UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission File No. 001-11625
PENTAIR, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-907434
(State of incorporation) (IRS Employer 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 March 31, 1998 was 38,370,265.
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 Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 4. Results of Votes of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature Page
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PENTAIR, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
($ expressed in thousands except per share amounts)
Quarter Ended March 31
1998 1997
Net sales $ 464,965 $ 411,139
Operating costs:
Cost of goods sold 320,155 285,188
Selling, general and administrative 100,921 88,472
Total operating costs 421,076 373,660
Operating Income 43,889 37,479
Interest expense - net 5,353 5,118
Income before income taxes 38,536 32,361
Provision for income taxes 14,827 12,944
Net income 23,709 19,417
Preferred dividend requirements 1,184 1,218
Income available to common shareholders $ 22,525 $ 18,199
Basic Earnings per Common Share $0.59 $0.48
Diluted Earnings per Common Share $0.54 $0.45
Weighted Average Common Shares
Outstanding 38,291 37,843
Outstanding Assuming Dilution 43,291 42,940
PENTAIR, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited) (in thousands)
March 31, December 31,
1998 1997
ASSETS
Current assets
Cash and cash equivalents $ 25,554 $ 34,340
Accounts and notes receivable 395,305 369,220
Inventories 271,750 266,409
Other current assets 36,316 35,401
Total current assets 728,925 705,370
Property, Plant & Equipment - net 283,332 293,554
Goodwill 423,248 429,279
Other assets 48,837 44,659
TOTAL ASSETS $1,484,342 $1,472,862
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and notes payable $ 119,905 $ 152,592
Compensation and other benefits accruals 60,945 70,758
Income taxes 10,326 15,158
Accrued product claims and warranties 34,455 35,114
Accrued rebates 10,704 21,658
Accrued expenses and other liabilities 66,950 62,194
Current maturities of long-term debt 29,108 34,703
Total current liabilities 332,393 392,177
Long-term debt 348,320 294,549
Pensions and other retirement compensation 53,316 52,470
Postretirement medical and other benefits 44,600 45,135
Reserves - insurance subsidiary 30,478 32,313
Other liabilities 25,826 25,656
Commitments and contingencies
Preferred stock - at liquidation value 58,765 59,696
Unearned compensation relating to ESOP (5,340) (6,315)
Common stock - par value, $.16 2/3 6,396 6,365
Additional paid-in capital 188,456 186,486
Accumulated other comprehensive income (5,177) (5,085)
Retained earnings 406,309 389,415
Total shareholders' equity 649,409 630,562
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,484,342 $1,472,862
See Notes to Consolidated Financial Statements.
PENTAIR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) (in thousands)
Three Months Ended
March 31
1998 1997
Cash provided by (used for)
Operating activities
Net income $ 23,709 $ 19,417
Adjustments to reconcile to cash flow:
Depreciation 13,922 14,194
Amortization 4,620 3,141
Deferred income taxes 187 680
Changes in assets and liabilities,
net of effects of acquisitions/dispositions
Accounts receivable (26,660) (25,869)
Inventories (6,034) (14,090)
Accounts payable (33,158) 3,102
Compensation and benefits (9,765) (3,674)
Income taxes (4,967) (2,088)
Pensions and other
retirement compensation 1,449 1,884
Reserves - insurance subsidiary (1,835) 1,167
Other assets/liabilities - net (10,876) (2,538)
Cash used for operating activities (49,408) (4,674)
Investing activities
Capital expenditures (4,570) (21,540)
Payments for acquisition of businesses (12) (16,391)
Other 0 (1,434)
Cash used for investing activities (4,582) (39,365)
Financing activities
Borrowings 69,058 42,252
Debt payments (21,438) (3,959)
Unearned ESOP compensation decrease 975 990
Employee stock plans and other 1,175 2,825
Dividends paid (6,920) (6,325)
Cash provided by financing activities 42,850 35,783
Effects of currency exchange rate changes 2,354 2,553
(Decrease) in cash and cash equivalents (8,786) (5,703)
Cash and cash equivalents
- beginning of period 34,340 22,973
- end of period $25,554 $17,270
See Notes to Consolidated Financial Statements.
<PAGE
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, 1997, previously filed with the Commission.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the operating results to be expected for the full
year.
Income tax provisions for interim periods are based on the current best
estimate of the annual effective federal, state and foreign income tax rates.
2. Adoption of New Accounting Standards
In 1997, the Company adopted the following new accounting standards: Statement
of Financial Accounting Standard (FAS) No. 128, "Earnings per Share", Statement
of Financial Accounting Standard (FAS) No. 130 "Reporting Comprehensive
Income", and Statement of Financial Accounting Standard (FAS) No. 131
"Disclosures about Segments of an Enterprise and Related Information".
FAS 128 requires the reporting of earnings per share (EPS) in two forms:
basic EPS and diluted EPS. Pentair has historically reported its EPS on a
fully diluted basis, which reflects the dilution resulting from employee
stock options and convertible securities related to employee benefit plans,
and is directly comparable to the new diluted EPS reported. See also Note 3.
FAS 130 establishes standards for the reporting of comprehensive income and its
components. Comprehensive income is defined as the change in equity during the
period from transactions and other events and circumstances from non-owner
sources. See also Note 4.
FAS 131 requires the Company to report information about its operating segments
based upon how the Company manages its operations. The Company manages its
businesses in three distinct operating groups and has realigned its external
reportable segments to conform with these internal management structures. The
three reportable segments -- Professional Tools and Equipment, Water and Fluid
Technologies, and Electrical and Electronic Enclosures - replace the Specialty
Products and General Industrial Equipment segments which had been reported
since 1991.
Prior year financial statements have been restated accordingly.
3. Earnings per common share
Basic earnings per common share is computed by dividing net income, after
deducting preferred stock dividends, by the average common shares outstanding
during the period.
Diluted earnings per common share is computed by dividing net income after
adjusting the tax benefits on deductible ESOP dividends by the average common
shares outstanding plus the incremental shares that would have been outstanding
upon the assumed exercise of dilutive stock options and upon the assumed
conversion of each series preferred stock. The tax benefits applicable to
preferred dividends paid to ESOPs are recorded in the following ways: for
allocated shares, they are credited to income tax expense and included in
the earnings per share calculation; for unallocated shares, they are credited
to retained earnings and excluded from the earnings per share calculation.
Effective December 15, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (FAS No. 128).
Earnings per share amounts presented for 1997 have been restated for the
adoption of FAS No. 128. The following table reflects the calculation of
basic and diluted earnings per share.
(In thousands except per share amounts)
March 31
1998 1997
Earnings per share
Income from continuing operations $23,709 $19,417
Preferred dividend requirements 1,184 1,218
Income available to common shareholders 22,525 18,199
Weighted average shares outstanding 38,291 37,843
Basic Earnings per Common Share $0.59 $0.48
Earnings per share - assuming dilution
Income available to common shareholders 22,525 18,199
Add back preferred dividend requirements
due to conversion into common shares 1,184 1,218
Elimination of tax benefit on preferred
ESOP dividend due to conversion into
common shares (407) (372)
Addition of tax benefit on ESOP dividend
assuming conversion to common shares -
at common dividend rate 235 194
Income available to common
shareholders assuming dilution 23,537 19,239
Weighted average shares outstanding 38,291 37,843
Dilutive impact of stock options outstanding 496 404
Assumed conversion of preferred stock 4,504 4,693
Weighted average shares
and potentially dilutive shares outstanding 43,291 42,940
Diluted Earnings per Common Share $0.54 $0.45
4. Comprehensive Income (in thousands)
Quarter ended March 31
1998 1997
Total Comprehensive Income 23,617 13,258
5. Inventories
(In thousands)
March 31, December 31,
1998 1997
Finished goods $146,582 $131,847
Work in process 58,398 58,047
Raw materials and supplies 66,770 76,515
Total $271,750 $266,409
6. Property Plant and Equipment
(In thousands)
March 31, December 31,
1998 1997
Land and land improvements $ 14,254 $ 14,278
Buildings 119,944 119,996
Machinery and equipment 378,609 374,967
Construction in progress 18,087 19,113
Accumulated depreciation (247,562) (234,800)
Net Property Plant and Equipment $283,332 $293,554
7. The long-term debt is summarized
as follows (in thousands):
March 31, December 31,
1998 1997
Revolving credit facilities $161,868 $102,119
Private placement debt 197,858 197,858
Other 17,702 29,275
TOTAL 377,428 329,252
Current maturities (29,108) (34,703)
Total long-term debt $348,320 $294,549
Debt agreements contain various restrictive covenants, including a limitation
on the payment of dividends and certain other restricted payments. Under the
most restrictive covenants, $143 million of the March 31, 1998 retained
earnings were unrestricted for such purposes.
8. Capital Stock
Preferred - authorized 2,800,000
outstanding - Series 1988 111,267
outstanding - Series 1990 1,574,836
Common - authorized 122,200,000
outstanding 38,370,265
On December 29, 1997, the Company announced that the Pentair board had
authorized the repurchase within the next 12 months of up to 350,000 shares of
Pentair common stock. Any purchases would be made periodically in the open
market, by block purchases or private transactions. The share repurchase is
intended to offset the dilution caused by stock issuances under employee stock
compensation plans.
The Company repurchased 25,000 shares on December 30 and 31, 1997, which
transactions settled in January 1998.
9. Supplemental Statement of Cash Flows Information
The following is supplemental information relating to the Statement of
Cash Flows ($000's):
Three Months Ended March 31
1998 1997
Interest paid $ 4,947 $ 2,538
Income tax payments 21,062 10,981
10. Reclassifications
Certain reclassifications have been made to prior years' financial
statements to conform to the current year presentation.
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, 1998 and 1997 follows:
Segment Information ($000s):
1998 PTE WFT EEE Other Total
Net sales from
external customers $185,668 $133,875 $145,422 $ 0 $464,965
Intersegment net sales 2,521 1,751 0 (4,272) 0
Segment profit (loss)
- operating income 21,061 15,578 15,221 (7,971) 43,889
Segment assets 423,686 514,561 470,344 75,761 1,484,342
1997
Net sales from
external customers $160,888 $ 79,310 $141,735 $29,206 $ 411,139
Intersegment net sales 2,436 1,845 0 (4,281) 0
Segment profit (loss)
- operating income 15,811 9,972 14,786 (3,091) 37,478
Segment assets 370,574 284,359 496,924 187,844 1,339,701
PTE = Professional Tools and Equipment
WFT = Water and Fluid Technologies
EEE = Electrical and Electronic Enclosures
Other = Corporate expenses, captive insurance company, intermediate
financial companies, charges that do not relate to current
operations, divested operations (Federal Cartridge 1997),
intercompany eliminations, and all cash and cash equivalents
RESULTS OF OPERATIONS
Consolidated Results.
Consolidated net sales increased to $465.0 million in 1998, representing
a 13.1% increase over 1997; taking the divestiture of Federal Cartridge into
account, the sales increase exceeded 20%. The double digit growth rate is
attributed to excellent performance in the tools and equipment businesses
and acquisitions (primarily the pump businesses purchased from General Signal).
Operating income increased to $43.9 million in 1998, up 17.1% over 1997, and
operating income as a percent of sales improved from 9.1% to 9.4%. Gross
profit margins increased in 1998 to 31.1% versus 30.6% in 1997. This is
primarily due to internal cost reduction efforts. Selling, general and
administrative expense (SG&A) as a percent of sales was 21.7% in 1998
as compared to 21.5% in 1997. Net income increased 22.1% over first
quarter 1997. Earnings per share of $.54 was an increase of 20.0%.
The first quarter of 1998 is Pentair's 18th consecutive quarter in which
earnings per share improved over the same quarter in prior years.
The effect of foreign currency traslation for the first quarter of 1998 on
Pentair's operations has been unfavorable, but except for the impact on
Electrical and Electronic Enclosures sales, has not been material.
Professional Tools and Equipment Segment
This segment continued to perform extremely well as a result of high consumer
confidence levels and several new tool introductions, such as Porter-Cable's
cordless nailer, called the Bammer. As a result, a strong backlog has been
built going into the second quarter. In the equipment businesses, the benefits
of recent acquisitions and closer cooperation among these units are beginning
to be reflected in improved results.
Net sales increased to $188.2 million in 1998, representing a 15.2% increase
over 1997. Operating income increased to $21.1 million in 1998, up 33.2%
over 1997, and operating income as a percent of sales improved from 9.7%
to 11.2%.
Water and Fluid Technologies Segment
In this segment, efforts are continuing to focus on bringing the pump businesses
we acquired from General Signal up to our performance standards. Great
progress has been made in rationalizing the Pump Group product line,
streamlining manufacturing operations, and taking advantage of joint
purchasing opportunities among all the pump businesses. Similarly, the
results of efforts to improve production capacity in the water conditioning
control valve business favorably impacted the first quarter. As for overseas
markets, European orders have been particularly strong this quarter.
Net sales increased to $135.6 million in 1998, representing a 67.1% increase
over 1997. Excluding the effects of acquisitions, sales grew modestly over
1998. Operating income increased to $15.6 million in 1998, up 56.2% over
1997, but operating income as a percent of sales declined from 12.3% to 11.5%.
This decrease is due to lower initial margins from newly acquired businesses.
Electrical and Electronic Enclosures Segment
Sales in North American enclosure markets were level in the first quarter
compared to the same period last year. The European enclosure situation
is improving and order intake has been stronger in 1998. European enclosure
sales in the first quarter of this year increased by double digits in
local currency, but only single digit growth when converted to US dollars
due to continued unfavorable currency translation.
Net sales increased to $145.4 million in 1998, representing a 2.6% increase
over 1997. Operating income increased to $15.2 million in 1998, up 2.9%
over 1997, and operating income as a percent of sales improved from 10.4%
to 10.5%.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was negative $49.4 million in 1998
compared to negative $4.7 million in 1997, including a one-time $17
million tax payment associated with the Federal Cartridge divestiture.
Capital expenditures were $4.6 million in 1998 compared to $21.5 million
in 1997. The Company had a negative free cash flow of $54.0 million in 1998
compared to a negative $26.2 million in 1997. 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. Historically, free cash flow is negative
during the first few months of each fiscal year and positive thereafter.
Borrowings in the first quarter of 1998 financed approximately half of the
operating needs and all capital expenditures. The percentage of long-term
debt to total capital was 35% at March 31, 1998 compared to 32% at December
31, 1997.
OUTLOOK
While the outlook for each of its segments in 1998 is encouraging, Pentair
believes it must improve its performance on a company-wide basis in managing
total capital and generating free cash flow. The Company has adopted a plan
to reduce the costs of operations over the next two years and to maintain those
reductions in future years through improvements in productivity and delivery
of corporate services.
In addition, Pentair continues to look for synergistic acquisitions in each of
its business segments, in line with its pattern over the past three years.
Pentair will continue to pursue complementary acquisitions to fold into
current operations, but will also carefully review larger targets which would
significantly expand its current segments. Other acquisitions are possible,
but only if they present Pentair extraordinary opportunities.
Acquisition and internal growth initiatives, coupled with the savings
anticipated from cost reduction activities, should generate consistent and
attractive results for Pentair shareholders in 1998 and beyond.
NOTIFICATION REGARDING FORWARD-LOOKING INFORMATION
Except for historical information contained herein, certain statements are
forward-looking statements that involve risks and uncertainties, including,
but not limited to, the effect of economic conditions, product demand
and market acceptance risks, customer mix, the impact of competitive products
and pricing, product development, commercialization and technological
difficulties, capacity and supply constraints or difficulties, production
efficiency improvement opportunities, the results of financing efforts,
actual purchases under agreements and the effect of the Company's accounting
policies. The actual results that the Company achieves may differ materially
from these forward-looking statements due to such risks and uncertainties.
The Company undertakes no obligation to revise any forward-looking statements
in order to reflect events or circumstances that may arise after the date of
this report. Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and in the Company's other
filings with the Securities and Exchange Commission from time to time that
advise interested parties of the risks and uncertainties that may affect the
Company's financial condition and results of operations.
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 22, 1998, for the purpose of electing certain members to the
board of directors, approving the appointment of auditors, and voting
on the proposals described below. 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
Quentin J. Hietpas 33,860,588 360,377 0
Richard M. Schulze 33,882,848 338,117 0
Karen E. Welke 33,095,374 1,125,592 0
PROPOSAL 2
The appointment of Deloitte & Touche LLP as independent auditors of
the Company for 1998 was ratified by the following vote:
Shares Shares
Voted Voted Shares Broker
For Against Abstaining Non-Votes
34,074,007 44,064 102,895 0
ITEM 5 - Other Information
On April 30, 1998, Century Manufacturing acquired the assets of T-Tech
Industries, which designs, manufactures, and markets automatic transmission
fluid exchanger systems and accessories. The company is profitable and
results will be accretive to Pentair's 1998 earnings.
On May 5, 1998, the board of directors of Pentair announced its intention
to make a cash offer for the entire issued and to-be-issued share capital
of VERO Group plc, of Southampton, England, a supplier of racks, subracks,
and enclosures to the general electronics, networking and telecommunications
industries. Following a subsequent increased offer by a competing bidder,
Pentair declined to increase its offer, which it considered to have been
fully-priced.
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
27 Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K was filed on January 13, 1998 regarding the Company's
announced stock repurchase plan.
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 15, 1998