 73,949 | | | | 69,667 | | | | 47,842 | | | | 73,949 | |
| Deferred tax liabilities | | | 125,785 | | | | 142,873 | | | | 109,781 | | | | 125,785 | |
| Other non-current liabilities | | | 70,455 | | | | 70,804 | | | | 86,526 | | | | 70,455 | |
| Non-current liabilities of discontinued operations | | | 2,029 | | | | 3,054 | | | | — | | | | 2,029 | |
| | | | | | | |
| | | |
| Total liabilities | | | 1,698,145 | | | | 1,672,781 | | | | 1,694,980 | | | | 1,698,145 | |
| Commitments and contingencies | | | | | | | | | | | | | | | | |
| | | | | | |
Shareholders’ equity | | | | | | | | | | | | | | | | |
Common shares par value $0.162/3; | | | | | | | | | |
| 101,202,237 and 100,967,385 shares issued and outstanding, respectively | | | 16,867 | | | | 16,828 | | |
Common shares par value $0.162/3; 99,777,165 and 101,202,237 shares issued and outstanding, respectively | | | | 16,629 | | | | 16,867 | |
| Additional paid-in capital | | | 518,751 | | | | 517,369 | | | | 488,540 | | | | 518,751 | |
| Retained earnings | | | 1,020,978 | | | | 889,063 | | | | 1,148,126 | | | | 1,020,978 | |
| Unearned restricted stock compensation | | | — | | | | (7,872 | ) | |
| Accumulated other comprehensive income | | | (986 | ) | | | 32,406 | | | | 16,704 | | | | (986 | ) |
| | | |
| | | | | | | |
| Total shareholders’ equity | | | 1,555,610 | | | | 1,447,794 | | | | 1,669,999 | | | | 1,555,610 | |
| | | | | | | |
| | | |
Total liabilities and shareholders’ equity | | $ | 3,253,755 | | | $ | 3,120,575 | | | $ | 3,364,979 | | | $ | 3,253,755 | |
| | | | | | | |
| | | |
See accompanying notes to consolidated financial statements.
4345
Pentair, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | |
| | | Years ended December 31 | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | (In thousands) | |
| |
Operating activities | | | | | | | | | | | | |
| Net income | | $ | 185,049 | | | $ | 171,225 | | | $ | 141,352 | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | | | | |
| Net income from discontinued operations | | | — | | | | (40,248 | ) | | | (46,138 | ) |
| Loss on disposal of discontinued operations | | | — | | | | 6,047 | | | | 2,936 | |
| Depreciation | | | 56,565 | | | | 47,063 | | | | 40,809 | |
| Amortization | | | 15,995 | | | | 7,501 | | | | 377 | |
| Deferred income taxes | | | 5,898 | | | | 16,736 | | | | 31,319 | |
| Stock compensation | | | 24,186 | | | | 6,345 | | | | 4,003 | |
| Excess tax benefits from stock-based compensation | | | (8,676 | ) | | | — | | | | — | |
| Gain on sale of investment | | | (5,435 | ) | | | — | | | | — | |
Changes in assets and liabilities, net of effects of business acquisitions and dispositions | | | | | | | | | | | | |
| Accounts and notes receivable | | | (20,946 | ) | | | 26,918 | | | | (5,080 | ) |
| Inventories | | | (19,201 | ) | | | (51,996 | ) | | | 13,174 | |
| Prepaid expenses and other current assets | | | (120 | ) | | | 2,176 | | | | (4,781 | ) |
| Accounts payable | | | 6,629 | | | | 17,274 | | | | (12,758 | ) |
| Employee compensation and benefits | | | (21,394 | ) | | | 4,596 | | | | 4,813 | |
| Accrued product claims and warranties | | | (1,099 | ) | | | 2,993 | | | | (1,756 | ) |
| Income taxes | | | 10,357 | | | | 6,352 | | | | 5,437 | |
| Other current liabilities | | | 4,609 | | | | 8,879 | | | | (3,336 | ) |
| Pension and post-retirement benefits | | | 16,512 | | | | 11,508 | | | | (2,108 | ) |
| Other assets and liabilities | | | (439 | ) | | | 6,794 | | | | 6,769 | |
| | | | | | | | | | | | | |
| Net cash provided by continuing operations | | | 248,490 | | | | 250,163 | | | | 175,032 | |
| Net cash (used for) provided by operating activities of discontinued operations | | | (632 | ) | | | 13,928 | | | | 87,907 | |
| | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 247,858 | | | | 264,091 | | | | 262,939 | |
Investing activities | | | | | | | | | | | | |
| Capital expenditures | | | (62,471 | ) | | | (48,867 | ) | | | (43,622 | ) |
| Proceeds from sale of property and equipment | | | 17,111 | | | | — | | | | — | |
| Acquisitions, net of cash acquired | | | (150,534 | ) | | | (869,155 | ) | | | (229,094 | ) |
| Divestitures | | | (10,155 | ) | | | 773,399 | | | | (2,400 | ) |
| Proceeds from sale of investment | | | 23,835 | | | | — | | | | — | |
| Other | | | (2,071 | ) | | | 60 | | | | (5,246 | ) |
| | | | | | | | | | | | | |
| Net cash used for investing activities | | | (184,285 | ) | | | (144,563 | ) | | | (280,362 | ) |
Financing activities | | | | | | | | | | | | |
| Net short-term repayments | | | — | | | | (4,162 | ) | | | (873 | ) |
| Proceeds from the Bridge Facility | | | — | | | | 850,000 | | | | — | |
| Repayment of the Bridge Facility | | | — | | | | (850,000 | ) | | | — | |
| Proceeds from long-term debt | | | 413,279 | | | | 343,316 | | | | 780,857 | |
| Repayment of long-term debt | | | (395,978 | ) | | | (440,518 | ) | | | (709,886 | ) |
| Excess tax benefits from stock-based compensation | | | 8,676 | | | | — | | | | — | |
| Proceeds from exercise of stock options | | | 8,380 | | | | 10,862 | | | | 5,795 | |
| Repurchases of common stock | | | (25,000 | ) | | | (4,200 | ) | | | (1,589 | ) |
| Dividends paid | | | (53,134 | ) | | | (43,128 | ) | | | (40,494 | ) |
| | | | | | | | | | | | | |
| Net cash (used for) provided by financing activities | | | (43,777 | ) | | | (137,830 | ) | | | 33,810 | |
Effect of exchange rate changes on cash | | | (2,791 | ) | | | 1,808 | | | | (8,046 | ) |
| | | | | | | | | | | | | |
Change in cash and cash equivalents | | | 17,005 | | | | (16,494 | ) | | | 8,341 | |
Cash and cash equivalents, beginning of period | | | 31,495 | | | | 47,989 | | | | 39,648 | |
| | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 48,500 | | | $ | 31,495 | | | $ | 47,989 | |
| | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
44
Pentair, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Unearned
| | | Accumulated
| | | | | | | |
| | | | | | | | | Additional
| | | | | | non-vested
| | | other
| | | | | | | |
| | | Common shares | | | paid-in
| | | Retained
| | | stock
| | | comprehensive
| | | | | | Comprehensive
| |
| | | Number | | | Amount | | | capital | | | earnings | | | compensation | | | income (loss) | | | Total | | | income | |
| | | (In thousands, except share and per-share data) | |
| |
Balance — December 31, 2002 | | | 98,444,900 | | | | 8,204 | | | | 482,695 | | | | 660,108 | | | | (5,138 | ) | | | (40,145 | ) | | | 1,105,724 | | | | | |
| Net income | | | | | | | | | | | | | | | 141,352 | | | | | | | | | | | | 141,352 | | | $ | 141,352 | |
| Change in cumulative translation adjustment | | | | | | | | | | | | | | | | | | | | | | | 27,220 | | | | 27,220 | | | | 27,220 | |
| Adjustment in minimum pension liability, net of $13,339 tax expense | | | | | | | | | | | | | | | | | | | | | | | 20,864 | | | | 20,864 | | | | 20,864 | |
| Changes in market value of derivative financial instruments | | | | | | | | | | | | | | | | | | | | | | | (2,107 | ) | | | (2,107 | ) | | | (2,107 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 187,329 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tax benefit of stock options | | | | | | | | | | | 1,696 | | | | | | | | | | | | | | | | 1,696 | | | | | |
| Cash dividends — $0.41 per common share | | | | | | | | | | | | | | | (40,494 | ) | | | | | | | | | | | (40,494 | ) | | | | |
| Share repurchases | | | (80,000 | ) | | | (7 | ) | | | (1,582 | ) | | | | | | | | | | | | | | | (1,589 | ) | | | | |
| Exercise of stock options, net of 208,378 shares tendered for payment | | | 448,300 | | | | 37 | | | | 5,758 | | | | | | | | | | | | | | | | 5,795 | | | | | |
| Issuance of restricted shares, net of cancellations | | | 254,732 | | | | 21 | | | | 4,727 | | | | | | | | (4,748 | ) | | | | | | | — | | | | | |
| Amortization of restricted shares | | | | | | | | | | | | | | | | | | | 3,697 | | | | | | | | 3,697 | | | | | |
| Shares surrendered by employees to pay taxes | | | (62,848 | ) | | | (5 | ) | | | (1,094 | ) | | | | | | | | | | | | | | | (1,099 | ) | | | | |
| Stock compensation | | | | | | | | | | | 419 | | | | | | | | | | | | | | | | 419 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance — December 31, 2003 | | | 99,005,084 | | | $ | 8,250 | | | $ | 492,619 | | | $ | 760,966 | | | $ | (6,189 | ) | | $ | 5,832 | | | $ | 1,261,478 | | | | | |
| Net income | | | | | | | | | | | | | | | 171,225 | | | | | | | | | | | | 171,225 | | | $ | 171,225 | |
| Change in cumulative translation adjustment | | | | | | | | | | | | | | | | | | | | | | | 25,359 | | | | 25,359 | | | | 25,359 | |
| Adjustment in minimum pension liability, net of $279 tax benefit | | | | | | | | | | | | | | | | | | | | | | | (437 | ) | | | (437 | ) | | | (437 | ) |
| Changes in market value of derivative financial instruments | | | | | | | | | | | | | | | | | | | | | | | 1,652 | | | | 1,652 | | | | 1,652 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 197,799 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tax benefit of stock options | | | | | | | | | | | 17,185 | | | | | | | | | | | | | | | | 17,185 | | | | | |
| Cash dividends — $0.43 per common share | | | | | | | | | | | | | | | (43,128 | ) | | | | | | | | | | | (43,128 | ) | | | | |
| Stock dividend | | | | | | | 8,276 | | | | (8,276 | ) | | | | | | | | | | | | | | | — | | | | | |
| Share repurchases | | | (105,500 | ) | | | (17 | ) | | | (4,183 | ) | | | | | | | | | | | | | | | (4,200 | ) | | | | |
| Exercise of stock options, net of 1,150,623 shares tendered for payment | | | 1,832,016 | | | | 305 | | | | 10,557 | | | | | | | | | | | | | | | | 10,862 | | | | | |
| Issuance of restricted shares, net of cancellations | | | 341,728 | | | | 26 | | | | 8,146 | | | | | | | | (7,675 | ) | | | | | | | 497 | | | | | |
| Amortization of restricted shares | | | | | | | | | | | | | | | | | | | 5,992 | | | | | | | | 5,992 | | | | | |
| Shares surrendered by employees to pay taxes | | | (105,943 | ) | | | (12 | ) | | | (3,085 | ) | | | | | | | | | | | | | | | (3,097 | ) | | | | |
| Stock compensation | | | | | | | | | | | 4,406 | | | | | | | | | | | | | | | | 4,406 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance — December 31, 2004 | | | 100,967,385 | | | $ | 16,828 | | | $ | 517,369 | | | $ | 889,063 | | | $ | (7,872 | ) | | $ | 32,406 | | | $ | 1,447,794 | | | | | |
| Net income | | | | | | | | | | | | | | | 185,049 | | | | | | | | | | | | 185,049 | | | $ | 185,049 | |
| Change in cumulative translation adjustment | | | | | | | | | | | | | | | | | | | | | | | (28,406 | ) | | | (28,406 | ) | | | (28,406 | ) |
| Adjustment in minimum pension liability, net of $3,645 tax benefit | | | | | | | | | | | | | | | | | | | | | | | (5,702 | ) | | | (5,702 | ) | | | (5,702 | ) |
| Changes in market value of derivative financial instruments | | | | | | | | | | | | | | | | | | | | | | | 716 | | | | 716 | | | | 716 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 151,657 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Effect of accounting change (SFAS 123R) | | | | | | | | | | | (7,872 | ) | | | | | | | 7,872 | | | | | | | | — | | | | | |
| Tax benefit of stock options | | | | | | | | | | | 10,707 | | | | | | | | | | | | | | | | 10,707 | | | | | |
| Cash dividends — $0.13 per common share | | | | | | | | | | | | | | | (53,134 | ) | | | | | | | | | | | (53,134 | ) | | | | |
| Share repurchases | | | (755,663 | ) | | | (126 | ) | | | (24,874 | ) | | | | | | | | | | | | | | | (25,000 | ) | | | | |
| Exercise of stock options, net of 549,150 shares tendered for payment | | | 747,282 | | | | 125 | | | | 1,371 | | | | | | | | | | | | | | | | 1,496 | | | | | |
| Issuance of restricted shares, net of cancellations | | | 289,764 | | | | 48 | | | | 248 | | | | | | | | | | | | | | | | 296 | | | | | |
| Shares surrendered by employees to pay taxes | | | (46,531 | ) | | | (8 | ) | | | (1,920 | ) | | | | | | | | | | | | | | | (1,928 | ) | | | | |
| Stock compensation | | | | | | | | | | | 23,722 | | | | | | | | | | | | | | | | 23,722 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance — December 31, 2005 | | | 101,202,237 | | | $ | 16,867 | | | $ | 518,751 | | | $ | 1,020,978 | | | $ | — | | | $ | (986 | ) | | $ | 1,555,610 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Years ended December 31 | |
| In thousands | | 2006 | | | 2005 | | | 2004 | |
| | |
| |
Operating activities | | | | | | | | | | | | |
| Net income | | $ | 183,731 | | | $ | 185,049 | | | $ | 171,225 | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | | | | |
| Net income from discontinued operations | | | — | | | | — | | | | (40,248 | ) |
| Loss on disposal of discontinued operations | | | 36 | | | | — | | | | 6,047 | |
| Depreciation | | | 56,899 | | | | 56,565 | | | | 47,063 | |
| Amortization | | | 18,197 | | | | 15,995 | | | | 7,501 | |
| Deferred income taxes | | | (11,085 | ) | | | 5,898 | | | | 16,736 | |
| Stock compensation | | | 25,377 | | | | 24,186 | | | | 6,345 | |
| Excess tax benefits from stock-based compensation | | | (3,043 | ) | | | (8,676 | ) | | | — | |
| Gain on sale of investment | | | (364 | ) | | | (5,435 | ) | | | — | |
Changes in assets and liabilities, net of effects of business acquisitions and dispositions | | | | | | | | | | | | |
| Accounts and notes receivable | | | 15,873 | | | | (20,946 | ) | | | 26,918 | |
| Inventories | | | (39,354 | ) | | | (19,201 | ) | | | (51,996 | ) |
| Prepaid expenses and other current assets | | | (5,052 | ) | | | (120 | ) | | | 2,176 | |
| Accounts payable | | | (18,935 | ) | | | 6,629 | | | | 17,274 | |
| Employee compensation and benefits | | | (13,229 | ) | | | (21,394 | ) | | | 4,596 | |
| Accrued product claims and warranties | | | 456 | | | | (1,099 | ) | | | 2,993 | |
| Income taxes | | | 9,556 | | | | 10,357 | | | | 6,352 | |
| Other current liabilities | | | (13,784 | ) | | | 4,609 | | | | 8,879 | |
| Pension and post-retirement benefits | | | 19,398 | | | | 16,512 | | | | 11,508 | |
| Other assets and liabilities | | | 6,886 | | | | (439 | ) | | | 6,794 | |
| |
| |
| Net cash provided by continuing operations | | | 231,563 | | | | 248,490 | | | | 250,163 | |
| Net cash (used for) provided by operating activities of discontinued operations | | | 48 | | | | (632 | ) | | | 13,928 | |
| |
| |
| Net cash provided by operating activities | | | 231,611 | | | | 247,858 | | | | 264,091 | |
Investing activities | | | | | | | | | | | | |
| Capital expenditures | | | (51,078 | ) | | | (62,471 | ) | | | (48,867 | ) |
| Proceeds from sale of property and equipment | | | 684 | | | | 17,111 | | | | — | |
| Acquisitions, net of cash acquired | | | (29,286 | ) | | | (150,534 | ) | | | (869,155 | ) |
| Divestitures | | | (24,007 | ) | | | (10,155 | ) | | | 773,399 | |
| Proceeds from sale of investment | | | 1,153 | | | | 23,835 | | | | — | |
| Other | | | (7,523 | ) | | | (2,071 | ) | | | 60 | |
| |
| |
| Net cash used for investing activities | | | (110,057 | ) | | | (184,285 | ) | | | (144,563 | ) |
Financing activities | | | | | | | | | | | | |
| Net short-term borrowings (repayments) | | | 13,831 | | | | — | | | | (4,162 | ) |
| Proceeds from the Bridge Facility | | | — | | | | — | | | | 850,000 | |
| Repayment of the Bridge Facility | | | — | | | | — | | | | (850,000 | ) |
| Proceeds from long-term debt | | | 608,975 | | | | 413,279 | | | | 343,316 | |
| Repayment of long-term debt | | | (631,755 | ) | | | (395,978 | ) | | | (440,518 | ) |
| Excess tax benefits from stock-based compensation | | | 3,043 | | | | 8,676 | | | | — | |
| Proceeds from exercise of stock options | | | 4,066 | | | | 8,380 | | | | 10,862 | |
| Repurchases of common stock | | | (59,359 | ) | | | (25,000 | ) | | | (4,200 | ) |
| Dividends paid | | | (56,583 | ) | | | (53,134 | ) | | | (43,128 | ) |
| |
| |
| Net cash used for financing activities | | | (117,782 | ) | | | (43,777 | ) | | | (137,830 | ) |
Effect of exchange rate changes on cash | | | 2,548 | | | | (2,791 | ) | | | 1,808 | |
| |
| |
Change in cash and cash equivalents | | | 6,320 | | | | 17,005 | | | | (16,494 | ) |
Cash and cash equivalents, beginning of period | | | 48,500 | | | | 31,495 | | | | 47,989 | |
| |
| |
Cash and cash equivalents, end of period | | $ | 54,820 | | | $ | 48,500 | | | $ | 31,495 | |
| |
| |
See accompanying notes to consolidated financial statements.
4546
Pentair, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Unearned
| | | Accumulated
| | | | | | | |
| | | | | | | | | Additional
| | | | | | non-vested
| | | other
| | | | | | | |
In thousands, except share
| | Common shares | | | paid-in
| | | Retained
| | | stock
| | | comprehensive
| | | | | | Comprehensive
| |
| and per-share data | | Number | | | Amount | | | capital | | | earnings | | | compensation | | | income (loss) | | | Total | | | income | |
| | |
| |
Balance — December 31, 2003 | | | 99,005,084 | | | $ | 8,250 | | | $ | 492,619 | | | $ | 760,966 | | | $ | (6,189 | ) | | $ | 5,832 | | | $ | 1,261,478 | | | | | |
| Net income | | | | | | | | | | | | | | | 171,225 | | | | | | | | | | | | 171,225 | | | $ | 171,225 | |
| Change in cumulative translation adjustment | | | | | | | | | | | | | | | | | | | | | | | 25,359 | | | | 25,359 | | | | 25,359 | |
| Adjustment in minimum pension liability, net of $279 tax benefit | | | | | | | | | | | | | | | | | | | | | | | (437 | ) | | | (437 | ) | | | (437 | ) |
| Changes in market value of derivative financial instruments | | | | | | | | | | | | | | | | | | | | | | | 1,652 | | | | 1,652 | | | | 1,652 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 197,799 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tax benefit of stock options | | | | | | | | | | | 17,185 | | | | | | | | | | | | | | | | 17,185 | | | | | |
| Cash dividends — $0.43 per common share | | | | | | | | | | | | | | | (43,128 | ) | | | | | | | | | | | (43,128 | ) | | | | |
| Stock dividend | | | | | | | 8,276 | | | | (8,276 | ) | | | | | | | | | | | | | | | — | | | | | |
| Share repurchases | | | (105,500 | ) | | | (17 | ) | | | (4,183 | ) | | | | | | | | | | | | | | | (4,200 | ) | | | | |
| Exercise of stock options, net of 1,150,623 shares tendered for payment | | | 1,832,016 | | | | 305 | | | | 10,557 | | | | | | | | | | | | | | | | 10,862 | | | | | |
| Issuance of restricted shares, net of cancellations | | | 341,728 | | | | 26 | | | | 8,146 | | | | | | | | (7,675 | ) | | | | | | | 497 | | | | | |
| Amortization of restricted shares | | | | | | | | | | | | | | | | | | | 5,992 | | | | | | | | 5,992 | | | | | |
| Shares surrendered by employees to pay taxes | | | (105,943 | ) | | | (12 | ) | | | (3,085 | ) | | | | | | | | | | | | | | | (3,097 | ) | | | | |
| Stock compensation | | | | | | | | | | | 4,406 | | | | | | | | | | | | | | | | 4,406 | | | | | |
| | | | | |
| | | | | |
Balance — December 31, 2004 | | | 100,967,385 | | | $ | 16,828 | | | $ | 517,369 | | | $ | 889,063 | | | $ | (7,872 | ) | | $ | 32,406 | | | $ | 1,447,794 | | | | | |
| Net income | | | | | | | | | | | | | | | 185,049 | | | | | | | | | | | | 185,049 | | | $ | 185,049 | |
| Change in cumulative translation adjustment | | | | | | | | | | | | | | | | | | | | | | | (28,406 | ) | | | (28,406 | ) | | | (28,406 | ) |
| Adjustment in minimum pension liability, net of $3,645 tax benefit | | | | | | | | | | | | | | | | | | | | | | | (5,702 | ) | | | (5,702 | ) | | | (5,702 | ) |
| Changes in market value of derivative financial instruments | | | | | | | | | | | | | | | | | | | | | | | 716 | | | | 716 | | | | 716 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 151,657 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Effect of accounting change (SFAS 123R) | | | | | | | | | | | (7,872 | ) | | | | | | | 7,872 | | | | | | | | — | | | | | |
| Tax benefit of stock options | | | | | | | | | | | 10,707 | | | | | | | | | | | | | | | | 10,707 | | | | | |
| Cash dividends — $0.52 per common share | | | | | | | | | | | | | | | (53,134 | ) | | | | | | | | | | | (53,134 | ) | | | | |
| Share repurchases | | | (755,663 | ) | | | (126 | ) | | | (24,874 | ) | | | | | | | | | | | | | | | (25,000 | ) | | | | |
| Exercise of stock options, net of 549,150 shares tendered for payment | | | 747,282 | | | | 125 | | | | 1,371 | | | | | | | | | | | | | | | | 1,496 | | | | | |
| Issuance of restricted shares, net of cancellations | | | 289,764 | | | | 48 | | | | 248 | | | | | | | | | | | | | | | | 296 | | | | | |
| Shares surrendered by employees to pay taxes | | | (46,531 | ) | | | (8 | ) | | | (1,920 | ) | | | | | | | | | | | | | | | (1,928 | ) | | | | |
| Stock compensation | | | | | | | | | | | 23,722 | | | | | | | | | | | | | | | | 23,722 | | | | | |
| | | | | |
| | | | | |
Balance — December 31, 2005 | | | 101,202,237 | | | $ | 16,867 | | | $ | 518,751 | | | $ | 1,020,978 | | | $ | — | | | $ | (986 | ) | | $ | 1,555,610 | | | | | |
| Net income | | | | | | | | | | | | | | | 183,731 | | | | | | | | | | | | 183,731 | | | $ | 183,731 | |
| Change in cumulative translation adjustment | | | | | | | | | | | | | | | | | | | | | | | 28,471 | | | | 28,471 | | | | 28,471 | |
| Adjustment in minimum pension liability, net of $1,685 tax expense | | | | | | | | | | | | | | | | | | | | | | | 1,513 | | | | 1,513 | | | | 1,513 | |
| Changes in market value of derivative financial instruments | | | | | | | | | | | | | | | | | | | | | | | 657 | | | | 657 | | | | 657 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 214,372 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment to initially apply SFAS 158, net of $8,280 tax benefit | | | | | | | | | | | | | | | | | | | | | | | (12,951 | ) | | | (12,951 | ) | | | | |
| Tax benefit of stock options | | | | | | | | | | | 3,338 | | | | | | | | | | | | | | | | 3,338 | | | | | |
| Cash dividends — $0.56 per common share | | | | | | | | | | | | | | | (56,583 | ) | | | | | | | | | | | (56,583 | ) | | | | |
| Share repurchases | | | (1,986,026 | ) | | | (332 | ) | | | (59,027 | ) | | | | | | | | | | | | | | | (59,359 | ) | | | | |
| Exercise of stock options, net of 183,866 shares tendered for payment | | | 310,963 | | | | 52 | | | | 2,846 | | | | | | | | | | | | | | | | 2,898 | | | | | |
| Issuance of restricted shares, net of cancellations | | | 324,219 | | | | 54 | | | | 304 | | | | | | | | | | | | | | | | 358 | | | | | |
| Amortization of Restricted Shares | | | | | | | | | | | 10,677 | | | | | | | | | | | | | | | | 10,677 | | | | | |
| Shares surrendered by employees to pay taxes | | | (74,228 | ) | | | (12 | ) | | | (2,589 | ) | | | | | | | | | | | | | | | (2,601 | ) | | | | |
| Stock compensation | | | | | | | | | | | 14,240 | | | | | | | | | | | | | | | | 14,240 | | | | | |
| | | | | |
| | | | | |
Balance — December 31, 2006 | | | 99,777,165 | | | $ | 16,629 | | | $ | 488,540 | | | $ | 1,148,126 | | | $ | — | | | $ | 16,704 | | | $ | 1,669,999 | | | | | |
| | | | | |
| | | | | |
See accompanying notes to consolidated financial statements.
47
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements
| |
1. | Summary of Significant Accounting Policies |
Fiscal year
Our fiscal year ends on December 31. We report our interim quarterly periods on a13-week basis ending on a Saturday.
Principles of Consolidationconsolidation
The accompanying consolidated financial statements include the accounts of Pentair and all subsidiaries, both U.S. andnon-U.S., that we control. Intercompany accounts and transactions have been eliminated. Investments in companies of which we own 20 percent20% to 50 percent50% of the voting stock or have the ability to exercise significant influence over operating and financial policies of the investee are accounted for using the equity method of accounting and, as a result, our share of the earnings or losses of such equity affiliates is included in the statement of income. The cost method of accounting is used for investments in which Pentair has less than a 20 percent20% ownership interest and we do not have the ability to exercise significant influence. These investments are carried at cost and are adjusted only forother-than-temporary declines in fair value.
On May 17, 2004, our Board of Directors approved a2-for-1 stock split in the form of a 100 percent stock dividend payable on June 8, 2004, to shareholders of record as of June 1, 2004. All share and per share information presented in thisForm 10-K has been retroactively restated to reflect the effect of this stock split.
Effective after the close of business October 2, 2004, we completed the sale of our former Tools Group to The Black & Decker Corporation. Our consolidated financial statements have been restated to reflect the Tools Group as a discontinued operation for all periods presented.
Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the current year’s presentation.
Use of Estimatesestimates
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires us to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that could differ from those estimates. The critical accounting policies that require our most significant estimates and judgments include:
| | |
| • | the assessment of recoverability of long-lived assets, including goodwill; and |
| |
| • | accounting for pension benefits, because of the importance in making the estimates necessary to apply these policies. |
Revenue Recognitionrecognition
We recognize revenue when it is realized or realizable and has been earned. Revenue is recognized when persuasive evidence of an arrangement exists; shipment or delivery has occurred (depending on the terms of the sale); the seller’s price to the buyer is fixed or determinable; and collectibility is reasonably assured.
Generally, there is no post-shipment obligation on product sold other than warranty obligations in the normal, ordinary course of business. In the event significant post-shipment obligations were to exist, revenue recognition would be deferred until substantially all obligations were satisfied.
46
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
Sales Returnsreturns
The right of return may exist explicitly or implicitly with our customers. Revenue from a transaction is recognized only if our price is fixed and determinable at the date of sale; the customer has paid or is obligated to pay; the customer’s obligation would not be changed in the event of theft, physical destruction, or damage of the product; the customer has economic substance apart from our Company; we do not have significant obligations for future performance to directly bring about resale of the product by the customer; and the amount of returns can reasonably be estimated.
In general, our return policy allows for customer returns only upon our authorization. Goods returned must be product we continue to market and must be in salable condition. Returns of custom or modified goods are normally not allowed.
At the time of sale, we reduce revenue for the estimated effect of returns. Estimated sales returns include consideration of historical sales levels, the timing and magnitude of historical sales return levels as a percent of sales, type of product, type of customer, and a projection of this experience into the future.
48
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
Pricing and Sales Incentivessales incentives
We record estimated reductions to revenue for customer programs and incentive offerings including pricing arrangements, promotions, and other volume-based incentives at the later of the date revenue is recognized or the incentive is offered. Sales incentives given to our customers are recorded as a reduction of revenue unless we (1) receive an identifiable benefit for the goods or services in exchange for the consideration and (2) we can reasonably estimate the fair value of the benefit received. The following represents a description of our pricing arrangements, promotions, and other volume-based incentives:
Pricing Arrangementsarrangements
Pricing is established up front with our customers, and we record sales at the agreed upon net selling price. However, one of our businesses allows customers to apply for a refund of a percentage of the original purchase price if they can demonstrate sales to a qualifying OEM customer. At the time of sale, we estimate the anticipated refund to be paid based on historical experience and reduce sales for the probable cost of the discount. The cost of these refunds is recorded as a reduction in gross sales.
Promotions
Our primary promotional activity is what we refer to as cooperative advertising. Under thisour cooperative advertising program,programs, we agree to pay the customer a fixed percentage of sales as an allowance tothat may be used to advertise and promote our products. The customer is not required to provide evidence of the advertisement or promotion. We recognize the cost of this cooperative advertising at the time of sale. The cost of this program is recorded as a reduction in gross sales.
Volume-Based IncentivesVolume-based incentives
These incentives involve rebates that are negotiated up front with the customer and are redeemable only if the customer achieves a specified cumulative level of sales.sales or sales increase. Under these incentive programs, at the time of sale, we reforecast the anticipated rebate to be paid based on forecasted sales levels. These forecasts are updated at least monthly, for each customer and sales are reduced for the anticipated cost of the rebate. If the forecasted sales for a customer changes, the accrual for rebates is adjusted to reflect the new amount of rebates expected to be earned by the customer.
There have been no material accounting revisions for revenue-recognition related estimates.
47
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
Shipping and Handling Costshandling costs
Amounts billed to customers for shipping and handling are recorded innetNet sales in the accompanying consolidated statementsConsolidated Statements of income.Income. Shipping and handling costs incurred by Pentair for the delivery of goods to customers are included incostCost of goods soldin the accompanying consolidated statementsConsolidated Statements of income.Income.
Cash Equivalentsequivalents
We consider highly liquid investments with original maturities of three months or less to be cash equivalents.
Trade Receivablesreceivables and Concentrationconcentration of Credit Riskcredit risk
We record an allowance for doubtful accounts, reducing our receivables balance to an amount we estimate is collectible from our customers. Estimates used in determining the allowance for doubtful accounts are based on historical collection experience, current trends, aging of accounts receivable, and periodic credit evaluations of our customers’ financial condition. We generally do not require collateral. No customer receivable balances exceeded 10 percent10% of total net receivable balances as of December 31, 20052006 and 2004,2005, respectively.
In December 2004,2006, we entered into a one-year Accounts Receivable Purchase Agreement whereby designated customer accounts receivable may be sold without recourse to a third-party financial institution on a revolving basis. These receivables consisted of specific invoices that were assigned and subject to a filed security
49
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
interest. Providing collections and claims services, we act as the agent for the third-party. Following the initial settlement period, we are required to transfer payments and make adjustments to invoice amounts on the assigned receivables to the third-party on a monthly basis. We are also required to maintain trade credit insurance on the sold receivables. Receivable sales could occur on the settlement date or as the third-party permits, up to a maximum total outstanding amount of $30 million, with the ability to make additional sales as sold receivables are repaid.
As of December 31, 2006, we had sold approximately $30.0 million of accounts receivable to a third-party financial institution to mitigate accounts receivable concentration risk because the customer did not take advantage of the early pay discounts and to provide additional financing capacity. In compliance with Statement of Financial Accounting Standards (“SFAS”) No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, (“SFAS 140”) sales of accounts receivable are reflected as a reduction of accounts receivable in the Consolidated Balance Sheets and the proceeds are included in the cash flows from operating activities in the Consolidated Statements of Cash Flows. In 2006, a loss in the amount of $0.8 million related to the sale of accounts receivable is included in the line item Gain on sale of assets, netin our Consolidated Statements of Income.
In December 2004, we entered into a one-year Accounts Receivable Purchase Agreement whereby designated customer accounts receivable could be sold without recourse to a third-party financial institution on a revolving basis. These receivables consisted of specific invoices that were assigned and subject to a filed security interest. Providing collections and claims services, we acted as the agent for the third-party, providing collections and claims services.third-party. Following the initial settlement period, we were required to transfer payments and make adjustmentadjustments to invoice amounts and pay interest (at LIBOR plus 1.05%) on the assigned receivables to the third-party on a monthly basis. We were also required to maintain trade credit insurance on the sold receivables. Receivable sales could have occurred on the settlement date or as the third-party permitted, up to a maximum total outstanding amount of $30 million, with the ability to make additional sales as sold receivables arewere repaid. The Accounts Receivable Purchase Agreement was not renewed in 2005.
As of December 31, 2004, we had sold an approximate $22.0 million interest in our pool of accounts receivable to a third-party financial institution to mitigate the credit risk associated with the receivable balance of a large customer.customer because we did not offer early pay discounts. In compliance with Statement of Financial Accounting Standards No.SFAS 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, sales of accounts receivable are reflected as a reduction of accounts receivable in the consolidated balance sheetsour Consolidated Balance Sheets and the proceeds are included in the cash flows from operating activities in the consolidated statementour Consolidated Statement of cash flows.Cash Flows. As the estimated present value of the receivables sold approximated the carrying amount, no gain or loss was recorded in 2004.
Inventories
InventoriesBeginning in the fourth quarter, inventories are stated at the lower of cost or market. Inventoriesmarket with substantially all costed using thefirst-in, first-out (FIFO) method and with an insignificant amount of inventories located outside the United States subsidiaries are generally determined bycosted using a moving average method which approximates FIFO. Prior to the fourth quarter 2006, inventories located in the United States were costed using thelast-in, first-out (LIFO) method. Inventoriesand FIFO methods, and inventories of foreign-basedforeign based subsidiaries are determined bywere costed primarily using thefirst-in, first-out (FIFO) FIFO method with a smaller amount of inventories costed using the LIFO and moving average methods.
Property, Plant, And EquipmentChange in accounting principle
Prior to October 1, 2006, inventories in the United States were costed using both the LIFO and FIFO methods, and inventories outside the United States were costed primarily using the FIFO methods with smaller amounts of inventory using the LIFO and moving average methods. Effective that date, we elected to change our method of accounting to cost all inventories previously costed using the LIFO method using the FIFO method to better reflect the current value of inventory in the balance sheet and to provide a better matching of revenue and expense in the consolidated statements of income. In addition, this change results in a more unified
50
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
method of inventory costing. The result of the accounting change was immaterial to our consolidated financial statements for all periods presented. Accordingly, the cumulative effect of the accounting change was recorded in the consolidated statement of income in the fourth quarter of 2006, rather than retrospectively applied to the prior period consolidated financial statements.
Property, plant, and equipment
Property, plant, and equipment is stated at historical cost. We compute depreciation by the straight-line method based on the following estimated useful lives:
| | | | | |
| | | Years | |
| |
| Land improvements | | | 5 to 20 | |
| Buildings and leasehold improvements | | | 5 to 50 | |
| Machinery and equipment | | | 3 to 15 | |
48
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
Significant improvements that add to productive capacity or extend the lives of properties are capitalized. Costs for repairs and maintenance are charged to expense as incurred. When property is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any related gains or losses are included in income.
We review the recoverability of long-lived assets to be held and used, such as property, plant and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced for the cost to dispose of the assets. The measurement of impairment requires us to estimate future cash flows and the fair value of long-lived assets.
Goodwill and Identifiable Intangible Assetsidentifiable intangible assets
Goodwill represents the excess of the cost of acquired businesses over the fair value of identifiable tangible net assets and identifiable intangible assets purchased.
Goodwill is tested for impairment on an annual basis. During the fourth quarter of 2005,2006, we completed our annual impairment test of goodwill and determined there was no impairment.
TheOur primary identifiable intangible assets of Pentair include trade marks and trade names, brand names, patents, non-compete agreements, proprietary technology, and customer relationships. Under the provisions of SFAS No. 142,Goodwill and Other Intangible Assets,identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment annually, or more frequently if events warrant. The impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount. During the fourth quarter of 2005,2006, we completed our annual impairment test for those identifiable assets not subject to amortization and determined there was no impairment.
Cost and Equity Method Investmentsequity method investments
We have investments that are accounted for at historical cost or, if we have significant influence over the investee, using the equity method. Pentair’sOur proportionate share of income or losses from investments accounted for under the equity method is recorded in the consolidated statementsConsolidated Statements of income.Income. We write down or write off an
51
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
investment and recognize a loss when events or circumstances indicate there is impairment in the investment that isother-than-temporary. This requires significant judgment, including assessment of the investees’ financial condition, and in certain cases the possibility of subsequent rounds of financing, as well as the investees’ historical and projected results of operations and projected results and cash flows. If the actual outcomes for the investees are significantly different from projections, we may incur future charges for the impairment of these investments.
Income Taxestaxes
Pentair usesWe use the asset and liability approach to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a
49
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in our tax provision in the period of change.
Environmental
In accordance withSOP 96-1,Environmental Remediation Liabilities, we recognize environmentalclean-up liabilities on an undiscounted basis when a loss is probable and can be reasonably estimated. Such liabilities generally are not subject to insurance coverage. The cost of each environmentalclean-up is estimated by engineering, financial, and legal specialists based on current law. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the likelihood that, where applicable, other potentially responsible parties (PRPs)(“PRPs”) will be able to fulfill their commitments at the sites where Pentair may be jointly and severally liable. The process of estimating environmentalclean-up liabilities is complex and dependent primarily on the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, the uncertainty as to what remedy and technology will be required, and the outcome of discussions with regulatory agencies and other PRPs at multi-party sites. In future periods, new laws or regulations, advances inclean-up technologies, and additional information about the ultimateclean-up remedy that is used could significantly change our estimates. Accruals for environmental liabilities are included in otherOther current liabilitiesandOther non-current liabilitiesin the Consolidated Balance Sheets.
Insurance Subsidiarysubsidiary
We insure certain general and product liability, property, workers’ compensation, and automobile liability risks through our wholly- ownedregulated wholly-owned captive insurance subsidiary.subsidiary, Penwald Insurance Company (“Penwald”). Reserves for policy claims are established based on actuarial projections of ultimate losses. As of December 31, 20052006 and 2004,2005, reserves for policy claims were $54.3 million ($10.0 million included in Accrued product claims and warranties and $44.3 million included in Other non-current liabilities) and $45.8 million ($10.0 million included in Aaccruedccrued product claims and warrantiesand $35.8 million included in Oother noncurrent liabilities) and $38.8 million ($10.0 million included inaccrued product claims and warrantiesand $28.8 million included inother noncurrentther non-current liabilities), respectively.
Stock-Based CompensationStock-based compensation
In the fourth quarter of 2005, we adopted the fair value recognition provisions of Statement of Financial Accounting StandardsSFAS No. (SFAS) 123R (revised 2004),Share Based Payment,(“SFAS 123R”) which revised SFAS No. 123,Accounting for Stock-Based Compensation(“SFAS 123)123”) and supersedes Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees (APB 25) (“APB 25”)requiring us to recognize expense related to the fair value of our stock-based compensation awards. We adopted SFAS 123R effective January 1, 2005 using the modified retrospective transition method permitted by SFAS 123R. Under this transition method, restatement of only the
52
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
interim financial statements in the year of adoption is permitted. We did not restate the financial information for 2004 and 2003 as a result of the adoption. In connection with the adoption, the expense in the proformapro forma disclosures related to stock-based compensation was corrected for immaterial errors, resulting in no change to previously reported quarterly proformapro forma earnings per share. The adoption of SFAS 123R in 2005 resulted in the recognition of incremental pre-tax stock-based compensation expense of $16.4 million, a reduction in net income of $12.0 million, a reduction in basic and diluted earnings per share of $.12,$0.12, a reduction in cash flows from operating activities of $8.7 million and an increase in cash flows from financing activities of $8.7 million. We additionally reclassified our unearned compensation on non-vested share awards of $7.9 million to additional paid in capital. The cumulative effect adjustment for forfeitures related to non-vested share awards was immaterial.
In accordance with SFAS 123R, the estimated grant date fair value of each stock-based award is recognized in income on an accelerated basis over the requisite service period (generally the vesting period).
50
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
The estimated fair value of each Pentair option is calculated using the Black-Scholes option-pricing model. From time to time, we have elected to modify the terms of the original grant. These modified grants in 2005 have beenare accounted for as a new award and measured using the fair value method under SFAS 123R, resulting in the inclusion of additional compensation expense in our consolidated statementConsolidated Statements of income.Income. Non-vested share awards are recorded as compensation cost over the requisite service periods based on the market value on the date of grant.
Prior to January 1, 2005 we applied the recognition and measurement principles of APB 25 to our stock options and other stock-based compensation plans as permitted pursuant to SFAS 123.
In accordance with APB 25, cost for stock-based compensation iswas recognized in income based on the excess, if any, of the quoted market price of the stock at the grant date of the award or other measurement date over the amount an employee must pay to acquire the stock. The exercise price for stock options granted to employees equals the fair market value of Pentair’sour common stock at the date of grant, thereby resulting in no recognition of compensation expense by Pentair.us. However, from time to time, we have elected to modify the terms of the original grant. Those modified grants have been accounted for as a new award and
measured using the intrinsic value method under APB 25, resulting in the inclusion of compensation expense in our consolidated statementConsolidated Statements of income.Income. Non-vested share awards are recorded as compensation cost over the requisite service periods based on the market value on the date of grant. Unearned compensation cost on non-vested share awards was shown as a reduction to shareholders’ equity.
Earnings Per Common Shareper common share
Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted average number of common shares outstanding, including the dilutive effects of stock options and non-vested shares. Unless otherwise noted, references are to diluted earnings per share.
5153
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
Basic and diluted earnings per share were calculated using the following:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 | | |
| In thousands, except per-share data | | | 2006 | | 2005 | | 2004 | |
| | | (In thousands, except per-share data) | | | |
| |
Earnings per common share — basic | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 185,049 | | | $ | 137,024 | | | $ | 98,150 | | | $ | 183,767 | | | $ | 185,049 | | | $ | 137,024 | |
| Discontinued operations | | | — | | | | 34,201 | | | | 43,202 | | | | (36 | ) | | | — | | | | 34,201 | |
| | | | | | | | | |
| | | |
| Net income | | $ | 185,049 | | | $ | 171,225 | | | $ | 141,352 | | | $ | 183,731 | | | $ | 185,049 | | | $ | 171,225 | |
| | | |
| | | | | | | | | |
| Continuing operations | | $ | 1.84 | | | $ | 1.38 | | | $ | 1.00 | | | $ | 1.84 | | | $ | 1.84 | | | $ | 1.38 | |
| Discontinued operations | | | — | | | | 0.34 | | | | 0.44 | | | | — | | | | — | | | | 0.34 | |
| | | | | | | | | |
| | | |
| Basic earnings per common share | | $ | 1.84 | | | $ | 1.72 | | | $ | 1.44 | | | $ | 1.84 | | | $ | 1.84 | | | $ | 1.72 | |
| | | |
| | | | | | | | | |
Earnings per common share — diluted | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 185,049 | | | $ | 137,024 | | | $ | 98,150 | | | $ | 183,767 | | | $ | 185,049 | | | $ | 137,024 | |
| Discontinued operations | | | — | | | | 34,201 | | | | 43,202 | | | | (36 | ) | | | — | | | | 34,201 | |
| | | | | | | | | |
| | | |
| Net income | | $ | 185,049 | | | $ | 171,225 | | | $ | 141,352 | | | $ | 183,731 | | | $ | 185,049 | | | $ | 171,225 | |
| | | |
| | | | | | | | | |
| Continuing operations | | $ | 1.80 | | | $ | 1.35 | | | $ | 0.99 | | | $ | 1.81 | | | $ | 1.80 | | | $ | 1.35 | |
| Discontinued operations | | | — | | | | 0.33 | | | | 0.43 | | | | — | | | | — | | | | 0.33 | |
| | | | | | | | | |
| | | |
| Diluted earnings per common share | | $ | 1.80 | | | $ | 1.68 | | | $ | 1.42 | | | $ | 1.81 | | | $ | 1.80 | | | $ | 1.68 | |
| | | |
| | | | | | | | | |
Weighted average common shares outstanding — basic | | | 100,665 | | | | 99,316 | | | | 97,876 | | | | 99,784 | | | | 100,665 | | | | 99,316 | |
| Dilutive impact of stock-based compensation | | | 1,953 | | | | 2,390 | | | | 1,744 | | | | 1,587 | | | | 1,953 | | | | 2,390 | |
| | | | | | | | | |
| | | |
Weighted average common shares outstanding — diluted | | | 102,618 | | | | 101,706 | | | | 99,620 | | | | 101,371 | | | | 102,618 | | | | 101,706 | |
| | | | | | | | | |
| | | |
| Stock options excluded from the calculation of diluted earnings per share because the exercise price was greater than the average market price of the common shares | | | 1,040 | | | | 42 | | | | 1,246 | | | | 3,089 | | | | 1,040 | | | | 42 | |
Derivative Financial Instrumentsfinancial instruments
We recognize all derivatives, including those embedded in other contracts, as either assets or liabilities at fair value in our balance sheet.Consolidated Balance Sheets. If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and the hedged item are recognized in earnings. If the derivative is designated and is effective as a cash-flow hedge, changes in the fair value of the derivative are recorded in other comprehensive income (OCI) and are recognized in the consolidated statementsConsolidated Statements of incomeIncome when the hedged item affects earnings. If the underlying hedged transaction ceases to exist or if the hedge becomes ineffective, all changes in fair value of the related derivatives that have not been settled are recognized in current earnings. For a derivative that is not designated as or does not qualify as a hedge, changes in fair value are reported in earnings immediately.
We use derivative instruments for the purpose of hedging interest rate and currency exposures, which exist as part of ongoing business operations. All hedging instruments are designated and effective as hedges, in accordance with the provisions of SFAS 133,Accounting for Derivative Instruments and Hedge Activities,as amended. We do not hold or issue derivative financial instruments for trading or speculative purposes. All other contracts that contain provisions meeting the definition of a derivative also meet the requirements of, and have been designated as, normal purchases or sales. Our policy is not to enter into contracts with terms that cannot be designated as normal purchases or sales.
5254
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
Foreign Currency Translationcurrency translation
The financial statements of subsidiaries located outside of the United States are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date.
The resultant translation adjustments are included in accumulated other comprehensive income, a separate component of shareholders’ equity. Income and expense items are translated at average monthly rates of exchange.
New Accounting Standards to be Adopted in the Futureaccounting standards
In December 2004, the Financial Accounting Standards Board (FASB)(“FASB”) issued SFAS No. 153,Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.Transactions(“SFAS 153”). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29,Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005 and is required to bewe adopted by usit on January 1, 2006. The adoption of SFAS 153 isdid not expected to have a material impact on our consolidated financial position, results of operations, financial condition, or cash flow.
In November 2004, the FASB issued SFAS No. 151,Inventory Costs — An Amendment of ARB No. 43, Chapter 4(“SFAS 151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is required to bewe adopted by usit on January 1, 2006. We are currently evaluating the effect that theThe adoption of SFAS 151 willdid not have a material impact on our consolidated results of operations andor financial condition but do not expect SFAS 151 to have a material impact.condition.
In March 2004, the Emerging Issues Task Force (EITF)(“EITF”) reached a consensus on IssueNo. 03-1, “TheThe Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments.”Investments(“EITF03-1”).EITF03-1 provides guidance onother-than-temporary impairment models for marketable debt and equity securities accounted for under SFAS 115 and non-marketable equity securities accounted for under the cost method. The EITF developed a basic three-step model to evaluate whether an investment isother-than-temporarily impaired. In November 2005, the FASB approved the issuance of FASB Staff PositionFAS No. 115-1 andFAS No. 124-1, “TheThe Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments.” The FSPFASB Staff Position (“FSP”) addresses when an investment is considered impaired, whether the impairment isother-than-temporary, and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of another-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized asother-than-temporary. The FSP is effective for reporting periods beginning after December 15, 2005 and is required to bewe adopted by usit on January 1, 2006. The adoption of this accounting principle isEITF03-1 did not expected to have a significantmaterial impact on our consolidated results of operations or financial positioncondition.
In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections(“SFAS 154”) which replaces Accounting Principles Board Opinion No. 20,Accounting Changesand SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements — An Amendment of APB Opinion No. 28. SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a
55
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154 on January 1, 2006 did not have a material impact on our consolidated results of operations or financial condition.
In June 2005, the EITF reached a consensus on IssueNo. 05-5,Accounting for Early Retirement or Postemployment Programs with Specific Features (such as Terms Specified in Altersteilzeit Early Retirement Arrangements)(“EITF05-5”). EITF05-5 addresses the accounting for the bonus feature in the German Altersteilzeit (“ATZ”) early retirement programs and requires recognition of the program expenses at the time the ATZ contracts are signed. The EITF offers two transition alternatives, either cumulative effect or retrospective application. EITF05-5 is effective for fiscal years beginning after December 15, 2005 and we adopted it on January 1, 2006. The adoption of EITF05-5 did not have a material impact on our consolidated results of operations or financial condition.
In July 2006, the FASB issued FASB Interpretation No. 48Accounting for Uncertainty in Income Taxes —an interpretation of FASB Statement 109(“FIN 48”). FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file a tax return in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006. If there are changes in net assets as a result of the application of FIN 48, these will be accounted for as an adjustment to retained earnings. We are currently assessing the impact of FIN 48 on our consolidated results of operations and financial condition.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements(“SAB 108”). SAB 108 addresses diversity in practice in quantifying financial statement misstatements. SAB 108 requires that a company quantify misstatements based on their impact on each of its financial statements and related disclosures. SAB 108 is effective for fiscal years ending after November 15, 2006, allowing a one-time transitional cumulative effect adjustment to retained earnings as of January 1, 2006 for errors that were not previously deemed material, but are material under the guidance in SAB 108. The adoption of SAB 108 did not have a material impact on our consolidated results of operations, financial condition.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of adopting SFAS 157 on our consolidated results of operations or financial condition.
In September 2006, the FASB issued SFAS No. 158,Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R)(“SFAS 158”). SFAS 158 requires that we recognize the overfunded or underfunded status of our defined benefit and retiree medical plans as an asset or liability in our 2006 year-end balance sheet, with changes in the funded status recognized through other comprehensive income in the year in which they occur. The adoption of SFAS 158 increased total assets by $2.0 million, increased total liabilities by $14.9 million and decreased total shareholders’ equity by $12.9 million, net of tax, in our December 31, 2006 Consolidated Balance Sheet. The adoption of SFAS 158 had no impact on our consolidated results of operations.
On December 1, 2005,11, 2006 we acquired McLean Thermal Management, Aspen Motion Technologies,entered into an agreement to acquire all of the share capital of Jung Pumpen GmbH, a German-based manufacturer of municipal and Electronic Solutions businesses from APW, Ltd. (collectively, “Thermal”)residential wastewater pumps and related products, subject to German Federal Cartel Office approval. The acquisition was completed on February 2, 2007 for $140.0 million, including a cash payment of $138.9 million and transaction costs of $1.1 million. These businesses provide thermal management solutions and integration services to the telecommunications, data communications, medical, and security
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Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
marketsapproximately $227 million, net of cash acquired of $13 million, excluding transaction costs and subject to a post-closing net asset value adjustment.
On April 12, 2006, we acquired as part of our Technical Products Group.Water Group the assets of Geyer’s Manufacturing & Design Inc. and FTA Filtration, Inc. (together “Krystil Klear”), two privately-held companies, for $15.5 million in cash. Krystil Klear expands our industrial filtration product offering to include a full range of steel and stainless steel tanks which house filtration solutions. Goodwill recorded as part of the initial purchase price allocation was $93.7$9.2 million, all of which is tax deductible. Preliminary estimates of identifiable intangible assets acquired as part of the acquisition were $18.9 million, including definite-lived intangibles of $9.8 million with a weighted average amortization period of 10.0 years. We continue to evaluate the purchase price allocation for the ThermalKrystil Klear acquisition, including intangible assets, contingent liabilities, plant rationalization costs, and property, plant and equipment. We expect to revise the purchase price allocation as better information becomes availableavailable.
During 2006, we completed several other small acquisitions totaling $14.2 million in 2006.cash and notes payable, adding to both our Water and Technical Products Groups. Total goodwill recorded as part of the initial purchase price allocations was $7.9 million, of which $2.9 million is tax deductible. We continue to evaluate the purchase price allocations for these acquisitions and expect to revise the purchase price allocations as better information becomes available.
On December 1, 2005, we acquired, as part of our Technical Products Group, the McLean Thermal Management, Aspen Motion Technologies, and Electronic Solutions businesses from APW, Ltd. (collectively, “Thermal”) for $143.9 million, including a cash payment of $140.6 million and transaction costs of $3.3 million. These businesses provide thermal management solutions and integration services to the telecommunications, data communications, medical, and security markets. Final goodwill recorded as part of the purchase price allocation was $71.1 million, all of which is tax deductible. Final identifiable intangible assets acquired as part of the acquisition were $45.6 million, including definite-lived intangibles, such as proprietary technology and customer relationships, of $23.1 million with a weighted average amortization period of approximately 12 years.
On February 23, 2005, we acquired, as part of our Water Group, certain assets of Delta Environmental Products, Inc. and affiliates (collectively, “DEP”), a privately-held company, for $10.3 million, including a cash payment of $10.0 million, transaction costs of $0.2 million, and debt assumed of $0.1 million. The DEP product line addressees the water and wastewater markets as part of our Water Group. Goodwillmarkets. Final goodwill recorded as part of the initial purchase price allocation was $9.3$7.2 million, all of which is tax deductible.
Effective July 31, 2004, we completed the acquisition of all of the shares of capital stock of WICOR, Inc. (“WICOR”) from Wisconsin Energy Corporation (“WEC”) for $874.7 million, including a cash payment of $871.1 million, transaction costs of $11.2 million, and debt assumed of $21.6 million, less a favorable final purchase price adjustment of $14.0 million and less cash acquired of $15.2 million. This includes an additional $0.4 million ofin transaction costs recorded in the first three quarters of 2005. WICOR manufacturesmanufactured water system, filtration, and pool equipment products primarily under the STA-RITE®, SHURflo®, and Hypro®brands. We funded the payment of the purchase price and related fees and expenses of the WICOR acquisition with an $850 million committed line of credit (the “Bridge Facility”) and through additional borrowings available under our existing credit facility.
Identifiable intangible assets acquired as part of the acquisition were $181.5 million, including $102.0 million of definite-lived intangible assets, including patented and proprietary technology of $39.6 million with a weighted average amortization period of 11.6 years and customer relationships of $62.4 million with a weighted average amortization period of 18.0 years. We ascribed useful lives to patented and proprietary technology based on an analysis of the legal and contractual provisions. In addition, we ascribed a useful life of 18.0 years to customer relationships based on an analysis of customer attrition rates, the stability of product technology, and the value of proven customer service in retaining long standing customers. Due to a relatively flat forecasted attrition pattern, we will amortize the customer relationship balance on a straight-line basis over its estimated useful life.
Goodwill recorded as part of the final purchase price allocation was adjusted to $612.4 million, of which $70.6 million is tax deductible.
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Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
The following pro forma consolidated condensed financial results of operations for the years ended December 31, 2005,2006, and 20042005 are presented as if the acquisitions had been completed at the beginning of each period presented.presented:
| | | | | | | | | | | | | | | | | |
| | | Years Ended December 31 | | | Years ended December 31 | |
| | | 2005 | | 2004 | | |
| | | (In thousands, except
| | |
| In thousands, except per-share data | | | 2006 | | 2005 | |
| | | per-share data) | | | |
| |
| Pro forma net sales from continuing operations | | $ | 3,068,371 | | | $ | 2,091,238 | | | $ | 3,169,681 | | | $ | 3,102,400 | |
| Pro forma net income from continuing operations | | | 186,215 | | | | 152,156 | | | | 184,041 | | | | 188,537 | |
| Pro forma net income | | | 186,215 | | | | 186,357 | | | | 184,005 | | | | 188,537 | |
Pro forma earnings per common share — continuing operations | | | | | | | | | | | | | | | | |
| Basic | | $ | 1.85 | | | $ | 1.53 | | | $ | 1.84 | | | $ | 1.87 | |
| Diluted | | $ | 1.81 | | | $ | 1.50 | | | $ | 1.82 | | | $ | 1.84 | |
Weighted average common shares outstanding | | | | | | | | | | | | | | | | |
| Basic | | | 100,665 | | | | 99,316 | | | | 99,784 | | | | 100,665 | |
| Diluted | | | 102,618 | | | | 101,706 | | | | 101,371 | | | | 102,618 | |
These pro forma consolidated condensed financial results have been prepared for comparative purposes only and include certain adjustments, such as increased interest expense on acquisition debt. The adjustments do not reflect the effect of synergies that would have been expected to result from the integration of these acquisitions. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the combination occurred on January 1 of each year presented, or of future results of the consolidated entities.
| |
3. | Discontinued Operations/Divestitures |
Effective after the close of business on October 2, 2004, we completed the sale of our former Tools Group to The Black & Decker Corporation (“BDK”). In January 2006, pursuant to the purchase agreement for the sale of our former Tools Group, we completed the repurchase of a manufacturing facility in Suzhou, China from BDK for approximately $796.8 million in cash, including a $21.8 million interim$5.7 million. We recorded no gain or loss on the repurchase. In March 2006, we completed an outstanding net asset value increase, subjectarbitration with BDK relating to post-closing adjustments. We used the proceeds frompurchase price for the Tools Group sale and borrowings underof our credit facility to repay, on October 4, 2004, the $850 million Bridge Facility used to acquire WICOR. We retained certain insurance liabilities, employee compensation and benefit liabilities, environmental liabilities, pension obligations, and post-retirement obligations of theformer Tools Group. InThe decision by the fourth quarterarbitrator constituted a final resolution of 2004, we recorded aall disputes between BDK and us regarding the net asset value. We paid the final net asset value purchase price adjustment pursuant to the purchase agreement of $16.1 million plus interest of $1.1 million in March 2006, resulting in an incremental pre-tax loss on the disposal of the Tools Groupdiscontinued operations of $6.0$3.4 million or $1.6 million net of tax. In the third quarter of 2006, we resolved a prior year tax provision of $9.0 million. In July of 2005, we paid $10.4item that resulted in a $1.4 million to BDKincome tax benefit related to purchase price adjustments. We currently have an outstanding dispute over the net asset value of theour former Tools Group and may be required to repay some portion of the proceeds to BDK. We believe our accrual at December 31, 2005 is an adequate reserve amount for any potential liability. We expect resolution of this matter in the first quarter of 2006.Group.
In 2001, we completed the sale of our former Service Equipment businesses (Century Mfg. Co./Lincoln Automotive Company) to Clore Automotive, LLC for total consideration of $18.2 million and we completed the sale of Lincoln Industrial to affiliates of The Jordan Company LLC (Jordan), other investors, and members of management of Lincoln Industrial for total consideration of $78.4 million, including the retention of a preferred stock interest. In January 2003, we paid $2.4 million for a final adjustment to the selling price related to the disposition of Lincoln Industrial, which was offset by a previously established reserve.LLC. In the fourth quarter of 2003, we reported an additional loss from discontinued operations of $2.9 million primarily due to a reduction in estimated proceeds related to exiting the remaining two remaining facilities.
55
Pentair, Inc. In March 2006, we exited a leased facility from our former Service Equipment business resulting in a net cash outflow of $2.2 million and Subsidiaries
an immaterial gain from disposition.
Notes to Consolidated Financial Statements — (continued)
Operating results of the discontinued operations are summarized below. The amounts exclude general corporate overhead previously allocated to the Tools Group. The amounts include an allocation of interest based on a ratio of the net assets of the discontinued operations to the total net assets of Pentair.
| | | | | | | | | | | | | |
| | | 2005 | | | 2004* | | | 2003 | |
| | | (In thousands) | |
| |
| Net sales | | $ | — | | | $ | 842,110 | | | $ | 1,081,378 | |
| Income (loss) from discontinued operations before income taxes | | | — | | | | 65,232 | | | | 74,803 | |
| Income tax (benefit) expense | | | — | | | | 24,984 | | | | 28,665 | |
| | | | | | | | | | | | | |
| Income from discontinued operations, net of income taxes | | | — | | | | 40,248 | | | | 46,138 | |
| Gain (loss) on disposal of discontinued operations | | | (4,197 | ) | | | 2,990 | | | | (4,517 | ) |
| Income tax (benefit) expense | | | (4,197 | ) | | | 9,037 | | | | (1,581 | ) |
| | | | | | | | | | | | | |
| Loss on disposal of discontinued operations, net of tax | | $ | — | | | $ | (6,047 | ) | | $ | (2,936 | ) |
| | | | | | | | | | | | | |
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Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
| | | �� | | | | | | | | | | |
| In thousands | | 2006 | | | 2005 | | | 2004* | |
| | |
| |
| Net sales | | $ | — | | | $ | — | | | $ | 842,110 | |
| Income from discontinued operations before income taxes | | | — | | | | — | | | | 65,232 | |
| Income tax expense | | | — | | | | — | | | | 24,984 | |
| |
| |
| Income from discontinued operations, net of income taxes | | | — | | | | — | | | | 40,248 | |
| Gain (loss) on disposal of discontinued operations before income taxes | | | (3,621 | ) | | | (4,197 | ) | | | 2,990 | |
| Income tax (benefit) expense | | | (3,585 | ) | | | (4,197 | ) | | | 9,037 | |
| |
| |
| Loss on disposal of discontinued operations, net of tax | | $ | (36 | ) | | $ | — | | | $ | (6,047 | ) |
| |
| |
| |
| * | Includes discontinued operations through the date of divestiture, October 2, 2004. |
During 2005 weWe recorded an additional losspre-tax losses on the disposal of discontinued operations of $3.6 million and $4.2 million.million as of December 31, 2006 and 2005 respectively. The 2006 loss was primarily due to an unfavorable arbitration ruling resulting in a purchase price adjustment associated with the sale of our former Tools Group. The additional 2005 loss relates to increased reserve requirements for product recalls and contingent purchase price adjustments associated with the sale of our former Tools Group. We recorded aIncome tax benefits of $3.6 million and $4.2 million benefitwere recorded for the years ended December 31, 2006 and 2005, respectively. The effective tax rate for discontinued operations in our income2006 differs from the statutory rate primarily due to the reversal of prior years’ tax provision related to discontinued operations.reserves and research and development tax credits. The effective tax rate in 2005 for discontinued operations differs from the statutory rate due primarily to research and development tax credits and permanent book/tax differences.
During 2004 and 2003 our income tax provision related to discontinued operations was $34.0 million and $27.1 million, respectively. The effective tax rate of the discontinued operations for 2004 and 2003 differs from the statutory rate due primarily to state and foreign taxes. The tax provision resulting from the Tools Group sale transaction was $9.0 million. This amount, reflected in the $34.0 million amount above, differs from the statutory rate due primarily to state and foreign taxes which were impacted by the form of the transaction and the geographic locations of the assets that were sold.
Net (liabilities) assetsLiabilities of discontinued operations consist of the following:
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | (In thousands) | |
| |
| Property, plant, and equipment, net | | $ | — | | | $ | 393 | |
| Current liabilities | | | 192 | | | | 192 | |
| Other noncurrent liabilities | | | 2,029 | | | | 3,054 | |
| | | | | | | | | |
| Total liabilities | | | 2,221 | | | | 3,246 | |
| | | | | | | | | |
| Net (liabilities) assets of discontinued operations | | $ | (2,221 | ) | | $ | (2,853 | ) |
| | | | | | | | | |
| | | | | | | | | |
| In thousands | | 2006 | | | 2005 | |
| | |
| |
| Current liabilities | | $ | — | | | $ | 192 | |
| Other noncurrent liabilities | | | — | | | | 2,029 | |
| |
| |
| Total liabilities of discontinued operations | | $ | — | | | $ | 2,221 | |
| |
| |
At December 31, 2005, and 2004, the liabilities totalingof $2.2 million, and $3.2 million, respectively, representrepresented the estimated future cash outflows associated with the exit from a leased facility.
56
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
| |
| 4. | Goodwill and Other Identifiable Intangible Assets |
The changes in the carrying amount of goodwill for the year ended December 31, 20052006 by segment is as follows:
| | | | | | | | | | | | | | |
| | | | | | Technical
| | | |
| In thousands | | | Water | | Products | | Consolidated | |
| | | | | | | | | | | | | |
| | | | | Technical
| | | | |
| | | Water | | Products | | Consolidated | | |
| | | (In thousands) | | |
| | |
| Balance at December 31, 2004 | | $ | 1,422,175 | | | $ | 198,229 | | | $ | 1,620,404 | | |
| Balance at December 31, 2005 | | | $ | 1,433,280 | | | $ | 284,927 | | | $ | 1,718,207 | |
| Acquired | | | 9,270 | | | | 93,735 | | | | 103,005 | | | | 14,804 | | | | 979 | | | | 15,783 | |
| Purchase accounting adjustments | | | 13,773 | | | | — | | | | 13,773 | | | | (9,447 | ) | | | (23,232 | ) | | | (32,679 | ) |
| Foreign currency translation | | | (11,938 | ) | | | (7,037 | ) | | | (18,975 | ) | | | 10,823 | | | | 6,637 | | | | 17,460 | |
| | | | | | | | | |
| Balance at December 31, 2005 | | $ | 1,433,280 | | | $ | 284,927 | | | $ | 1,718,207 | | |
| | | | | | | | | |
| Balance at December 31, 2006 | | | $ | 1,449,460 | | | $ | 269,311 | | | $ | 1,718,771 | |
| | | |
| | | |
The acquired goodwill in the Water Group is related to our acquisitions of Krystil Klear and several other small acquisitions during 2006. The acquired goodwill in the Technical Products Group is related to one small acquisition.
59
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
Purchase accounting adjustments recorded in 2005during 2006 relate to the WICOR, Inc., DEP, Thermal, and ESSEFKrystil Klear acquisitions. During 2005 we finalized our evaluation of theThe purchase price allocationadjustments during 2006 included adjustments for the WICOR acquisition, the adjustments primarilyadditional transaction and restructuring costs incurred, valuation of intangible assets related to contingent liabilities, reserves for plant rationalizations,Thermal, and deferred income taxes. During the fourth quarter of 2005 we made an adjustment to reverse a pre-acquisition tax contingency reservereclassifications related to the ESSEF acquisition.WICOR, Inc. purchase accounting.
The detail of acquired intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | | 2006 | | 2005 | |
| | | Gross
| | | | | | Gross
| | | | | | | Gross
| | | | | | Gross
| | | | | |
| | | Carrying
| | Accumulated
| | | | Carrying
| | Accumulated
| | | | | Carrying
| | Accumulated
| | | | Carrying
| | Accumulated
| | | |
| In thousands | | | Amount | | Amortization | | Net | | Amount | | Amortization | | Net | |
| | | Amount | �� | | Amortization | | Net | | Amount | | Amortization | | Net | | | |
| | | (In thousands) | |
| | |
Finite-life intangible assets | | | | | | | | | | | | | | | | | | | | | | | | | |
| Patents | | $ | 15,685 | | | $ | (4,135 | ) | | $ | 11,550 | | | $ | 14,659 | | | $ | (2,239 | ) | | $ | 12,420 | | |
Finite-life intangible assets Patents | | | $ | 15,433 | | | $ | (6,001 | ) | | $ | 9,432 | | | $ | 15,685 | | | $ | (4,135 | ) | | $ | 11,550 | |
| Non-compete agreements | | | 3,937 | | | | (2,021 | ) | | | 1,916 | | | | 7,464 | | | | (4,237 | ) | | | 3,227 | | | | 4,343 | | | | (3,091 | ) | | | 1,252 | | | | 3,937 | | | | (2,021 | ) | | | 1,916 | |
| Proprietary technology | | | 51,386 | | | | (5,107 | ) | | | 46,279 | | | | 45,145 | | | | (1,896 | ) | | | 43,249 | | | | 45,755 | | | | (8,240 | ) | | | 37,515 | | | | 51,386 | | | | (5,107 | ) | | | 46,279 | |
| Customer relationships | | | 87,707 | | | | (8,647 | ) | | | 79,060 | | | | 84,044 | | | | (3,451 | ) | | | 80,593 | | | | 110,616 | | | | (15,924 | ) | | | 94,692 | | | | 87,707 | | | | (8,647 | ) | | | 79,060 | |
| | | | | | | | | | | | | | | |
| Total finite-life intangible assets | | $ | 158,715 | | | $ | (19,910 | ) | | $ | 138,805 | | | $ | 151,312 | | | $ | (11,823 | ) | | $ | 139,489 | | |
| | | |
| aTotal finite-life intangible assets | | | $ | 176,147 | | | $ | (33,256 | ) | | $ | 142,891 | | | $ | 158,715 | | | $ | (19,910 | ) | | $ | 138,805 | |
| | | | | | | | | | | | | | | | | | |
Indefinite-life intangible assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Brand names | | $ | 127,728 | | | $ | — | | | $ | 127,728 | | | $ | 118,637 | | | $ | — | | | $ | 118,637 | | | $ | 144,120 | | | $ | — | | | $ | 144,120 | | | $ | 127,728 | | | $ | — | | | $ | 127,728 | |
| | | | | | | |
| Total intangibles, net | | | | | | | | | | $ | 266,533 | | | | | | | | | | | $ | 258,126 | | | | | | | | | | | $ | 287,011 | | | | | | | | | | | $ | 266,533 | |
| | | | | | | | | | | |
Intangible asset amortization expense in 2006, 2005, and 2004 and 2003 was $13.2 million, $11.7 million, $7.5 million, and $1.5$7.5 million, respectively. The increase in amortization expense between 2005 and 2004 was primarily the result of the WICOR acquisition. In the third quarter of 2004, we recorded $102.0 million of finite-lived intangible assets, including patented and proprietary technology of $39.6 million with a weighted average amortization period of 11.6 years and customer relationships of $62.4 million with a weighted average amortization period of 18.0 years.
The estimated future amortization expense for identifiable intangible assets during the next five years is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 |
| | | (In thousands) |
| |
| Estimated amortization expense | | $ | 12,278 | | | $ | 11,959 | | | $ | 11,046 | | | $ | 10,864 | | | $ | 10,360 | |
| | | | | | | | | | | | | | | | | | | | | |
| In thousands | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | |
| |
| |
| |
| Estimated amortization expense | | $ | 12,863 | | | $ | 11,911 | | | $ | 11,664 | | | $ | 11,152 | | | $ | 10,944 | |
5760
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
| |
| 5. | Supplemental Balance Sheet Information |
| | | | | | | | | | | | | | | | | |
| In thousands | | | 2006 | | 2005 | |
| | | 2005 | | 2004 | |
| | | (In thousands) | | |
| Inventories | | | | | | | | | | | | | | | | |
| Raw materials and supplies | | $ | 146,389 | | | $ | 126,816 | | | $ | 186,508 | | | $ | 146,389 | |
| Work-in-process | | | 49,418 | | | | 34,993 | | | | 55,141 | | | | 49,418 | |
| Finished goods | | | 153,505 | | | | 161,867 | | | | 157,208 | | | | 153,505 | |
| | | | | | | |
| | | |
| Total inventories | | $ | 349,312 | | | $ | 323,676 | | | $ | 398,857 | | | $ | 349,312 | |
| | | |
| | | | | | | |
Property, plant and equipment | | | | | | | | | | | | | | | | |
| Land and land improvements | | $ | 24,432 | | | $ | 34,230 | | | $ | 28,989 | | | $ | 24,432 | |
| Buildings and leasehold improvements | | | 168,776 | | | | 167,989 | | | | 181,335 | | | | 168,776 | |
| Machinery and equipment | | | 483,639 | | | | 464,974 | | | | 521,245 | | | | 483,639 | |
| Construction in progress | | | 21,326 | | | | 23,336 | | | | 38,312 | | | | 21,326 | |
| | | | | | | |
| | | |
| Total property, plant and equipment | | | 698,173 | | | | 690,529 | | | | 769,881 | | | | 698,173 | |
| Less accumulated depreciation and amortization | | | 386,334 | | | | 354,227 | | | | 439,509 | | | | 386,334 | |
| | | | | | | |
| | | |
| Property, plant and equipment, net | | $ | 311,839 | | | $ | 336,302 | | | $ | 330,372 | | | $ | 311,839 | |
| | | | | | | |
| | | |
Certain inventories are valued at LIFO. If all inventories were valued at FIFO as of the end of 2005 and 2004, inventories would have been $351.1 million and $324.1 million, respectively.
Cost Method Investmentsmethod investments
As part of the sale of Lincoln Industrial in 2001, we received 37,500 shares of 5% Series C Junior Convertible Redeemable Preferred Stock convertible into a 15 percent15% equity interest in the new organization — LN Holdings Corporation. During the second quarter of 2005 we sold our interest in the stock LN Holdings Corporation for cash consideration of $23.6 million, resulting in a pre-tax gain of $5.2 million or an after-tax gain of $3.5 million. The terms of the sale agreement establishestablished two escrow accounts totaling $14 million. We received payments from an escrow of $0.2 million during the fourth quarter of 2005, increasing our gain. During 2006 we received $1.2 million from the escrow accounts which also increased our gain from the sale. Any remaining escrow balances are to be distributed by April 2008 to former shareholders in accordance with their ownership percentages. Any funds received from settlement of escrows in future periods will be accounted for as additional gain on sale of this interest. The preferred stock was recorded at $18.4 million in other assets as December 31, 2004, which represented the estimated fair value of that investment at the time of the Lincoln Industrial sale.
Equity Method Investmentsmethod investments
We have a 50 percent50% investment in FARADYNE Motors LLC at December 31, 2005,(“FARADYNE”), a joint venture with ITT Water Technologies, Inc. that began design, development, and manufacturing of submersible pump motors in 2005. We do not consolidate the investment in our financial statements as we do not have a controlling interest over the investment. The investment in and loans to FARADYNE balance was $5.4 million and $1.2 million at December 31, 2006 and December 31, 2005, was $1.2 million,respectively, which is net of our proportionate share of losses during 2005the results of $1.2 million.their operations. Our proportionate share of earnings or lossesthe results of their operations is recorded on a one-month lag.
6. Supplemental Cash Flow Information
The following table summarizes supplemental cash flow information:
| | | | | | | | | | | | | |
| In thousands | | 2006 | | | 2005 | | | 2004 | |
| |
| |
| |
| Interest payments | | $ | 52,957 | | | $ | 44,403 | | | $ | 49,339 | |
| Income tax payments | | | 77,225 | | | | 79,414 | | | | 63,488 | |
5861
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
6. Supplemental Cash Flow Information
The following table summarizes supplemental cash flow information:
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | (In thousands) | |
| |
| Interest payments | | $ | 44,403 | | | $ | 49,339 | | | $ | 41,962 | |
| Income tax payments | | | 79,414 | | | | 63,488 | | | | 46,598 | |
7. Accumulated Other Comprehensive Income (Loss)
Components of accumulated other comprehensive income (loss) consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 | | |
| In thousands | | | 2006 | | 2005 | | 2004 | |
| | | (In thousands) | | | |
| |
| Minimum pension liability adjustments, net of tax | | $ | (17,534 | ) | | $ | (11,832 | ) | | $ | (11,395 | ) | | $ | (28,972 | ) | | $ | (17,534 | ) | | $ | (11,832 | ) |
| Foreign currency translation adjustments | | | 16,045 | | | | 44,451 | | | | 19,092 | | | | 44,516 | | | | 16,045 | | | | 44,451 | |
| Market value of derivative financial instruments, net of tax | | | 503 | | | | (213 | ) | | | (1,865 | ) | | | 1,160 | | | | 503 | | | | (213 | ) |
| | | | | | | | | |
| | | |
| Accumulated other comprehensive income (loss) | | $ | (986 | ) | | $ | 32,406 | | | $ | 5,832 | | | $ | 16,704 | | | $ | (986 | ) | | $ | 32,406 | |
| | | | | | | | | |
| | | |
In 2006, the minimum pension liability adjustment increased compared to 2005 primarily due to the adoption of SFAS 158, as noted in Note 11. In 2005, the minimum pension liability adjustment increased compared to the prior year despite no change in the discount rate for the U.S. plans. The increase iswas attributable to lower than expected pension plan performance as well as a reduction in the discount rates associated with our foreign defined benefit plans. In 2004,The net foreign currency translation gain in 2006 of $28.5 million was the minimum pension liability remained relatively consistent compared to prior year despiteresult of the 50 basis point decrease inweakening of the discount rate to 5.75% as of December 31, 2004, as it was offset by our pension plan asset performance.U.S. dollar against the euro. The net foreign currency translation loss in 2005 of $28.4 million was the result of the weakeningstrengthening of the U.S. dollar against the Euro. The net foreign currency gain in 2004 of $25.4 million, was primarily the result of a stronger U.S. dollar against the Euro and Canadian dollar currencies.euro. Changes in the market value of derivative financial instruments waswere impacted primarily by the maturities of derivatives and changing interest rates. Fluctuations in the value of hedging instruments are generally offset by changes in the cash flows of the underlying exposures being hedged.
59
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
8. Debt
Long-term debtDebt and the average interest raterates on debt outstanding as of December 31 isare summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Average
| | | | | | | | | Average
| | | | | | | |
| | | Interest Rate
| | | | | | | | | interest rate
| | | | | | | |
| | | December 31,
| | Maturity
| | December 31
| | December 31
| | | December 31,
| | Maturity
| | December 31
| | December 31
| |
| In thousands | | | 2006 | | (Year) | | 2006 | | 2005 | |
| | | 2005 | | (Year) | | 2005 | | 2004 | | | |
| | | (In thousands) | |
| | |
| Commercial paper, maturing within 54 days | | | 4.74 | % | | | | | | $ | 144,656 | | | $ | 178,008 | | |
| Commercial paper, maturing within 49 days | | | | 5.76 | % | | | | | | $ | 208,882 | | | $ | 144,656 | |
| Revolving credit facilities | | | 4.93 | % | | | 2010 | | | | 112,300 | | | | 53,700 | | | | 6.10 | % | | | 2010 | | | | 25,000 | | | | 112,300 | |
| Private placement — fixed rate | | | 5.50 | % | | | 2007-2013 | | | | 135,000 | | | | 135,000 | | | | 5.50 | % | | | 2007-2013 | | | | 135,000 | | | | 135,000 | |
| Private placement — floating rate | | | 4.80 | % | | | 2013 | | | | 100,000 | | | | 100,000 | | | | 5.98 | % | | | 2013 | | | | 100,000 | | | | 100,000 | |
| Senior notes | | | 7.85 | % | | | 2009 | | | | 250,000 | | | | 250,000 | | | | 7.85 | % | | | 2009 | | | | 250,000 | | | | 250,000 | |
| Other | | | 2.55 | % | | | 2006-2009 | | | | 6,285 | | | | 14,394 | | | | 3.14 | % | | | 2007-2016 | | | | 21,972 | | | | 6,285 | |
| | | | | | | | | | | |
| | | |
| Total contractual debt obligations | | | | | | | | | | | 748,241 | | | | 731,102 | | | | | | | | | | | | 740,854 | | | | 748,241 | |
| Interest rate swap monetization deferred income | | | | | | | | | | | 4,373 | | | | 5,539 | | | | | | | | | | | | 3,207 | | | | 4,373 | |
| Fair value adjustment of hedged debt | | | | | | | | | | | — | | | | (536 | ) | |
| | | | | | | |
| Total long-term debt, including current portion per balance sheet | | | | | | | | | | | 752,614 | | | | 736,105 | | |
| Less current maturities | | | | | | | | | | | (4,137 | ) | | | (11,957 | ) | |
| | | |
| Total debt, including current portion per balance sheet | | | | | | | | | | | | 744,061 | | | | 752,614 | |
| Less: Current maturities | | | | | | | | | | | | (7,625 | ) | | | (4,137 | ) |
| Short-term borrowings | | | | | | | | | | | | (14,563 | ) | | | — | |
| | | |
| | | | | | | |
| Long-term debt | | | | | | | | | | $ | 748,477 | | | $ | 724,148 | | | | | | | | | | | $ | 721,873 | | | $ | 748,477 | |
| | | | | | | |
| | | |
As of December 31, 2005, we hadWe have a $800 million multi-currency revolving credit facilityCredit Facility (the “Credit Facility”) with various banksof $800 million expiring on March 4, 2010. The interest rate on the loans under the Credit Facility is LIBOR plus 0.625%. Interest rates and fees on the Credit Facility vary based on our credit ratings.
In July 2005, we amended our floating rate private placement note purchase agreement, decreasing the interest rate on the notes by .550% to LIBOR plus .600%. Additionally, the amendment extended the prepayment provisions of the note purchase agreement permitting prepayment on or after July 25, 2006.
We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We use the Credit Facility asback-up liquidity to support 100% of commercial paper outstanding. As of December 31, 2005,2006, we had $144.7$208.9 million of commercial paper outstanding that maturedmatures within 5449 days.
62
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
All of the commercial paper was classified as long-term as we have the intent and the ability to refinance such obligations on a long-term basis under the Credit Facility. Availability under our Credit Facility at
We have $35 million of outstanding private placement debt maturing in May 2007. We classified this debt as long-term as of December 31, 2005, including outstanding commercial paper, was approximately $543.0 million.
Effective following2006 as we have the close of businessintent and ability to refinance such obligation on July 31, 2004, we completed the acquisition of WICOR. We funded the payment of the purchase price and related fees and expenses of the WICOR acquisition with an $850 million Bridge Facility and through additional borrowings available under our existing Credit Facility. The interest rate on the Bridge Facility and loansa long-term basis under the Credit Facility during the period of the Bridge Facility was LIBOR plus 1.375%.
On October 4, 2004, we received approximately $796.8 million of proceeds from the sale of our Tools Group to BDK. As required under the terms of the Bridge Facility, we used the proceeds from the Tools Group sale and additional borrowings under the Credit Facility to pay off the Bridge Facility. Following payment of the Bridge Facility and based on our existing credit ratings, the interest rate on loans under the Credit Facility decreased to LIBOR plus 1.125%.
We were in compliance with all debt covenants as of December 31, 2005.2006.
60
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
In addition to the Credit Facility, we have $25 million of uncommitted credit facilities, under which we had no$14.0 million in borrowings as of December 31, 2005.2006.
Long-term debtDebt outstanding at December 31, 2005,2006, matures on a calendar year basis by contractual debt maturity as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Thereafter | | Total | | |
| In thousands | | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | Thereafter | | Total | |
| | | (In thousands) | | | |
| |
| Contractual debt obligation maturities | | $ | 2,971 | | | $ | 37,910 | | | $ | 156 | | | $ | 250,129 | | | $ | 257,034 | | �� | $ | 200,041 | | | $ | 748,241 | | | $ | 21,022 | | | $ | 380 | | | $ | 250,275 | | | $ | 269,066 | | | $ | 75 | | | $ | 200,036 | | | $ | 740,854 | |
| Other maturities | | | 1,166 | | | | 1,166 | | | | 1,166 | | | | 875 | | | | — | | | | — | | | | 4,373 | | | | 1,166 | | | | 1,166 | | | | 875 | | | | — | | | | — | | | | — | | | | 3,207 | |
| | | | | | | | | | | | | | | | | |
| | | |
| Total maturities | | $ | 4,137 | | | $ | 39,076 | | | $ | 1,322 | | | $ | 251,004 | | | $ | 257,034 | | | $ | 200,041 | | | $ | 752,614 | | | $ | 22,188 | | | $ | 1,546 | | | $ | 251,150 | | | $ | 269,066 | | | $ | 75 | | | $ | 200,036 | | | $ | 744,061 | |
| | | | | | | | | | | | | | | | | |
| | | |
9. Derivative and Financial Instruments
Cash-Flow HedgesCash-flow hedges
We haveIn September 2005, we entered into a $100 million interest rate swap agreement with several major financial institutions expiring July 2013, to exchange variable rate interest payment obligations for fixed rate obligations without the exchange of the underlying principalprinciple amounts in order to manage interest rate exposures. The effective date of the fixed rate swap becomes effectivewas April 25, 2006. The swap agreement has a fixed interest rate of 4.68% and expires in April 2006, at theJuly 2013. The fixed interest rate of 4.68% plus the .60% interest rate spread over LIBOR, resultingresults in aan effective fixed interest rate of 5.28%. The fair value of the swap was an asset of $1.9 million and $0.8 million at December 31, 2005. At December 31, 2004 we had a variable to fixed interest rate swap agreement outstanding with an aggregate notional amount of $20.0 million, with a fixed interest rate of 6.31 percent, this agreement expired2006 and 2005, respectively and is recorded in June 2005. The fair value of this swap was a liability of $0.4 million at December 31, 2004.Other assets.
The variable to fixed interest rate swap is designated as and is effective as a cash-flow hedge. The fair value of this swap is recorded on the balance sheet,Consolidated Balance Sheet, with changes in fair valuesvalue included in other comprehensive income (OCI). Derivative gains and losses included in OCI are reclassified into earnings at the time the related interest expense is recognized or the settlement of the related commitment occurs. We estimate the net derivative gains or losses that will be reclassified into earnings during 2006 will not be material. No hedging relationships were de-designated during 2005.
Fair Value Hedge
During 2002, we entered into a interest rate swap agreement to effectively convert $100 million of senior notes for the term of the notes (maturing October 2009) from a 7.85 percent fixed annual rate to a floating annual rate equal to the six-month LIBOR rate plus 3.69 percent. The fair value of the swap was a liability of $0.5 million at December 31, 2004. This swap agreement was designated and accounted for as a fair value hedge. Since this swap qualified for the short-cut method under SFAS No. 133, changes in the fair value of the swap (included inother long-term liabilitiesin the consolidated balance sheets) are offset by changes in the fair value of the designated debt being hedged. Consequently, there was no impact on net income or shareholders’ equity. During 2005, we terminated this swap agreement resulting in a nominal amount of proceeds.2006.
6163
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
Fair Valuevalue of Financial Instrumentsfinancial instruments
The recorded amounts and estimated fair values of long-term debt, excluding the effects of derivative financial instruments, and the recorded amounts and estimated fair value of those derivative financial instruments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | | 2006 | | 2005 | |
| | | Recorded
| | Fair
| | Recorded
| | Fair
| | | Recorded
| | Fair
| | Recorded
| | Fair
| |
| In thousands | | | amount | | value | | amount | | value | |
| | | Amount | | Value | | Amount | | Value | | | |
| | | (In thousands) | |
| | |
Long-term debt, including current portion | | | | | | | | | | | | | | | | | |
Total debt, including current portion | | | | | | | | | | | | | | | | | |
| Variable rate | | $ | 356,956 | | | $ | 356,956 | | | $ | 338,582 | | | $ | 338,582 | | | $ | 347,920 | | | $ | 347,920 | | | $ | 356,956 | | | $ | 356,956 | |
| Fixed rate | | | 391,285 | | | | 411,253 | | | | 392,520 | | | | 428,766 | | | | 392,934 | | | | 403,807 | | | | 391,285 | | | | 411,253 | |
| | | | | | | | | | | |
| | | |
| Total | | $ | 748,241 | | | $ | 768,209 | | | $ | 731,102 | | | $ | 767,348 | | | $ | 740,854 | | | $ | 751,727 | | | $ | 748,241 | | | $ | 768,209 | |
| | | | | | | | | | | |
| | | |
Derivative financial instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Variable to fixed interest rate swap asset (liability) | | $ | 773 | | | $ | 773 | | | $ | (350 | ) | | $ | (350 | ) | |
| Fixed to variable interest rate swap liability | | | — | | | | — | | | | (536 | ) | | | (536 | ) | |
| Market value of variable to fixed interest rate swap asset | | | $ | 1,901 | | | $ | 1,901 | | | $ | 773 | | | $ | 773 | |
| | | | | | | | | | | |
| Market value of derivative financial instruments | | $ | 773 | | | $ | 773 | | | $ | (886 | ) | | $ | (886 | ) | |
| | | | | | | | | | | |
The following methods were used to estimate the fair values of each class of financial instrument:
| | |
| • | short-term financial instruments (cash and cash equivalents, accounts and notes receivable, accounts and notes payable, and short-term borrowings) — recorded amount approximates fair value because of the short maturity period; |
| |
| • | long-term debt, including current maturities — fair value is based on market quotes available for issuance of debt with similar terms; and |
| |
| • | interest rate swap agreements — fair value is based on market or dealer quotes. |
10. Income Taxes
Income from continuing operations before income taxes consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 | | |
| In thousands | | | 2006 | | 2005 | | 2004 | |
| | | (In thousands) | | | |
| |
| United States | | $ | 219,556 | | | $ | 159,679 | | | $ | 119,331 | | | $ | 205,049 | | | $ | 219,556 | | | $ | 159,679 | |
| International | | | 63,962 | | | | 50,353 | | | | 24,484 | | | | 50,420 | | | | 63,962 | | | | 50,353 | |
| | | | | | | | | |
| | | |
| Income from continuing operations before taxes | | $ | 283,518 | | | $ | 210,032 | | | $ | 143,815 | | | $ | 255,469 | | | $ | 283,518 | | | $ | 210,032 | |
| | | | | | | | | |
| | | |
62
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
The provision for income taxes for continuing operations consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 | | |
| In thousands | | | 2006 | | 2005 | | 2004 | |
| | | (In thousands) | | | |
| |
Currently payable | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal | | $ | 59,355 | | | $ | 42,730 | | | $ | 11,350 | | | $ | 51,834 | | | $ | 59,355 | | | $ | 42,730 | |
| State | | | 7,369 | | | | 5,051 | | | | 1,903 | | | | 9,998 | | | | 7,369 | | | | 5,051 | |
| International | | | 23,796 | | | | 14,513 | | | | (1,160 | ) | | | 14,273 | | | | 23,796 | | | | 14,513 | |
| | | | | | | | | |
| | | |
| Total current taxes | | | 90,520 | | | | 62,294 | | | | 12,093 | | | | 76,105 | | | | 90,520 | | | | 62,294 | |
Deferred | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal and state | | | 5,837 | | | | 8,341 | | | | 22,446 | | | | (8,063 | ) | | | 5,837 | | | | 8,341 | |
| International | | | 2,112 | | | | 2,373 | | | | 11,126 | | | | 3,660 | | | | 2,112 | | | | 2,373 | |
| | | | | | | | | |
| | | |
| Total deferred taxes | | | 7,949 | | | | 10,714 | | | | 33,572 | | | | (4,403 | ) | | | 7,949 | | | | 10,714 | |
| | | |
| | | | | | | | | |
| Total provision for income taxes | | $ | 98,469 | | | $ | 73,008 | | | $ | 45,665 | | | $ | 71,702 | | | $ | 98,469 | | | $ | 73,008 | |
| | | | | | | | | |
| | | |
64
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
Reconciliation of the U.S. statutory income tax rate to our effective tax rate for continuing operations follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 | | |
| Percentages | | | 2006 | | 2005 | | 2004 | |
| | | (Percentages) | | | |
| |
| U.S. statutory income tax rate | | | 35.0 | | | | 35.0 | | | | 35.0 | | | | 35.0 | | | | 35.0 | | | | 35.0 | |
| State income taxes, net of federal tax benefit | | | 2.3 | | | | 2.6 | | | | 1.9 | | | | 2.5 | | | | 2.3 | | | | 2.6 | |
| Tax effect of stock-based compensation | | | 0.6 | | | | — | | | | — | | | | 0.4 | | | | 0.6 | | | | — | |
| Tax effect of international operations | | | (1.2 | ) | | | (1.4 | ) | | | (2.6 | ) | | | (8.2 | ) | | | (1.2 | ) | | | (1.4 | ) |
| Tax credits | | | (1.5 | ) | | | (1.4 | ) | | | (2.1 | ) | | | (1.1 | ) | | | (1.5 | ) | | | (1.4 | ) |
| Domestic manufacturing deduction | | | (0.5 | ) | | | — | | | | — | | | | (0.8 | ) | | | (0.5 | ) | | | — | |
| ESOP dividend benefit | | | (0.3 | ) | | | (0.3 | ) | | | (0.5 | ) | | | (0.3 | ) | | | (0.3 | ) | | | (0.3 | ) |
| All other, net | | | 0.3 | | | | 0.3 | | | | 0.1 | | | | 0.6 | | | | 0.3 | | | | 0.3 | |
| | | | | | | | | |
| | | |
| Effective tax rate on continuing operations | | | 34.7 | | | | 34.8 | | | | 31.8 | | | | 28.1 | | | | 34.7 | | | | 34.8 | |
| | | | | | | | | |
| | | |
Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as “temporary differences.” We record the tax effect of these temporary differences as “deferred tax assets” (generally items that can be used as a tax deduction or credit in future periods) and “deferred tax liabilities” (generally items for which we received a tax deduction but the tax impact has not yet been recorded in the consolidated statementsConsolidated Statements of income)Income).
During 2006, our effective tax rate was impacted by favorable resolution of prior years’ federal tax returns and higher utilization of foreign tax credits.
During 2005, our effective tax rate was impacted by a benefit of $1.4 million related to R&D tax credits, a settlementand favorable resolution of an IRS audit resulting in a release ofprior years’ federal tax contingency reserves of $1.3 million, a favorable adjustment related to the filing of our 2004 Federal tax return of $1.0 million.returns. Our effective tax rate was also impacted favorably by tax deductions for profits associated with qualified domestic production activities. These favorable items arewere offset by a $3.2 million anticipatedan unfavorable settlement for a routine German tax examination related to prior years as well as the tax impact of the adoption of SFAS 123R.
During the fourth quarter of 2004, we repatriated approximately $75.0 million in extraordinary dividends, as defined in the American Jobs Creation Act of 2004 (the “Jobs Act”), consisting primarily of foreign proceeds resulting from the sale of the Tools Group. We elected to apply the provisions of Section 965 of the Internal Revenue Code, enacted as part of the Jobs Act, to the repatriated extraordinary dividends and therefore, were eligible to claim an eighty-five percent dividends received deduction for income tax purposes on the eligible amounts. The net tax cost of the repatriation of the extraordinary dividends, recorded in discontinued operations, was approximately $4.0 million.
63
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
United States income taxes have not been provided on undistributed earnings of international subsidiaries. It is our intention to reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to do so. As of December 31, 2005,2006, approximately $97.0$120 million of unremitted earnings attributable to international subsidiaries were considered to be indefinitely invested. We believe that any U.S. tax on repatriated earnings would be substantially offset by U.S. foreign tax credits.
65
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
The tax effects of the major items recorded as deferred tax assets and liabilities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 Deferred Tax | | 2004 Deferred Tax | | | 2006 Deferred tax | | 2005 Deferred tax | |
| | | Assets | | Liabilities | | Assets | | Liabilities | | |
| In thousands | | | Assets | | Liabilities | | Assets | | Liabilities | |
| | | (In thousands) | | | |
| |
| Accounts receivable allowances | | $ | 5,336 | | | $ | — | | | $ | 5,606 | | | $ | — | | | $ | 5,984 | | | $ | — | | | $ | 5,336 | | | $ | — | |
| Inventory valuation | | | — | | | | 3,055 | | | | 354 | | | | — | | | | 1,864 | | | | — | | | | — | | | | 3,055 | |
| Accelerated depreciation/amortization | | | — | | | | 28,047 | | | | — | | | | 37,349 | | | | — | | | | 20,116 | | | | — | | | | 28,047 | |
| Accrued product claims and warranties | | | 38,781 | | | | — | | | | 33,778 | | | | — | | | | 36,940 | | | | — | | | | 38,781 | | | | — | |
| Employee benefit accruals | | | 92,487 | | | | — | | | | 72,810 | | | | — | | | | 111,046 | | | | — | | | | 92,487 | | | | — | |
| Goodwill and other intangibles | | | — | | | | 150,793 | | | | — | | | | 140,126 | | | | — | | | | 163,256 | | | | — | | | | 150,793 | |
| Other, net | | | — | | | | 31,524 | | | | — | | | | 28,872 | | | | — | | | | 31,665 | | | | — | | | | 31,524 | |
| | | | | | | | | | | |
| | | |
| Total deferred taxes | | $ | 136,604 | | | $ | 213,419 | | | $ | 112,548 | | | $ | 206,347 | | | $ | 155,834 | | | $ | 215,037 | | | $ | 136,604 | | | $ | 213,419 | |
| | | |
| | | | | | | | | | | |
| Net deferred tax liability | | | | | | $ | (76,815 | ) | | | | | | $ | (93,799 | ) | | | | | | $ | (59,203 | ) | | | | | | $ | (76,815 | ) |
| | | | | | | | | | | |
The determination of annual income tax expense takes into consideration amounts which may be needed to cover exposures for open tax years. The Internal Revenue Service (IRS) has examined our U.S. federal income tax returns through 20012003 with no material adjustments and is currently auditing 2002 and 2003.adjustments. The IRS has also completed a survey of our 2004 U.S. federal income tax return with no material findings. In connection with the completion of the 19982002 to 2001 Federal2003 federal income tax audit and the 2004 survey, we adjusted certainrecognized benefits of $8.0 million and $1.8 million in our second and third quarter 2006 income tax reserves established related to the periods under examination and recorded a benefit of $1.3 million to our first quarter 2005 income statement.statements, respectively. We do not expect any material impact on earnings to result from the resolution of matters related to open tax years; however, actual settlements may differ from amounts accrued.
Non-U.S. tax losses of $5.7$9.1 million and $5.3$5.7 million were available for carryforward at December 31, 20052006 and 2004,2005, respectively. A valuation allowance of $1.5$1.6 million and $1.6$1.5 million exists for deferred income tax benefits related to thenon-U.S. loss carryforwards available that may not be realized as of December 31, 20052006 and 2004,2005, respectively. We believe that sufficient taxable income will be generated in the respective countries to allow us to fully recover the remainder of the tax losses. A majority of ournon-U.S. tax losses can be carried forward indefinitely. The remainingnon-U.S. tax losses will begin to expire in 2007.2009. State tax losses of $56.1 million and $43.5 million were available for carryforward at December 31, 2006 and 2005, respectively. Valuation allowances exist for the entire balance of deferred tax benefits related to the state tax losses. Certain state tax losses will expire in 2007, while others are subject to carryforward periods of up to twenty years.
Pension and Post-Retirement Benefitspost-retirement benefits
We sponsor domestic and foreign defined-benefit pension and other post-retirement plans. Pension benefits are based principally on an employee’s years of serviceand/or compensation levels near retirement. In addition, we also provide certain post-retirement health care and life insurance benefits. Generally, the post-retirement health care and life insurance plans require contributions from retirees. We use a December 31 measurement date each year.
The acquisition of WICOR in 2004 increased unfunded pension liabilities by approximately $23.7 million and increased post-retirement liabilities by approximately $32.1 million atOn December 31, 2004. Corresponding liabilities equal to2006, we adopted SFAS 158 which requires that we recognize the unfunded liabilities were recorded on WICOR’s opening balance sheet.overfunded or underfunded status of our defined benefit and retiree medical plans as an asset or liability in our 2006 year-end Consolidated Balance Sheets, with changes in the funded status recognized through other comprehensive income, net of tax.
6466
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
The sale of our Tools Group in 2004 decreased post-retirement liabilities at December 31, 2004 by approximately $4.8 million. In 2005 we completed the transfer of pension plan assets and related plan liabilities, resulting in a reduction in plan liabilities that was $3.8 million greater than the amount of plan assets transferred.
In 2004, under the requirements of SFAS No. 88,Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, we recognized a curtailment expense and special termination benefits totaling approximately $1.8 million due to the divestiture of the Tools Group.
On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Medicare Act) was signed into law. The Act expands Medicare to include coverage for prescription drugs. On May 19, 2004, the FASB issued FSPNo. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003”, which requires current recognition of the federal subsidy that employers may receive for providing drug coverage to retirees. FSPNo. 106-2 was effective for the Company July 4, 2004. The amount of subsidies we expect to receive is not material relative to our accumulated post-retirement benefit obligation.
65
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
Obligations and Funded Status
The following tables present reconciliations of the benefit obligation of the plans, the plan assets of the pension plans, and the funded status of the plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Post-Retirement | | | Pension benefits | | Post-retirement | |
| | | 2005 | | 2004 | | 2005 | | 2004 | | |
| In thousands | | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | (In thousands) | | | |
| |
Change in benefit obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Benefit obligation beginning of year | | $ | 545,118 | | | $ | 419,616 | | | $ | 68,085 | | | $ | 36,903 | | | $ | 542,104 | | | $ | 545,118 | | | $ | 57,566 | | | $ | 68,085 | |
| Service cost | | | 16,809 | | | | 15,998 | | | | 850 | | | | 696 | | | | 18,411 | | | | 16,809 | | | | 736 | | | | 850 | |
| Interest cost | | | 29,515 | | | | 27,514 | | | | 3,787 | | | | 3,012 | | | | 29,676 | | | | 29,515 | | | | 3,195 | | | | 3,787 | |
| Amendments | | | 158 | | | | — | | | | — | | | | — | | | | — | | | | 158 | | | | — | | | | — | |
| Liability transfer | | | (22,432 | ) | | | — | | | | — | | | | — | | | | — | | | | (22,432 | ) | | | — | | | | — | |
| Special termination benefits | | | — | | | | 1,589 | | | | — | | | | — | | |
| Actuarial (gain) loss | | | 8,610 | | | | 30,799 | | | | (11,669 | ) | | | 2,992 | | | | (10,473 | ) | | | 8,610 | | | | (6,345 | ) | | | (11,669 | ) |
| Acquisitions | | | — | | | | 91,433 | | | | — | | | | 32,136 | | |
| Divestiture | | | — | | | | (14,479 | ) | | | — | | | | (4,765 | ) | |
| Translation (gain) loss | | | (7,876 | ) | | | 3,906 | | | | — | | | | — | | | | 8,057 | | | | (7,876 | ) | | | — | | | | — | |
| Benefits paid | | | (27,798 | ) | | | (31,258 | ) | | | (3,487 | ) | | | (2,889 | ) | | | (23,880 | ) | | | (27,798 | ) | | | (3,575 | ) | | | (3,487 | ) |
| | | | | | | | | | | |
| | | |
| Benefit obligation end of year | | $ | 542,104 | | | $ | 545,118 | | | $ | 57,566 | | | $ | 68,085 | | | $ | 563,895 | | | $ | 542,104 | | | $ | 51,577 | | | $ | 57,566 | |
| | | |
| | | | | | | | | | | |
Change in plan assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair value of plan assets beginning of year | | $ | 381,281 | | | $ | 295,399 | | | $ | — | | | $ | — | | | $ | 351,656 | | | $ | 381,281 | | | $ | — | | | $ | — | |
| Actual return on plan assets | | | 13,518 | | | | 53,696 | | | | — | | | | — | | | | 40,173 | | | | 13,518 | | | | — | | | | — | |
| Asset transfer — acquisitions | | | — | | | | 67,709 | | | | — | | | | — | | |
| Asset transfer — divestiture | | | (18,600 | ) | | | (11,954 | ) | | | — | | | | — | | | | (99 | ) | | | (18,600 | ) | | | — | | | | — | |
| Company contributions | | | 4,133 | | | | 7,193 | | | | 3,487 | | | | 2,889 | | | | 4,308 | | | | 4,133 | | | | 3,575 | | | | 3,487 | |
| Translation (loss) gain | | | (878 | ) | | | 496 | | | | — | | | | — | | | | 1,071 | | | | (878 | ) | | | — | | | | — | |
| Benefits paid | | | (27,798 | ) | | | (31,258 | ) | | | (3,487 | ) | | | (2,889 | ) | | | (23,880 | ) | | | (27,798 | ) | | | (3,575 | ) | | | (3,487 | ) |
| | | | | | | | | | | |
| | | |
| Fair value of plan assets end of year | | $ | 351,656 | | | $ | 381,281 | | | $ | — | | | $ | — | | | $ | 373,229 | | | $ | 351,656 | | | $ | — | | | $ | — | |
| | | |
| | | | | | | | | | | |
Funded status | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Plan assets less than benefit obligation | | $ | (190,448 | ) | | $ | (163,837 | ) | | $ | (57,566 | ) | | $ | (68,085 | ) | | $ | (190,666 | ) | | $ | (190,448 | ) | | $ | (51,577 | ) | | $ | (57,566 | ) |
| Unrecognized cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net transition obligation | | | 87 | | | | 122 | | | | — | | | | — | | | | * | | | | 87 | | | | * | | | | — | |
| Net actuarial (gain) loss | | | 93,398 | | | | 76,694 | | | | (16,123 | ) | | | (612 | ) | | | * | | | | 93,398 | | | | * | | | | (16,123 | ) |
| Prior service cost (benefit) | | | 774 | | | | 915 | | | | (260 | ) | | | (970 | ) | | | * | | | | 774 | | | | * | | | | (260 | ) |
| | | | | | | | | | | |
| | | |
| Net amount recognized | | $ | (96,189 | ) | | $ | (86,106 | ) | | $ | (73,949 | ) | | $ | (69,667 | ) | | $ | (190,666 | ) | | $ | (96,189 | ) | | $ | (51,577 | ) | | $ | (73,949 | ) |
| | | | | | | | | | | |
| | | |
| | |
| * | | Not applicable due to adoption of new accounting standard. |
Of the $190.4$190.7 million underfunding at December 31, 2005, $104.82006, $115.0 million relates to foreign pension plans and our supplemental executive retirement plans which are not commonly funded.
6667
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
Amounts recognized in the consolidated balance sheets of:Consolidated Balance Sheets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Post-Retirement | | | Pension benefits | | Post-retirement | |
| In thousands | | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | 2005 | | 2004 | | 2005 | | 2004 | | | |
| | | (In thousands) | |
| | |
| Noncurrent assets | | | $ | 2,458 | | | $ | * | | | $ | — | | | $ | * | |
| Current liabilities | | | | (4,183 | ) | | | * | | | | (3,735 | ) | | | * | |
| Noncurrent liabilities | | | | (188,941 | ) | | | * | | | | (47,842 | ) | | | * | |
| Prepaid benefit cost | | $ | 7,391 | | | $ | 8,428 | | | $ | — | | | $ | — | | | | * | | | | 7,391 | | | | * | | | | — | |
| Accrued benefit liability | | | (133,041 | ) | | | (114,545 | ) | | | (73,949 | ) | | | (69,667 | ) | | | * | | | | (133,041 | ) | | | * | | | | (73,949 | ) |
| Intangible asset | | | 716 | | | | 610 | | | | — | | | | — | | | | * | | | | 716 | | | | * | | | | — | |
Accumulated other comprehensive income —
pre-tax | | | 28,745 | | | | 19,401 | | | | — | | | | — | | | | * | | | | 28,745 | | | | * | | | | — | |
| | | | | | | | | | | |
| | | |
| Net amount recognized | | $ | (96,189 | ) | | $ | (86,106 | ) | | $ | (73,949 | ) | | $ | (69,667 | ) | | $ | (190,666 | ) | | $ | (96,189 | ) | | $ | (51,577 | ) | | $ | (73,949 | ) |
| | | | | | | | | | | |
| | | |
| | |
| * | | Not applicable due to adoption of new accounting standard. |
The accumulated benefit obligation for all defined benefit plans was $463.1$490.4 million and $469.2$463.1 million at December 31, 2005,2006, and 2004,2005, respectively.
Information for pension plans with an accumulated benefit obligation or projected benefit obligation in excess of plan assets are as follows:
| | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | |
| In thousands | | | 2006 | | 2005 | |
| | | (In thousands) | | | |
| |
| Pension plans with an accumulated benefit obligation in excess of plan assets: | | | | | | | | | | | | | | | | |
| Fair value of plan assets | | $ | 344,811 | | | $ | 107,605 | | | $ | 365,615 | | | $ | 344,811 | |
| Accumulated benefit obligation | | | 457,932 | | | | 201,591 | | | | 485,204 | | | | 457,932 | |
| Pension plans with a projected benefit obligation in excess of plan assets: | | | | | | | | | | | | | | | | |
| Fair value of plan assets | | $ | 344,811 | | | $ | 374,182 | | | $ | 365,615 | | | $ | 344,811 | |
| Projected benefit obligation | | | 536,895 | | | | 539,661 | | | | 558,738 | | | | 536,895 | |
Components of net periodic benefit cost are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Post-Retirement | | | Pension benefits | | Post-retirement | |
| | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | 2003 | | |
| In thousands | | | 2006 | | 2005 | | 2004 | | 2006 | | 2005 | | 2004 | |
| | | (In thousands) | | | |
| |
| Service cost | | $ | 16,809 | | | $ | 15,998 | | | $ | 15,262 | | | $ | 850 | | | $ | 696 | | | $ | 558 | | | $ | 18,411 | | | $ | 16,809 | | | $ | 15,998 | | | $ | 735 | | | $ | 850 | | | $ | 696 | |
| Interest cost | | | 29,515 | | | | 27,513 | | | | 23,890 | | | | 3,787 | | | | 3,012 | | | | 2,273 | | | | 29,676 | | | | 29,515 | | | | 27,513 | | | | 3,195 | | | | 3,787 | | | | 3,012 | |
| Expected return on plan assets | | | (29,443 | ) | | | (27,970 | ) | | | (24,748 | ) | | | | | | | | | | | | | | | (27,977 | ) | | | (29,443 | ) | | | (27,970 | ) | | | | | | | | | | | | |
| Amortization of transition obligation | | | 20 | | | | 22 | | | | 20 | | | | — | | | | — | | | | — | | | | 20 | | | | 20 | | | | 22 | | | | — | | | | — | | | | — | |
| Amortization of prior year service cost (benefit) | | | 289 | | | | 450 | | | | 650 | | | | (199 | ) | | | (581 | ) | | | (922 | ) | | | 289 | | | | 289 | | | | 450 | | | | (236 | ) | | | (199 | ) | | | (581 | ) |
| Recognized net actuarial loss | | | 2,764 | | | | 1,446 | | | | 672 | | | | — | | | | — | | | | — | | |
| Recognized net actuarial (gain) loss | | | | 4,119 | | | | 2,764 | | | | 1,446 | | | | (846 | ) | | | — | | | | — | |
| Special termination benefits | | | — | | | | 1,589 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,589 | | | | — | | | | — | | | | — | |
| Curtailment expense | | | — | | | | 185 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 185 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | |
| | | |
| Net periodic benefit cost | | $ | 19,954 | | | $ | 19,233 | | | $ | 15,746 | | | $ | 4,438 | | | $ | 3,127 | | | $ | 1,909 | | | $ | 24,538 | | | $ | 19,954 | | | $ | 19,233 | | | $ | 2,848 | | | $ | 4,438 | | | $ | 3,127 | |
| | | |
| | | | | | | | | | | | | | | |
| Continuing operations | | $ | 19,954 | | | $ | 14,897 | | | $ | 12,428 | | | $ | 4,438 | | | $ | 2,368 | | | $ | 942 | | | $ | 24,538 | | | $ | 19,954 | | | $ | 14,897 | | | $ | 2,848 | | | $ | 4,438 | | | $ | 2,368 | |
| Discontinued operations | | | — | | | | 4,336 | | | | 3,318 | | | | — | | | | 759 | | | | 967 | | | | — | | | | — | | | | 4,336 | | | | — | | | | — | | | | 759 | |
| | | | | | | | | | | | | | | |
| | | |
| Net periodic benefit cost | | $ | 19,954 | | | $ | 19,233 | | | $ | 15,746 | | | $ | 4,438 | | | $ | 3,127 | | | $ | 1,909 | | | $ | 24,538 | | | $ | 19,954 | | | $ | 19,233 | | | $ | 2,848 | | | $ | 4,438 | | | $ | 3,127 | |
| | | | | | | | | | | | | | | |
| | | |
6768
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
Amounts not yet recognized in net periodic benefit cost and included in accumulated other comprehensive income (pre-tax):
| | | | | | | | | | | | | | | | | |
| | | Pension benefits | | | Post-retirement | |
| In thousands | | 2006 | | | 2005 | | | 2006 | | | 2005 | |
| | |
| |
| Net transition obligation | | $ | 67 | | | $ | | * | | $ | — | | | $ | | * |
| Prior service cost (benefit) | | | 485 | | | | | * | | | (23 | ) | | | | * |
| Net actuarial (gain) loss | | | 68,587 | | | | | * | | | (21,622 | ) | | | | * |
| |
| |
| Accumulated other comprehensive income (loss) | | $ | 69,139 | | | $ | | * | | $ | (21,645 | ) | | $ | | * |
| |
| |
| | |
| * | | Not applicable due to adoption of new accounting standard. |
The estimated amount that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2007 is as follows:
| | | | | | | | | |
| | | Pension
| | | Post-
| |
| In thousands | | benefits | | | retirement | |
| | |
| |
| Net actuarial loss | | $ | 3,250 | | | $ | (1,421 | ) |
| Prior service cost | | | 160 | | | | (246 | ) |
| Transition obligation | | | 20 | | | | — | |
| |
| |
| Total estimated 2007 amortization | | $ | 3,430 | | | $ | (1,667 | ) |
| |
| |
Additional Information
| | | | | | | | | |
| | | Pension Benefits | |
| | | 2005 | | | 2004 | |
| | | (In thousands) | |
| |
| Increase in minimum liability included in other comprehensive income, net of tax | | $ | (5,702 | ) | | $ | (437 | ) |
| | | | | | | | | |
| | | Pension benefits | |
| In thousands | | 2006 | | | 2005 | |
| | |
| |
Decrease (increase) in minimum liability included in
other comprehensive income, net of tax | | $ | 1,513 | | | $ | (5,702 | ) |
Assumptions
Weighted-average assumptions used to determine domestic benefit obligations at December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Post-Retirement | | | Pension benefits | | Post-retirement | |
| | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | 2003 | | |
| Percentages | | | 2006 | | 2005 | | 2004 | | 2006 | | 2005 | | 2004 | |
| | | (Percentages) | | | |
| |
| Discount rate | | | 5.75 | | | | 5.75 | | | | 6.25 | | | | 5.75 | | | | 5.75 | | | | 6.25 | | | | 6.00 | | | | 5.75 | | | | 5.75 | | | | 6.00 | | | | 5.75 | | | | 5.75 | |
| Rate of compensation increase | | | 5.00 | | | | 5.00 | | | | 5.00 | | | | | | | | | | | | | | | | 5.00 | | | | 5.00 | | | | 5.00 | | | | | | | | | | | | | |
Weighted-average assumptions used to determine the domestic net periodic benefit cost for years ending December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Post-Retirement | | | Pension benefits | | Post-retirement | |
| | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | 2003 | | |
| Percentages | | | 2006 | | 2005 | | 2004 | | 2006 | | 2005 | | 2004 | |
| | | (Percentages) | | | |
| |
| Discount rate | | | 5.75 | | | | 6.25 | | | | 6.25 | | | | 5.75 | | | | 6.25 | | | | 6.25 | | | | 5.75 | | | | 5.75 | | | | 6.25 | | | | 5.75 | | | | 5.75 | | | | 6.25 | |
| Expected long-term return on plan assets | | | 8.50 | | | | 8.50 | | | | 8.50 | | | | | | | | | | | | | | | | 8.50 | | | | 8.50 | | | | 8.50 | | | | | | | | | | | | | |
| Rate of compensation increase | | | 5.00 | | | | 5.00 | | | | 5.00 | | | | | | | | | | | | | | | | 5.00 | | | | 5.00 | | | | 5.00 | | | | | | | | | | | | | |
Discount Raterate
The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based on our December 31 measurement date. The discount rate was determined by matching our
69
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
expected benefit payments to payments from a stream of AA or higher bonds available in the marketplace, adjusted to eliminate the effects of call provisions. This produced a discount rate for our U.S. plans of 5.75 percent6.00% in 2006 and 5.75% in 2005 and 2004 and 6.25 percent in 2003.2004. The discount rates on our foreign plans ranged from 2.00% to 5.15% in 2006, 2.00% to 4.90% in 2005 versus a range ofand 2.00% to 5.25% in 2004. There are no other known or anticipated changes in our discount rate assumptionsassumption that will impact our pension expense in 2006.2007.
Expected Raterate of Returnreturn
TheOur expected rate of return on plan assets in 2006 equaled 8.5%, which remained unchanged from 2005 and 2004. The expected rate of return is designed to be a long-term assumption that may be subject to considerableyear-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical ten-year compounded annual return of 9.0 percent,returns, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader longer-term market indices. In 2005,2006, the pension plan assets yielded a positive return of 4.2 percent,12.3%, compared to a positive returnreturns of 17.6 percent4.2% in 2005 and 17.6% in 2004. OurIn 2006, our expected rate of return on plan assets was lower than our actual return on plan assets while in 2005 equaled 8.5 percent, which remained unchanged from 2004. In 2005 our expected return on plan assets was higher than our actual return on plan assets while in 2004plans assets. The significant difference between our expected return on plan assets was lower thancompared to our actual return on plansplan assets thein 2006 was primarily attributable to overall market performance being better than expected. The significant difference between our expected return on plan assets compared to our actual return on plan assets in 2005 and 2004 iswas primarily attributable to the fluctuations of the Pentairour common stock price during 2005 which approximates 10% of the respective years.plan assets. There are no known or anticipated changes in our return assumption that will impact our pension expense in 2006.2007.
68
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
We base our determination of pension expense or income on a market-related valuation of assets which reducesyear-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market-related value of assets. Since the market-related value of assets recognizes gains or losses over afive-year-period, the future value of assets will be impacted as previously deferred gains or losses are recorded.
Pension-Related AdjustmentsPension and post-retirement related adjustments to Equityequity
In 2003, the financial markets recovered and resulted in a positive return on plan assets of 24.8 percent which eliminated $20.9 million of the 2002 $29.2 million charge to shareholders’ equity. The charge did not impact earnings. In 2004, our discount rate was lowered from 6.25 percent6.25% to 5.75 percent.5.75%. However, the change in the discount rate assumption was offset by higher than anticipated returns on assets and thus, did not significantly affect our shareholders’ equity. In 2005, our discount rate remained consistent with 2004; however, a lower return on plan assets as well as a decrease in the discount rates for our foreign plans resulted in an after-tax charge to equity of $5.7 million. In 2006, our discount rate increased from 5.75% to 6.00% and our return on plan assets was higher than anticipated. Before the effect of adopting SFAS 158, we had an after-tax increase in equity of $1.5 million. The effect of initially applying SFAS 158 resulted in an after-tax charge to equity of $12.9 million.
Net Periodic Benefit Costperiodic benefit cost
Total net periodic pension benefit cost was $24.5 million in 2006, $20.0 million in 2005, and $19.2 million in 2004, and $15.7 million in 2003.2004. Total net periodic pension benefit cost is expected to be approximately $24.5$25 million in 2006. The increasing trend in net periodic pension cost from 2003 forward is largely driven by the decrease in the discount rate in 2005 and by actual returns on plan assets.2007. The net periodic pension benefit cost for 20062007 has been estimated assuming a discount rate of 5.75 percent6.0% and an expected return on plan assets of 8.5 percent.8.5%.
Unrecognized Pension Lossespension and post-retirement losses
As of our December 31, 20052006 measurement date, our pension plans have $93.4$47.0 million of cumulative unrecognized losses. To the extent the unrecognized loss, when adjusted for the difference between market and market related values of assets, exceeds 10% of the projected benefit obligation, it will be amortized into expense each year on a straight-line basis over the remaining expected future-working lifetime of active participants (currently
70
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
(currently approximating 12 years). The amount included in pension expensenet periodic benefit cost for loss amortization was $3.3 million and $2.8 million in 2006 and 2005, was $2.8 million.respectively.
The assumed health care cost trend rates at December 31 are as follows:
| | | | | | | | | | |
| | | | | | | | | | | 2006 | | 2005 | |
| | | 2005 | | 2004 | | | |
| |
| Health care cost trend rate assumed for next year | | | 11.00 | % | | | 11.50 | % | | | 10.50 | % | | | 11.00 | % |
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % |
| Year that the rate reaches the ultimate trend rate | | | 2018 | | | | 2018 | | | | 2018 | | | | 2018 | |
The assumed health care cost trend rates can have a significant effect on the amounts reported for health care plans. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:
| | | | | | | | | |
| | | 1-Percentage-Point
| | 1-Percentage-Point
|
| | | Increase | | Decrease |
| | | (In thousands) |
| |
| Effect on total of service and interest cost | | $ | 291 | | | $ | (251 | ) |
| Effect on postretirement benefit obligation | | | 2,458 | | | | (2,131 | ) |
| | | | | | | | | |
| | | 1-Percentage-Point
| | | 1-Percentage-Point
| |
| In thousands | | Increase | | | Decrease | |
| | |
| |
| Effect on total annual service and interest cost | | $ | 202 | | | $ | (173 | ) |
| Effect on post-retirement benefit obligation | | | 1,331 | | | | (1,178 | ) |
69
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
Plan Assets
Objective
The primary objective of our pension plans is to meet commitments to our employees at a reasonable cost to the company. This is primarily accomplished through growth of capital and safety of the funds invested. The plans will therefore be actively invested to achieve real growth of capital over inflation through appreciation of securities held and through the accumulation and reinvestment of dividend and interest income.
Asset Allocationallocation
Our actual overall asset allocation for the plans as compared to our investment policy goals is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Investment Policy | | | | | | | Investment Policy | |
Asset Class | | 2005(1) | | 2004(1) | | Target | | Minimum | | Maximum | | | 2006(1) | | 2005(1) | | Target | | Minimum | | Maximum | |
| | | | |
| |
| Large Capitalization U.S. Stocks | | | 19.5% | | | | 18.6% | | | | 20.0% | | | | 15.0% | | | | 25.0% | | | | 18.0% | | | | 19.5% | | | | 20.0% | | | | 15.0% | | | | 25.0% | |
| Mid Capitalization, U.S. Stocks | | | 12.9% | | | | 11.9% | | | | 12.5% | | | | 7.5% | | | | 17.5% | | | | 12.4% | | | | 12.9% | | | | 12.5% | | | | 7.5% | | | | 17.5% | |
| Small Capitalization, U.S. Stocks | | | 6.9% | | | | 3.2% | | | | 7.5% | | | | 2.5% | | | | 12.5% | | | | 7.5% | | | | 6.9% | | | | 7.5% | | | | 2.5% | | | | 12.5% | |
| Pentair Stock | | | 9.5% | | | | 10.7% | | | | 10.0% | | | | 5.0% | | | | 15.0% | | | | 8.2% | | | | 9.5% | | | | 10.0% | | | | 5.0% | | | | 15.0% | |
International(Non-U.S.) Stocks | | | 21.2% | | | | 12.4% | | | | 20.0% | | | | 15.0% | | | | 25.0% | | | | 21.3% | | | | 21.2% | | | | 20.0% | | | | 15.0% | | | | 25.0% | |
| Private Equity | | | 0.1% | | | | 0.2% | | | | 0.0% | | | | 0.0% | | | | 5.0% | | | | 0.2% | | | | 0.1% | | | | 0.0% | | | | 0.0% | | | | 5.0% | |
| Fixed Income (Bonds) | | | 9.4% | | | | 10.6% | | | | 10.0% | | | | 5.0% | | | | 15.0% | | | | 9.5% | | | | 9.4% | | | | 10.0% | | | | 5.0% | | | | 15.0% | |
| Fund of Hedged Funds | | | 20.5% | | | | 16.0% | | | | 20.0% | | | | 15.0% | | | | 25.0% | | | | 11.7% | | | | 20.5% | | | | 20.0% | | | | 15.0% | | | | 25.0% | |
| Cash | | | 0.0% | | | | 16.4% | | | | | | | | | | | | | | | | 11.2% | | | | 0.0% | | | | | | | | | | | | | |
| | |
| (1) | | Actual asset allocation as of December 31, 20052006 and 2004,2005, respectively. |
We regularly review our asset allocation and periodically rebalance our investments to our targeted allocation when considered appropriate. From time to time, we may be outside our targeted ranges by amounts we deem acceptable.
At December 31, 2004, our cash balance was higher than normal due to the liquidation of the WICOR pension assets held in a separate trust. Those funds were transferred to our pension master trust and subsequent to December 31, 2004, a portion was reinvested in accordance with our targeted asset allocations. We transferred most of the remaining cash balance to BDK in conjunction with our transfer of certain pension benefit obligations related to the divested Tools Group. We do require a cash balance to be available to fund monthly benefit payments and administrative fees.
Equity securities include Pentair common stock in the amount of $32.6$29.6 million and $41.1$32.6 million at December 31, 2006 and 2005, respectively.
71
Pentair, Inc. and 2004, respectively.Subsidiaries
Notes to consolidated financial statements — (continued)
Cash Flows
Contributions
In 2006, pension contributions totaled $4.3 million. There were no contributions required or made to domestic defined benefit pension plans in fiscal year 2006. In 2005, pension contributions totaled $4.1 million, including $0.3 million of contributions to domestic defined benefit pension plans. In 2004, pension contributions totaled $7.2 million, including $2.7 million of contributions to domestic defined benefit pension plans. The contributions in 2005 and 2004 equaled or exceeded the minimum funding requirement. Our 20062007 pension contributions are expected to be in the range of $5$15 million to $10$20 million. The 2007 expected contributions will equal or exceed our minimum funding requirements.
70
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the plans as follows:
| | | | | | | | | | |
| In millions | | | Pension benefits | | Post-retirement | |
| | | | | | | | | | | |
| | | Pension Benefits | | Post-Retirement | |
| | | (In millions) | | |
| | |
| 2006 | | $ | 25.7 | | | $ | 4.0 | | |
| 2007 | | | 24.7 | | | | 4.0 | | | $ | 26.6 | | | $ | 3.7 | |
| 2008 | | | 25.9 | | | | 4.0 | | | | 26.7 | | | | 3.7 | |
| 2009 | | | 27.0 | | | | 4.0 | | | | 27.6 | | | | 3.8 | |
| 2010 | | | 28.1 | | | | 4.0 | | | | 28.6 | | | | 3.8 | |
| 2011-2015 | | | 166.9 | | | | 21.7 | | |
| 2011 | | | | 29.9 | | | | 4.0 | |
| 2012-2016 | | | | 179.3 | | | | 20.9 | |
Savings Planplan
We have a 401(k) plan (the plan) with an employee stock ownership (ESOP) bonus component, which covers certain union and nearly all non-union U.S. employees who meet certain age requirements. Under the plan, eligible U.S. employees may voluntarily contribute a percentage of their eligible compensation. Matching contributions are made in cash to employees who meet certain eligibility and service requirements. Our matching contribution is fixed at 50 percent50% of eligible employee contributions, and is limited to 5 percent5% of employee compensation contributed by employees.
In addition to the matching contribution, all employees who meet certain service requirements receive a discretionary ESOP contribution equal to 1.5 percent1.5% of annual eligible compensation.
Our combined expense for the plan and ESOP werewas approximately $12.3 million, $8.8 million, and $10.7 million, in 2006, 2005, and $7.3 million, in 2005, 2004, and 2003, respectively.
Authorized Sharesshares
We may issue up to 250 million shares of common stock. Our Board of Directors may designate up to 15 million of those shares as preferred stock. On December 10, 2004, the Board of Directors designated a new series of preferred stock of up to 2.5 million shares, Series A Junior Participating Preferred Stock, par value $0.10 per share. No shares of preferred stock were issued or outstanding as of December 31, 20052006 or December 31, 2004.2005.
Purchase Rightsrights
On December 10, 2004, our Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock. The dividend was payable upon the close of business on January 28, 2005 to the shareholders of record upon the close of business on January 28, 2005. Each Right entitles the registered holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock, at a price of $240.00 per one one-hundredth of a share, subject to adjustment. However, the Rights are not exercisable unless certain change in control events occur, such as a person acquiring or obtaining the right to acquire beneficial ownership of 15 percent15% or more of our outstanding common stock. The
72
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
description and terms of the Rights are set forth in a Rights Agreement, dated December 10, 2004. The Rights will expire on January 28, 2015, unless the Rights are earlier redeemed or exchanged in accordance with the terms of the Rights Agreement. On January 28, 2005, the common share purchase rights issued pursuant to the Rights Agreement dated July 31, 1995 were redeemed in their entirety for an amount equal to $0.0025 per right.
71
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
Share Repurchasesrepurchases
In December 2004,2005, the Board of Directors authorized the developmentrepurchase of a program and process to repurchase shares of our common stock up to a maximum dollar limit of $25.0$25 million annually. There is no expiration associated withof our common stock. On July 28, 2006, the Board of Directors increased our repurchase authorization granted. In 2005,to $50 million, and on September 28, 2006, the Board of Directors further increased our repurchase authorization to $100 million. As of December 31, 2006, we repurchased 755,663had purchased 1,986,026 shares for $25.0$59.4 million pursuant to these programs during 2006. The Board of Directors authorized the continuation of the repurchase program in 2007 with a maximum dollar limit of $40.6 million. This authorization expires on December 31, 2007. As of February 16, 2007, we had not repurchased any additional shares under this plan. Weplan and, accordingly, we have the authority in 20062007 to repurchase shares up to a maximum dollar limit of $25.0$40.6 million. As of February 17, 2006 we had not repurchased any shares under this plan. In 20042005 and 2003,2004, respectively, we repurchased 105,500755,663 shares and 80,000105,500 shares of our common stock under similar plans.authorizations.
Total stock-based compensation expense from continuing operations in 2006, 2005, and 2004 and 2003 was $25.3 million, $24.2 million, $6.3 million, and $4.0$6.3 million, respectively. The increase in 2005 is attributable to the adoption of SFAS 123R in the fourth quarter of 2005 using the modified retrospective transition method and restating interim periods in 2005. The adoption of SFAS 123R in 2005 resulted in the recognition of incremental pre-tax stock-based compensation of $16.4 million, a reduction in net income of $12.0 million, a reduction in basic and diluted earnings per share of $.12,$0.12, a reduction in cash flows from operating activities of $8.7 million and an increase in cash flows from financing activities of $8.7 million. We additionally reclassified our unearned compensation on non-vested share awards of $7.9 million to additional paid in capital. The cumulative effect adjustment for forfeitures related to non-vested share awards was immaterial.
The following table shows the 2005 quarterly impact of the adoption of the new accounting standard:
| | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | |
| | | First | | | Second | | | Third | | | Fourth | | | Year | |
| | | (In thousands, except per-share data) | |
| |
| Net income, prior to SFAS 123R adoption | | $ | 43,305 | | | $ | 64,522 | | | $ | 47,375 | | | $ | 41,845 | | | $ | 197,047 | |
| Impact of SFAS 123R adoption, net of tax | | | (3,124 | ) | | | (3,143 | ) | | | (2,842 | ) | | | (2,889 | ) | | | (11,998 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net income, adjusted for SFAS 123R adoption | | $ | 40,181 | | | $ | 61,379 | | | $ | 44,533 | | | $ | 38,956 | | | $ | 185,049 | |
| | | | | | | | | | | | | | | | | | | | | |
| Basic earnings per common share | | $ | 0.43 | | | $ | 0.64 | | | $ | 0.47 | | | $ | 0.42 | | | $ | 1.96 | |
| Impact of SFAS 123R adoption, net of tax | | | (0.03 | ) | | | (0.03 | ) | | | (0.03 | ) | | | (0.03 | ) | | | (0.12 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Basic earnings per common share | | $ | 0.40 | | | $ | 0.61 | | | $ | 0.44 | | | $ | 0.39 | | | $ | 1.84 | |
| | | | | | | | | | | | | | | | | | | | | |
| Diluted earnings per common share | | $ | 0.42 | | | $ | 0.63 | | | $ | 0.46 | | | $ | 0.41 | | | $ | 1.92 | |
| Impact of SFAS 123R adoption, net of tax | | | (0.03 | ) | | | (0.03 | ) | | | (0.03 | ) | | | (0.03 | ) | | | (0.12 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Diluted earnings per common share | | $ | 0.39 | | | $ | 0.60 | | | $ | 0.43 | | | $ | 0.38 | | | $ | 1.80 | |
| | | | | | | | | | | | | | | | | | | | | |
7273
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
Prior to 2005, we applied APB 25 and the disclosure onlydisclosure-only provisions of SFAS No. 123. The following table illustrates the effect on income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation during 2004 and 2003.2004. The estimated fair value of each Pentair option iswas calculated using the Black-Scholes option-pricing model.
| | | | | | | | | | | | | |
| | | 2004 | | 2003 | | |
| | | (In thousands, except
| | |
| In thousands, except per-share data | | | 2004 | |
| | | per-share data) | | | |
| |
| Net income | | $ | 171,225 | | | $ | 141,352 | | | $ | 171,225 | |
| Plus stock-based employee compensation included in net income, net of tax | | | 6,558 | | | | 2,414 | | | | 6,558 | |
| Less estimated stock-based employee compensation determined under fair value based method, net of tax | | | (17,958 | ) | | | (8,015 | ) | | | (17,958 | ) |
| | | | | | | |
| | | |
| Net Income — pro forma | | $ | 159,825 | | | $ | 135,751 | | | $ | 159,825 | |
| | | |
| | | | | | | |
Earnings per common share | | | | | | | | | | | | |
| Basic — as reported | | $ | 1.72 | | | $ | 1.44 | | | $ | 1.72 | |
| Plus stock-based employee compensation included in net income, net of tax | | | 0.07 | | | | 0.02 | | | | 0.07 | |
| Less estimated stock-based employee compensation determined under fair value based method, net of tax | | | (0.18 | ) | | | (0.07 | ) | | | (0.18 | ) |
| | | | | | | |
| | | |
| Basic — pro forma | | $ | 1.61 | | | $ | 1.39 | | | $ | 1.61 | |
| | | |
| | | | | | | |
| Diluted — as reported | | $ | 1.68 | | | $ | 1.42 | | | $ | 1.68 | |
| Plus stock-based employee compensation included in net income, net of tax | | | 0.07 | | | | 0.02 | | | | 0.07 | |
| Less estimated stock-based employee compensation determined under fair value based method, net of tax | | | (0.18 | ) | | | (0.08 | ) | | | (0.18 | ) |
| | | | | | | |
| | | |
| Diluted — pro forma | | $ | 1.57 | | | $ | 1.36 | | | $ | 1.57 | |
| | | |
| | | | | | | |
Weighted average common shares outstanding | | | | | | | | | | | | |
| Basic | | | 99,316 | | | | 97,876 | | | | 99,316 | |
| Diluted | | | 101,441 | | | | 99,620 | | | | 101,441 | |
The amounts shown above are not indicative of the effect in future years since the estimated fair value of options is amortized on an accelerated basis to expense over the vesting period, and the number of options granted varies from year to year.
We estimated the fair values using the Black-Scholes option-pricing model, modified for dividends and using the following assumptions:
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 2006 | | 2005 | | 2004 | |
| | | 2005 | | 2004 | | 2003 | | |
| |
| Risk-free interest rate | | | 3 | .97% | | | 2 | .83% | | | 2 | .86% | | | 4.57% | | | | 3.97% | | | | 2.83% | |
| Expected dividend yield | | | 1 | .29% | | | 1 | .54% | | | 2 | .10% | | | 1.45% | | | | 1.29% | | | | 1.54% | |
| Expected stock price volatility | | | 34 | .50% | | | 39 | .70% | | | 40 | .00% | | | 31.50% | | | | 34.50% | | | | 39.70% | |
| Expected lives | | | 3 | .6 yrs. | | | 5 | .2 yrs. | | | 5 | .0 yrs. | | | 4.5 yrs | | | | 3.6 yrs | | | | 5.2 yrs | |
73
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
Omnibus Stock Incentive Planstock incentive plan
In April 2004, the Omnibus Stock Incentive Plan as Amended and Restated (the Plan)“Plan”) was approved by shareholders. The Plan authorizes the issuance of additional shares of our common stock and extends through April 2014. The Plan allows for the granting of:
| | |
| • | nonqualified stock options; |
|
| • | incentive stock options; |
|
| • | non-vested shares; |
|
| • | rights to non-vested shares; |
74
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
| |
| • | incentive compensation units (ICUs); |
|
| • | stock appreciation rights; |
|
| • | performance shares; and |
|
| • | performance units. |
The Plan is administered by our Compensation Committee (the Committee)“Committee”), which is made up of independent members of our Board of Directors. Employees eligible to receive awards under the Plan are managerial, administrative, or other key employees who are in a position to make a material contribution to the continued profitable growth and long-term success of Pentair. The Committee has the authority to select the recipients of awards, determine the type and size of awards, establish certain terms and conditions of award grants, and take certain other actions as permitted under the Plan. The Plan provides that no more than 20 percent20% of the total shares available for issuance under the Plan may be used to make awards other than stock options and limits the Committee’s authority to reprice awards or to cancel and reissue awards at lower prices.
Non-QualifiedNon-qualified and Incentive Stock Optionsincentive stock options
Under the Plan, we may grant stock options to any eligible employee with an exercise price equal to the market value of the shares on the dates the options were granted. Options generally vest over a three-year period commencing on the grant date and expire ten years after the grant date. OptionPrior to 2006, option grants typically havehad a reload feature when shares are retired to pay the exercise price, allowing individuals to receive additional options upon exercise equal to the number of shares retired. Option awards granted after 2005 under the Plan do not have a reload feature attached to the option.
Non-Vested Shares, RightsNon-vested shares and rights to Non-Vested Shares and ICUsnon-vested shares
Under the Plan, eligible employees are awarded non-vested shares or rights to non-vested shares (awards) of our common stock. Share awards generally vest from two to five years after issuance, subject to continuous employment and certain other conditions. Non-vested share awards are valued at market value on the date of grant and are expensed over the vesting period. Annual expense for the value of non-vested shares and rights to non-vested shares was $11.1 million in 2006, $7.0 million in 2005, and $6.3 million in 2004, and $3.7 million in 2003. ICUs are cash incentives granted to employees. Annual expense for ICUs was $0.0 million in 2005, $0.3 million in 2004, and $0.9 million in 2003.2004.
Stock Appreciation Rights, Performance Shares,appreciation rights, performance shares, and Performance Unitsperformance units
Under the Plan, the compensation committee is permitted to issue these awards; however, there have been no issuances of these awards.
74
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
Outside Directors Nonqualified Stock Option Plandirectors nonqualified stock option plan
Nonqualified stock options are granted to outside directors under the Outside Directors Nonqualified Stock Option Plan (the Directors Plan)“Directors Plan”) with an exercise price equal to the market value of the shares on the option grant dates. Options generally vest over a three-year period commencing on the grant date and expire ten years after the grant date. The Directors Plan extends to January 2008.
75
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
Stock options
The following table summarizes stock option activity under all plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2006 | |
| | | | | Exercise
| | Remaining
| | Aggregate
| | | | | Exercise
| | Remaining
| | Aggregate
| |
Options Outstanding | | Shares | | Price(1) | | Contractual Life(1) | | Intrinsic Value | | | Shares | | Price(1) | | Contractual Life(1) | | Intrinsic Value | |
| | | | |
| |
Balance January 1 | | | 5,487,018 | | | $ | 20.97 | | | | | | | | | | | | 5,872,382 | | | $ | 27.18 | | | | | | | | | |
| Granted | | | 1,774,049 | | | | 40.83 | | | | | | | | | | | | 1,311,766 | | | | 36.89 | | | | | | | | | |
| Exercised | | | (1,296,432 | ) | | | 19.25 | | | | | | | | | | | | (494,829 | ) | | | 19.59 | | | | | | | | | |
| Forfeited | | | (4,256 | ) | | | 26.31 | | | | | | | | | | | | (296,130 | ) | | | 36.24 | | | | | | | | | |
| Expired | | | (87,997 | ) | | | 32.51 | | | | | | | | | | | | (57,553 | ) | | | 38.52 | | | | | | | | | |
| | | | | | | | | | | |
| | | |
Balance December 31 | | | 5,872,382 | | | $ | 27.18 | | | | 7.0 years | | | $ | 159,603,865 | | | | 6,335,636 | | | $ | 29.26 | | | | 6.5 years | | | $ | 185,361,874 | |
| | | |
| | | | | | | | | | | |
Options exercisable December 31 | | | 2,856,331 | | | $ | 22.60 | | | | 5.6 years | | | $ | 64,554,208 | | | | 3,845,583 | | | $ | 25.19 | | | | 5.4 years | | | $ | 96,874,128 | |
Shares available for grant December 31 | | | 9,767,068 | | | | | | | | | | | | | | | | 8,739,681 | | | | | | | | | | | | | |
The weighted-average grant date fair value of options granted in 2006, 2005, 2004, and 20032004 was estimated to be $10.90, $11.44, $8.64, and $5.76$8.64 per share, respectively. The total intrinsic value of options that were exercised during 2006, 2005, and 2004 and 2003 was $8.5 million, $29.5 million, $47.5 million, and $3.8$47.5 million, respectively. At December 31, 2005,2006, the total unrecognized compensation cost related to stock options was $9.8$6.4 million. This cost is expected to be recognized over a weighted average period of 9 months.1.8 years.
Cash received from option exercises for the years ended December 31, 2006, 2005, and 2004 and 2003 was $4.1 million, $8.4 million, $10.9 million, and $5.8$10.9 million, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $3.3 million, $10.7 million, $17.2 million, and $1.7$17.2 million for the years ended December 31, 2006, 2005, 2004, and 2003,2004, respectively.
The following table summarizes non-vested share activity under all plans:
| | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2006 | |
| | | | | Grant Date
| | | | | Grant Date
| |
Non-Vested Shares Outstanding | | Shares | | Fair Value(1) | | |
| Non-vested Shares Outstanding | | | Shares | | Fair Value(1) | |
| | | | |
| |
Balance January 1 | | | 873,220 | | | $ | 19.27 | | | | 995,792 | | | $ | 24.98 | |
| Granted | | | 300,943 | | | | 40.87 | | | | 352,742 | | | | 37.77 | |
| Vested | | | (159,147 | ) | | | 41.73 | | | | (237,886 | ) | | | 34.33 | |
| Forfeited | | | (19,224 | ) | | | 39.49 | | | | (42,599 | ) | | | 34.16 | |
| | | | | | | |
| | | |
Balance December 31 | | | 995,792 | | | $ | 24.98 | | | | 1,068,049 | | | $ | 31.52 | |
| | | | | | | |
| | | |
75
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
As of December 31, 2005,2006, there was $12.5$15.6 million of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.32.4 years. The total fair value of shares vested during the years ended December 31, 2006, 2005 and 2004, and 2003, was $8.2 million, $6.6 million, $12.4 million, and $3.8$12.4 million, respectively.
During 2005, we increased the contractual term of options for one individual resulting in additional compensation expense of $0.4 million under SFAS 123R. In 2004, we recorded $4.4 million of compensation expense under APB 25 related to the modification of option terms for employees terminated in association with our Tools Group divestiture.
76
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
We classify our continuing operations into the following business segments:
| | |
| • | Water — manufactures and markets essential products and systems used in the movement, storage, treatment, storage and enjoyment of water. Water segment products include water and wastewater pumps; filtration and purification components and systems; storage tanks and pressure vessels; and pool and spa equipment and accessories. |
| |
| • | Technical Products — formerly referred to as Enclosures, designs, manufactures, and markets standard, modified and custom enclosures that house and protect sensitive controls,electronics and electrical components; thermal management products; and accessories. Applications served include industrial machinery, data communications, networking, telecommunications, test and measurement, automotive, medical, security, defense, and general electronics. Products include metallic and composite enclosures, cabinets, cases, subracks, backplanes, and associated thermal management systems. |
| |
| • | Other — is primarily composed of unallocated corporate expenses, our captive insurance subsidiary, intermediate finance companies, divested operations, and intercompany eliminations. |
The accounting policies of our operating segments are the same as those described in the summary of significant accounting policies. We evaluate performance based on the sales and operating income of the segments and use a variety of ratios to measure performance. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented.
76
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
Financial information by reportable business segment is included in the following summary:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | 2005 | | | 2004 | | | 2003 | |
| | | Net Sales to External Customers | | | Operating Income (loss) | |
| | | (In thousands) | |
| |
| Water | | $ | 2,131,505 | | | $ | 1,563,394 | | | $ | 1,060,303 | | | $ | 267,138 | | | $ | 197,310 | | | $ | 143,962 | |
| Technical Products | | | 815,074 | | | | 714,735 | | | | 582,684 | | | | 109,229 | | | | 87,844 | | | | 51,094 | |
| Other | | | — | | | | — | | | | — | | | | (53,295 | ) | | | (37,912 | ) | | | (24,846 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 2,946,579 | | | $ | 2,278,129 | | | $ | 1,642,987 | | | $ | 323,072 | | | $ | 247,242 | | | $ | 170,210 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Identifiable Assets(1) | | | Depreciation | |
| |
| Water | | $ | 2,501,297 | | | $ | 2,497,980 | | | $ | 1,321,128 | | | $ | 35,842 | | | $ | 26,751 | | | $ | 20,517 | |
| Technical Products | | | 640,729 | | | | 503,322 | | | | 462,837 | | | | 19,318 | | | | 19,408 | | | | 19,721 | |
| Other(1) | | | 111,729 | | | | 119,273 | | | | 996,712 | | | | 1,405 | | | | 904 | | | | 571 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 3,253,755 | | | $ | 3,120,575 | | | $ | 2,780,677 | | | $ | 56,565 | | | $ | 47,063 | | | $ | 40,809 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amortization | | | Capital Expenditures | |
| |
| Water | | $ | 11,494 | | | $ | 7,534 | | | $ | 1,543 | | | $ | 44,790 | | | $ | 24,981 | | | $ | 17,831 | |
| Technical Products | | | 177 | | | | — | | | | — | | | | 15,826 | | | | 16,240 | | | | 7,014 | |
| Other | | | 4,324 | | | | (33 | ) | | | (1,166 | ) | | | 1,855 | | | | 7,646 | | | | 18,777 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 15,995 | | | $ | 7,501 | | | $ | 377 | | | $ | 62,471 | | | $ | 48,867 | | | $ | 43,622 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| In thousands | | 2006 | | | 2005 | | | 2004 | | | 2006 | | | 2005 | | | 2004 | |
| | | | | |
| | | Net sales to external customers | | | Operating income (loss) | |
| |
| Water | | $ | 2,155,225 | | | $ | 2,131,505 | | | $ | 1,563,394 | | | $ | 212,498 | | | $ | 267,138 | | | $ | 197,310 | |
| Technical Products | | | 999,244 | | | | 815,074 | | | | 714,735 | | | | 148,905 | | | | 109,229 | | | | 87,844 | |
| Other | | | — | | | | — | | | | — | | | | (54,417 | ) | | | (53,295 | ) | | | (37,912 | ) |
| | | |
| | | |
| Consolidated | | $ | 3,154,469 | | | $ | 2,946,579 | | | $ | 2,278,129 | | | $ | 306,986 | | | $ | 323,072 | | | $ | 247,242 | |
| | | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Identifiable assets(1) | | | Depreciation | |
| |
| Water | | $ | 2,605,103 | | | $ | 2,501,297 | | | $ | 2,497,980 | | | $ | 35,978 | | | $ | 35,842 | | | $ | 26,751 | |
| Technical Products | | | 681,257 | | | | 640,729 | | | | 503,322 | | | | 19,617 | | | | 19,318 | | | | 19,408 | |
Other(1) | | | 78,619 | | | | 111,729 | | | | 119,273 | | | | 1,304 | | | | 1,405 | | | | 904 | |
| | | |
| | | |
| Consolidated | | $ | 3,364,979 | | | $ | 3,253,755 | | | $ | 3,120,575 | | | $ | 56,899 | | | $ | 56,565 | | | $ | 47,063 | |
| | | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amortization | | | Capital expenditures | |
| |
| Water | | $ | 11,292 | | | $ | 11,494 | | | $ | 7,534 | | | $ | 29,733 | | | $ | 44,790 | | | $ | 24,981 | |
| Technical Products | | | 1,931 | | | | 177 | | | | — | | | | 20,959 | | | | 15,826 | | | | 16,240 | |
| Other | | | 4,974 | | | | 4,324 | | | | (33 | ) | | | 386 | | | | 1,855 | | | | 7,646 | |
| | | |
| | | |
| Consolidated | | $ | 18,197 | | | $ | 15,995 | | | $ | 7,501 | | | $ | 51,078 | | | $ | 62,471 | | | $ | 48,867 | |
| | | |
| | | |
| | |
| (1) | | All cash and cash equivalents are included in Other. |
77
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
The following table presents certain geographic information:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | 2003 | | |
| In thousands | | | 2006 | | 2005 | | 2004 | | 2006 | | 2005 | | 2004 | |
| | | Net sales to External Customers | | Long-Lived Assets | | | | | |
| | | (In thousands) | | | Net sales to external customers | | Long-lived assets | |
| |
| U.S./Canada | | $ | 2,423,934 | | | $ | 1,858,224 | | | $ | 1,358,277 | | | $ | 235,021 | | | $ | 249,299 | | | $ | 175,361 | | | $ | 2,567,744 | | | $ | 2,423,934 | | | $ | 1,858,224 | | | $ | 219,847 | | | $ | 235,021 | | | $ | 249,299 | |
| Europe | | | 378,418 | | | | 319,285 | | | | 239,102 | | | | 53,701 | | | | 62,025 | | | | 42,167 | | | | 405,751 | | | | 378,418 | | | | 319,285 | | | | 77,291 | | | | 53,701 | | | | 62,025 | |
| Asia and other | | | 144,227 | | | | 100,620 | | | | 45,608 | | | | 23,117 | | | | 24,978 | | | | 15,578 | | | | 180,974 | | | | 144,227 | | | | 100,620 | | | | 33,234 | | | | 23,117 | | | | 24,978 | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| Consolidated | | $ | 2,946,579 | | | $ | 2,278,129 | | | $ | 1,642,987 | | | $ | 311,839 | | | $ | 336,302 | | | $ | 233,106 | | | $ | 3,154,469 | | | $ | 2,946,579 | | | $ | 2,278,129 | | | $ | 330,372 | | | $ | 311,839 | | | $ | 336,302 | |
| | | | | | | | | | | | | | | | | |
| | | | | |
Net sales are based on the location in which the sale originated. Long-lived assets represent property, plant, and equipment, net of related depreciation.
We offer a broad array of products and systems to multiple markets and customers for which we do not have the financialinformation systems to track revenues by primary product category. However, our net sales by segment is representative of our sales by major product category.
We sell our products through various distribution channels including wholesale and retail distributors, original equipment manufacturers, and home centers. In our Water segment, one customer accounted for just over 10% of segment sales in 2006, no single customer accounted for more than 10 percent10% of segment sales in 2005, and in 2004 one customer accounted for about 11 percent and 12 percent11% of segment sales in 2004 and 2003, respectively.sales. In our Technical Products segment, no single customer accounted for more than 10 percent10% of segment sales in 2006, 2005, 2004, or 2003.2004.
77
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
| |
| 15. | Commitments and Contingencies |
Operating Lease Commitmentslease commitments
Net rental expense under operating leases follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 | | |
| In thousands | | | 2006 | | 2005 | | 2004 | |
| | | (In thousands) | | | |
| |
| Gross rental expense | | $ | 33,651 | | | $ | 27,712 | | | $ | 24,407 | | | $ | 39,497 | | | $ | 33,651 | | | $ | 27,712 | |
| Sublease rental income | | | (214 | ) | | | (804 | ) | | | (698 | ) | | | (264 | ) | | | (214 | ) | | | (804 | ) |
| | | | | | | | | |
| | | |
| Net rental expense | | $ | 33,437 | | | $ | 26,908 | | | $ | 23,709 | | | $ | 39,233 | | | $ | 33,437 | | | $ | 26,908 | |
| | | | | | | | | |
| | | |
Future minimum lease commitments under non-cancelable operating leases, principally related to facilities, vehicles, and machinery and equipment are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Thereafter | | Total | | |
| In thousands | | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | Thereafter | | Total | |
| | | (In thousands) | | | |
| |
| Minimum lease payments | | $ | 26,317 | | | $ | 20,978 | | | $ | 17,219 | | | $ | 14,151 | | | $ | 11,633 | | | $ | 22,555 | | | $ | 112,853 | | | $ | 28,445 | | | $ | 23,441 | | | $ | 17,932 | | | $ | 12,855 | | | $ | 11,816 | | | $ | 9,017 | | | $ | 103,506 | |
| Minimum sublease rentals | | | (487 | ) | | | (407 | ) | | | (407 | ) | | | (339 | ) | | | — | | | | — | | | | (1,640 | ) | | | (472 | ) | | | (472 | ) | | | (404 | ) | | | (65 | ) | | | (65 | ) | | | — | | | | (1,478 | ) |
| | | | | | | | | | | | | | | | | |
| | | |
| Net future minimum lease commitments | | $ | 25,830 | | | $ | 20,571 | | | $ | 16,812 | | | $ | 13,812 | | | $ | 11,633 | | | $ | 22,555 | | | $ | 111,213 | | | $ | 27,973 | | | $ | 22,969 | | | $ | 17,528 | | | $ | 12,790 | | | $ | 11,751 | | | $ | 9,017 | | | $ | 102,028 | |
| | | | | | | | | | | | | | | | | |
| | | |
Environmental
We have been named as defendants, targets, or potentially responsible parties (PRPs)(“PRP”) in a small number of environmentalclean-ups, in which our current or former business units have generally been givende minimisstatus. To date, none of these claims have resulted inclean-up costs, fines, penalties, or damages in an amount material to our financial position or results of operations. We have disposed of a number of businesses over the last tenin recent years and in certain cases, such as the disposition of the Cross Pointe Paper Corporation uncoated paper business in 1995, the disposition of the Federal Cartridge Company ammunition business in 1997, the disposition of Lincoln Industrial in 2001, and the disposition of the Tools Group in 2004, we have retained responsibility and potential liability for certain environmental obligations. We have received claims for
78
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
indemnification from purchasers both of the paper business and the ammunition businessthese businesses and have established what we believe to be adequate accruals for potential liabilities arising out of retained responsibilities. We settled some of the claims in 2005 and 2003 andprior years; to date our recorded accrual wasaccruals have been adequate.
In addition, there are pendingongoing environmental issues at a limited number of sites, including one site acquired in the acquisition of Essef Corporation in 1999, which relatesrelate to operations no longer carried out at that site.the sites. We have established what we believe to be adequate accruals for remediation costs at this and otherthese sites. We do not believe that projected response costs will result in a material liability.
We may be named as a PRP at other sites in the future, for both divested and acquired businesses. When itthe outcome of the matter is probable and it is possible to provide reasonable estimates of our liability with respect to environmental sites, provisions have been made in accordance with generally accepted accounting principles in the United States. As of December 31, 2006 and 2005, and 2004, our undiscounted reserves for such environmental liabilities were approximately $5.6 million and $6.4 million, and $9.4 million, respectively, measured on an undiscounted basis.respectively. We cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmentalclean-up costs and liabilities will not exceed the amount of our current reserves.
78
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
Litigation
We have been made parties to a number of actions filed or have been given notice of potential claims relating to the conduct of our business, including those pertaining to commercial disputes, product liability, environmental, safety and health, patent infringement, and employment matters.
We comply with the requirements of Statement of Financial Accounting Standards (“SFAS”)SFAS No. 5,Accounting for Contingencies, and related guidance, and record liabilities for an estimated loss from a loss contingency where the outcome of the matter is probable and can be reasonably estimated. Factors that are considered when determining whether the conditions for accrual have been met include the (a) nature of the litigation, claim, or assessment, (b) progress of the case, including progress after the date of the financial statements but before the issuance date of the financial statements, (c) opinions of legal counsel, and (d) management’s intended response to the litigation, claim, or assessment. Where the reasonable estimate of the probable loss is a range, we record the most likely estimate of the loss. When no amount within the range is a better estimate than any other amount, however, the minimum amount in the range is accrued. Gain contingencies are not recorded until realized.
While we believe that a material adverse impact on our consolidated financial position, results of operations, or cash flows from any such future charges is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future adverse ruling or unfavorable development could result in future charges that could have a material adverse impact. We do and will continue to periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our consolidated financial position, results of operations, and cash flows for the proceedings and claims could change in the future.
Product Liability Claimsliability claims
We are subject to various product liability lawsuits and personal injury claims. A substantial number of these lawsuits and claims are insured and accrued for by Penwald Insurance Company (“Penwald”) our captive insurance subsidiary. Penwald records a liability for these claims based on actuarial projections of ultimate losses. For all other claims, accruals covering the claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are adjusted periodically as additional information becomes available. We have not experienced significant unfavorable trends in either the severity or frequency of product liability lawsuits or personal injury claims.
79
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
Horizon Litigationlitigation
Twenty-eight separate lawsuits involving 29 primary plaintiffs, a class action, and claims for indemnity by Celebrity Cruise Lines, Inc. (Celebrity)(“Celebrity”) were brought against Essef Corporation (Essef)(“Essef”) and certain of its subsidiaries prior to our acquisition of Essef in August 1999. Celebrity has alleged that it had sustained economic damages due to loss of use of the M/V Horizon while it was dry-docked.
The claims against Essef and its involved subsidiaries were 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 cruise ship, and allegations that the spa and filters contained Legionnaire’s disease bacteria that infected certain passengers on cruises from December 1993April 1994 through July 1994.
The individual and class claims by passengers were tried and resulted in an adverse jury verdict finding liability on the part of the Essef defendants (70%) and Celebrity and its sister company, Fantasia (together 30%).
79
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
After expiration of post-trial appeals, we paid all outstanding punitive damage awards of $7.0 million in the Horizon cases, plus interest of approximately $1.6 million, in January 2004. We had reserved for the amount of punitive damages awarded at the time of the Essef acquisition. A reserve for the $1.6 million interest cost was recorded in 2003. All of the personal injury cases have now been resolved through either settlement or trial.judgment.
The only remaining unresolved claims in this case arewere those brought by Celebrity for damages resulting from the outbreak. Celebrity filed an amended complaint seeking attorney fees and costs for prior litigation as well asout-of-pocket losses, lost profits, and loss of business enterprise value. Discovery commenced lateOn June 28, 2006, a jury returned a verdict against the Essef defendants in 2004,the total amount of $193.0 million for its claims forout-of-pocket expenses ($10.4 million), lost profits ($47.6 million) and lost enterprise value ($135.0 million). The verdict was completedexclusive of pre-judgment interest and attorneys’ fees.
On January 17, 2007, the Court ruled on our post-trial motions, granting judgment in August 2005.our favor as a matter of law with respect to Celebrity’s claimsclaim for damages exceed $185lost enterprise value ($135.0 million). The Court also granted a new trial with respect to lost profits ($47.6 million). In addition, the Court denied without prejudice our claim for contribution to reduce Celebrity’s recovery by 30% to account for its contributory negligence, with leave to renew the motion following retrial.
Celebrity’s claim for lost profits at trial amounted to approximately $60.3 million. Assuming mattersWe believe that actual lost profits suffered, if any, are substantially less. In a new trial, there remain questions of causation, standing, contribution and proof are decided against it, Essef’s experts believe thatof damages should amount to no more than approximately $16 to $25 million. Dispositive motions in this matter were filed in August 2005, which were decided in December 2005. Celebrity’s motion for indemnity from Essef for payments made by Celebrity for passenger claims of approximately $2.3 million was denied. Essef’s motion for dismissal of certain damage claims was denied without prejudice to renewal in conjunction with both parties’ motions to exclude certain expert testimony. We expect these motions to be adjudicated in March 2006. Trial has been scheduled for April 24, 2006.determined. We believe our reserves for any liability to Celebrity are adequate and intend to vigorously defend against theseCelebrity’s claims. We cannot predict whether Celebrity will appeal the ruling on lost enterprise value, nor whether and to what extent Essef may eventually be found liable on Celebrity’s claims.
Several issues have not been decided by the Court, including whether Celebrity is entitled to recovery of its attorneys’ fees and related costs in the passenger claims phase of the case ($4.1 million), and, with respect to pre-judgment interest, the length of the interest period and the rate of interest on any eventual judgment. We have assessed the impact of the ruling on our previously established reserves for this matter and, based on information available at this time, have not changed our reserves following this ruling, except to take into account quarterly interest accruals.
We believe that any judgment we pay in this matter would be tax-deductible in the year paid or in subsequent years. In addition to the impact of any loss on this matter on our earnings per share when recognized, we may need to borrow funds from our banks or other sources to pay any judgment finally determined after exhaustion of all appeals. We expect that we would have available adequate funds to allow us to do so, based on discussions with our lending sources and our estimates of the results of our business operations over the foreseeable future.
Warranties and Guaranteesguarantees
In connection with the disposition of our businesses or product lines, we may agree to indemnify purchasers for various potential liabilities relating to the sold business, such as pre-closing tax, product liability, warranty, environmental, or other obligations. The subject matter, amounts, and duration of any such indemnification
80
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
obligations vary for each type of liability indemnified and may vary widely from transaction to transaction. Generally, the maximum obligation under such indemnifications is not explicitly stated and as a result, the overall amount of these obligations cannot be reasonably estimated. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial condition or results of operations.
In accordance with FASB Interpretation No. 45 (“FIN 45”),Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Others, we recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.
We have guaranteed the indebtedness of one customer, whose outstanding debt at December 31, 2005 was $1.1 million. The debt amount is a declining balance and scheduled to be paid in full by June 2007. The liability relating to the guarantee is not material.
We provide service and warranty policies on our products. Liability under service and warranty policies is based upon a review of historical warranty and service claim experience. Adjustments are made to accruals as claim data and historical experience warrant.
80
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
The changes in the carrying amount of service and product warranties for the year ended December 31, 20052006 and 20042005 are as follows:
| | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | |
| In thousands | | | 2006 | | 2005 | |
| | | (In thousands) | | | |
| |
| Balance at beginning of the year | | $ | 32,524 | | | $ | 14,427 | | | $ | 33,551 | | | $ | 32,524 | |
| Service and product warranty provision | | | 40,576 | | | | 35,141 | | | | 48,791 | | | | 40,576 | |
| Payments | | | (44,123 | ) | | | (32,237 | ) | | | (49,190 | ) | | | (44,123 | ) |
| Acquired | | | 2,231 | | | | 14,899 | | | | 484 | | | | 2,231 | |
| Translation | | | 2,343 | | | | 294 | | | | 457 | | | | 2,343 | |
| | | | | | | |
| | | |
| Balance at end of the year | | $ | 33,551 | | | $ | 32,524 | | | $ | 34,093 | | | $ | 33,551 | |
| | | | | | | |
| | | |
Stand-By LettersStand-by letters of Creditcredit
In the ordinary course of business, predominantly for contracts and bids involving municipal pump products, we are required to commit to bonds that require payments to our customers for any non-performance. The outstanding face value of the bonds fluctuates with the value of our projects in process and in our backlog. In addition, we issue financial stand-by letters of credit to secure our performance to third parties under self-insurance programs and certain legal matters. As of December 31, 2006 and December 31, 2005, the outstanding value of these instruments totaled $59.6 million and $38.8 million. As of December 31, 2004, the outstanding value of these instruments totaled $64.9 million, which included a $38.9 million stand-by letter of credit pertainingrespectively.
81
Pentair, Inc. and Subsidiaries
Notes to an indemnified legal matter that was resolved in our favor during 2005, eliminating the bond requirement.consolidated financial statements — (continued)
| |
| 16. | Selected Quarterly Financial Data (Unaudited) |
In the fourth quarter of 2005, we adopted SFAS 123R, Stock-Based Payment, using the modified retrospective method as of January 1, 2005. As a result, quarterly financial information for 2005 has been restated from the previously filed quarterly financial information for the impact of the adoption of SFAS 123R, see Note 13 for the reconciliation. As we did not retrospectively adopt SFAS 123R for all periods, the 2004 quarterly financial data remains unmodified.
81
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
The following table represents the 20052006 quarterly financial information restated for the adoption of SFAS 123R:information:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2006 | |
| | | First | | Second | | Third | | Fourth | | Year | | |
| In thousands, except per-share data | | | First | | Second | | Third | | Fourth | | Year | |
| | | (In thousands, except per-share data) | | | |
| |
| Net sales | | $ | 709,635 | | | $ | 788,523 | | | $ | 716,308 | | | $ | 732,113 | | | $ | 2,946,579 | | | $ | 771,389 | | | $ | 862,022 | | | $ | 778,020 | | | $ | 743,038 | | | $ | 3,154,469 | |
| Gross profit | | | 204,138 | | | | 235,233 | | | | 200,841 | | | | 207,809 | | | | 848,021 | | | | 222,508 | | | | 262,689 | | | | 212,487 | | | | 208,566 | | | | 906,250 | |
| Operating income | | | 72,086 | | | | 107,234 | | | | 76,880 | | | | 66,872 | | | | 323,072 | | | | 78,556 | | | | 107,975 | | | | 60,293 | | | | 60,162 | | | | 306,986 | |
| Income from continuing operations | | | 40,181 | | | | 61,379 | | | | 44,533 | | | | 38,956 | | | | 185,049 | | | | 43,071 | | | | 68,633 | | | | 33,441 | | | | 38,622 | | | | 183,767 | |
| Income from discontinued operations, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | |
| Loss on disposal of discontinued operations, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | |
| Gain (loss) on disposal of discontinued operations, net of tax | | | | (1,451 | ) | | | — | | | | 1,400 | | | | 15 | | | | (36 | ) |
| Net income | | | 40,181 | | | | 61,379 | | | | 44,533 | | | | 38,956 | | | | 185,049 | | | | 41,620 | | | | 68,633 | | | | 34,841 | | | | 38,637 | | | | 183,731 | |
Earnings per common share(1) | | | | | | | | | | | | | | | | | | | | | |
Earnings per common share(1) | | | | | | | | | | | | | | | | | | | | | |
Basic | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 0.40 | | | $ | 0.61 | | | $ | 0.44 | | | $ | 0.39 | | | $ | 1.84 | | | $ | 0.43 | | | $ | 0.68 | | | $ | 0.34 | | | $ | 0.39 | | | $ | 1.84 | |
| Discontinued operations | | | — | | | | — | | | | — | | | | — | | | | — | | | | (0.01 | ) | | | — | | | | 0.01 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | |
| Basic earnings per common share | | $ | 0.40 | | | $ | 0.61 | | | $ | 0.44 | | | $ | 0.39 | | | $ | 1.84 | | | $ | 0.42 | | | $ | 0.68 | | | $ | 0.35 | | | $ | 0.39 | | | $ | 1.84 | |
| | | |
| | | | | | | | | | | | | |
Diluted | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 0.39 | | | $ | 0.60 | | | $ | 0.43 | | | $ | 0.38 | | | $ | 1.80 | | | $ | 0.42 | | | $ | 0.67 | | | $ | 0.33 | | | $ | 0.39 | | | $ | 1.81 | |
| Discontinued operations | | | — | | | | — | | | | — | | | | — | | | | — | | | | (0.01 | ) | | | — | | | | 0.01 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | |
| Diluted earnings per common share | | $ | 0.39 | | | $ | 0.60 | | | $ | 0.43 | | | $ | 0.38 | | | $ | 1.80 | | | $ | 0.41 | | | $ | 0.67 | | | $ | 0.34 | | | $ | 0.39 | | | $ | 1.81 | |
| | | | | | | | | | | | | |
| | | |
| |
| (1) | Amounts may not total to annual earnings because each quarter and year are calculated separately based on basic and diluted weighted-average common shares outstanding during that period. |
82
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
The following table represents the 2005 quarterly financial information as previously reported:
| | | | | | | | | | | | | |
| | | 2005 | |
| | | First | | | Second | | | Third | |
| | | (In thousands, except per-share data) | |
| |
| Net sales | | $ | 709,635 | | | $ | 788,523 | | | $ | 716,308 | |
| Gross profit | | | 204,138 | | | | 235,233 | | | | 200,841 | |
| Operating income | | | 76,373 | | | | 104,978 | | | | 80,776 | |
| Income from continuing operations | | | 43,305 | | | | 64,522 | | | | 47,375 | |
| Income from discontinued operations, net of tax | | | — | | | | — | | | | — | |
| Loss on disposal of discontinued operations, net of tax | | | — | | | | — | | | | — | |
| Net income | | | 43,305 | | | | 64,522 | | | | 47,375 | |
Earnings per common share | | | | | | | | | | | | |
Basic | | | | | | | | | | | | |
| Continuing operations | | $ | 0.43 | | | $ | 0.64 | | | $ | 0.47 | |
| Discontinued operations | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Basic earnings per common share | | $ | 0.43 | | | $ | 0.64 | | | $ | 0.47 | |
| | | | | | | | | | | | | |
Diluted | | | | | | | | | | | | |
| Continuing operations | | $ | 0.42 | | | $ | 0.63 | | | $ | 0.46 | |
| Discontinued operations | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Diluted earnings per common share | | $ | 0.42 | | | $ | 0.63 | | | $ | 0.46 | |
| | | | | | | | | | | | | |
83
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
The following table represents the 2004 quarterly financial information:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2005 | |
| | | First | | Second | | Third | | Fourth | | Year | | |
| In thousands, except per-share data | | | First | | Second | | Third | | Fourth | | Year | |
| | | (In thousands, except per-share data) | | | |
| |
| Net sales | | $ | 488,453 | | | $ | 530,433 | | | $ | 607,767 | | | $ | 651,476 | | | $ | 2,278,129 | | | $ | 709,635 | | | $ | 788,523 | | | $ | 716,308 | | | $ | 732,113 | | | $ | 2,946,579 | |
| Gross profit | | | 140,073 | | | | 161,651 | | | | 169,784 | | | | 183,202 | | | | 654,710 | | | | 204,138 | | | | 235,233 | | | | 200,841 | | | | 207,809 | | | | 848,021 | |
| Operating income | | | 50,110 | | | | 70,984 | | | | 64,099 | | | | 62,049 | | | | 247,242 | | | | 72,086 | | | | 107,234 | | | | 76,880 | | | | 66,872 | | | | 323,072 | |
| Income from continuing operations | | | 28,242 | | | | 41,993 | | | | 33,092 | | | | 33,697 | | | | 137,024 | | | | 40,181 | | | | 61,379 | | | | 44,533 | | | | 38,956 | | | | 185,049 | |
| Income from discontinued operations, net of tax | | | 11,968 | | | | 13,470 | | | | 14,810 | | | | — | | | | 40,248 | | |
| Loss on disposal of discontinued operations, net of tax | | | — | | | | — | | | | — | | | | (6,047 | ) | | | (6,047 | ) | |
| Net income | | | 40,210 | | | | 55,463 | | | | 47,902 | | | | 27,650 | | | | 171,225 | | | | 40,181 | | | | 61,379 | | | | 44,533 | | | | 38,956 | | | | 185,049 | |
Earnings per common share(1) | | | | | | | | | | | | | | | | | | | | | |
Earnings per common share(1) | | | | | | | | | | | | | | | | | | | | | |
Basic | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 0.29 | | | $ | 0.42 | | | $ | 0.33 | | | $ | 0.34 | | | $ | 1.38 | | | $ | 0.40 | | | $ | 0.61 | | | $ | 0.44 | | | $ | 0.39 | | | $ | 1.84 | |
| Discontinued operations | | | 0.12 | | | | 0.14 | | | | 0.15 | | | | (0.07 | ) | | | 0.34 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | |
| Basic earnings per common share | | $ | 0.41 | | | $ | 0.56 | | | $ | 0.48 | | | $ | 0.27 | | | $ | 1.72 | | | $ | 0.40 | | | $ | 0.61 | | | $ | 0.44 | | | $ | 0.39 | | | $ | 1.84 | |
| | | |
| | | | | | | | | | | | | |
Diluted | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 0.28 | | | $ | 0.42 | | | $ | 0.32 | | | $ | 0.33 | | | $ | 1.35 | | | $ | 0.39 | | | $ | 0.60 | | | $ | 0.43 | | | $ | 0.38 | | | $ | 1.80 | |
| Discontinued operations | | | 0.12 | | | | 0.13 | | | | 0.15 | | | | (0.07 | ) | | | 0.33 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | |
| Diluted earnings per common share | | $ | 0.40 | | | $ | 0.55 | | | $ | 0.47 | | | $ | 0.26 | | | $ | 1.68 | | | $ | 0.39 | | | $ | 0.60 | | | $ | 0.43 | | | $ | 0.38 | | | $ | 1.80 | |
| | | | | | | | | | | | | |
| | | |
| |
| (1) | Amounts may not total to annual earnings because each quarter and year are calculated separately based on basic and diluted weighted-average common shares outstanding during that period. |
8483
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
| |
| 17. | Financial Statements of Subsidiary Guarantors |
The $250 million Senior Notes due 2009 are jointly and severally guaranteed by domestic subsidiaries (the “Guarantor Subsidiaries”), each of which is directly or indirectly wholly-owned by Pentair (the “Parent Company”). The following supplemental financial information sets forth the condensed consolidated balance sheets as of December 31, 20052006 and 2004,2005, the related condensed consolidated statements of income and statements of cash flows for each of the three years in the period ended December 31, 2005,2006, for the Parent Company, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries, and total consolidated Pentair and subsidiaries.
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
For the Year Endedyear ended December 31, 20052006
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | |
| | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | |
| In thousands | | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
| | | (In thousands) | | | |
| |
| Net sales | | $ | — | | | $ | 2,430,598 | | | $ | 640,918 | | | $ | (124,937 | ) | | $ | 2,946,579 | | | $ | — | | | $ | 2,596,642 | | | $ | 722,606 | | | $ | (164,779 | ) | | $ | 3,154,469 | |
| Cost of goods sold | | | 381 | | | | 1,755,604 | | | | 461,091 | | | | (118,518 | ) | | | 2,098,558 | | | | 682 | | | | 1,887,551 | | | | 524,674 | | | | (164,688 | ) | | | 2,248,219 | |
| | | | | | | | | | | | | |
| | | |
| Gross profit | | | (381 | ) | | | 674,994 | | | | 179,827 | | | | (6,419 | ) | | | 848,021 | | | | (682 | ) | | | 709,091 | | | | 197,932 | | | | (91 | ) | | | 906,250 | |
| Selling, general and administrative | | | 51,370 | | | | 346,026 | | | | 82,446 | | | | (935 | ) | | | 478,907 | | | | 24,366 | | | | 385,209 | | | | 131,725 | | | | (91 | ) | | | 541,209 | |
| Research and development | | | — | | | | 35,589 | | | | 10,453 | | | | — | | | | 46,042 | | | | — | | | | 45,600 | | | | 12,455 | | | | — | | | | 58,055 | |
| | | | | | | | | | | | | |
| | | |
| Operating (loss) income | | | (51,751 | ) | | | 293,379 | | | | 86,928 | | | | (5,484 | ) | | | 323,072 | | | | (25,048 | ) | | | 278,282 | | | | 53,752 | | | | — | | | | 306,986 | |
| Gain on sale of investment | | | 5,435 | | | | — | | | | — | | | | — | | | | 5,435 | | |
| Gain (loss) on sale of assets, net | | | | 1,152 | | | | (788 | ) | | | — | | | | — | | | | 364 | |
| Net interest (income) expense | | | (63,743 | ) | | | 115,379 | | | | (1,163 | ) | | | (5,484 | ) | | | 44,989 | | | | (63,991 | ) | | | 119,461 | | | | (3,589 | ) | | | — | | | | 51,881 | |
| | | |
| | | | | | | | | | | | | |
| Income before income taxes | | | 17,427 | | | | 178,000 | | | | 88,091 | | | | — | | | | 283,518 | | | | 40,095 | | | | 158,033 | | | | 57,341 | | | | — | | | | 255,469 | |
| Provision for income taxes | | | 6,057 | | | | 60,823 | | | | 31,589 | | | | — | | | | 98,469 | | | | 13,774 | | | | 37,549 | | | | 20,379 | | | | — | | | | 71,702 | |
| | | | | | | | | | | | | |
| | | |
| Income from continuing operations | | | | 26,321 | | | | 120,484 | | | | 36,962 | | | | — | | | | 183,767 | |
| Loss on disposal of discontinued operations, net of tax | | | | (36 | ) | | | — | | | | — | | | | — | | | | (36 | ) |
| | | |
| | | |
| Net income | | $ | 11,370 | | | $ | 117,177 | | | $ | 56,502 | | | $ | — | | | $ | 185,049 | | | $ | 26,285 | | | $ | 120,484 | | | $ | 36,962 | | | $ | — | | | $ | 183,731 | |
| | | | | | | | | | | | | |
| | | |
8584
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
December 31, 2006
| | | | | | | | | | | | | | | | | | | | | |
| | | Parent
| | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| In thousands | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | |
| |
ASSETS |
Current assets | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 8,810 | | | $ | 6,550 | | | $ | 39,460 | | | $ | — | | | $ | 54,820 | |
| Accounts and notes receivable, net | | | 190 | | | | 316,157 | | | | 150,103 | | | | (44,316 | ) | | | 422,134 | |
| Inventories | | | — | | | | 283,687 | | | | 115,170 | | | | — | | | | 398,857 | |
| Deferred tax assets | | | 96,566 | | | | 66,255 | | | | 5,359 | | | | (117,602 | ) | | | 50,578 | |
| Prepaid expenses and other current assets | | | 16,766 | | | | 20,555 | | | | 16,496 | | | | (22,578 | ) | | | 31,239 | |
| |
| |
| Total current assets | | | 122,332 | | | | 693,204 | | | | 326,588 | | | | (184,496 | ) | | | 957,628 | |
Property, plant and equipment, net | | | 4,753 | | | | 214,709 | | | | 110,910 | | | | — | | | | 330,372 | |
Other assets | | | | | | | | | | | | | | | | | | | | |
| Investments in subsidiaries | | | 1,978,466 | | | | 61,351 | | | | 134,204 | | | | (2,174,021 | ) | | | — | |
| Goodwill | | | — | | | | 1,466,536 | | | | 252,235 | | | | — | | | | 1,718,771 | |
| Intangibles, net | | | — | | | | 261,050 | | | | 25,961 | | | | — | | | | 287,011 | |
| Other | | | 76,076 | | | | 15,078 | | | | 5,423 | | | | (25,380 | ) | | | 71,197 | |
| |
| |
| Total other assets | | | 2,054,542 | | | | 1,804,015 | | | | 417,823 | | | | (2,199,401 | ) | | | 2,076,979 | |
| |
| |
Total assets | | $ | 2,181,627 | | | $ | 2,711,928 | | | $ | 855,321 | | | $ | (2,383,897 | ) | | $ | 3,364,979 | |
| |
| |
| |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
Current liabilities | | | | | | | | | | | | | | | | | | | | |
| Short-term borrowings | | $ | — | | | $ | — | | | $ | 14,563 | | | $ | — | | | $ | 14,563 | |
| Current maturities of long-term debt | | | 1,167 | | | | 258 | | | | 34,649 | | | | (28,449 | ) | | | 7,625 | |
| Accounts payable | | | 3,053 | | | | 158,294 | | | | 94,709 | | | | (49,770 | ) | | | 206,286 | |
| Employee compensation and benefits | | | 12,388 | | | | 48,447 | | | | 28,047 | | | | — | | | | 88,882 | |
| Current pension and post-retirement benefits | | | 7,918 | | | | — | | | | — | | | | — | | | | 7,918 | |
| Accrued product claims and warranties | | | — | | | | 28,955 | | | | 15,138 | | | | — | | | | 44,093 | |
| Income taxes | | | 48,462 | | | | 1,685 | | | | 4,389 | | | | (32,043 | ) | | | 22,493 | |
| Accrued rebates and sales incentives | | | — | | | | 35,185 | | | | 4,234 | | | | — | | | | 39,419 | |
| Other current liabilities | | | 16,408 | | | | 51,858 | | | | 38,132 | | | | (16,395 | ) | | | 90,003 | |
| |
| |
| Total current liabilities | | | 89,396 | | | | 324,682 | | | | 233,861 | | | | (126,657 | ) | | | 521,282 | |
| | | | | | | | | | | | | | | | | | | | | |
Other liabilities | | | | | | | | | | | | | | | | | | | | |
| Long-term debt | | | 695,924 | | | | 1,786,914 | | | | 40,987 | | | | (1,801,952 | ) | | | 721,873 | |
| Pension and other retirement compensation | | | 121,680 | | | | 27,470 | | | | 58,526 | | | | — | | | | 207,676 | |
| Post-retirement medical and other benefits | | | 23,143 | | | | 50,079 | | | | — | | | | (25,380 | ) | | | 47,842 | |
| Deferred tax liabilities | | | 3,200 | | | | 161,360 | | | | 30,780 | | | | (85,559 | ) | | | 109,781 | |
| Due to / (from) affiliates | | | (453,623 | ) | | | 65,884 | | | | 270,531 | | | | 117,208 | | | | — | |
| Other non-current liabilities | | | 31,908 | | | | 7,322 | | | | 47,296 | | | | — | | | | 86,526 | |
| |
| |
| Total liabilities | | | 511,628 | | | | 2,423,711 | | | | 681,981 | | | | (1,922,340 | ) | | | 1,694,980 | |
Shareholders’ equity | | | 1,669,999 | | | | 288,217 | | | | 173,340 | | | | (461,557 | ) | | | 1,669,999 | |
| |
| |
Total liabilities and shareholders’ equity | | $ | 2,181,627 | | | $ | 2,711,928 | | | $ | 855,321 | | | $ | (2,383,897 | ) | | $ | 3,364,979 | |
| |
| |
85
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the Year Ended December 31, 2006
| | | | | | | | | | | | | | | | | | | | | |
| | | Parent
| | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| In thousands | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | |
| |
Operating activities | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 26,285 | | | $ | 120,484 | | | $ | 36,962 | | | $ | — | | | $ | 183,731 | |
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | | | | | | | | | | | | | | | | | | | |
| Loss on disposal of discontinued operations | | | 36 | | | | — | | | | — | | | | — | | | | 36 | |
| Depreciation | | | 1,304 | | | | 42,874 | | | | 12,721 | | | | — | | | | 56,899 | |
| Amortization | | | 4,974 | | | | 12,199 | | | | 1,024 | | | | — | | | | 18,197 | |
| Deferred income taxes | | | (10,895 | ) | | | (5,359 | ) | | | 5,169 | | | | — | | | | (11,085 | ) |
| Stock compensation | | | 25,377 | | | | — | | | | — | | | | — | | | | 25,377 | |
| Excess tax benefits from stock-based compensation | | | (3,043 | ) | | | — | | | | — | | | | — | | | | (3,043 | ) |
| Gain on sale of assets, net | | | (1,152 | ) | | | 788 | | | | — | | | | — | | | | (364 | ) |
| Intercompany dividends | | | (113,360 | ) | | | (30 | ) | | | 113,390 | | | | — | | | | — | |
Changes in assets and liabilities, net of effects of business acquisitions and dispositions | | | | | | | | | | | | | | | | | | | | |
| Accounts and notes receivable | | | (4,015 | ) | | | 23,799 | | | | (14,196 | ) | | | 10,285 | | | | 15,873 | |
| Inventories | | | — | | | | (16,681 | ) | | | (22,673 | ) | | | — | | | | (39,354 | ) |
| Prepaid expenses and other current assets | | | (8,580 | ) | | | (11,241 | ) | | | 3,434 | | | | 11,335 | | | | (5,052 | ) |
| Accounts payable | | | (146 | ) | | | (13,118 | ) | | | 4,614 | | | | (10,285 | ) | | | (18,935 | ) |
| Employee compensation and benefits | | | (4,760 | ) | | | (9,109 | ) | | | 640 | | | | — | | | | (13,229 | ) |
| Accrued product claims and warranties | | | — | | | | 573 | | | | (117 | ) | | | — | | | | 456 | |
| Income taxes | | | 40,491 | | | | (21,921 | ) | | | (9,014 | ) | | | — | | | | 9,556 | |
| Other current liabilities | | | 2,406 | | | | (10,185 | ) | | | 5,330 | | | | (11,335 | ) | | | (13,784 | ) |
| Pension and post-retirement benefits | | | 11,653 | | | | 3,278 | | | | 4,467 | | | | — | | | | 19,398 | |
| Other assets and liabilities | | | (6,079 | ) | | | 507 | | | | 12,458 | | | | — | | | | 6,886 | |
| |
| |
| Net cash provided by (used for) continuing operations | | | (39,504 | ) | | | 116,858 | | | | 154,209 | | | | — | | | | 231,563 | |
| Net cash used for discontinued operations | | | 37 | | | | — | | | | 11 | | | | — | | | | 48 | |
| |
| |
| Net cash provided by (used for) operating activities | | | (39,467 | ) | | | 116,858 | | | | 154,220 | | | | — | | | | 231,611 | |
Investing activities | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | | (385 | ) | | | (24,623 | ) | | | (26,070 | ) | | | — | | | | (51,078 | ) |
| Proceeds from sales of property and equipment | | | — | | | | 433 | | | | 251 | | | | — | | | | 684 | |
| Acquisitions, net of cash acquired | | | (23,535 | ) | | | (217 | ) | | | (5,534 | ) | | | — | | | | (29,286 | ) |
| Investment in subsidiaries | | | 226,425 | | | | (85,854 | ) | | | (140,571 | ) | | | — | | | | — | |
| Divestitures | | | (18,246 | ) | | | — | | | | (5,761 | ) | | | — | | | | (24,007 | ) |
| Proceeds from sale of investments | | | 1,153 | | | | — | | | | — | | | | — | | | | 1,153 | |
| Other | | | (2,899 | ) | | | (4,624 | ) | | | — | | | | — | | | | (7,523 | ) |
| |
| |
| Net cash provided by (used for) investing activities | | | 182,513 | | | | (114,885 | ) | | | (177,685 | ) | | | — | | | | (110,057 | ) |
Financing activities | | | | | | | | | | | | | | | | | | | | |
| Net short-term borrowings (repayments) | | | — | | | | — | | | | 13,831 | | | | — | | | | 13,831 | |
| Proceeds from long-term debt | | | 609,205 | | | | (299 | ) | | | 69 | | | | — | | | | 608,975 | |
| Repayment of long-term debt | | | (631,755 | ) | | | — | | | | — | | | | — | | | | (631,755 | ) |
| Proceeds from exercise of stock options | | | 4,066 | | | | — | | | | — | | | | — | | | | 4,066 | |
| Excess tax benefit from stock-based compensation | | | 3,043 | | | | — | | | | — | | | | — | | | | 3,043 | |
| Repurchases of common stock | | | (59,359 | ) | | | — | | | | — | | | | — | | | | (59,359 | ) |
| Dividends paid | | | (56,583 | ) | | | — | | | | — | | | | — | | | | (56,583 | ) |
| |
| |
| Net cash provided by (used for) financing activities | | | (131,383 | ) | | | (299 | ) | | | 13,900 | | | | — | | | | (117,782 | ) |
Effect of exchange rate changes on cash | | | (5,857 | ) | | | 514 | | | | 7,891 | | | | — | | | | 2,548 | |
| |
| |
Change in cash and cash equivalents | | | 5,806 | | | | 2,188 | | | | (1,674 | ) | | | — | | | | 6,320 | |
Cash and cash equivalents, beginning of period | | | 3,004 | | | | 4,362 | | | | 41,134 | | | | — | | | | 48,500 | |
| |
| |
Cash and cash equivalents, end of period | | $ | 8,810 | | | $ | 6,550 | | | $ | 39,460 | | | $ | — | | | $ | 54,820 | |
| |
| |
86
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
For the Year Ended December 31, 2005
| | | | | | | | | | | | | | | | | | | | | |
| | | Parent
| | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| In thousands | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | |
| |
| Net sales | | $ | — | | | $ | 2,430,598 | | | $ | 640,918 | | | $ | (124,937 | ) | | $ | 2,946,579 | |
| Cost of goods sold | | | 381 | | | | 1,755,604 | | | | 461,091 | | | | (118,518 | ) | | | 2,098,558 | |
| |
| |
| Gross profit | | | (381 | ) | | | 674,994 | | | | 179,827 | | | | (6,419 | ) | | | 848,021 | |
| Selling, general and administrative | | | 51,370 | | | | 346,026 | | | | 82,446 | | | | (935 | ) | | | 478,907 | |
| Research and development | | | — | | | | 35,589 | | | | 10,453 | | | | — | | | | 46,042 | |
| |
| |
| Operating (loss) income | | | (51,751 | ) | | | 293,379 | | | | 86,928 | | | | (5,484 | ) | | | 323,072 | |
| Gain on sale of assets, net | | | 5,435 | | | | — | | | | — | | | | — | | | | 5,435 | |
| Net interest (income) expense | | | (63,743 | ) | | | 115,379 | | | | (1,163 | ) | | | (5,484 | ) | | | 44,989 | |
| |
| |
| Income before income taxes | | | 17,427 | | | | 178,000 | | | | 88,091 | | | | — | | | | 283,518 | |
| Provision for income taxes | | | 6,057 | | | | 60,823 | | | | 31,589 | | | | — | | | | 98,469 | |
| |
| |
| Net income | | $ | 11,370 | | | $ | 117,177 | | | $ | 56,502 | | | $ | — | | | $ | 185,049 | |
| |
| |
87
Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
December 31, 2005
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | |
| | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | |
| In thousands | | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
| | | (In thousands) | | | |
| |
ASSETS | ASSETS | ASSETS |
Current assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 3,004 | | | $ | 4,362 | | | $ | 41,134 | | | $ | — | | | $ | 48,500 | | | $ | 3,004 | | | $ | 4,362 | | | $ | 41,134 | | | $ | — | | | $ | 48,500 | |
| Accounts and notes receivable, net | | | 543 | | | | 338,439 | | | | 118,896 | | | | (34,031 | ) | | | 423,847 | | | | 543 | | | | 338,439 | | | | 118,896 | | | | (34,031 | ) | | | 423,847 | |
| Inventories | | | — | | | | 267,007 | | | | 82,305 | | | | — | | | | 349,312 | | | | — | | | | 267,007 | | | | 82,305 | | | | — | | | | 349,312 | |
| Deferred tax assets | | | 74,116 | | | | 34,039 | | | | 8,154 | | | | (67,338 | ) | | | 48,971 | | | | 74,116 | | | | 34,039 | | | | 8,154 | | | | (67,338 | ) | | | 48,971 | |
| Prepaid expenses and other current assets | | | 7,658 | | | | 8,798 | | | | 12,999 | | | | (5,061 | ) | | | 24,394 | | | | 7,658 | | | | 8,798 | | | | 12,999 | | | | (5,061 | ) | | | 24,394 | |
| | | | | | | | | | | | | |
| | | |
| Total current assets | | | 85,321 | | | | 652,645 | | | | 263,488 | | | | (106,430 | ) | | | 895,024 | | | | 85,321 | | | | 652,645 | | | | 263,488 | | | | (106,430 | ) | | | 895,024 | |
Property, plant and equipment, net | | | 5,681 | | | | 228,858 | | | | 77,300 | | | | — | | | | 311,839 | | | | 5,681 | | | | 228,858 | | | | 77,300 | | | | — | | | | 311,839 | |
Other assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investments in subsidiaries | | | 1,983,857 | | | | 42,174 | | | | 84,804 | | | | (2,110,835 | ) | | | — | | | | 1,983,857 | | | | 42,174 | | | | 84,804 | | | | (2,110,835 | ) | | | — | |
| Goodwill | | | — | | | | 1,488,425 | | | | 229,782 | | | | — | | | | 1,718,207 | | | | — | | | | 1,488,425 | | | | 229,782 | | | | — | | | | 1,718,207 | |
| Intangibles, net | | | — | | | | 240,084 | | | | 26,449 | | | | — | | | | 266,533 | | | | — | | | | 240,084 | | | | 26,449 | | | | — | | | | 266,533 | |
| Other | | | 49,100 | | | | 7,157 | | | | 5,895 | | | | — | | | | 62,152 | | | | 49,100 | | | | 7,157 | | | | 5,895 | | | | — | | | | 62,152 | |
| | | | | | | | | | | | | |
| | | |
| Total other assets | | | 2,032,957 | | | | 1,777,840 | | | | 346,930 | | | | (2,110,835 | ) | | | 2,046,892 | | | | 2,032,957 | | | | 1,777,840 | | | | 346,930 | | | | (2,110,835 | ) | | | 2,046,892 | |
| | | | | | | | | | | | | |
| | | |
Total assets | | $ | 2,123,959 | | | $ | 2,659,343 | | | $ | 687,718 | | | $ | (2,217,265 | ) | | $ | 3,253,755 | | | $ | 2,123,959 | | | $ | 2,659,343 | | | $ | 687,718 | | | $ | (2,217,265 | ) | | $ | 3,253,755 | |
| | | |
| | | | | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY |
Current liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current maturities of long-term debt | | $ | 1,166 | | | $ | 76,269 | | | $ | 19,862 | | | $ | (93,160 | ) | | $ | 4,137 | | | $ | 1,166 | | | $ | 76,269 | | | $ | 19,862 | | | $ | (93,160 | ) | | $ | 4,137 | |
| Accounts payable | | | 836 | | | | 167,256 | | | | 72,531 | | | | (33,303 | ) | | | 207,320 | | | | 836 | | | | 167,256 | | | | 72,531 | | | | (33,303 | ) | | | 207,320 | |
| Employee compensation and benefits | | | 13,869 | | | | 57,006 | | | | 24,677 | | | | — | | | | 95,552 | | | | 13,869 | | | | 57,006 | | | | 24,677 | | | | — | | | | 95,552 | |
| Accrued product claims and warranties | | | — | | | | 28,664 | | | | 14,887 | | | | — | | | | 43,551 | | | | — | | | | 28,664 | | | | 14,887 | | | | — | | | | 43,551 | |
| Current liabilities of discontinued operations | | | — | | | | — | | | | 192 | | | | — | | | | 192 | | | | — | | | | — | | | | 192 | | | | — | | | | 192 | |
| Income taxes | | | 886 | | | | 7,195 | | | | 9,437 | | | | — | | | | 17,518 | | | | 886 | | | | 7,195 | | | | 9,437 | | | | — | | | | 17,518 | |
| Accrued rebates and sales incentives | | | — | | | | 42,262 | | | | 3,112 | | | | — | | | | 45,374 | | | | — | | | | 42,262 | | | | 3,112 | | | | — | | | | 45,374 | |
| Other current liabilities | | | 31,547 | | | | 61,318 | | | | 23,223 | | | | (5,062 | ) | | | 111,026 | | | | 31,547 | | | | 61,318 | | | | 23,223 | | | | (5,062 | ) | | | 111,026 | |
| | | | | | | | | | | | | |
| | | |
| Total current liabilities | | | 48,304 | | | | 439,970 | | | | 167,921 | | | | (131,525 | ) | | | 524,670 | | | | 48,304 | | | | 439,970 | | | | 167,921 | | | | (131,525 | ) | | | 524,670 | |
Other liabilities | | | | | | | | | | | | | | | | | | | | | |
| Long-term debt | | | 745,162 | | | | 1,710,648 | | | | 12,344 | | | | (1,719,677 | ) | | | 748,477 | | | | 745,162 | | | | 1,710,648 | | | | 12,344 | | | | (1,719,677 | ) | | | 748,477 | |
| Pension and other retirement compensation | | | 75,743 | | | | 28,386 | | | | 48,651 | | | | — | | | | 152,780 | | | | 75,743 | | | | 28,386 | | | | 48,651 | | | | — | | | | 152,780 | |
| Post-retirement medical and other benefits | | | 24,155 | | | | 49,794 | | | | — | | | | — | | | | 73,949 | | | | 24,155 | | | | 49,794 | | | | — | | | | — | | | | 73,949 | |
| Deferred tax liabilities | | | — | | | | 167,544 | | | | 25,579 | | | | (67,338 | ) | | | 125,785 | | | | — | | | | 167,544 | | | | 25,579 | | | | (67,338 | ) | | | 125,785 | |
| Due to/(from) affiliates | | | (356,365 | ) | | | 64,324 | | | | 246,212 | | | | 45,829 | | | | — | | |
| Due to / (from) affiliates | | | | (356,365 | ) | | | 64,324 | | | | 246,212 | | | | 45,829 | | | | — | |
| Other non-current liabilities | | | 31,350 | | | | 881 | | | | 38,224 | | | | — | | | | 70,455 | | | | 31,350 | | | | 881 | | | | 38,224 | | | | — | | | | 70,455 | |
| Non-current liabilities of discontinued operations | | | — | | | | — | | | | 2,029 | | | | — | | | | 2,029 | | | | — | | | | — | | | | 2,029 | | | | — | | | | 2,029 | |
| | | |
| | | | | | | | | | | | | |
| Total liabilities | | | 568,349 | | | | 2,461,547 | | | | 540,960 | | | | (1,872,711 | ) | | | 1,698,145 | | | | 568,349 | | | | 2,461,547 | | | | 540,960 | | | | (1,872,711 | ) | | | 1,698,145 | |
Shareholders’ equity | | | 1,555,610 | | | | 197,796 | | | | 146,758 | | | | (344,554 | ) | | | 1,555,610 | | | | 1,555,610 | | | | 197,796 | | | | 146,758 | | | | (344,554 | ) | | | 1,555,610 | |
| | | | | | | | | | | | | |
| | | |
Total liabilities and shareholders’ equity | | $ | 2,123,959 | | | $ | 2,659,343 | | | $ | 687,718 | | | $ | (2,217,265 | ) | | $ | 3,253,755 | | | $ | 2,123,959 | | | $ | 2,659,343 | | | $ | 687,718 | | | $ | (2,217,265 | ) | | $ | 3,253,755 | |
| | | | | | | | | | | | | |
| | | |
8688
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the Year Ended December 31, 2005
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | |
| | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | |
| In thousands | | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
| | | (In thousands) | | | |
| |
Operating activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 11,370 | | | $ | 117,177 | | | $ | 56,502 | | | $ | — | | | $ | 185,049 | | | $ | 11,370 | | | $ | 117,177 | | | $ | 56,502 | | | $ | — | | | $ | 185,049 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation | | | 1,406 | | | | 43,669 | | | | 11,490 | | | | — | | | | 56,565 | | | | 1,406 | | | | 43,669 | | | | 11,490 | | | | — | | | | 56,565 | |
| Amortization | | | 4,324 | | | | 10,652 | | | | 1,019 | | | | — | | | | 15,995 | | | | 4,324 | | | | 10,652 | | | | 1,019 | | | | — | | | | 15,995 | |
| Deferred income taxes | | | (12,161 | ) | | | 14,745 | | | | 3,314 | | | | — | | | | 5,898 | | | | (12,161 | ) | | | 14,745 | | | | 3,314 | | | | — | | | | 5,898 | |
| Stock compensation | | | 11,350 | | | | 10,954 | | | | 1,882 | | | | — | | | | 24,186 | | | | 11,350 | | | | 10,954 | | | | 1,882 | | | | — | | | | 24,186 | |
| Excess tax benefits from stock-based compensation | | | (4,072 | ) | | | (3,929 | ) | | | (675 | ) | | | — | | | | (8,676 | ) | | | (4,072 | ) | | | (3,929 | ) | | | (675 | ) | | | — | | | | (8,676 | ) |
| Gain on sale of investment | | | (5,435 | ) | | | — | | | | — | | | | — | | | | (5,435 | ) | | | (5,435 | ) | | | — | | | | — | | | | — | | | | (5,435 | ) |
| Intercompany dividends | | | 23,890 | | | | (1,050 | ) | | | (22,840 | ) | | | — | | | | — | | | | 23,890 | | | | (1,050 | ) | | | (22,840 | ) | | | — | | | | — | |
Changes in assets and liabilities, net of effects of business acquisitions and dispositions | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounts and notes receivable | | | 2,966 | | | | (13,346 | ) | | | (23,120 | ) | | | 12,554 | | | | (20,946 | ) | | | 2,966 | | | | (13,346 | ) | | | (23,120 | ) | | | 12,554 | | | | (20,946 | ) |
| Inventories | | | — | | | | (16,365 | ) | | | (2,836 | ) | | | — | | | | (19,201 | ) | | | — | | | | (16,365 | ) | | | (2,836 | ) | | | — | | | | (19,201 | ) |
| Prepaid expenses and other current assets | | | 1,524 | | | | (131 | ) | | | (538 | ) | | | (975 | ) | | | (120 | ) | | | 1,524 | | | | (131 | ) | | | (538 | ) | | | (975 | ) | | | (120 | ) |
| Accounts payable | | | (6,876 | ) | | | 8,132 | | | | 17,958 | | | | (12,585 | ) | | | 6,629 | | | | (6,876 | ) | | | 8,132 | | | | 17,958 | | | | (12,585 | ) | | | 6,629 | |
| Employee compensation and benefits | | | (13,700 | ) | | | (5,882 | ) | | | (1,812 | ) | | | — | | | | (21,394 | ) | | | (13,700 | ) | | | (5,882 | ) | | | (1,812 | ) | | | — | | | | (21,394 | ) |
| Accrued product claims and warranties | | | — | | | | (1,150 | ) | | | 51 | | | | — | | | | (1,099 | ) | | | — | | | | (1,150 | ) | | | 51 | | | | — | | | | (1,099 | ) |
| Income taxes | | | 14,252 | | | | (8,880 | ) | | | 4,985 | | | | — | | | | 10,357 | | | | 14,252 | | | | (8,880 | ) | | | 4,985 | | | | — | | | | 10,357 | |
| Other current liabilities | | | 7,035 | | | | (10,497 | ) | | | 7,065 | | | | 1,006 | | | | 4,609 | | | | 7,035 | | | | (10,497 | ) | | | 7,065 | | | | 1,006 | | | | 4,609 | |
| Pension and post-retirement benefits | | | 7,901 | | | | 4,690 | | | | 3,921 | | | | — | | | | 16,512 | | | | 7,901 | | | | 4,690 | | | | 3,921 | | | | — | | | | 16,512 | |
| Other assets and liabilities | | | (8,794 | ) | | | 1,603 | | | | 6,752 | | | | — | | | | (439 | ) | | | (8,794 | ) | | | 1,603 | | | | 6,752 | | | | — | | | | (439 | ) |
| | | | | | | | | | | | | |
| | | |
| Net cash provided by continuing operations | | | 34,980 | | | | 150,392 | | | | 63,118 | | | | — | | | | 248,490 | | | | 34,980 | | | | 150,392 | | | | 63,118 | | | | — | | | | 248,490 | |
| Net cash used for discontinued operations | | | — | | | | — | | | | (632 | ) | | | — | | | | (632 | ) | | | — | | | | — | | | | (632 | ) | | | — | | | | (632 | ) |
| | | |
| | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 34,980 | | | | 150,392 | | | | 62,486 | | | | — | | | | 247,858 | | | | 34,980 | | | | 150,392 | | | | 62,486 | | | | — | | | | 247,858 | |
Investing activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | | (1,854 | ) | | | (43,706 | ) | | | (16,911 | ) | | | — | | | | (62,471 | ) | | | (1,854 | ) | | | (43,706 | ) | | | (16,911 | ) | | | — | | | | (62,471 | ) |
| Proceeds from sales of property and equipment | | | — | | | | 16,532 | | | | 579 | | | | — | | | | 17,111 | | | | — | | | | 16,532 | | | | 579 | | | | — | | | | 17,111 | |
| Acquisitions, net of cash acquired | | | (150,534 | ) | | | — | | | | — | | | | — | | | | (150,534 | ) | | | (150,534 | ) | | | — | | | | — | | | | — | | | | (150,534 | ) |
| Investment in subsidiaries | | | 139,641 | | | | (122,393 | ) | | | (17,248 | ) | | | — | | | | — | | | | 139,641 | | | | (122,393 | ) | | | (17,248 | ) | | | — | | | | — | |
| Divestitures | | | (10,383 | ) | | | 289 | | | | (61 | ) | | | — | | | | (10,155 | ) | | | (10,383 | ) | | | 289 | | | | (61 | ) | | | — | | | | (10,155 | ) |
| Proceeds from sale of investments | | | 23,835 | | | | — | | | | — | | | | — | | | | 23,835 | | | | 23,835 | | | | — | | | | — | | | | — | | | | 23,835 | |
| Other | | | (100 | ) | | | (2,275 | ) | | | 304 | | | | — | | | | (2,071 | ) | | | (100 | ) | | | (2,275 | ) | | | 304 | | | | — | | | | (2,071 | ) |
| | | | | | | | | | | | | |
| | | |
| Net cash provided by (used for) investing activities | | | 605 | | | | (151,553 | ) | | | (33,337 | ) | | | — | | | | (184,285 | ) | | | 605 | | | | (151,553 | ) | | | (33,337 | ) | | | — | | | | (184,285 | ) |
Financing activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Proceeds from long-term debt | | | 413,279 | | | | — | | | | — | | | | — | | | | 413,279 | | | | 413,279 | | | | — | | | | — | | | | — | | | | 413,279 | |
| Repayment of long-term debt | | | (395,978 | ) | | | — | | | | — | | | | — | | | | (395,978 | ) | | | (395,978 | ) | | | — | | | | — | | | | — | | | | (395,978 | ) |
| Proceeds from exercise of stock options | | | 8,380 | | | | — | | | | — | | | | — | | | | 8,380 | | | | 8,380 | | | | — | | | | — | | | | — | | | | 8,380 | |
| Excess tax benefit from stock-based compensation | | | 8,676 | | | | — | | | | — | | | | — | | | | 8,676 | | | | 8,676 | | | | — | | | | — | | | | — | | | | 8,676 | |
| Repurchases of common stock | | | (25,000 | ) | | | — | | | | — | | | | — | | | | (25,000 | ) | | | (25,000 | ) | | | — | | | | — | | | | — | | | | (25,000 | ) |
| Dividends paid | | | (53,134 | ) | | | — | | | | — | | | | — | | | | (53,134 | ) | | | (53,134 | ) | | | — | | | | — | | | | — | | | | (53,134 | ) |
| | | | | | | | | | | | | |
| | | |
| Net cash used for financing activities | | | (43,777 | ) | | | — | | | | — | | | | — | | | | (43,777 | ) | | | (43,777 | ) | | | — | | | | — | | | | — | | | | (43,777 | ) |
Effect of exchange rate changes on cash | | | 8,901 | | | | (47 | ) | | | (11,645 | ) | | | — | | | | (2,791 | ) | | | 8,901 | | | | (47 | ) | | | (11,645 | ) | | | — | | | | (2,791 | ) |
| | | |
| | | | | | | | | | | | | |
Change in cash and cash equivalents | | | 709 | | | | (1,208 | ) | | | 17,504 | | | | — | | | | 17,005 | | | | 709 | | | | (1,208 | ) | | | 17,504 | | | | — | | | | 17,005 | |
Cash and cash equivalents, beginning of period | | | 2,295 | | | | 5,570 | | | | 23,630 | | | | | | | | 31,495 | | | | 2,295 | | | | 5,570 | | | | 23,630 | | | | | | | | 31,495 | |
| | | | | | | | | | | | | |
| | | |
Cash and cash equivalents, end of period | | $ | 3,004 | | | $ | 4,362 | | | $ | 41,134 | | | $ | — | | | $ | 48,500 | | | $ | 3,004 | | | $ | 4,362 | | | $ | 41,134 | | | $ | — | | | $ | 48,500 | |
| | | | | | | | | | | | | |
| | | |
8789
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
For the Year Ended December 31, 2004
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | |
| | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | |
| In thousands | | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
| | | (In thousands) | | | |
| |
| Net sales | | $ | — | | | $ | 1,868,579 | | | $ | 491,260 | | | $ | (81,710 | ) | | $ | 2,278,129 | | | $ | — | | | $ | 1,868,579 | | | $ | 491,260 | | | $ | (81,710 | ) | | $ | 2,278,129 | |
| Cost of goods sold | | | 186 | | | | 1,358,877 | | | | 344,845 | | | | (80,489 | ) | | | 1,623,419 | | | | 186 | | | | 1,358,877 | | | | 344,845 | | | | (80,489 | ) | | | 1,623,419 | |
| | | | | | | | | | | | | |
| | | |
| Gross profit | | | (186 | ) | | | 509,702 | | | | 146,415 | | | | (1,221 | ) | | | 654,710 | | | | (186 | ) | | | 509,702 | | | | 146,415 | | | | (1,221 | ) | | | 654,710 | |
| Selling, general and administrative | | | 64,951 | | | | 253,173 | | | | 59,112 | | | | (1,221 | ) | | | 376,015 | | | | 64,951 | | | | 253,173 | | | | 59,112 | | | | (1,221 | ) | | | 376,015 | |
| Research and development | | | — | | | | 23,673 | | | | 7,780 | | | | — | | | | 31,453 | | | | — | | | | 23,673 | | | | 7,780 | | | | — | | | | 31,453 | |
| | | | | | | | | | | | | |
| | | |
| Operating (loss) income | | | (65,137 | ) | | | 232,856 | | | | 79,523 | | | | — | | | | 247,242 | | | | (65,137 | ) | | | 232,856 | | | | 79,523 | | | | — | | | | 247,242 | |
| Net interest (income) expense | | | (25,713 | ) | | | 55,410 | | | | 7,513 | | | | — | | | | 37,210 | | | | (25,713 | ) | | | 55,410 | | | | 7,513 | | | | — | | | | 37,210 | |
| | | | | | | | | | | | | |
| | | |
| Income (loss) before income taxes | | | (39,424 | ) | | | 177,446 | | | | 72,010 | | | | — | | | | 210,032 | | | | (39,424 | ) | | | 177,446 | | | | 72,010 | | | | — | | | | 210,032 | |
| Provision (benefit) for income taxes | | | (15,162 | ) | | | 63,791 | | | | 24,379 | | | | — | | | | 73,008 | | | | (15,162 | ) | | | 63,791 | | | | 24,379 | | | | — | | | | 73,008 | |
| | | |
| | | | | | | | | | | | | |
| Income (loss) from continuing operations | | | (24,262 | ) | | | 113,655 | | | | 47,631 | | | | — | | | | 137,024 | | | | (24,262 | ) | | | 113,655 | | | | 47,631 | | | | — | | | | 137,024 | |
| Income from discontinued operations, net of tax | | | — | | | | — | | | | 40,248 | | | | — | | | | 40,248 | | | | — | | | | — | | | | 40,248 | | | | — | | | | 40,248 | |
| Loss on disposal of discontinued operations, net of tax | | | — | | | | — | | | | (6,047 | ) | | | — | | | | (6,047 | ) | | | — | | | | — | | | | (6,047 | ) | | | — | | | | (6,047 | ) |
| | | | | | | | | | | | | |
| | | |
| Net (loss) income | | $ | (24,262 | ) | | $ | 113,655 | | | $ | 81,832 | | | $ | — | | | $ | 171,225 | | | $ | (24,262 | ) | | $ | 113,655 | | | $ | 81,832 | | | $ | — | | | $ | 171,225 | |
| | | | | | | | | | | | | |
| | | |
8890
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
December 31, 2004
| | | | | | | | | | | | | | | | | | | | | |
| | | Parent
| | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | | (In thousands) | |
| |
ASSETS |
Current assets | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 2,295 | | | $ | 5,570 | | | $ | 23,630 | | | $ | — | | | $ | 31,495 | |
| Accounts and notes receivable, net | | | 1,003 | | | | 305,060 | | | | 111,872 | | | | (21,476 | ) | | | 396,459 | |
| Inventories | | | — | | | | 236,057 | | | | 87,619 | | | | — | | | | 323,676 | |
| Current assets of discontinued operations | | | — | | | | — | | | | — | | | | — | | | | — | |
| Deferred tax assets | | | 58,469 | | | | 31,933 | | | | 9,830 | | | | (51,158 | ) | | | 49,074 | |
| Prepaid expenses and other current assets | | | 8,558 | | | | 8,484 | | | | 13,428 | | | | (6,037 | ) | | | 24,433 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total current assets | | | 70,325 | | | | 587,104 | | | | 246,379 | | | | (78,671 | ) | | | 825,137 | |
Property, plant and equipment, net | | | 5,111 | | | | 243,672 | | | | 87,519 | | | | — | | | | 336,302 | |
Other assets | | | | | | | | | | | | | | | | | | | | |
| Non-current assets of discontinued operations | | | — | | | | — | | | | 393 | | | | — | | | | 393 | |
| Investments in subsidiaries | | | 1,881,872 | | | | 44,718 | | | | 59,918 | | | | (1,986,508 | ) | | | — | |
| Goodwill | | | — | | | | 1,382,276 | | | | 238,128 | | | | — | | | | 1,620,404 | |
| Intangibles, net | | | — | | | | 229,754 | | | | 28,372 | | | | — | | | | 258,126 | |
| Other | | | 69,479 | | | | 6,110 | | | | 4,624 | | | | — | | | | 80,213 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total other assets | | | 1,951,351 | | | | 1,662,858 | | | | 331,435 | | | | (1,986,508 | ) | | | 1,959,136 | |
| | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 2,026,787 | | | $ | 2,493,634 | | | $ | 665,333 | | | $ | (2,065,179 | ) | | $ | 3,120,575 | |
| | | | | | | | | | | | | | | | | | | | | |
| |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
Current liabilities | | | | | | | | | | | | | | | | | | | | |
| Current maturities of long-term debt | | $ | 1,166 | | | $ | 369 | | | $ | 14,904 | | | $ | (4,482 | ) | | $ | 11,957 | |
| Accounts payable | | | 5,350 | | | | 148,266 | | | | 62,391 | | | | (20,718 | ) | | | 195,289 | |
| Employee compensation and benefits | | | 18,589 | | | | 57,101 | | | | 29,131 | | | | — | | | | 104,821 | |
| Accrued product claims and warranties | | | — | | | | 27,426 | | | | 15,098 | | | | — | | | | 42,524 | |
| Current liabilities of discontinued operations | | | — | | | | — | | | | 192 | | | | — | | | | 192 | |
| Income taxes | | | 20,246 | | | | (15,871 | ) | | | 23,020 | | | | — | | | | 27,395 | |
| Accrued rebates and sales incentives | | | — | | | | 39,306 | | | | 2,312 | | | | — | | | | 41,618 | |
| Other current liabilities | | | 34,092 | | | | 52,586 | | | | 22,470 | | | | (6,065 | ) | | | 103,083 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total current liabilities | | | 79,443 | | | | 309,183 | | | | 169,518 | | | | (31,265 | ) | | | 526,879 | |
| Long-term debt | | | 720,545 | | | | 1,668,639 | | | | 12,491 | | | | (1,677,527 | ) | | | 724,148 | |
| Pension and other retirement compensation | | | 58,289 | | | | 25,432 | | | | 51,635 | | | | — | | | | 135,356 | |
| Post-retirement medical and other benefits | | | 25,160 | | | | 44,507 | | | | — | | | | — | | | | 69,667 | |
| Deferred tax liabilities | | | (249 | ) | | | 163,326 | | | | 30,954 | | | | (51,158 | ) | | | 142,873 | |
| Due to/(from) affiliates | | | (339,363 | ) | | | 182,226 | | | | 229,132 | | | | (71,995 | ) | | | — | |
| Other non-current liabilities | | | 35,168 | | | | 2,403 | | | | 33,233 | | | | — | | | | 70,804 | |
| Non-current liabilities of discontinued operations | | | — | | | | — | | | | 3,054 | | | | — | | | | 3,054 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total liabilities | | | 578,993 | | | | 2,395,716 | | | | 530,017 | | | | (1,831,945 | ) | | | 1,672,781 | |
Shareholders’ equity | | | 1,447,794 | | | | 97,918 | | | | 135,316 | | | | (233,234 | ) | | | 1,447,794 | |
| | | | | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 2,026,787 | | | $ | 2,493,634 | | | $ | 665,333 | | | $ | (2,065,179 | ) | | $ | 3,120,575 | |
| | | | | | | | | | | | | | | | | | | | | |
89
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the Year Ended December 31, 2004
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | |
| | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | |
| In thousands | | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
| | | (In thousands) | | | |
| |
Operating activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | (24,262 | ) | | $ | 113,655 | | | $ | 81,832 | | | $ | — | | | $ | 171,225 | | | $ | (24,262 | ) | | $ | 113,655 | | | $ | 81,832 | | | $ | — | | | $ | 171,225 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income from discontinued operations | | | — | | | | — | | | | (40,248 | ) | | | — | | | | (40,248 | ) | | | — | | | | — | | | | (40,248 | ) | | | — | | | | (40,248 | ) |
| Loss on disposal of discontinued operations | | | — | | | | — | | | | 6,047 | | | | — | | | | 6,047 | | | | — | | | | — | | | | 6,047 | | | | — | | | | 6,047 | |
| Depreciation | | | 904 | | | | 36,763 | | | | 9,396 | | | | — | | | | 47,063 | | | | 904 | | | | 36,763 | | | | 9,396 | | | | — | | | | 47,063 | |
| Amortization | | | 4,569 | | | | 2,726 | | | | 206 | | | | — | | | | 7,501 | | | | 4,569 | | | | 2,726 | | | | 206 | | | | — | | | | 7,501 | |
| Deferred income taxes | | | (1,122 | ) | | | 15,759 | | | | 2,099 | | | | — | | | | 16,736 | | | | (1,122 | ) | | | 15,759 | | | | 2,099 | | | | — | | | | 16,736 | |
| Stock-based compensation | | | 1,743 | | | | 4,249 | | | | 353 | | | | — | | | | 6,345 | | | | 1,743 | | | | 4,249 | | | | 353 | | | | — | | | | 6,345 | |
| Intercompany dividends | | | 28,475 | | | | (9,475 | ) | | | (19,000 | ) | | | — | | | | — | | | | 28,475 | | | | (9,475 | ) | | | (19,000 | ) | | | — | | | | — | |
Changes in assets and liabilities, net of effects of business acquisitions and dispositions | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounts and notes receivable | | | 1,167 | | | | 9,858 | | | | 7,778 | | | | 8,115 | | | | 26,918 | | | | 1,167 | | | | 9,858 | | | | 7,778 | | | | 8,115 | | | | 26,918 | |
| Inventories | | | — | | | | (43,865 | ) | | | (8,131 | ) | | | — | | | | (51,996 | ) | | | ��� | | | | (43,865 | ) | | | (8,131 | ) | | | — | | | | (51,996 | ) |
| Prepaid expenses and other current assets | | | (3,527 | ) | | | 2,869 | | | | 4,728 | | | | (1,894 | ) | | | 2,176 | | | | (3,527 | ) | | | 2,869 | | | | 4,728 | | | | (1,894 | ) | | | 2,176 | |
| Accounts payable | | | 3,823 | | | | 20,412 | | | | 394 | | | | (7,355 | ) | | | 17,274 | | | | 3,823 | | | | 20,412 | | | | 394 | | | | (7,355 | ) | | | 17,274 | |
| Employee compensation and benefits | | | (2,709 | ) | | | 4,384 | | | | 2,921 | | | | — | | | | 4,596 | | | | (2,709 | ) | | | 4,384 | | | | 2,921 | | | | — | | | | 4,596 | |
| Accrued product claims and warranties | | | — | | | | 1,942 | | | | 1,051 | | | | — | | | | 2,993 | | | | — | | | | 1,942 | | | | 1,051 | | | | — | | | | 2,993 | |
| Income taxes | | | (11,633 | ) | | | (5,778 | ) | | | 23,763 | | | | — | | | | 6,352 | | | | (11,633 | ) | | | (5,778 | ) | | | 23,763 | | | | — | | | | 6,352 | |
| Other current liabilities | | | (242 | ) | | | 7,299 | | | | (42 | ) | | | 1,864 | | | | 8,879 | | | | (242 | ) | | | 7,299 | | | | (42 | ) | | | 1,864 | | | | 8,879 | |
| Pension and post-retirement benefits | | | 4,980 | | | | 3,168 | | | | 3,360 | | | | — | | | | 11,508 | | | | 4,980 | | | | 3,168 | | | | 3,360 | | | | — | | | | 11,508 | |
| Other assets and liabilities | | | 6,371 | | | | 1,379 | | | | (956 | ) | | | — | | | | 6,794 | | | | 6,371 | | | | 1,379 | | | | (956 | ) | | | — | | | | 6,794 | |
| | | | | | | | | | | | | |
| | | |
| Net cash provided by continuing operations | | | 8,537 | | | | 165,345 | | | | 75,551 | | | | 730 | | | | 250,163 | | | | 8,537 | | | | 165,345 | | | | 75,551 | | | | 730 | | | | 250,163 | |
| Net cash provided by discontinued operations | | | — | | | | — | | | | 13,928 | | | | — | | | | 13,928 | | | | — | | | | — | | | | 13,928 | | | | — | | | | 13,928 | |
| | | |
| | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 8,537 | | | | 165,345 | | | | 89,479 | | | | 730 | | | | 264,091 | | | | 8,537 | | | | 165,345 | | | | 89,479 | | | | 730 | | | | 264,091 | |
Investing activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | | (1,886 | ) | | | (32,254 | ) | | | (14,727 | ) | | | — | | | | (48,867 | ) | | | (1,886 | ) | | | (32,254 | ) | | | (14,727 | ) | | | — | | | | (48,867 | ) |
| Acquisitions, net of cash acquired | | | (858,774 | ) | | | — | | | | (10,381 | ) | | | — | | | | (869,155 | ) | | | (858,774 | ) | | | — | | | | (10,381 | ) | | | — | | | | (869,155 | ) |
| Investment in subsidiaries | | | 230,841 | | | | (131,066 | ) | | | (133,246 | ) | | | 33,471 | | | | — | | | | 230,841 | | | | (131,066 | ) | | | (133,246 | ) | | | 33,471 | | | | — | |
| Divestitures | | | 773,099 | | | | 300 | | | | — | | | | — | | | | 773,399 | | | | 773,099 | | | | 300 | | | | — | | | | — | | | | 773,399 | |
| Equity investments | | | — | | | | 28 | | | | 32 | | | | — | | | | 60 | | | | — | | | | 28 | | | | 32 | | | | — | | | | 60 | |
| | | |
| | | | | | | | | | | | | |
| Net cash provided by (used for) investing activities | | | 143,280 | | | | (162,992 | ) | | | (158,322 | ) | | | 33,471 | | | | (144,563 | ) | | | 143,280 | | | | (162,992 | ) | | | (158,322 | ) | | | 33,471 | | | | (144,563 | ) |
Financing activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net short-term borrowings (repayments) | | | (4,162 | ) | | | — | | | | — | | | | — | | | | (4,162 | ) | | | (4,162 | ) | | | — | | | | — | | | | — | | | | (4,162 | ) |
| Proceeds from the Bridge Facility | | | 850,000 | | | | — | | | | — | | | | — | | | | 850,000 | | | | 850,000 | | | | — | | | | — | | | | — | | | | 850,000 | |
| Repayment of the Bridge Facility | | | (850,000 | ) | | | — | | | | — | | | | — | | | | (850,000 | ) | | | (850,000 | ) | | | — | | | | — | | | | — | | | | (850,000 | ) |
| Proceeds from long-term debt | | | 343,316 | | | | — | | | | — | | | | — | | | | 343,316 | | | | 343,316 | | | | — | | | | — | | | | — | | | | 343,316 | |
| Repayment of long-term debt | | | (440,518 | ) | | | — | | | | — | | | | — | | | | (440,518 | ) | | | (440,518 | ) | | | — | | | | — | | | | — | | | | (440,518 | ) |
| Proceeds from exercise of stock options | | | 10,862 | | | | — | | | | — | | | | — | | | | 10,862 | | | | 10,862 | | | | — | | | | — | | | | — | | | | 10,862 | |
| Repurchases of common stock | | | (4,200 | ) | | | — | | | | — | | | | — | | | | (4,200 | ) | | | (4,200 | ) | | | — | | | | — | | | | — | | | | (4,200 | ) |
| Dividends paid | | | (43,128 | ) | | | — | | | | — | | | | — | | | | (43,128 | ) | | | (43,128 | ) | | | — | | | | — | | | | — | | | | (43,128 | ) |
| | | | | | | | | | | | | |
| | | |
| Net cash used for financing activities | | | (137,830 | ) | | | — | | | | — | | | | — | | | | (137,830 | ) | | | (137,830 | ) | | | — | | | | — | | | | — | | | | (137,830 | ) |
Effect of exchange rate changes on cash | | | (15,065 | ) | | | 62 | | | | 51,012 | | | | (34,201 | ) | | | 1,808 | | | | (15,065 | ) | | | 62 | | | | 51,012 | | | | (34,201 | ) | | | 1,808 | |
| | | |
| | | | | | | | | | | | | |
Change in cash and cash equivalents | | | (1,078 | ) | | | 2,415 | | | | (17,831 | ) | | | — | | | | (16,494 | ) | | | (1,078 | ) | | | 2,415 | | | | (17,831 | ) | | | — | | | | (16,494 | ) |
Cash and cash equivalents, beginning of period | | | 3,373 | | | | 3,155 | | | | 41,461 | | | | — | | | | 47,989 | | | | 3,373 | | | | 3,155 | | | | 41,461 | | | | — | | | | 47,989 | |
| | | | | | | | | | | | | |
| | | |
Cash and cash equivalents, end of period | | $ | 2,295 | | | $ | 5,570 | | | $ | 23,630 | | | $ | — | | | $ | 31,495 | | | $ | 2,295 | | | $ | 5,570 | | | $ | 23,630 | | | $ | — | | | $ | 31,495 | |
| | | | | | | | | | | | | |
| | | |
9091
Pentair, Inc. and Subsidiaries
Notes to Consolidated Financial Statementsconsolidated financial statements — (continued)
On February 2, 2007, we acquired, as part of our Water Group, all the outstanding shares of capital stock of Jung Pumpen GmbH (“Jung”) for approximately $227 million, net of cash acquired of $13 million, excluding transaction costs and subject to a post-closing net asset value adjustment. Jung is a leading German manufacturer of wastewater products for municipal and residential markets. Jung brings to Pentair Inc.its strong application engineering expertise and Subsidiaries
Unaudited Condensed Consolidated Statementsa complementary product offering, including a new line of Income
For the Year Ended December 31, 2003
| | | | | | | | | | | | | | | | | | | | | |
| | | Parent
| | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | | (In thousands) | |
| |
| Net sales | | $ | — | | | $ | 1,358,874 | | | $ | 326,570 | | | $ | (42,457 | ) | | $ | 1,642,987 | |
| Cost of goods sold | | | — | | | | 1,006,638 | | | | 234,850 | | | | (44,731 | ) | | | 1,196,757 | |
| | | | | | | | | | | | | | | | | | | | | |
| Gross profit | | | — | | | | 352,236 | | | | 91,720 | | | | 2,274 | | | | 446,230 | |
| Selling, general and administrative | | | 54,206 | | | | 173,308 | | | | 23,300 | | | | 2,274 | | | | 253,088 | |
| Research and development | | | — | | | | 17,271 | | | | 5,661 | | | | — | | | | 22,932 | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating (loss) income | | | (54,206 | ) | | | 161,657 | | | | 62,759 | | | | — | | | | 170,210 | |
| Net interest (income) expense | | | (41,018 | ) | | | 48,591 | | | | 18,822 | | | | — | | | | 26,395 | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | (13,188 | ) | | | 113,066 | | | | 43,937 | | | | — | | | | 143,815 | |
| Provision (benefit) for income taxes | | | (6,983 | ) | | | 35,044 | | | | 17,604 | | | | — | | | | 45,665 | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations | | | (6,205 | ) | | | 78,022 | | | | 26,333 | | | | — | | | | 98,150 | |
| Income from discontinued operations, net of tax | | | — | | | | — | | | | 46,138 | | | | — | | | | 46,138 | |
| Loss on disposal of discontinued operations, net of tax | | | — | | | | — | | | | (2,936 | ) | | | — | | | | (2,936 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net (loss) income | | $ | (6,205 | ) | | $ | 78,022 | | | $ | 69,535 | | | $ | — | | | $ | 141,352 | |
| | | | | | | | | | | | | | | | | | | | | |
91
water re-use products, submersible wastewater and drainage pumps, wastewater disposal units and tanks. Jung also brings to Pentair Inc.its well-known European presence, astate-of-the-art training facility in Germany, and Subsidiaries
Notes to Consolidated Financial Statements — (continued)
Pentair, Inc.sales offices in Germany, Austria, France, Hungary, Poland and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the Year Ended December 31, 2003
| | | | | | | | | | | | | | | | | | | | | |
| | | Parent
| | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | | (In thousands) | |
| |
Operating activities | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | (6,205 | ) | | $ | 78,022 | | | $ | 69,535 | | | $ | — | | | $ | 141,352 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | |
| Net income from discontinued operations | | | — | | | | — | | | | (46,138 | ) | | | — | | | | (46,138 | ) |
| Loss on disposal of discontinued operations | | | — | | | | — | | | | 2,936 | | | | — | | | | 2,936 | |
| Depreciation | | | 571 | | | | 32,327 | | | | 7,911 | | | | — | | | | 40,809 | |
| Amortization | | | 141 | | | | 236 | | | | — | | | | — | | | | 377 | |
| Deferred income taxes | | | 354 | | | | 13,110 | | | | 17,855 | | | | — | | | | 31,319 | |
| Stock compensation | | | 2,315 | | | | 668 | | | | 1,020 | | | | — | | | | 4,003 | |
| Intercompany dividends | | | 51,571 | | | | (4,936 | ) | | | (46,635 | ) | | | — | | | | — | |
Changes in assets and liabilities, net of effects of business acquisitions and dispositions | | | | | | | | | | | | | | | | | | | | |
| Accounts and notes receivable | | | 688 | | | | (11,847 | ) | | | 3,018 | | | | 3,061 | | | | (5,080 | ) |
| Inventories | | | — | | | | 12,653 | | | | 521 | | | | — | | | | 13,174 | |
| Prepaid expenses and other current assets | | | (8,891 | ) | | | (605 | ) | | | 1,677 | | | | 3,038 | | | | (4,781 | ) |
| Accounts payable | | | (2,247 | ) | | | (8,030 | ) | | | 561 | | | | (3,042 | ) | | | (12,758 | ) |
| Employee compensation and benefits | | | 470 | | | | 4,042 | | | | 301 | | | | — | | | | 4,813 | |
| Accrued product claims and warranties | | | — | | | | (2,281 | ) | | | 525 | | | | — | | | | (1,756 | ) |
| Income taxes | | | 7,685 | | | | (12,316 | ) | | | 10,068 | | | | — | | | | 5,437 | |
| Other current liabilities | | | 11,513 | | | | (684 | ) | | | (11,132 | ) | | | (3,033 | ) | | | (3,336 | ) |
| Pension and post-retirement benefits | | | (3,586 | ) | | | (936 | ) | | | 2,414 | | | | ��� | | | | (2,108 | ) |
| Other assets and liabilities | | | (152 | ) | | | 4,466 | | | | 2,455 | | | | — | | | | 6,769 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net cash provided by continuing operations | | | 54,227 | | | | 103,889 | | | | 16,892 | | | | 24 | | | | 175,032 | |
| Net cash provided by discontinued operations | | | — | | | | — | | | | 87,907 | | | | — | | | | 87,907 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 54,227 | | | | 103,889 | | | | 104,799 | | | | 24 | | | | 262,939 | |
Investing activities | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | | (4,159 | ) | | | (18,639 | ) | | | (20,824 | ) | | | — | | | | (43,622 | ) |
| Acquisitions, net of cash acquired | | | (228,647 | ) | | | 573 | | | | (1,020 | ) | | | — | | | | (229,094 | ) |
| Investment in subsidiaries | | | 121,289 | | | | (89,880 | ) | | | (74,588 | ) | | | 43,179 | | | | — | |
| Divestitures | | | (2,400 | ) | | | — | | | | — | | | | — | | | | (2,400 | ) |
| Equity investments | | | — | | | | — | | | | (5,294 | ) | | | — | | | | (5,294 | ) |
| Other | | | 48 | | | | — | | | | — | | | | — | | | | 48 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net cash provided by (used for) investing activities | | | (113,869 | ) | | | (107,946 | ) | | | (101,726 | ) | | | 43,179 | | | | (280,362 | ) |
Financing activities | | | | | | | | | | | | | | | | | | | | |
| Net short-term borrowings (repayments) | | | (873 | ) | | | — | | | | — | | | | — | | | | (873 | ) |
| Proceeds from long-term debt | | | 780,857 | | | | — | | | | — | | | | — | | | | 780,857 | |
| Repayment of long-term debt | | | (709,886 | ) | | | — | | | | — | | | | — | | | | (709,886 | ) |
| Proceeds from exercise of stock options | | | 5,795 | | | | — | | | | — | | | | — | | | | 5,795 | |
| Repurchases of common stock | | | (1,589 | ) | | | — | | | | — | | | | — | | | | (1,589 | ) |
| Dividends paid | | | (40,494 | ) | | | — | | | | — | | | | — | | | | (40,494 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net cash provided by financing activities | | | 33,810 | | | | — | | | | — | | | | — | | | | 33,810 | |
Effect of exchange rate changes on cash | | | 23,015 | | | | 2,566 | | | | 9,576 | | | | (43,203 | ) | | | (8,046 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Change in cash and cash equivalents | | | (2,817 | ) | | | (1,491 | ) | | | 12,649 | | | | — | | | | 8,341 | |
Cash and cash equivalents, beginning of period | | | 6,190 | | | | 4,646 | | | | 28,812 | | | | — | | | | 39,648 | |
| | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 3,373 | | | $ | 3,155 | | | $ | 41,461 | | | $ | — | | | $ | 47,989 | |
| | | | | | | | | | | | | | | | | | | | | |
Slovakia.
92
| |
ItemITEM 9. | Changes In and Disagreements With Accountants on Accounting and Financial DisclosureCHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| |
ItemITEM 9A. | Controls and ProceduresCONTROLS AND PROCEDURES |
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the year ended December 31, 2005,2006, pursuant toRule 13a-15(b) of the Securities Exchange Act of 1934 (“the Exchange Act”). Based upon their evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the year ended December 31, 20052006 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control Over Financial Reporting
The report of management required under this ITEM 9A is contained in ITEM 8 of this Annual Report onForm 10-K under the caption “Management’s Report on Internal Control Over Financial Reporting.”
Attestation Report of Independent Registered Public Accounting Firm
The attestation report required under this ITEM 9A is contained in ITEM 8 of this Annual Report onForm 10-K under the caption “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 20052006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| |
ItemITEM 9B. | Other InformationOTHER INFORMATION |
None.
93
PART III
| |
ItemITEM 10. | Directors and Executive Officers of the RegistrantDIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Information required under this item with respect to directors is contained in our Proxy Statement for our 20062007 annual meeting of shareholders under the captions “Corporate Governance Matters”, “Election of Certain Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference.
Information required under this item with respect to executive officers is contained in Part I of thisForm 10-K under the caption “Executive Officers of the Registrant.”
Our Board of Directors has adopted Pentair’s Code of Business Conduct and Ethics and designated it as the code of ethics for the Company’s Chief Executive Officer and senior financial officers in accordance with SEC rules.officers. The Code of Business Conduct and Ethics also applies to all employees and directors in accordance with New York Stock Exchange Listing Standards. We have posted a copy of Pentair’s Code of Business Conduct and Ethics on our website atwww.pentair.com/code.html. Pentair’s Code of Business Conduct and Ethics is also available in print to any shareholder who requests it in writing from our Corporate Secretary. We intend to satisfy the disclosure requirements under Item 5.05 ofForm 8-K regarding amendments to, or waivers from, Pentair’s Code of Business Conduct and Ethics by posting such information on our website atwww.pentair.com/code.html.
We are not including the information contained on our website as part of, or incorporating it by reference into, this report.
| |
ItemITEM 11. | Executive CompensationEXECUTIVE COMPENSATION |
Information required under this item is contained in our Proxy Statement for our 20062007 annual meeting of shareholders under the captions “Election of Directors”“Corporate Governance Matters — Compensation Committee,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation” and “Director Compensation” and is incorporated herein by reference.
| |
ItemITEM 12. | Security OwnershipSECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information on security ownership required under this item is contained in our Proxy Statement for our 2007 annual meeting of shareholders under the caption “Security Ownership” and is incorporated herein by reference.
94
The following table summarizes, as of December 31, 2006, information about compensation plans under which equity securities of Pentair are authorized for issuance:
Equity Compensation Plan Information
| | | | | | | | | | | | | |
| | | | | | | | | Number of Securities
| |
| | | | | | | | | Remaining Available for
| |
| | | Number of Securities to be
| | | Weighted-average
| | | Future Issuance Under
| |
| | | Issued Upon Exercise of
| | | Exercise Price of
| | | Equity Compensation Plans
| |
| | | Outstanding Options,
| | | Outstanding Options,
| | | (Excluding Securities Reflected
| |
| | | Warrants and Rights
| | | Warrants and Rights
| | | in Column (a))
| |
| Plan Category | | (a) | | | (b) | | | (c) | |
| | |
| |
| Equity compensation plans approved by security holders | | | 6,287,636 | (1) | | $ | 29.394 | | | | 8,739,681 | (2) |
| Equity compensation plans not approved by security holders | | | 48,000 | (3) | | $ | 11.375 | | | | — | |
| |
| |
| Total | | | 6,335,636 | | | $ | 29.257 | | | | 8,739,681 | |
| |
| |
| | |
| (1) | | Represents options to purchase shares of Certain Beneficial Ownerscommon stock granted under the Omnibus Stock Incentive Plan and Managementthe Outside Directors Nonqualified Stock Option Plan. |
|
| (2) | | Represents securities remaining available for issuance under the Omnibus Stock Incentive Plan and Outside Directors Nonqualified Stock Option Plan. No more than 20% of the shares available for issuance under the Omnibus Stock Incentive Plan (1,616,979 under the current plan) may be used to make awards other than stock options. |
|
| (3) | | Represents options to purchase common stock granted pursuant to an individual stock option agreement described below. |
Individual Stock Option Agreement. On January 2, 2001, the Company awarded Randall J. Hogan (currently the Company’s Chairman and Chief Executive Officer) an option to purchase 48,000 shares of common stock pursuant to an individual stock option agreement. These options have an exercise price of $11.375 per share and vested in three equal annual installments, commencing one year after the date of grant. The options expire 10 years after the date of grant and the exercise price of the options was the closing price of common stock on the date of grant. If a “Change in Control” (as defined in the Company’s Key Executive Employment and Severance Agreements) of the Company occurs, then all the options not yet exercised become immediately exercisable. All share numbers and per share amounts described in this section have been changed to reflect the Company’s2-for-1 stock split in 2004.
Burn Rate. Our three-year average burn rate is approximately 2.60% when calculated using the guidelines published by Institutional Shareholder Services (ISS). Under ISS guidelines, the “burn-rate” is the total number of equity awards granted in any given year divided by the number of common shares outstanding, with a premium applied to grants of restricted stock. The number of equity awards used in the burn rate calculation is not discounted by cancelled or forfeited options or shares acquired or retained by the Company.
| |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Information required under this item is contained in our Proxy Statement for our 20062007 annual meeting of shareholders under the captions “Security Ownership of Management and Beneficial Ownership” and “Securities Authorized for Issuance under Equity Compensation Plans”“Corporate Governance Matters — Independent Directors,” “Corporate Governance Matters — Related Party Transactions” and is incorporated herein by reference.
| |
Item 13.ITEM 14. | Certain Relationships and Related TransactionsPRINCIPAL ACCOUNTANT FEES AND SERVICES |
No matters require disclosure here.
| |
Item 14. | Principal Accounting Fees and Services |
Information required under this item is contained in our Proxy Statement for our 20062007 annual meeting of shareholders under the caption “Independent Auditor Fees”“Audit Committee Disclosure” and is incorporated herein by reference.
9495
PART IV
| |
ItemITEM 15. | Exhibits and Financial Statement SchedulesEXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| | |
| (a) | List of documents filed as part of this report: |
(1) Financial Statements
Consolidated Statements of Income for the Years Ended December 31, 2006, 2005, 2004, and 20032004
Consolidated Balance Sheets as of December 31, 20052006 and December 31, 20042005
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005, 2004, and 20032004
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2006, 2005, 2004, and 20032004
Notes to Consolidated Financial Statements
| | |
| | (2) | Financial Statement Schedules |
Schedule II — Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(3) Exhibits
The exhibits of this Annual Report onForm 10-K included herein are set forth on the attached Exhibit Index beginning on page 98.80.
9596
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, on February 27, 2006.26, 2007.
PENTAIR, INC.
David D. Harrison
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on February 27, 2006.26, 2007.
| | | | | | | |
Signature | | Title | | |
| |
| | | | | |
/s/ Randall J. Hogan
Randall J. Hogan | | Chairman and Chief Executive Officer | | |
| | | | | |
/s/ David D. Harrison
David D. Harrison | | Executive Vice President and Chief Financial Officer | | |
| | | | | |
* *
Glynis A. Bryan | | Director | | |
| | | | | |
* *
Richard J. Cathcart | | Director | | |
| | | | | |
* *
Barbara B. Grogan | | Director | | |
| | | | | |
* *
Charles A. Haggerty | | Director | | |
| | | | | |
* *
David A. Jones | | Director | | |
| | | | | |
* *
Augusto Meozzi | | Director | | |
| | | | | |
* *
Ronald L. Merriman | | Director | | |
| | | | | |
* *
William T. Monahan | | Director | | |
| | | | | |
* *
Karen E. Welke | | Director | | |
| | | | | | | |
| *By | | /s/ Louis L. Ainsworth
Louis L. Ainsworth
Attorney-in-fact | | | | |
9697
Schedule II — Valuation and Qualifying Accounts
Pentair, Inc. and Subsidiariessubsidiaries
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Additions
| | | | | | | | | | | Additions
| | | | | | | |
| | | Balance
| | Charged to
| | | | Other
| | Balance
| | | Balance
| | Charged to
| | | | Other
| | Balance
| |
| | | Beginning
| | Costs and
| | | | Changes
| | End of
| | | Beginning
| | Costs and
| | | | Changes
| | End of
| |
| | | of Period | | Expenses | | Deductions - | | Add (Deduct) | | Period | | |
| In thousands | | | of Period | | Expenses | | Deductions | | Add (deduct) | | Period | |
| | | (In thousands) | | | |
| |
Allowances for doubtful accounts | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2006 | | | $ | 14,017 | | | $ | 3,034 | | | $ | 2,918 | (1) | | $ | 515 | (2) | | $ | 14,648 | |
| Year ended December 31, 2005 | | $ | 18,775 | | | $ | 1,388 | | | $ | 5,931 | (1) | | $ | (215 | )(2) | | $ | 14,017 | | | $ | 18,775 | | | $ | 1,388 | | | $ | 5,931 | (1) | | $ | (215 | )(2) | | $ | 14,017 | |
| Year ended December 31, 2004 | | $ | 12,564 | | | $ | 2,663 | | | $ | 2,333 | (1) | | $ | 5,881 | (2) | | $ | 18,775 | | | $ | 12,564 | | | $ | 2,663 | | | $ | 2,333 | (1) | | $ | 5,881 | (2) | | $ | 18,775 | |
| Year ended December 31, 2003 | | $ | 10,525 | | | $ | 1,973 | | | $ | 1,664 | (1) | | $ | 1,730 | (2) | | $ | 12,564 | | |
| | |
| (1) | | Uncollectible accounts written off, net of recoveries. |
| |
| (2) | | Result of acquisitions and foreign currency effects. |
9798
Exhibit Index
| | | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Exhibit | Number | | Exhibit |
| |
| | 3 | .1 | | Second Restated Articles of Incorporation as amended through May 1, 2002 (Incorporated by reference to Exhibit 3.1 contained in Pentair’s Quarterly Report onForm 10-Q for the quarterly period ended March 30, 2002). | 3 | .1 | | Second Restated Articles of Incorporation as amended through May 1, 2002 (Incorporated by reference to Exhibit 3.1 contained in Pentair’s Quarterly Report onForm 10-Q for the quarterly period ended March 30, 2002). |
| | 3 | .2 | | Third Amended and Superceding By-Laws as amended through May 1, 2002 (Incorporated by reference to Exhibit 3.2 contained in Pentair’s Quarterly Report onForm 10-Q for the quarterly period ended March 30, 2002). | 3 | .2 | | Third Amended and Superceding By-Laws as amended through May 1, 2002 (Incorporated by reference to Exhibit 3.2 contained in Pentair’s Quarterly Report onForm 10-Q for the quarterly period ended March 30, 2002). |
| | 3 | .3 | | Statement of Resolution of the Board of Directors Establishing the Series and Fixing the Relative Rights and Preferences of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 3.1 contained in Pentair’s Current Report onForm 8-K dated December 10, 2004). | 3 | .3 | | Statement of Resolution of the Board of Directors Establishing the Series and Fixing the Relative Rights and Preferences of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 3.1 contained in Pentair’s Current Report onForm 8-K dated December 10, 2004). |
| | 4 | .1 | | Rights Agreement dated as of December 10, 2004 between Pentair, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 4.1 contained in Pentair’s Registration Statement onForm 8-A, dated as of December 31, 2004). | 4 | .1 | | Rights Agreement dated as of December 10, 2004 between Pentair, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 4.1 contained in Pentair’s Registration Statement onForm 8-A, dated as of December 31, 2004). |
| | 4 | .2 | | Form of Indenture, dated June 1, 1999, between Pentair, Inc. and U.S. Bank National Association, as Trustee Agent (Incorporated by reference to Exhibit 4.2 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 2000). | 4 | .2 | | Form of Indenture, dated June 1, 1999, between Pentair, Inc. and U.S. Bank National Association, as Trustee Agent (Incorporated by reference to Exhibit 4.2 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 2000). |
| | 4 | .3 | | Note Purchase Agreement dated as of July 25, 2003 for $50,000,000 4.93% Senior Notes, Series A, due July 25, 2013, $100,000,000 Floating Rate Senior Notes, Series B, due July 25, 2013, and $50,000,000 5.03% Senior Notes, Series C, due October 15, 2013 (Incorporated by reference to Exhibit 10.22 contained in Pentair’s Current Report onForm 8-K dated July 25, 2003). | 4 | .3 | | Note Purchase Agreement dated as of July 25, 2003 for $50,000,000 4.93% Senior Notes, Series A, due July 25, 2013, $100,000,000 Floating Rate Senior Notes, Series B, due July 25, 2013, and $50,000,000 5.03% Senior Notes, Series C, due October 15, 2013 (Incorporated by reference to Exhibit 10.22 contained in Pentair’s Current Report onForm 8-K dated July 25, 2003). |
| | 4 | .4 | | Supplemental Indenture between Pentair, Inc. and U.S. Bank National Association, as Trustee, dated as of August 2, 2004 (Incorporated by reference to Exhibit 4.1 contained in Pentair’s Quarterly Report onForm 10-Q for the quarterly period ended October 2, 2004). | 4 | .4 | | Supplemental Indenture between Pentair, Inc. and U.S. Bank National Association, as Trustee, dated as of August 2, 2004 (Incorporated by reference to Exhibit 4.1 contained in Pentair’s Quarterly Report onForm 10-Q for the quarterly period ended October 2, 2004). |
| | 4 | .5 | | Second Amended and Restated Credit Agreement dated as of March 4, 2005 among Pentair, Inc., various subsidiaries of Pentair, Inc. and various financial institutions therein and Bank of America, N.A., as Administrative Agent and Issuing Bank. (Incorporated by reference to Exhibit 99.1 contained in Pentair’s Current Report onForm 8-K dated March 4, 2005). | 4 | .5 | | Second Amended and Restated Credit Agreement dated as of March 4, 2005 among Pentair, Inc., various subsidiaries of Pentair, Inc. and various financial institutions therein and Bank of America, N.A., as Administrative Agent and Issuing Bank. (Incorporated by reference to Exhibit 99.1 contained in Pentair’s Current Report onForm 8-K dated March 4, 2005). |
| | 4 | .6 | | First Amendment to Note Purchase agreement dated July 19, 2005 by and among Pentair, Inc. and the undersigned holders (Incorporated by reference to Exhibit 4 contained in Pentair’s Quarterly Report onForm 10-Q for the quarterly period ended July 2, 2005). | 4 | .6 | | First Amendment to Note Purchase agreement dated July 19, 2005 by and among Pentair, Inc. and the undersigned holders (Incorporated by reference to Exhibit 4 contained in Pentair’s Quarterly Report onForm 10-Q for the quarterly period ended July 2, 2005). |
| | 10 | .1 | | Pentair’s Supplemental Employee Retirement Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.1 contained in Pentair’s Current Report onForm 8-K filed September 21, 2000).* | 10 | .1 | | Pentair’s Supplemental Employee Retirement Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.1 contained in Pentair’s Current Report onForm 8-K filed September 21, 2000).* |
| | 10 | .2 | | Pentair’s 1999 Supplemental Executive Retirement Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Current Report onForm 8-K filed September 21, 2000).* | 10 | .2 | | Pentair’s 1999 Supplemental Executive Retirement Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Current Report onForm 8-K filed September 21, 2000).* |
| | 10 | .3 | | Pentair’s Restoration Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.3 contained in Pentair’s Current Report onForm 8-K filed September 21, 2000).* | 10 | .3 | | Pentair’s Restoration Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.3 contained in Pentair’s Current Report onForm 8-K filed September 21, 2000).* |
| | 10 | .4 | | Amended and Restated Pentair, Inc. Outside Directors Nonqualified Stock Option Plan as amended through February 27, 2002 (Incorporated by reference to Exhibit 10.7 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 2001).* | 10 | .4 | | Amended and Restated Pentair, Inc. Outside Directors Nonqualified Stock Option Plan as amended through February 27, 2002 (Incorporated by reference to Exhibit 10.7 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 2001).* |
| | 10 | .5 | | Pentair, Inc. Non-Qualified Deferred Compensation Plan effective January 1, 1996 (Incorporated by reference to Exhibit 10.17 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 1995).* | 10 | .5 | | Pentair, Inc. Non-Qualified Deferred Compensation Plan effective January 1, 1996 (Incorporated by reference to Exhibit 10.17 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 1995).* |
| | 10 | .6 | | 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 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 1995).* | 10 | .6 | | 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 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 1995).* |
| | 10 | .7 | | Amendment effective August 23, 2000 to Pentair’s Non-Qualified Deferred Compensation Plan effective January 1, 1996 (Incorporated by reference to Exhibit 10.8 contained in Pentair’s Current Report onForm 8-K filed September 21, 2000).* | 10 | .7 | | Amendment effective August 23, 2000 to Pentair’s Non-Qualified Deferred Compensation Plan effective January 1, 1996 (Incorporated by reference to Exhibit 10.8 contained in Pentair’s Current Report onForm 8-K filed September 21, 2000).* |
| | 10 | .8 | | Pentair, Inc. Executive Officer Performance Plan as Amended and Restated, effective January 1, 2003 (Incorporated by reference to Appendix 1 contained in Pentair’s Proxy Statement for its 2003 annual meeting of shareholders).* | |
9899
| | | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Exhibit | Number | | Exhibit |
| |
| | 10 | .9 | | Pentair’s Management Incentive Plan as amended and restated January 1, 2002 (Incorporated by reference to Exhibit 10.16 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 2001).* | 10 | .8 | | Pentair, Inc. Executive Officer Performance Plan as Amended and Restated, effective January 1, 2003 (Incorporated by reference to Appendix 1 contained in Pentair’s Proxy Statement for its 2003 annual meeting of shareholders).* |
| | 10 | .10 | | Amendment effective January 1, 2003 to Pentair’s Management Incentive Plan (Incorporated by reference to Exhibit 10.15 contained in Pentair’s annual Report onForm 10-K for the year ended December 31, 2003).* | 10 | .9 | | Pentair’s Management Incentive Plan as amended and restated January 1, 2002 (Incorporated by reference to Exhibit 10.16 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 2001).* |
| | 10 | .11 | | Pentair’s Flexible Perquisite Program as amended effective January 1, 1989 (Incorporated by reference to Exhibit 10.20 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 1989).* | 10 | .10 | | Amendment effective January 1, 2003 to Pentair’s Management Incentive Plan (Incorporated by reference to Exhibit 10.15 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 2003).* |
| | 10 | .12 | | Form of Key Executive Employment and Severance Agreement effective August 23, 2000 for Randall J. Hogan (Incorporated by reference to Exhibit 10.11 contained in Pentair’s Current Report onForm 8-K filed September 21, 2000).* | 10 | .11 | | Pentair’s Flexible Perquisite Program as amended effective January 1, 1989 (Incorporated by reference to Exhibit 10.20 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 1989).* |
| | 10 | .13 | | Form of Key Executive Employment and Severance Agreement effective August 23, 2000 for Louis Ainsworth, Richard J. Cathcart, Michael V. Schrock, Karen A. Durant, David D. Harrison, Frederick S. Koury, Michael G. Meyer, Jack J. Dempsey, and Charles M. Brown (Incorporated by reference to Exhibit 10.13 contained in Pentair’s Current Report onForm 8-K filed September 21, 2000).* | 10 | .12 | | Form of Key Executive Employment and Severance Agreement effective August 23, 2000 for Randall J. Hogan (Incorporated by reference to Exhibit 10.11 contained in Pentair’s Current Report onForm 8-K filed September 21, 2000).* |
| | 10 | .14 | | Employment Agreement dated October 17, 2001, between Pentair, Inc. and Richard J. Cathcart. (Incorporated by reference to Exhibit 10.31 contained in Pentair’s Quarterly Report onForm 10-Q for the quarterly period ended September 29, 2001).* | 10 | .13 | | Form of Key Executive Employment and Severance Agreement effective August 23, 2000 for Louis Ainsworth, Richard J. Cathcart, Michael V. Schrock, Karen A. Durant, David D. Harrison, Frederick S. Koury, Michael G. Meyer, and Jack J. Dempsey (Incorporated by reference to Exhibit 10.13 contained in Pentair’s Current Report onForm 8-K filed September 21, 2000).* |
| | 10 | .15 | | Pentair, Inc. International Stock Purchase and Bonus Plan, as Amend and Restated, effective May 1, 2004 (Incorporated by reference to Appendix I contained in Pentair’s Proxy Statement for its 2004 annual meeting of shareholders). * | 10 | .14 | | Form of Key Executive Employment and Severance Agreement effective as of February 12, 2007 for John L. Stauch.* |
| | 10 | .16 | | Pentair, Inc. Compensation Plan for Non-Employee Directors, as Amended and Restated, effective May 1, 2004 (Incorporated by reference to Appendix F contained in Pentair’s Proxy Statement for its 2004 annual meeting of shareholders). * | 10 | .15 | | Employment Agreement dated October 17, 2001, between Pentair, Inc. and Richard J. Cathcart. (Incorporated by reference to Exhibit 10.31 contained in Pentair’s Quarterly Report onForm 10-Q for the quarterly period ended September 29, 2001).* |
| | 10 | .17 | | Pentair, Inc. Omnibus Stock Incentive Plan, as Amended and Restated, effective May 1, 2004 (Incorporated by reference to Appendix G contained in Pentair’s Proxy Statement for its 2004 annual meeting of shareholders). * | 10 | .16 | | Pentair, Inc. International Stock Purchase and Bonus Plan, as Amend and Restated, effective May 1, 2004 (Incorporated by reference to Appendix I contained in Pentair’s Proxy Statement for its 2004 annual meeting of shareholders).* |
| | 10 | .18 | | Pentair, Inc. Employee Stock Purchase and Bonus Plan, as Amended and Restated, effective May 1, 2004 (Incorporated by reference to Appendix H contained in Pentair’s Proxy Statement for its 2004 annual meeting of shareholders). * | 10 | .17 | | Pentair, Inc. Compensation Plan for Non-Employee Directors, as Amended and Restated, effective May 1, 2004 (Incorporated by reference to Appendix F contained in Pentair’s Proxy Statement for its 2004 annual meeting of shareholders).* |
| | 10 | .19 | | Amendment effective December 10, 2004 to the Pentair, Inc. Outside Director’s Nonqualified Stock Option Plan for Non-Employee Directors (Incorporated by reference to Exhibit 10.1 contained in Pentair’s Current Report onForm 8-K dated December 10, 2004).* | 10 | .18 | | Pentair, Inc. Omnibus Stock Incentive Plan, as Amended and Restated, effective May 1, 2004 (Incorporated by reference to Appendix G contained in Pentair’s Proxy Statement for its 2004 annual meeting of shareholders).* |
| | 10 | .20 | | Summary of Board of Director Compensation, approved December 10, 2004 (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Current Report onForm 8-K dated December 10, 2004).* | 10 | .19 | | Pentair, Inc. Employee Stock Purchase and Bonus Plan, as Amended and Restated, effective May 1, 2004 (Incorporated by reference to Appendix H contained in Pentair’s Proxy Statement for its 2004 annual meeting of shareholders).* |
| | 10 | .21 | | Letter Agreement, dated January 6, 2005, between Pentair, Inc. and Michael Schrock (Incorporated by reference to Exhibit 10.1 contained in Pentair’s Current Report onForm 8-K dated January 6, 2005).* | 10 | .20 | | Amendment effective December 10, 2004 to the Pentair, Inc. Outside Director’s Nonqualified Stock Option Plan for Non-Employee Directors (Incorporated by reference to Exhibit 10.1 contained in Pentair’s Current Report onForm 8-K dated December 10, 2004).* |
| | 10 | .22 | | Confidentiality and Non-Competition Agreement, dated January 6, 2005, between Pentair, Inc. and Michael Schrock (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Current Report onForm 8-K dated January 6, 2005).* | 10 | .21 | | Summary of Board of Director Compensation, approved December 10, 2004 (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Current Report onForm 8-K dated December 10, 2004).* |
| | 21 | | | List of Pentair subsidiaries. | 10 | .22 | | Letter Agreement, dated January 6, 2005, between Pentair, Inc. and Michael Schrock (Incorporated by reference to Exhibit 10.1 contained in Pentair’s Current Report onForm 8-K dated January 6, 2005).* |
| | 23 | | | Consent of Independent Registered Public Accounting Firm — Deloitte & Touche LLP. | 10 | .23 | | Confidentiality and Non-Competition Agreement, dated January 6, 2005, between Pentair, Inc. and Michael Schrock (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Current Report onForm 8-K dated January 6, 2005).* |
| | 24 | | | Power of Attorney. | 10 | .24 | | Letter Agreement, dated March 31, 2006, between Pentair, Inc. and Karen Durant (Incorporated by reference to Exhibit 10.1 in Pentair’s Current Report onForm 8-K dated April 5, 2006).* |
| | 31 | .1 | | Certification of Chief Executive Officer required byRule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | 10 | .25 | | Confidentiality and Non-Competition Agreement, dated April 1, 2006, between Pentair and Karen Durant (Incorporated by reference to Exhibit 10.2 to Pentair’s Current Report onForm 8-K dated April 5, 2006).* |
| | 31 | .2 | | Certification of Chief Financial Officer required byRule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | |
| | 32 | .1 | | Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| | 32 | .2 | | Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
100
| | | | | |
Exhibit
| | |
Number | | Exhibit |
| |
| | 10 | .26 | | Amendment effective December 14, 2006 to the Pentair, Inc. Outside Director’s Nonqualified Stock Option Plan for Non-Employee Directors.* |
| | 18 | | | Letter dated February 26, 2007 from Deloitte & Touche LLP related to a change in accounting principle for valuing inventory. |
| | 21 | | | List of Pentair subsidiaries. |
| | 23 | | | Consent of Independent Registered Public Accounting Firm — Deloitte & Touche LLP. |
| | 24 | | | Power of Attorney. |
| | 31 | .1 | | Certification of Chief Executive Officer required byRule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
| | 31 | .2 | | Certification of Chief Financial Officer required byRule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
| | 32 | .1 | | Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | 32 | .2 | | Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| * | | A management contract or compensatory contract. |
99
101
