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 March 31, 1997
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. 001-11625
PENTAIR, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0907434
(State or other jurisdiction (IRS Employer
of incorporation or Identification No.)
organization)
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 March 31, 1997 was 37,910,960.
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 4. Results of Votes of
Security Holders
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)
Three Months Ended
March 31
1997 1996
Net sales $411,139 $366,290
Operating costs
Cost of goods sold 285,188 251,554
Selling, general and
administrative 88,472 82,111
Total operating costs 373,660 333,665
Operating income 37,479 32,625
Interest expense 5,288 5,337
Interest income 170 712
Income before income taxes 32,361 28,000
Provision for income taxes 12,944 11,500
Net income 19,417 16,500
Preferred dividend requirements 1,218 1,275
Earnings applicable
to common stock $18,199 $15,225
Earnings per share:
Primary $0.48 $0.40
Diluted $0.45 $0.38
Weighted average common
and common equivalent shares:
Primary 38,247 37,728
Diluted 42,940 42,652
See Notes to Consolidated Financial Statements.
PENTAIR, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
($ expressed in thousands)
March 31, December 31,
1997 1996
ASSETS
Current assets
Cash and cash equivalents $17,270 $22,973
Accounts receivable - net 332,085 299,055
Inventories
Finished goods 146,430 159,617
Work in process 55,295 47,689
Raw materials and supplies 67,153 49,409
Total inventory 268,878 256,715
Deferred income taxes 23,589 23,084
Other current assets 13,905 12,428
Total current assets 655,727 614,255
Property, plant and equipment 543,914 525,918
Accumulated depreciation 238,932 227,069
PP & E - net 304,982 298,849
Marketable securities -
insurance subsidiary 40,745 40,764
Goodwill - net 298,083 298,372
Deferred Income Taxes 3,106 2,381
Other assets 37,058 34,393
TOTAL ASSETS $1,339,701 $1,289,014
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $102,693 $98,146
Compensation and other
benefits accruals 59,168 61,713
Income taxes 22,400 24,919
Accrued product claims
and warranties 25,272 25,167
Accrued expenses and
other liabilities 64,477 58,765
Current maturities of
long-term debt 44,948 32,928
Total current liabilities 318,958 301,638
Long-term debt 301,419 279,889
Pensions and other
retirement compensation 47,214 47,018
Postretirement medical and
other benefits 47,192 47,045
Reserves - insurance subsidiary 33,256 32,322
Other liabilities 17,063 17,251
Commitments and contingencies
Shareholders' equity
Preferred stock - at
liquidation value
Authorized: 2,500,000 shares
Outstanding: 1997 - 1,751,191 61,451 62,058
1996 - 1,769,983
Unearned compensation
relating to ESOP (13,450) (14,440)
Common stock -
par value, $.16 2/3
Authorized: 72,500,000 shares
Outstanding:
1997 - 37,910,960 6,319 6,287
1996 - 37,717,022
Additional paid-in capital 182,429 179,143
Currency translation,
marketable security and
pension adjustments 1,895 8,053
Retained earnings 335,955 322,750
Total shareholders' equity 574,599 563,851
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $1,339,701 $1,289,014
See Notes to Consolidated Financial Statements.
PENTAIR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
($ expressed in thousands)
Three Months Ended
March 31
1997 1996
Cash provided by (used for)
Operating activities
Net income $19,417 $16,500
Adjustments to reconcile
to cash flow:
Depreciation 14,194 11,891
Amortization 3,141 2,722
Deferred income taxes 680 (378)
Changes in assets and liabilities,
net of effects of acquisition
Accounts receivable (25,869) (25,600)
Inventories (14,090) (35,011)
Accounts payable 3,102 13,853
Compensation and benefits (3,674) (2,961)
Income taxes (2,088) 4,307
Pensions and other
retirement compensation 1,884 108
Reserves - insurance subsidiary 1,167 1,172
Other assets/liabilities - net (2,538) (2,487)
Cash used for operating activities (4,674) (15,884)
Investing activities
Capital expenditures (21,540) (9,415)
Construction funds in escrow (1,453) 0
Net proceeds (purchases)
of marketable securities 19 (1,471)
Proceeds from sale of
discontinued Operations 0 100,000
Acquisitions -
net of cash acquired (16,391) (126,883)
Cash used for investing activities (39,365) (37,769)
Financing activities
Borrowings 42,252 47,245
Debt payments (3,959) (1,985)
Unearned ESOP
compensation decrease 990 1,035
Employee stock plans and other 2,825 3,891
Dividends paid (6,325) (5,920)
Cash provided by (used for)
financing activities 35,783 44,266
Effects of currency
exchange rate changes 2,553 776
Increase (decrease)
in cash and cash equivalents (5,703) (8,611)
Cash and cash equivalents
- beginning of period 22,973 36,648
- end of period $17,270 $28,037
See Notes to Consolidated Financial Statements.
PENTAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with
instructions for Form 10-Q and, accordingly, do not include
all information and footnotes required by generally accepted
accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting
only of normal recurring accruals, considered necessary
for a fair presentation have been included.
These statements should be read in conjunction with the
financial statements and footnotes included in the Company's
Annual Report on Form 10-K for the year ended December 31,
1996, previously filed with the Commission.
2. The results of operations for the three months ended
March 31, 1997 are not necessarily indicative of the
operating results to be expected for the full year.
3. Income tax provisions for interim periods are based on
the current best estimate of the effective federal,
state and foreign income tax rates.
4. Earnings per common share are based on the weighted
average number of common and common equivalent shares
outstanding during each period. The tax benefits
applicable to preferred dividends paid to ESOPs are:
for allocated shares credited to income tax expense and for
unallocated shares, credited to retained earnings
and are not considered earnings applicable to common stock.
Fully diluted computations assume full conversion of
each series of preferred stock into common stock,
the elimination of preferred dividend requirements,
and the recognition of the tax benefit on deductible ESOP
dividends applicable to allocated shares payable
based on the converted common dividend rate. Conversion
was assumed during the portion of each period that the
securities were outstanding.
5. The long-term debt is summarized as follows ($ millions):
March 31, December 31,
1997 1996
Revolving credit facilities $189 $168
Private placement debt 125 115
Other 32 30
TOTAL 346 313
Current maturities (45) (33)
Total long-term debt $301 $280
Debt agreements contain various restrictive covenants, including
a limitation on the payment of dividends and certain other
restricted payments. Under the most restrictive covenants,
$118 million of the March 31, 1997 retained earnings were
unrestricted for such purposes.
6. Statement of Cash Flows
The following is supplemental information relating to
the Statement of Cash Flows ($000's):
Three Months Ended March 31
1997 1996
Interest paid
(net of capitalized
interest in 1997) $2,538 $6,187
Income tax payments 10,981 3,310
7. Recent Accounting Standards
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," which is effective for financial
statements issued for the periods ending after December 15,
1997, including interim periods; earlier application is not
permitted. The Company has determined that adoption of the
standard will not have a material effect on the Company's
financial position or results of operations.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
BUSINESS SEGMENT INFORMATION
Selected information for business segments for the three
months ended March 31, 1997 and 1996 follows ($ millions):
General
Specialty Industrial
Products Equipment Corporate Total
1997
Net Sales $175.5 $235.7 $ 0.0 $411.1
Operating Income 20.7 22.4 (5.6) 37.5
Identifiable Assets 497.9 765.5 76.3 1,339.7
Depreciation
and Amortization 5.6 11.7 0.0 17.3
Capital Expenditures 5.9 15.6 0.0 21.5
1996
Net Sales $153.4 $212.9 $0.0 $366.3
Operating Income 18.9 19.2 (5.5) 32.6
Identifiable Assets 417.5 708.6 75.3 1,201.4
Depreciation
and Amortization 4.6 10.0 0.0 14.6
Capital Expenditures 3.6 5.8 0.0 9.4
RESULTS OF OPERATIONS
Consolidated Results.
Consolidated net sales increased to $411.1 million in 1997,
representing a 12.2% increase over 1996. The double digit growth
rate is attributed to strength in power tools, North American
enclosures and pumps, as well as acquisitions (Flex, Century,
SIATA, and Transrack). These more than offset continuing
economic weakness in Europe and adverse currency effects of the
strong U.S. dollar.
Operating income increased to $37.5 million in 1997, up 14.9%
over 1996, and operating income as a percent of sales improved
from 8.9% to 9.1%. Gross profit margins declined .7% in 1997
to 30.6% versus 31.3% in 1996. This is primarily due to
product mix. Selling, general and administrative expense (SG&A)
as a percent of sales was 21.5% in 1997 as compared to 22.4% in 1996,
thus offsetting the change in the gross profit margin.
Specialty Products Segment.
Specialty Products sales increased $22.1 million or 14.4%,
propelled by new product introductions, expanded distribution
in home center and hardware channels, and acquisitions. The
Tool businesses grew from acquisitions (Flex by Porter-Cable)
and continued expansion new channels, including Sears, and new
product introductions. In the Water products businesses,
slow economic conditions in the European markets of Fleck Controls
were balanced by gains at the Myers pump business. Myers' excellent
operating performance was supplemented by demand for pumps resulting
from flood conditions in the U.S. The SIATA acquisition (by Fleck
Controls) contributed to sales and income in 1997.
Operating income as a percent of sales decreased to 11.8% in 1997
from 12.3% in 1996 due to product mix and the continued economic
softness in Europe that affected both Flex and Fleck Controls.
General Industrial Equipment Segment.
General Industrial Equipment sales increased $22.8 million or 10.7%.
North American sales growth was strong enough to overcome weaker
European sales (especially as measured in a stronger U.S. Dollar)
in the enclosure and lubrication systems businesses in the first
quarter of 1997. Sales at Federal increased as a result of
introduction of new products and a reduction in ammunition industry
discounting. The acquisition of Century Manufacturing contributed
sales and income to the vehicle service equipment businesses in 1997.
Operating income as a percent of sales increased to 9.5% in 1997
from 9.0% in 1996 primarily as a result of higher profitability
at Federal.
FINANCIAL CONDITION
Cash flow from operating activities was negative $4.7 million in
1997 compared to negative $15.9 million in 1996. The improvement in
reducing cash used by operating activities in 1997 as compared to 1996
was a result of continued focus on managing working capital, principally
by controlling the increase in inventories in relation to sales growth.
Accounts receivable levels increased due to dating programs and the
addition of acquisition sales.
Capital expenditures were $21.5 million in 1997 as compared to
$9.4 million in 1996. The increase is primarily due to peak
construction efforts at Hoffman's new Mt. Sterling facility. The
Company had a negative free cash flow of $26.2 million in 1997
compared to negative $25.3 million in 1996. Free cash flow,
a measure of the internal financing of operational cash needs,
is defined as cash from operations less capital expenditures.
One of Pentair's primary financial goals is to maximize free
cash flow within the framework of supporting the operations of all
of its businesses.
Borrowings in the first quarter of 1997 financed some operating
needs and acquisition payments, along with capital expenditures.
The percentage of long-term debt to total capital was 34% at
March 31, 1997 compared to 33% at December 31, 1996.
OUTLOOK
In general, the Company is well-positioned to continue its
aggressive growth. Recent acquisitions are expected to continue to
contribute to sales and earnings growth. The strong emphasis on
product development and aggressive efforts to expand distribution
channels that helped during 1996 are expected to generate growth
in market share, sales and profits. In all subsidiaries, sales are
expected to grow as a result of new products and enhanced customer
service. Pentair also continues to search for strategic or synergistic
industrial acquisitions to complement its existing businesses.
The diversification of the industrial businesses in Pentair's
various markets has helped the company to maintain consistent growth
over the past few years. Also diversity in geography has helped the
company to weather the various economic patterns.
Capital outlays in 1997 are expected to be in the $70 million range.
Projects include completion of the manufacturing plant for Hoffman
Engineering in Mount Sterling, Kentucky, reconfiguration and expansion
of manufacturing facilities and new product development. The Company
believes that these capital expenditures are expected to be
financed out of its operating cash flows.
Looking ahead in 1997, the Company expects that cash from operating
activities should continue to provide the funds for capital investments,
dividends and small acquisitions. The Company has the capacity to
finance larger acquisitions while maintaining reasonable financial ratios.
The Company's future results of operations and the other forward
looking statements contained in the Outlook, in particular statements
about acquisitions, capital spending and sales growth, involve a number
of risks and uncertainties. In addition to the factors discussed
specifically above, among the other factors that could cause actual
results to differ materially include the following: business conditions
and the general economy; competitive factors, such as market acceptance
of new products, pricing, and the impact of competitive products; risk
of nonpayment of accounts receivable; manufacturing capacity; risks
associated with foreign operations; risks of inventory obsolescence
due to shifts in market demand; timing of product introductions;
and litigation regarding environmental issues. The actual results the
Company achieves may differ materially from those anticipated as a
result of these risks and uncertainties. Readers are encouraged to
carefully review and consider disclosures made by the Company in this
report and in the Company's Annual Report and other reports filed
from time to time with the Securities and Exchange Commission.
Future revenues, costs, margins, product mix and profits are all
influenced by a number of factors, as discussed above, however
Pentair believes that it has the products, facilities, personnel,
competitive advantage, and financial resources for continued
business success.
PART II - OTHER INFORMATION
ITEM 4 -Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Pentair, Inc. was held on
April 23, 1997, for the purpose of electing certain members to the
board of directors and approving the appointment of auditors. Proxies
for the meeting were solicited pursuant to Section 14(a) of the
Securities Exchange Act of 1934.
PROPOSAL 1
All of management's nominees for directors as listed in the proxy
statement were elected with the following vote:
Shares Shares Broker
Voted "For" "Withheld" Non-Votes
William J. Cadogan 32,361,635 366,624 0
Charles A. Haggerty 32,407,929 320,330 0
Harold V. Haverty 32,373,016 355,243 0
PROPOSAL 2
The appointment of Deloitte & Touche LLP as independent auditors
of the Company for 1997 was ratified by the following vote:
Shares
Shares Voted Shares Broker
Voted "For" "Against" "Abstaining" Non-Votes
32,598,122 52,361 77,776 0
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
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
/s/ Richard W. Ingman
Executive Vice President and
Chief Financial Officer
May 13, 1997
EXHIBIT INDEX
Exhibit Number
11 Calculation of Earnings per Common and
Common Equivalent Share
27 Financial Data Schedule