UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission File No. 0-4689
PENTAIR, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0907434
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 County B2 West,
Suite 400 St. Paul, Minnesota 55113-3105
(Address of principal executive offices) (Zip Code)
(612) 636-7920
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares outstanding of Registrant's only class of
common stock on June 30, 1994 was 18,198,210.
PENTAIR, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of
Results of Operations and Financial Condition
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature Page
Exhibit Index
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PENTAIR, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
($ expressed in thousands except per share amounts)
Six Months Ended Quarter Ended
June 30 March 31
1994 1993 1994 1993
Net sales $781,189 $642,112 $391,937 $320,283
Operating costs
Cost of goods sold 585,194 488,987 294,442 244,078
Selling, general
and administrative 143,305 109,755 71,162 54,795
Total operating costs 728,499 598,742 365,604 298,873
52,690 43,370 26,333 21,410
Equity in joint
venture income (loss) 499 (966) 121 (149)
Operating income 53,189 42,404 26,454 21,261
Interest expense (net) 14,964 10,222 7,129 5,079
Income before
income taxes 38,225 32,182 19,325 16,182
Provision for
income taxes 15,300 12,900 7,500 6,400
Net income 22,925 19,282 11,825 9,782
Preferred
dividend requirements 2,731 3,397 1,365 1,397
Earnings applicable
to common stock $20,194 $15,885 $10,460 $8,385
Earnings per share:
Primary $1.10 $.91 $.57 $.46
Diluted $1.08 $.90 $.56 $.46
Weighted average common and common equivalent shares:
Primary 18,376 17,450 18,380 18,328
Diluted 21,004 18,806 21,003 18,849
See Notes to Consolidated Financial Statements.
PENTAIR, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
($ expressed in thousands)
June 30, December 31,
ASSETS 1994 1993
Current assets
Cash and cash equivalents $17,587 $10,327
Accounts receivable - net 243,993 200,425
Inventories
Finished goods 157,393 122,712
Work in process 42,546 35,315
Raw materials 47,914 35,108
Supplies 5,862 5,691
Total inventory 253,715 198,826
Deferred income taxes 22,278 21,575
Other current assets 7,685 7,627
Total current assets 545,258 438,780
Property, plant and equipment 719,063 621,617
Less accumulated depreciation 335,199 305,751
Property, plant and
equipment - net 383,864 315,866
Marketable securities -
insurance subsidiary 18,830 18,594
Investment in joint ventures 68,704 72,867
Goodwill - net 169,736 88,970
Other assets 27,307 23,724
TOTAL ASSETS $1,213,699 $958,801
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $97,855 $93,820
Compensation and other
benefits accruals 59,959 42,737
Income taxes 8,848 8,787
Accrued product claims
and warranties 23,894 22,256
Accrued expenses and
other liabilities 69,829 50,075
Current maturities of debt 3,223 803
Total current liabilities 263,608 218,478
Long-term debt 408,107 238,856
Other liabilities 24,572 18,911
Deferred income taxes 8,369 7,518
Pensions and other
retirement compensation 36,164 29,687
Postretirement medical and
other benefits 61,390 60,637
Reserves - insurance subsidiary 17,499 13,865
Commitments and contingencies
Shareholders' equity
Preferred stock - at liquidation value
Authorized: 2,500,000 shares
Outstanding: 1994 - 1,966,053 68,963 69,380
1993 - 1,976,443
Unearned compensation
relating to ESOP (33,233) (35,453)
Common stock - par value, $.16 2/3
Authorized: 72,500,000 shares
Outstanding: 1994 - 18,198,210 3,033 3,022
1993 - 18,134,638
Additional paid-in capital 165,117 163,460
Cumulative translation adjustment 5,561 (287)
Minimum pension
liability adjustment (6,760) (6,760)
Retained earnings 191,309 177,487
Total shareholders' equity 393,990 370,849
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $1,213,699 $958,801
See Notes to Consolidated Financial Statements.
PENTAIR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
($ expressed in thousands)
Six Months Ended
June 30 June 30
1994 1993
Cash provided by (used for)
Operating activities
Net income $22,925 $19,282
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation 30,636 24,267
Amortization 2,811 1,235
Deferred income taxes 148 (2,038)
Undistributed loss (earnings)
from joint venture (499) 966
Changes in assets and liabilities,
net of effects of acquisition
Accounts receivable (20,607) (7,985)
Inventories (27,881) (18,972)
Accounts payable (1,759) (16,737)
Income taxes (1,215) (4,221)
Pensions and other
retirement compensation 6,477 4,031
Reserves - insurance subsidiary 3,634 4,154
Other assets/liabilities - net 15,148 6,660
Net cash from
operating activities 29,818 10,642
Investing activities
Capital expenditures (37,883) (24,620)
Cash investment in joint
venture - net 4,662 511
Purchase of marketable
securities - net (236) (4,060)
Acquisition - net of
cash acquired (140,116) 0
Net cash (used) for
investing activities (173,573) (28,169)
Financing activities
Borrowings 158,235 123,957
Debt payments (6,193) (101,217)
Unearned ESOP
compensation decrease 2,220 2,250
Employee stock plans and other 1,731 1,675
Dividends paid (9,276) (9,168)
Net cash provided for
financing activities 146,717 17,497
Effect of currency
exchange rate changes 4,298 0
Increase (decrease)
in cash and cash equivalents 7,260 (30)
Cash and cash equivalents
- beginning of period 10,327 8,392
- end of period $17,587 $8,362
See Notes to Consolidated Financial Statements.
PENTAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with
instructions for Form 10-Q and, accordingly, do not include all
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments, consisting only of
normal recurring accruals, considered necessary for a fair
presentation have been included.
These statements should be read in conjunction with the
financial statements and footnotes included in the Company's
Annual Report on Form 10-K for the year ended December 31,
1993, previously filed with the Commission.
2. The results of operations for the six months ended June 30,
1994 are not necessarily indicative of the operating results to
be expected for the full year.
3. Income tax provisions for interim periods are based on the
current best estimate of the effective federal, state and foreign
income tax rates.
4. Earnings per common share are based on the weighted
average number of common and common equivalent shares
outstanding during each period. The tax benefits applicable to
preferred dividends paid to ESOPs are: for allocated shares,
credited to income tax expense; and for unallocated shares,
credited to retained earnings and are not considered earnings
applicable to common stock.
Fully diluted computations assume full conversion of each
series of preferred stock into common stock, the elimination of
preferred dividend requirements, and the recognition of the tax
benefit on deductible ESOP dividends applicable to allocated
shares payable based on the converted common dividend rate.
Conversion was assumed during the portion of each period
that the securities were outstanding.
5. The long-term debt is summarized as follows ($ millions):
6/30/94 12/31/93
Revolving credit loans $156 $65
Private placement debt 160 160
Other 95 15
TOTAL 411 240
Current maturities (3) (1)
Total long-term debt $408 $239
Debt agreements contain various restrictive covenants,
including a limitation on the payment of dividends and certain
other restricted payments. Under the most restrictive
covenants, $104 million of the June 30, 1994 retained earnings
were unrestricted for such purposes.
6. The Company uses the equity method of accounting for its
Joint Ventures, Lake Superior Paper Industries (LSPI) and LSPI
Fiber.
Operations for the periods ending June 30 are summarized as
follows ($ millions):
Six Months Ended
1994 1993
Net Sales $78.4 $71.5
Operating Income (Loss) 3.0 (.4)
Pre-Tax Income (Loss) 1.0 (2.0)
Three Months Ended
1994 1993
Net Sales $39.3 $37.3
Operating Income (Loss) 1.2 .5
Pre-Tax Income (Loss) .2 (.4)
7. Statement of Cash Flows
The following is supplemental information relating to the
Statement of Cash Flows ($000's):
Six Months
Ended June 30
1994 1993
Interest paid (net of
capitalized interest) $15,294 $9,206
Income tax payments 15,281 15,988
All outstanding shares of the Pentair, Inc. $1.50 Cumulative
Convertible Preferred Stock, Series 1987 were called for
redemption on March 15, 1993. In lieu of redemption,
substantially all of the preferred shares were converted into
approximately 1,450,780 shares of common stock. This
conversion is treated as a non-cash transaction.
8. Acquisition
On February 28, 1994, the Registrant completed the purchase
from Fried. Krupp Hoesch-Krupp of all of the net assets and
business of the Schroff Group (Schroff), including the stock of
its international subsidiaries, for $154 million paid in cash at
closing, which includes $1.7 million in interest accrued from
January 1, 1994, the economic transfer date.
The operating assets of the Schroff manufacturing facilities in
Germany were acquired by a new indirect German subsidiary
of the Registrant, Schroff GmbH, subject to normal payables
and accruals of the business. These assets were used by
Schroff in the manufacture of cabinets, cases, subracks and
accessories for the electronics industry. Schroff GmbH is
continuing its predecessor's business and will use the assets
in the same manner as before.
The outstanding stock of all of the European subsidiaries of
Schroff was acquired by a new wholly-owned subsidiary of the
Registrant, EuroPentair GmbH, which also owns the stock of
the new Schroff GmbH. The outstanding stock of the
non-European subsidiaries of Schroff, which includes its U.S.
subsidiary Schroff, Inc., was acquired by FC Holdings Inc., a
wholly-owned U.S. subsidiary of the Registrant.
Pro Forma Financial Information
The Schroff operating results are included in the company's
consolidated results from January 1, 1994. The following pro
forma financial information assumes the acquisition occurred
at the beginning of 1993. These results have been prepared
for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisition
been made at the beginning of 1993, or of the results which
may occur in the future.
(Unaudited)
Year Ended
December 31, 1993
Net Sales $1,480.2 million
Net Income $46.8 million
Earnings Per Share
Primary $2.27
Diluted $2.21
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
BUSINESS SEGMENT INFORMATION
Selected information for business segments for the six months ended
June 30, 1994 and 1993 follows ($ millions):
General
SpecialtyIndustrial Paper Joint General
Products Equipment Products Ventures Corporate Total
1994
Net Sales $216.3 $381.0 $183.9 $0.0 $0.0 $781.2
Operating Income 21.4 35.4 5.9 0.5 (10.0) 53.2
Identifiable Assets 209.0 621.2 267.0 68.7 47.8 1,213.7
Depreciation 4.5 13.0 13.1 0.0 0.0 30.6
Capital Expenditures 4.6 17.0 16.2 0.0 0.1 37.9
1993
Net Sales $188.0 $263.0 $191.1 $0.0 $0.0 $642.1
Operating Income 17.4 20.2 14.3 (1.0) (8.5) 42.4
Identifiable Assets 182.7 392.4 235.2 56.8 37.4 904.5
Depreciation 3.9 8.3 12.1 0.0 0.0 24.3
Capital Expenditures 2.2 5.6 16.8 0.0 0.0 24.6
RESULTS OF OPERATIONS
Pentair reported net income of $22.9 million, or $1.08 per fully
diluted share, on consolidated net sales of $781.2 million for
the six months ended June 30, 1994. This represented a 18.9
percent increase in net income and a 21.7 percent increase in
sales over the first half of 1993. The first half 1993 net income
was $19.3 million, or 90 cents per fully diluted share, on
consolidated net sales of $642.1 million.
Specialty Products Segment. Net sales increased $28.2 million
or 15.0% and operating income increased $4.0 million or 22.7%
with each company in the segment contributing to the
improvement. The increases reflect new products and further
expansion into major home center distribution channels.
Strong domestic retail activity contributed to improved
earnings.
General Industrial Equipment Segment. Sales increased
$118.0 million or 44.9% and operating income increased $15.2
million or 75.2%. Schroff was a major contributor to the
increased sales and operating income for the first half of 1994.
Electrical enclosure sales continued strong for the first six
months of 1994, assisted by the strength in durable goods
spending in the U.S. Sporting ammunition sales increased due
to excellent demand while margins improved as well with lower
raw material costs. Lubrication and material dispensing sales
and profits were comparable to the prior year due in part to a
more stable European economy.
Paper Products Segment. Net sales decreased $7.2 million or
3.8% and operating income decreased $8.4 million or 58.7%.
Prices were down 3.3% over the first half of 1993. These
results were attributable to continuing price weakness in the
coated paper market and increased competition for uncoated
paper sales. As a result of the competition, the company
chose to build inventory at its uncoated distribution center
facility. Also during this quarter, the newest mill in Dayton
started production and sold a small amount of introductory
paper. This did not have a material effect on the quarters
results. Continuing world-wide oversupply in printing and
writing papers continue to depress paper pricing.
Joint Venture. Tons shipped were up 2.5% and prices were
unchanged. Profitability has been achieved through operating
efficiencies and cost reduction activities. This business
continues to be influenced by worldwide industry overcapacity
in both the lightweight coated and SCA markets.
FINANCIAL CONDITION
In 1994 as in 1993, net income adjusted for non-cash items
provided much of the funds for seasonal working capital
increases of accounts receivable and inventory. Capital
expenditures for the first six months were $37.9 million in 1994
and $24.6 million in 1993. The increase is largely attributable
to a couple of major projects at two businesses. The
percentage of long-term debt to total capital was 51% at June
30, 1994 compared to 39% at December 31, 1993, largely due
to the acquisition of Schroff during the first quarter of 1994.
Revolving credit facilities and other foreign credits were used
to fund the acquisition of Schroff.
The full year 1994 cash flow from operations is expected to be
higher than 1993 with the contributions of the new Schroff
business and focus on controlling working capital. Capital
expenditures are expected to be about $100 million in 1994 as
compared to $73.4 million in 1993.
Effective as of February 11, 1994, Pentair entered into revolving
credit facilities with a group of six banks, Continental Bank
N.A., Morgan Guaranty Trust Company of New York, J.P.
Morgan Delaware, First Bank National Association, Norwest
Bank Minnesota, N.A. and NBD Bank, N.A. Two parallel facility
agreements provide for aggregate credit lines of $170 million
divided among two bank groups. Pentair's outstanding Bid
Loan Agreement with certain of these banks was amended in
a related transaction. The facility agreements provide for
revolving credits for a three-year period, unless extended, at
the expiration of which period the outstanding loans are
converted into a term loan having a four-year repayment
period. The credit facilities are unsecured and include certain
financial and other covenants on the part of Pentair.
In addition, Pentair and its new subsidiary formed in connection
with the Schroff acquisition, EuroPentair GmbH, entered into a
115 million Deutschmark (approximately US $65 million) facility
agreement as of February 11, 1994 with Morgan Guaranty Trust
Company of New York, Continental Bank N.A., NBD Bank N.A.,
and Dresdner Bank AG. EuroPentair's obligations under the
Deutschmark agreement are guaranteed by the Registrant.
This facility is similar to the two other domestic credit
agreements, but provides for borrowings and repayments in
German marks or certain other European currencies. This
facility also provides for unsecured revolving loans for a
three-year period with a similar term loan conversion and
four-year repayment period. Substantially all of the available
credit under this agreement was borrowed at the closing of the
Schroff acquisition.
The three revolving credit facilities discussed above replace
previous credit agreements between Pentair and these banks
for revolving credit in the aggregate amount of $225 million.
Based upon current operating expectations, credit available
under revolving credit facilities and private placements is more
than adequate to cover seasonal working capital and capital
expenditure requirements.
OUTLOOK
In general, the Company is strong and well-positioned to
continue its growth. The strong emphasis on product
development and aggressive efforts at expanding distribution
channels that helped during the recent weak economic cycle
are expected to continue to grow market share, sales and
profitability. The European economy is showing some signs of
improving which should help General Industrial Equipment
segment results.
In all businesses, sales are expected to continue to respond to
new products and enhanced customer service. In particular,
sales in the Specialty Products segment should benefit from a
continued focus on market expansion through new distribution
channels such as homecenter chains and lumberyards.
Certain businesses have reduced product and operating costs
over the last few years, so profitability should respond
positively to increased sales. The durable goods market
continues to enhance the sales of electrical enclosures
domestically and a recovery in Europe would boost sales of
Schroff products.
Low operating rates in the domestic printing and writing papers
will keep prices depressed. There has been a continued
downward trend in pricing in most paper grades. With the
recent increase in the cost of market pulp, the already narrow
margins of our paper businesses have been squeezed even
harder. Signs of price increases in Europe may help the SCA
and LWC markets, if the European manufacturers withdraw
tonnage from the U.S. markets and redirect it to their home
markets. Pentair's position in the uncoated premium paper
niche market has attracted increased competition offering
similar marketing, distribution, and product benefits previously
adopted by Pentair.
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
McNeil (Ohio) Corporation - F.E. Myers (Myers), a division of
McNeil (Ohio) Corporation, is currently involved with the
remediation of soil surrounding two underground storage tanks
on property owned by Myers prior to September 1986. Basic
information concerning that remediation was previously
reported in the Company's Form 10-K for the year ending
December 31, 1993. In June 1994, during the remediation
process, it was determined that groundwater contamination
exists. At this time, Myers is investigating the extent of the
groundwater contamination, but does not have sufficient
information to determine whether the matter is likely to result in
liability to Myers that is material to the Registrant's overall
financial statements.
ITEM 5 - Other Information
As discussed in Registrant's 1993 Form 10-K regarding
operational environmental matters, its Niagara subsidiary was
notified by the Michigan Department of Natural Resources
(MDNR) that Niagara's sludge lagoons violate MDNR
regulations. Niagara is engaged in discussions with the MDNR
over testing of its sludge to determine its suitability as closure
material. If it is not determined suitable, it will be necessary to
accelerate closure of the lagoons. Niagara estimates the cost
of acceleration of closure to be approximately $5 million.
Niagara is also studying alternative disposal methods if
acceleration is required. Alternative sludge disposal methods
for future operations are believed to be available which would
be comparable in cost to that incurred for sludge disposal by
other similarly situated pulp and paper mills.
In addition, Niagara intends to expand groundwater monitoring
at the site to determine the extent of any groundwater
contamination. It is possible that some remediation at the site
may be required; but the Registrant does not anticipate that the
cost of any such remediation will have a material impact on
Registrant's financial condition or operations.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are included with this Form
10-Q Report as required by Item 601 of Regulation S-K.
Exhibit Description
Number
11 Calculation of Earnings per Common and Common
Equivalent Share
(b) Reports on Form 8-K.
A Form 8K/A (Amendment to Form 8K which was filed on
March 14, 1994) was filed on May 13, 1994 disclosing the
financial statements of the business acquired (Schroff) and the
pro forma financial information for Pentair and Schroff.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
/s/ David D. Harrison
Senior Vice President and
Chief Financial Officer
July 28, 1994
EXHIBIT INDEX
Exhibit Number
11 Calculation of Earnings per Common and
Common Equivalent Share