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 27, 1999
Commission File No. 001-11625
PENTAIR, INC.
(Exact name of Registrant as specified in its
charter)
Minnesota
41-0907434
(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)
(651) 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 27, 1999 was
42,604,349.
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)
First Quarter Ended
March 27, 1999 March 31, 1998
Net sales $470,493 $464,965
Operating costs:
Cost of goods sold 320,659 320,155
Selling, general
and administrative 103,396 100,921
Restructuring charge 38,000 0
Total operating costs 462,055 421,076
Operating Income 8,438 43,889
Interest expense - net 4,910 5,353
Income before income taxes 3,528 38,536
Provision for income taxes 1,288 14,827
Net income 2,240 23,709
Preferred dividend
requirements 0 1,184
Income available to
common shareholders $ 2,240 $ 22,525
Basic Earnings
per Common Share $0.05 $0.59
Diluted Earnings
per Common Share $0.05 $0.54
Weighted Average
Common Shares
Outstanding 42,225 38,291
Outstanding Assuming
Dilution 43,074 43,291
PENTAIR, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited) (in thousands)
March 27, December 31,
1999 1998
ASSETS
Current assets
Cash and cash equivalents $31,059 $32,039
Accounts and notes receivable 406,994 396,062
Inventories 282,311 278,581
Deferred income taxes 43,386 30,397
Other current assets 12,274 11,490
Total current assets 776,024 748,569
Property, Plant & Equipment - net 295,098 308,258
Goodwill 460,021 474,488
Other assets 56,476 23,351
TOTAL ASSETS $1,587,619 $1,554,666
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and notes payable $125,448 $155,962
Compensation and other
benefits accruals 61,904 69,893
Income taxes 18,404 7,111
Accrued product claims and warranties 29,029 29,475
Accrued rebates 8,994 19,682
Accrued restructuring charge 37,561 0
Accrued expenses and other liabilities 62,263 59,796
Current maturities of long-term debt 48,667 52,874
Total current liabilities 392,270 394,793
Long-term debt 312,544 288,026
Pensions and other retirement
compensation 60,412 60,564
Postretirement medical and other benefits 41,636 41,868
Reserves - insurance subsidiary 30,694 29,441
Other liabilities 46,433 30,162
Deferred income taxes 0 447
Commitments and contingencies
Preferred stock-at liquidation value 0 53,638
Common stock - par value, $.16 2/3 7,101 6,417
Additional paid-in capital 236,064 184,145
Accumulated other comprehensive income (4,062) (3,962)
Retained earnings 464,527 469,127
Total shareholders' equity 703,630 709,365
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,587,619 $1,554,666
See Notes to Consolidated Financial Statements.
PENTAIR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) (in thousands)
First Quarter
Ended
March 27 March 31
1999 1998
Cash provided by (used for)
Operating activities
Net income $2,240 $23,709
Adjustments to reconcile to cash flow:
Restructuring charge 38,000 0
Depreciation 14,188 13,922
Amortization 4,422 4,620
Deferred income taxes 930 187
Changes in assets and liabilities,
net of effects of
acquisitions/dispositions
Accounts receivable (24,853) (26,660)
Inventories (8,521) (6,034)
Accounts payable (27,963) (33,158)
Compensation and benefits (6,748) (9,765)
Income taxes (3,844) (4,967)
Pensions and other
retirement compensation 2,123 1,449
Reserves - insurance subsidiary 1,253 (1,835)
Other assets/liabilities - net (15,405) (10,876)
Cash used for operating activities (24,178) (49,408)
Investing activities
Capital expenditures (7,427) (4,570)
Payments for acquisition of businesses (33) (12)
Other 88 0
Cash used for investing activities (7,372) (4,582)
Financing activities
Borrowings 29,000 69,058
Debt payments (3,694) (21,438)
Unearned ESOP compensation decrease 0 975
Employee stock plans and other 3,404 1,175
Repurchase of stock (3,351) 0
Dividends paid (6,840) (6,920)
Cash provided by financing activities 18,519 42,850
Effects of currency exchange rate changes 12,051 2,354
(Decrease) in cash and cash equivalents (980) (8,786)
Cash and cash equivalents
- beginning of period 32,039 34,340
- end of period $31,059 $25,554
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, 1998, previously filed with
the Commission.
The results of operations for the three months ended
March 27, 1999 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 effective annual
federal, state and foreign income tax rates.
2. Subsequent Events
Web Tool & Manufacturing, Inc.
Pentair significantly increased its penetration of
fast-growing technology markets with the acquisition
of WEB Tool & Manufacturing, Inc. of Elk Grove
Village, Illinois which closed on April 2, 1999. WEB
designs, manufactures, and markets custom server
subracks and chassis for computer technology
applications. The purchase price was not disclosed,
but Pentair said that WEB is profitable and is
expected to be accretive to Pentair earnings in
1999. The cash transaction was financed through bank
borrowings.
Essef Corporation
On April 30, 1999, Pentair announced that it had
entered into a merger agreement to acquire Essef
Corporation (Nasdaq: ESSF) of Chardon, Ohio, for
$19.09 per share, payable in cash. Essef is a global
leader in the manufacture of composite water tanks,
pumps, filters, and other water equipment. The
merger excludes Essef's Anthony & Sylvan pool
construction business, which will be split off to
its shareholders at the time of closing of this
acquisition. The cash purchase price will be
approximately $312 million. Pentair will also assume
approximately $100 million of Essef debt. Pentair,
which will finance the acquisition through available
lines of credit, expects Essef to be accretive to
earnings over the first 12 months after acquisition.
The merger agreement, which was approved by the
boards of both Pentair and Essef, is subject to
Essef shareholder approval, regulatory approval
under the Hart-Scott-Rodino Act, and completion of
due diligence by Pentair. Essef's annual sales, for
the businesses being acquired, are estimated by
industry analysts to be approximately $350 million.
Completion of the transaction is currently targeted
for July 31, 1999.
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.
The following table reflects the calculation of
basic and diluted earnings per share.
(In thousands except per share amounts)
March 27, March 31,
1999 1998
Earnings per share
Income from continuing operations $2,240 $23,709
Preferred dividend requirements 0 1,184
Income available to common shareholders 2,240 22,525
Weighted average shares outstanding 42,225 38,291
Basic Earnings per Common Share $0.05 $0.59
Earnings per share - assuming dilution
Income available to common shareholders 2,240 22,525
Add back preferred dividend requirements
due to conversion into common shares 0 1,184
Elimination of tax benefit on preferred
ESOP dividend due to conversion into
common shares 0 (407)
Addition of tax benefit on ESOP dividend
assuming conversion to common shares -
at common dividend rate 0 235
Income available to common
shareholders assuming dilution 2,240 23,537
Weighted average shares outstanding 42,225 38,291
Dilutive impact of stock
options outstanding 298 496
Assumed conversion of preferred stock 551 4,504
Weighted average shares
and potentially dilutive shares outstanding 43,074 43,291
Diluted Earnings per Common Share $0.05 $0.54
4. Comprehensive Income
(in thousands)
First Quarter Ended
March 27, 1999 March 31, 1998
Net Income $2,240 $23,709
Other Comprehensive Income, net of tax:
Foreign Currency Translation Adjustments (100) (92)
Minimum Pension Liability Adjustment 0 0
Total Comprehensive Income $2,140 $23,617
5. Inventories
(In thousands) March 27,December 31,
1999 1998
Finished goods $160,893 $147,780
Work in process 66,474 64,421
Raw materials and supplies 54,944 66,380
Total $282,311 $278,581
6. Property Plant and Equipment
(In thousands) March 27,December 31,
1999 1998
Land and land improvements $15,040 $15,699
Buildings 129,292 131,989
Machinery and equipment 418,948 419,418
Construction in progress 25,706 25,883
Accumulated depreciation (293,888) (284,731)
Net Property Plant and Equipment$295,098 $308,258
7. The long-term debt is summarized as follows:
(in thousands)
March 27,December 31,
1999 1998
Revolving credit facilities$130,495 $103,479
Private placement debt 180,716 180,716
Other 50,000 56,705
TOTAL 361,211 340,900
Current maturities (48,667) (52,874)
Total long-term debt $312,544 $288,026
Debt agreements contain various restrictive
covenants, including a limitation on the payment of
dividends and certain other restricted payments.
Under the most restrictive covenants, $153 million
of the March 27, 1999 retained earnings were
unrestricted for such purposes.
8. Capital Stock
Preferred - authorized 0
outstanding - Series 1988 0
outstanding - Series 1990 0
Common - authorized 122,200,000
outstanding 42,604,349
Subsequent to year-end, both Series 1988 and Series
1990 preferred stock classes were redeemed and all
shares were converted to common stock on January 4,
1999 and January 15, 1999, respectively.
On December 14, 1998, the Company announced that the
Pentair board had authorized the Company to
repurchase on an annual basis up to 400,000 shares
of Pentair common stock. Any purchases would be
made periodically in the open market, by block
purchases or private transactions. The share
repurchase is intended to offset the dilution caused
by stock issuances under employee stock compensation
plans. As of March 27, 1999, the Company had
repurchased 95,500 shares under the authorization.
9. Supplemental Statement of Cash Flows Information
The following is supplemental information relating
to the Statement of Cash Flows ($000's):
First Quarter Ended
March 27, 1999 March 31, 1998
Interest paid $3,134 $4,947
Income tax payments 5,561 21,062
10. Reclassifications
Certain reclassifications have been made to prior
years' financial statements to conform to the
current year presentation.
11. Accounting Developments
In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company
must adopt this standard no later than January 1,
2000. The Company is reviewing the requirements of
this standard, which are quite complex. Although
the Company expects that this standard will not
materially affect its financial position and results
of operations, it has not yet determined the impact
of this standard on its financial statements.
12. Special Restructuring Charge
In the first quarter of 1999, the Company recorded a
special restructuring charge of $38.0 million ($24.1
million after-tax or $.56 per share). As shown
below, only $.4 million had been spent through March
27, 1999.
The restructuring plan comprises consolidation of
certain operations, overhead reductions, and
outsourcing of specific product lines in each of the
Company's three business segments. Pentair
anticipates a net reduction of approximately 700
jobs, less than seven percent of the company's
global workforce. Pentair's Electrical and
Electronic Enclosures Group already has initiated a
major overhead reduction in its European enclosure
businesses -- principally at the Schroff operation
in Straubenhardt, Germany -- and manufacturing
rationalization in its North American facilities.
This Group will absorb $16.7 million of the charge,
with anticipated savings of more than $4.0 million
in the remaining quarters of 1999 and more than $9.0
million in 2000. The Professional Tools and
Equipment Group will accelerate its already-strong
performance by consolidating distribution
operations, and by combining the headquarters of the
two power tool businesses, Delta and Porter-Cable.
In the service equipment businesses, products are
being outsourced to offshore manufacturers, and the
Jonesboro, Arkansas, manufacturing operation of
Lincoln Automotive will be closed. Restructuring
charges of $16.8 million in this Group will deliver
anticipated savings of more than $14.0 million in
2000. The Water and Fluid Technologies Group will
reduce the workforce at its Lincoln Industrial
business and outsource some product manufacturing.
Approximately 50 percent of the company's U.S.
manufacturing facility will be closed. This Group's
charge will be $4.5 million, with anticipated
savings of $0.4 million in late 1999 and more than
$2.0 million in the year 2000.
The components of the restructuring charge and
related reserve balances remaining at March 27, 1999
were (in millions):
Personnel Asset Exit
Costs Disposals Costs Total
1999 Restructuring Charge $27.5 $7.0 $3.5 $38.0
1999 Spending To Date (0.4) 0.0 0.0 (0.4)
Remaining Reserve $27.1 $7.0 $3.5 $37.6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
BUSINESS SEGMENT INFORMATION
Selected information for business segments for the
quarter ended March 27, 1999 and March 31, 1998
follows:
Segment Information ($000s):
1999 PTE WFT EEE Other Total
Net sales from
external customers $199,531 $127,609 $143,353 $ 0 $470,493
Intersegment net sales 1,014 898 0 (1,912) 0
Segment profit (loss)
- operating income 5,437 12,012 (4,350) (4,661) 8,438
Segment assets 484,106 508,090 509,762 85,661 1,587,619
1998
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 19,149 14,223 13,722 (3,205) 43,889
Segment assets 423,686 514,561 470,344 75,751 1,484,342
PTE = Professional Tools and Equipment
WFT = Water and Fluid Technologies
EEE = Electrical and Electronic Enclosures
Other = Corporate leadership expenses, captive
insurance company, intermediate financial companies,
charges that do not relate to current operations,
intercompany eliminations and all cash and cash
equivalents
RESULTS OF OPERATIONS
Consolidated Results.
Sales and income in the first quarter of 1999 were
affected by our adoption of a standard "4-4-5 week"
quarter for Pentair reporting. The first quarter
ended on March 27, 1999, with about 4 percent fewer
work days than the same period last year. Pentair's
fiscal year will continue to end on December 31.
Also, operating profits of the segments are now
reported net of all their administrative and related
costs. The prior year segment data was restated for
such reporting change.
Consolidated net sales increased to $470.5 million
in 1999, representing a 1.2% increase over 1998.
Operating income for 1999 includes a restructuring
charge of $38.0 million ($24.1 million after-tax or
$.56 per share). Excluding the restructuring
charge, operating income increased 5.8%, and
operating income as a percent of sales improved from
9.4% to 9.9%. Gross profit margins increased in
1999 to 31.8% versus 31.1% in 1998. This is
primarily due to internal cost reduction efforts.
Selling, general and administrative expense (SG&A)
as a percent of sales was 22.0% in 1999 as compared
to 21.7% in 1998. Net income excluding the
restructuring charge increased 11.2% over first
quarter 1998. Earnings per share excluding the
restructuring charge was $.61, an increase of 13.0%.
The tax rate reduction to 36.5 percent is consistent
with the pattern of reductions effected over the
last two years. It is anticipated that the tax rate
in the future quarters of 1999 will remain at
approximately 36.5 percent, before the effect of new
acquisitions. The Essef acquisition will add
approximately 1.4 percentage points to the full year
tax rate, due to non-deductible amortization of
goodwill.
Professional Tools and Equipment Segment
First quarter sales in the Professional Tools and
Equipment Group continued relatively strong, driven
by a good domestic economy and demand for newly
introduced products. A healthy economic outlook, an
array of new products, and continued distribution
expansion are expected to maintain high single-digit
sales growth in the second quarter of 1999.
Net sales increased to $200.5 million in 1999,
representing a 6.6% increase over 1998. Operating
income excluding the restructuring charge increased
to $22.2 million in 1999, up 16.0% over 1998, and
operating income as a percent of sales improved from
10.2% to 11.1%.
Housing starts are one critical factor driving
performance in the tools businesses. Although starts
in 1999 are expected to be down slightly from the
high levels we experienced in 1998, retail markets
will likely make up for slower construction markets.
Water and Fluid Technologies Segment
While 1998 was a year of consolidating new
operations, building efficiency, and outsourcing,
1999 will be a year for accelerating internal sales
growth. Working from the strong base established
last year, a step up in top line growth is expected
through entry into new markets and accelerated
product development.
Net sales decreased to $128.5 million in 1999,
representing a 5.2% decrease from 1998. Operating
income excluding the restructuring charge increased
to $16.5 million in 1999, up 15.9% over 1998, and
operating income as a percent of sales improved from
10.5% to 12.8%. Profits in the Group benefited from
continued productivity improvements and cost
reductions, while the diminution in overall sales is
largely attributable to the deliberate reduction in
the sales of the formerly unprofitable Layne &
Bowler pump line, begun in the second quarter of
1998.
First quarter orders rose strongly in the pump and
control valve businesses. This level of order
intake, driven in part by the recent introduction of
new products, is expected to generate second quarter
sales growth in the mid-to-high single digits for
this segment.
Electrical and Electronic Enclosures Segment
In the Electrical and Electronic Enclosures Group,
reduced capital spending in key industrial and
electronic markets, and continued weakness in
European enclosure markets, resulted in first
quarter sales below those of the same period last
year. Net sales decreased to $143.4 million in 1999,
representing a 1.4% decrease from 1998.
In North American markets, a high level of quoting
activity late in the first quarter, much of which
originated from the automotive industry, may
indicate a return to higher industrial capital
spending for the second quarter of 1999. Although
European markets are expected to continue to be
weak, Pentair is improving its competitive position
by implementing overhead reductions in its
underperforming German enclosures operation. Initial
savings from that reduction are expected in the
third quarter of 1999.
Operating income excluding the restructuring charge
decreased to $12.4 million in 1999, down 9.7% from
1998, as operating income as a percent of sales
declined from 9.4% to 8.7%.
In summary, the Company is encouraged by what is
happening in the North American market and organic
sales are expected to grow in the mid-to-high single
digits in the second quarter of 1999. In Europe,
necessary actions are being taken to structure the
business appropriately for the conditions there, and
there is cautious optimism about sales growth in
that market.
SPECIAL RESTRUCTURING CHARGE
In the first quarter of 1999, the Company recorded a
special restructuring charge of $38.0 million ($24.1
million after-tax or $.56 per share).
The restructuring plan comprises consolidation of
certain operations, overhead reductions, and
outsourcing of specific product lines in each of the
Company's three business segments. Pentair
anticipates a net reduction of approximately 700
jobs, less than seven percent of the company's
global workforce. Pentair's Electrical and
Electronic Enclosures Group already has initiated a
major overhead reduction in its European enclosure
businesses -- principally at the Schroff operation
in Straubenhardt, Germany -- and manufacturing
rationalization in its North American facilities.
This Group will absorb $16.7 million of the charge,
with anticipated savings of more than $4.0 million
in the remaining quarters of 1999 and more than $9.0
million in 2000. The Professional Tools and
Equipment Group will accelerate its already-strong
performance by consolidating distribution
operations, and by combining the headquarters of the
two power tool businesses, Delta and Porter-Cable.
In the service equipment businesses, products are
being outsourced to offshore manufacturers, and the
Jonesboro, Arkansas, manufacturing operation of
Lincoln Automotive will be closed. Restructuring
charges of $16.8 million in this Group will deliver
anticipated savings of more than $14.0 million in
2000. The Water and Fluid Technologies Group will
reduce the workforce at its Lincoln Industrial
business and outsource some product manufacturing.
Approximately 50 percent of Lincoln's U.S.
manufacturing facility will be closed. This Group's
charge will be $4.5 million, with anticipated
savings of $0.4 million in late 1999 and more than
$2.0 million in the year 2000.
The components of the restructuring charge and
related reserve balances remaining at March 27, 1999
were (in millions):
Personnel Asset Exit
Costs Disposals Costs Total
1999 Restructuring Charge $27.5 $7.0 $3.5 $38.0
1999 Spending To Date (0.4) 0.0 0.0 (0.4)
Remaining Reserve $27.1 $7.0 $3.5 $37.6
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was negative
$24.2 million in 1999 compared to negative $49.4
million in 1998. The Company believes that cash
flow from operations will continue to exceed its
needs for capital programs, smaller acquisitions and
dividends during the year.
Capital expenditures were $7.4 million in 1999
compared to $4.6 million in 1998. The Company had a
negative free cash flow of $31.6 million in 1999
compared to a negative $54.0 million in 1998. Free
cash flow, a measure of the internal financing of
operational cash needs, is defined as cash from
operations less capital expenditures. The Company is
targeting continued growth in free cash flow as a
percent of sales through improved profitability and
working capital ratios. Historically, free cash
flow is negative during the first few months of each
fiscal year and positive thereafter.
Borrowings in the first quarter of 1999 financed
operating needs and capital expenditures. The
percentage of long-term debt to total capital was
31% at March 27, 1999 compared to 29% at December
31, 1998. The Company has sufficient financing
capacity to continue its current acquisition program
and to support its ongoing stock repurchase program.
The stock repurchase is intended to offset the
dilution caused by stock issuances under employee
stock compensation plans. Significant acquisitions
(above approximately $250 million), such as Essef,
require increased credit facilities. The Company
believes it can obtain adequate financing for
acquisitions.
OUTLOOK
While the outlook for each of its segments in 1999
is encouraging, Pentair believes it must improve its
management of total capital and thereby increase
free cash flow.
Pentair's top line growth in the coming months will
be driven by new product introductions in the tools
and water businesses, and expanded distribution and
improved productivity in the enclosures businesses.
Improved order levels and stronger backlogs in our
tool and water segments, combined with several
growth initiatives in place across the organization,
should accelerate revenues in the second quarter and
beyond. Meanwhile, the benefits of the $60 million
cost savings project and our restructuring
activities will reinforce the profitability of all
the operating groups.
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 our cost-reduction
activities, are expected to generate consistent and
attractive results for Pentair shareholders in 1999
and beyond.
YEAR 2000
Background
The Year 2000 issue is the result of computer
programs and embedded computer chips originally
having been designed and developed using two digits
rather than four digits to define the applicable
year. Any of the Company's internal use computer
programs and hardware as well as its products that
are date sensitive may recognize a date using "00"
as the Year 1900 rather than the Year 2000. This
could result in a system failure or miscalculations
causing disruptions of operations, including, among
other things, a temporary inability to process
transactions or engage in normal business activities
for both the Company and its customers who rely on
its products.
State of Readiness
The Company's businesses have had "Y2K Project"
programs in place since as long ago as 1995 to
address Year 2000 problems in critical business
areas for information management systems, non-
information systems with embedded technology,
suppliers and customers. The Company has largely
completed its review and compliance planning for its
critical information systems (IS). Certain of the
Company's larger businesses have completed the
implementation of required actions for compliance;
the balance of the business units are in the process
of implementation. In many cases, implementation
includes installation of new Enterprise Resource
Planning ("ERP") systems designed to enable these
businesses to operate more efficiently and to
provide better management reporting. Pentair
anticipates that implementation and testing phases
will be substantially complete throughout the
company by the third quarter of 1999.
The Company is also in the process of reviewing and
replacing, where necessary, its other automated
communications and manufacturing systems. The
Company estimates that it will complete this phase
by the second quarter of 1999.
None of the Company's products are believed to be
date dependent.
The Company has close working relationships with a
large number of suppliers and customers. These
include, among others, utility and telecommunication
providers, raw materials and components suppliers,
and financial institutions, managed care
organizations and large retail establishments. The
Company has been reviewing, and continues to review,
with its critical suppliers and major customers the
status of their Year 2000 readiness. The Company's
business units have established plans for ongoing
monitoring of suppliers during 1999.
Costs to Address the Year 2000 Issue
As a result of the numerous different IS systems
used by businesses that the Company has acquired in
recent years and also as a result of changing
business requirements, the Company has an ongoing
development plan with scheduled replacements of
hardware and software occurring in 1999 throughout
the organization. Year 2000 compliance is a by-
product of our development plan.
The estimated cost associated with the total IS
development plan over the five-year period from 1995
to 1999 is anticipated to be approximately $55
million, which is approximately 80% complete. The
estimated cost specifically attributable to Year
2000 compliance, apart from other IS development
activities, amounts to approximately $10 million, of
which $8 million had been spent through December 31,
1998. Pentair has not deferred any significant IS
projects as a result of the implementation of the
Y2K Project.
Risks Represented by the Year 2000 Issue
Pentair believes that completed and planned
modifications and conversions of its internal
systems and equipment will allow it to be Year 2000
compliant in a timely manner. However, there can be
no assurance that the Company's systems or
equipment, nor those of third parties on which
Pentair relies, will be Year 2000 compliant , in all
material respects, in a timely manner. Nor can
Pentair give any assurance that its own or third
parties' contingency plans will mitigate the effects
of any noncompliance. Pentair believes that non-
compliance with Year 2000 issues would likely result
in some reduction of the Company's operations for
the first part of the year 2000, which could have a
material adverse effect on the Company's businesses
or their financial condition. Based on its
assessments to date, Pentair believes it will not
experience any material disruption as a result of
Y2K issues in internal manufacturing processes,
information processing, interfacing with major
customers or processing orders and billing.
However, if critical utility service providers
experience difficulties, which affect Pentair, or
its business units, a shutdown of some or all
operations at individual facilities could occur.
Pentair is developing contingency plans to provide
for continuity of processing (in the event of a Y2K
disruption) which will be based on the outcome of
its Y2K compliance reviews and the results of third
party verification efforts. Assuming no major
disruption in service from utility companies or
similar critical third-party providers, Pentair
believes that it will be able to manage its Year
2000 transition without material effect on Pentair's
results of operations or financial condition.
The most reasonably likely worst case scenario of
failure by Pentair or its suppliers or customers to
resolve Year 2000 issues would be a temporary
slowdown or cessation of manufacturing operations at
one or more of Pentair's facilities, and/or a
temporary inability on the part of Pentair to timely
process orders and to deliver finished products to
customers. Delays in meeting customer orders would
reduce or delay sales and affect the timing of
billings to and payments received from customers and
could result in complaints, charges or claims, or
temporarily increasing working capital.
Contingency Plans
Pentair's businesses are in the process of
developing Year 2000 contingency plans, based on
their review of their internal and external
compliance progress. A full review will be done
following the end of the second quarter of 1999 to
assess Pentair's vulnerability to internal non-
compliance and potential third-party failures and
actions which can be taken to reduce unfavorable
impacts. Possible plans may include arranging
alternative or additional suppliers and service
providers, increasing inventory levels, providing
additional back-up systems and replacing or
upgrading equipment and software.
NOTIFICATION REGARDING FORWARD-LOOKING INFORMATION
It should be noted that certain statements herein
which are not historical facts, including without
limitation those regarding 1) the timeliness of
product introductions and deliveries; 2)
expectations regarding market growth and
developments; 3) expectations for growth and
profitability; and 4) statements preceded by
"believes", "anticipates", "expects", "estimates" or
similar expressions are forward-looking statements.
Because such statements involve risks and
uncertainties, actual results may differ materially
from the results currently expected by the Company.
Factors that could cause such differences include,
but are not limited to, 1) general economic
conditions, such as the rate of economic growth in
the Company's principal geographic markets or
fluctuations in exchange rates; 2) industry
conditions, such as the strength of product demand,
the intensity of competition, pricing pressures, the
acceptability of new product introductions, the
introduction of new products by competitors, changes
in technology or the ability of the Company to
source components from third parties without
interruption and at reasonable prices and the
financial condition of the Company's customers; 3)
operating factors, such as continued improvement in
manufacturing activities and the achievement of
related efficiencies therein, and inventory risks
due to shifts in market demand; and, 4) the
expectations, uncertainties, costs and risks
associated with Year 2000 issues, such as the
Company's expectations as to when it will complete
the remediation and testing phases of its Year 2000
programs as well as contingency plans; its estimated
costs of achieving Year 2000 readiness; and the
Company's belief that its internal systems and
equipment will be compliant in a timely manner.
Factors that may cause these differences include,
but are not limited to, the availability of
qualified personnel and other IT resources; the
ability to identify and remediate all date-sensitive
computer coding or the ability to identify and
replace all embedded computer chips in affected
systems or equipment; and the actions of
governmental agencies or other third parties with
respect to Year 2000 problems.
The Company undertakes no obligation to revise any
forward-looking statements in order to reflect
events or circumstances that may arise after the
date hereof. Readers are urged to carefully review
and consider the various disclosures made by the
Company in this report and in 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 28, 1999, 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 votes.
Shares Shares Broker
Voted For Withheld Non-Votes
Winslow H. Buxton32,464,778294,129 0
Barbara B. Grogan32,427,686331,221 0
Stuart Maitland32,471,620287,287 0
Augusto Meozzi32,345,416 413,491 0
Joseph R. Collins32,458,713300,194 0
PROPOSAL 2
The appointment of Deloitte & Touche LLP as
independent auditors of the Company for 1999 was
ratified with the following vote.
Shares
Shares Voted Shares Broker
Voted For Against Abstaining Non-Votes
32,565,699 92,231 100,977 0
PROPOSAL 3
To amend the Restated Articles of Incorporation
increasing the total number of shares authorized to
be issued from 125,000,000 to 250,000,000.
PROPOSAL 3 PASSED.
Shares
Shares Voted Shares Broker
Voted For Against Abstaining Non-Votes
29,831,342 2,776,978 150,587 0
PROPOSAL 4
To amend the Restated Articles of Incorporation to
increase from 15,000,000 to 30,000,000 the number of
authorized shares designated as preferred shares.
PROPOSAL 4 DID NOT PASS.
Shares
Shares Voted Shares Broker
Voted For Against Abstaining Non-Votes
17,027,720 13,272,044 191,760 2,267,382
PROPOSAL 5
To amend the Restated Articles of Incorporation to
eliminate all currently authorized series of
preferred shares of the Company. PROPOSAL 5 PASSED.
Shares
Shares Voted Shares Broker
Voted For Against Abstaining Non-Votes
29,238,861 1,007,373 245,290 2,267,382
ITEM 5 - Other Information
On April 30, 1999, Pentair announced that it had
entered into a merger agreement to acquire Essef
Corporation (Nasdaq: ESSF) of Chardon, Ohio, for
$19.09 per share, payable in cash. Essef is a global
leader in the manufacture of composite water tanks,
pumps, filters, and other water equipment. The cash
purchase price will be approximately $312 million.
Pentair will also assume approximately $100 million
of Essef debt. Pentair, which will finance the
acquisition through available lines of credit,
expects Essef to be accretive to earnings over the
first 12 months after acquisition. The merger
agreement, which was approved by the boards of both
Pentair and Essef, is subject to Essef shareholder
approval, regulatory approval under the Hart-Scott-
Rodino Act, and completion of due diligence by
Pentair. Essef's 1999 sales are estimated by
industry analysts to be approximately $350 million,
exclusive of its Anthony & Sylvan pool construction
business, which will be split-off by Essef to its
current shareholders at the closing of the
acquisition. Completion of the transaction is
targeted for July 31, 1999.
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
3.1 Restated Articles of Incorporation as amended through April 28, 1999.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the first
quarter of 1999.
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 11, 1999