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 26, 1999
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 of (IRS Employer Identification No.)
Incorporation or organization)
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
June 26, 1999 was 42,677,375.
1
PENTAIR, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Shareholders' Equity
Consolidated Statements 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 6. Exhibits and Reports on Form 8-K
Signature Page
2
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 26 June 30 June 26 June 30
1999 1998 1999 1998
----------- ----------- ----------- ----------
Net sales $ 977,718 $ 936,755 $ 507,224 $ 471,790
Operating costs:
Cost of goods sold 667,874 645,575 347,215 325,420
Selling, general and
administrative 211,780 202,593 108,384 101,672
Restructuring charge 38,000 0 0 0
----------- ----------- ----------- ----------
Total operating costs 917,654 848,168 455,599 427,092
Operating Income 60,064 88,587 51,625 44,698
Interest expense - net 11,994 10,969 7,082 5,616
----------- ----------- ----------- ----------
Income before income taxes 48,070 77,618 44,543 39,082
Provision for income taxes 17,545 29,495 16,258 14,668
----------- ----------- ----------- ----------
Net income 30,525 48,123 28,285 24,414
Preferred dividend
Requirements 0 2,362 0 1,178
----------- ----------- ----------- ----------
Income available to
common shareholders $ 30,525 $ 45,761 $ 28,285 $ 23,236
=========== =========== =========== ==========
Earnings per Common Share:
Basic $0.72 $1.19 $0.67 $0.60
Diluted $0.71 $1.10 $0.66 $0.56
Weighted Average Common Shares
Outstanding 42,433 38,408 42,642 38,525
Outstanding Assuming Dilution 43,056 43,336 43,038 43,381
See Notes to Consolidated Financial Statements.
3
PENTAIR, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
June 26, December 31,
1999 1998
ASSETS
Current assets
Cash and cash equivalents $ 41,633 $ 32,039
Accounts and notes receivable 419,605 396,062
Inventories 292,834 278,581
Deferred income taxes 41,837 30,397
Other current assets 15,020 11,490
Total current assets 810,929 748,569
Property, Plant & Equipment - net 301,056 308,258
Goodwill 497,148 474,488
Other assets 60,484 23,351
TOTAL ASSETS $1,669,617 $1,554,666
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and notes payable $129,204 $155,962
Compensation and other
benefits accruals 69,604 69,893
Income taxes 8,855 7,111
Accrued product claims
and warranties 28,834 29,475
Accrued rebates 12,608 19,682
Accrued restructuring charge 34,909 0
Accrued expenses and other
liabilities 63,713 59,796
Current maturities of long-term
debt 47,821 52,874
Total current liabilities 395,548 394,793
Long-term debt 370,703 288,026
Pensions and other retirement
compensation 60,977 60,564
Postretirement medical and
other benefits 41,476 41,868
Reserves - insurance subsidiary 27,130 29,441
Other liabilities 48,849 30,162
Deferred income taxes 0 447
Preferred stock - at liquidation value 0 53,638
Common stock - par value, $.16 2/3 7,113 6,417
Additional paid-in capital 237,158 184,145
Accumulated other
comprehensive income (5,329) (3,962)
Retained earnings 485,992 469,127
Total shareholders' equity 724,934 709,365
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,669,617 $1,554,666
See Notes to Consolidated Financial Statements.
4
PENTAIR, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
Six Months Year
Ended Ended
June 26 December 31
(In thousands) 1999 1998
PREFERRED STOCK
Beginning Balance $ 53,638 $ 59,696
Conversions into common (53,638) (6,058)
-------- -------
Ending Balance 0 53,638
UNEARNED ESOP COMPENSATION $ 0 $ (6,315)
COMMON STOCK - PAR
Beginning Balance $ 6,417 $ 6,365
Repurchase of common stock (19) (58)
Employee stock plans - net 35 34
Conversions into common 680 76
--- --
Ending Balance 7,113 6,417
ADDITIONAL PAID IN CAPITAL
Beginning Balance $ 184,145 $ 186,486
Repurchase of common stock (4,011) (12,315)
Employee stock plans - net 4,066 3,993
Conversions into common 52,958 5,981
------ -----
Ending Balance 237,158 184,145
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Beginning Balance $ (1,587) $ (2,612)
Current period change (1,367) 1,025
------ -----
Ending Balance (2,954) (1,587)
MINIMUM LIABILITY PENSION ADJUSTMENT
Beginning Balance $ (2,375) $ (2,473)
Current period change 0 98
- --
Ending Balance (2,375) (2,375)
RETAINED EARNINGS
Beginning Balance $ 469,127 $ 389,415
Net Income 30,525 106,840
Dividends
Common (13,660) (23,063)
Preferred 0 (4,267)
Tax Benefit of preferred dividends 0 202
- ---
Ending Balance 485,992 469,127
TOTAL SHAREHOLDERS' EQUITY $ 724,934 $ 709,365
See Notes to Consolidated Financial Statements.
5
PENTAIR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) (in thousands)
Two Quarters Ended
June 26 June 30
1999 1998
Cash provided by (used for)
OPERATING ACTIVITIES
Net income $30,525 $48,123
Adjustments to reconcile to cash flow:
Restructuring charge 38,000 0
Depreciation 28,235 27,683
Amortization 9,323 9,183
Deferred income taxes 2,657 (1,230)
Changes in assets and liabilities,
net of effects of acquisitions/dispositions
Accounts receivable (30,967) (15,085)
Inventories (10,033) (15,924)
Accounts payable (26,179) (24,650)
Compensation and benefits 385 (3,474)
Income taxes (13,499) (13,887)
Pensions and other
retirement compensation (393) 2,452
Reserves - insurance subsidiary (2,311) 1,153
Other assets/liabilities - net (15,627) (14,528)
CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 10,116 (184)
INVESTING ACTIVITIES
Capital expenditures (18,982) (15,569)
Payments for acquisition of businesses (61,970) (15,925)
Other 88 13,651
CASH USED FOR INVESTING ACTIVITIES (80,864) (17,843)
FINANCING ACTIVITIES
Borrowings 116,555 69,689
Debt payments (38,483) (34,454)
Unearned ESOP compensation decrease 0 1,950
Employee stock plans and other 4,101 2,365
Repurchase of stock (4,030) (2,577)
Dividends paid (13,660) (13,861)
CASH PROVIDED BY FINANCING ACTIVITIES 64,483 23,112
Effects of currency exchange rate changes 15,859 (4,082)
Increase in cash and cash equivalents 9,594 1,003
Cash and cash equivalents
- beginning of period 32,039 34,340
- end of period $41,633 $35,343
See Notes to Consolidated Financial Statements.
6
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.
Pentair has adopted a standard "4-4-5 week" accounting quarter for
Pentair reporting in 1999. Pentair's fiscal year will continue to end
on December 31.
The results of operations for the two quarters ended June 26, 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.
Certain reclassifications have been made to prior years' financial
statements to conform to the current year presentation.
2. Acquisition
WEB Tool & Manufacturing, Inc.
On April 2, 1999, Pentair acquired all of the common stock of WEB Tool
& Manufacturing, Inc. for approximately $62 million, which was financed
through bank borrowings. WEB designs, manufactures, and markets custom
server subracks and chassis for computer technology applications. The
acquisition was accounted for as a purchase and accordingly, the
results of operations are included in the consolidated financial
statements since the date of acquisition. The proforma effect of this
acquisition is not presented because it is not material to the
Company's consolidated financial statements
3. Pending Acquisitions
Essef Corporation
On April 30, 1999, Pentair announced that it had entered into a merger
agreement to acquire all of the outstanding common stock of Essef
Corporation (Nasdaq: ESSF) of Chardon, Ohio, for $19.09 per share,
payable in cash. In June 1999, this purchase price for the Essef
transaction was reduced to $18.97 per share, as a result of certain
identified environmental costs. Essef is a global leader in the
manufacture of composite water tanks, pumps, filters, and other water
equipment. The acquisition 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 $310 million. Pentair will also assume approximately
$120 million of Essef debt. Pentair, which will finance the acquisition
through bank borrowings, 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 and completion of due diligence by
7
Pentair. Completion of the transaction is currently contemplated in
August following a special meeting of Essef's shareholders scheduled
to take place on August 6, 1999.
4. Earnings per common share
Basic earnings per common share is computed by dividing net income,
after deducting preferred stock dividends, by the weighted 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
weighted 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, the tax
benefits 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.
June 26, June 30,
(In thousands except per share amounts) 1999 1998
EARNINGS PER SHARE
Net Income $30,525 $48,123
Preferred dividend requirements 0 2,362
Income available to
common shareholders 30,525 45,761
Weighted average shares outstanding 42,433 38,408
Basic Earnings per Common Share $0.72 $1.19
EARNINGS PER SHARE - ASSUMING DILUTION
Income available to
common shareholders 30,525 45,761
Add back preferred dividend requirements
due to conversion into common shares 0 2,362
Elimination of tax benefit on preferred
ESOP dividend due to conversion into
common shares 0 (768)
Addition of tax benefit on ESOP dividend
assuming conversion to common shares -
at common dividend rate 0 444
Income available to common
shareholders assuming dilution 30,525 47,799
Weighted average shares outstanding 42,433 38,408
Dilutive impact of stock
options outstanding 348 524
Assumed conversion of preferred stock 275 4,404
8
Weighted average shares and
potentially dilutive shares outstanding 43,056 43,336
Diluted Earnings per Common Share $0.71 $1.10
5. Comprehensive Income
(in thousands)
Two Quarters Ended
June 26, 1999 June 30, 1998
Net Income $30,525 $48,123
Other Comprehensive Income, net of tax:
Foreign Currency
Translation Adjustments (1,367) (573)
Minimum Pension Liability Adjustment 0 58
Total Comprehensive Income $29,158 $47,608
Second Quarter Ended
June 26, 1999 June 30, 1998
Net Income $28,285 $24,414
Other Comprehensive Income, net of tax:
Foreign Currency
Translation Adjustments (1,267) (423)
Minimum Pension Liability Adjustment 0 0
Total Comprehensive Income $27,018 $23,991
6. Inventories
(In thousands) June 26, December 31,
1999 1998
Finished goods $166,176 $147,780
Work in process 61,969 64,421
Raw materials and supplies 64,689 66,380
Total $292,834 $278,581
7. Property Plant and Equipment
(In thousands) June 26, December 31,
1999 1998
Land and land improvements $15,104 $15,699
Buildings 131,884 131,989
Machinery and equipment 433,921 419,418
Construction in progress 31,506 25,883
Accumulated depreciation (311,359) (284,731)
Net Property Plant and Equipment $301,056 $308,258
8. Long-term debt is summarized as follows: (in thousands)
9
June 26, December 31,
1999 1998
Revolving credit facilities $159,549 $103,479
Private placement debt 209,712 180,716
Other 49,263 56,705
TOTAL 418,524 340,900
Current maturities (47,821) (52,874)
Total long-term debt $370,703 $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, $160 million of the
June 26, 1999 retained earnings were unrestricted for such purposes.
9. Capital Stock
- authorized 250,000,000
- common outstanding 42,677,375
Subsequent to December 31, 1998, all outstanding classes of preferred
stock were redeemed and all shares were converted to common stock on
January 4, 1999 and January 15, 1999, respectively. Of the 250 million
authorized shares, up to 15 million shares may be designated by the
Board of Directors as preferred shares. There were no designated
preferred shares at June 26, 1999.
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 June 26, 1999, the Company had repurchased 117,000 shares under the
authorization.
10. Supplemental Statement of Cash Flows Information
The following is supplemental information relating to the Statement of
Cash Flows ($000's):
Two Quarters Ended
June 26, 1999 June 30, 1998
Interest paid $13,699 $11,563
Income tax payments 27,747 44,408
11. 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, $3.0 million has been spent through June
26, 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
reduction of approximately 1,050 jobs, as detailed below, offset by
approximately 350 new jobs at other Pentair facilities in connection
with consolidation and rationalization. The restructuring plan does not
contemplate the Company exiting any of its current lines of business;
the projects involved are designed to make the Company's existing
businesses more efficient.
10
The Professional Tools and Equipment segment will consolidate North
American distribution operations and combine the headquarters of the
two power tool businesses, Delta and Porter-Cable, in Jackson,
Tennessee. In the service equipment businesses, products are being
outsourced to offshore manufacturers or transferred to other North
American facilities. The Jonesboro, Arkansas manufacturing operation of
Lincoln Automotive will be closed. These actions will result in the
termination of more than 600 employees. Restructuring charges for this
segment amounted to $16.8 million, $10 million of which is attributable
to employee terminations, and the balance of which relates to asset
write-downs and other exit costs. Management currently estimates the
benefits will be approximately $14.8 million in 2000 and $15.5 million
in 2001.
The Water and Fluid Technologies segment will reduce the workforce at
its Lincoln Industrial business and outsource some product
manufacturing, resulting in headcount reduction of approximately 100
employees. Lincoln Industrial plans to eliminate approximately 50
percent of the manufacturing space at its U.S. manufacturing
facilities. The charge for this segment was $4.5 million,
approximately $1.2 million of which relates to terminated employees,
and the balance of which is attributable to demolition and other exit
costs. Management currently estimates the benefits will be
approximately $0.4 million in 1999, $2.1 million in 2000 and $2.1
million in 2001.
The Electrical and Electronic Enclosures segment initiated termination
of employees in its European enclosure businesses and adopted a plan
to rationalize manufacturing at its North American facilities. These
actions will result in the reduction of approximately 350 employees.
This segment absorbed $16.7 million of the charge, largely related to
employee terminations. Management currently estimates the benefits
will be approximately $4.6 million in 1999, $9.2 million in 2000 and
$12.2 million in 2001.
The components of the restructuring charge and related reserve balances
remaining at June 26, 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
Cash spending (2.9) (0.1) (0.0) (3.0)
Non-cash spending (0.0) (0.1) (0.0) (0.1)
------------------------- --------- --------- ----- -----
Remaining Reserve $24.4 $6.8 $3.5 $34.9
========================= ========= ========= ===== =====
"Personnel Costs" consists of severance, medical plan continuation,
pension cash-outs, and outplacement per company policy for the 1,050
employees planned to be terminated. As of June 26, 1999, 185 employees
have been terminated (or in Europe are working under statutory notice
periods).
"Asset Disposals" consists of the write-down of the carrying value of
the Delta headquarters building which is held for resale and the
write-off of special-use manufacturing and support assets which will no
longer be needed and which will be scrapped or abandoned. The real
estate held for resale is expected to be disposed of by mid-2000. All
of these assets are currently classified as property, plant and
equipment. No charge has been taken with respect to the Jonesboro real
estate since the Company believes it will be able to be sold for book
value within a reasonable period.
"Exit Costs" consists of maintenance and security costs of surplus
buildings until leases expire or demolition or disposal of certain
buildings, including the Jonesboro building.
"Personnel Costs" and "Exit Costs" are cash costs and the "Asset
Disposals" are primarily non-cash costs. Our currently anticipated
schedule projects cash expenditures of $14.1 million in 1999, $15.3
11
million in 2000 and $1.6 million in 2001. These requirements will be
funded through cash from operations or borrowings under our existing
credit facilities.
During the first half of 1999, restructuring benefits (largely
personnel cost savings) of approximately $1.9 million were realized.
Currently anticipated benefits are projected to be a total of $5.0
million in 1999, $26.1 million in 2000 and $29.8 million in 2001. The
major components of anticipated benefits are in reductions in labor
costs and efficiencies in consolidating distribution and administrative
functions.
The anticipated benefits noted above are net of the costs of adding 350
employees at other Pentair locations. The benefits do not, however,
take into account one-time costs associated with these restructuring
plans. The Company anticipates that the associated one-time costs will
amount to approximately $6.2 million, one-half of which is contemplated
to be incurred in fiscal 1999, with most of the balance to be incurred
in the first quarter of 2000. These costs are not included in the
restructuring charge, since they relate to asset relocations, start-up
costs and training and recruiting of employees at other locations.
12. Subsequent Event
On August 2, 1999, the Company entered into a $400 million Bridge Loan
Agreement with Morgan Guaranty Trust Company of New York (the "Bridge
Loan"). The Bridge Loan, plus a portion of the amount available under
the Company's regular revolving credit facilities, will be sufficient
to finance the Essef acquisition. The Bridge Loan provides for floating
rates of interest depending upon the type of loan selected by the
Company and the principal amount of the loan outstanding on October 1
and December 1 of 1999. The Bridge Loan matures on March 30, 2000,
though it is required to be paid down in the event of any material
sale of assets or any new issuance of debt or equity.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
BUSINESS SEGMENT INFORMATION
Selected information for business segments (taking restructuring charge
into account for operating income) for the two quarters ended June 26,
1999 and June 30, 1998 follows:
Segment Information ($000s):
1999 PTE WFT EEE Other Total
Net sales from
external customers $404,827 $273,267 $299,624 $ 0 $ 977,718
Intersegment net sales 2,173 2,141 0 (4,314) 0
Segment profit (loss)
- operating income 26,046 32,946 10,055 (8,983) 60,064
Segment assets 483,238 507,065 572,893 106,421 1,669,617
1998
Net sales from
external customers $382,866 $270,365 $283,524 $ 0 $ 936,755
Intersegment net sales 3,369 3,452 0 (6,821) 0
Segment profit (loss)
- operating income 39,374 30,427 26,441 (7,655) 88,587
Segment assets 434,322 511,743 470,895 64,008 1,480,968
PTE = Professional Tools and Equipment
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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
Pentair has adopted a standard "4-4-5 week" accounting quarter for
Pentair reporting in 1999. 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 Results.
FIRST HALF ENDED JUNE 26, 1999 COMPARED TO FIRST HALF ENDED JUNE 30,
1998
Consolidated net sales increased to $977.7 million in the first half of
1999, representing a 4.4% increase over the corresponding 1998 period.
Operating income in the first half of 1999 after the restructuring
charge ($38 million) was $60.1 million, a decline of $28.5 million from
the corresponding 1998 period; operating income as a percent of sales
decreased from 9.5% to 6.1%. Operating income before the restructuring
charge was $98.1 million for the first half of 1999, up 10.7% over the
corresponding 1998 period, and as a percent of sales improved from 9.5%
in the 1998 period to 10.0% in the 1999 period.
Gross profit margins increased in first half 1999 to 31.7% versus 31.1%
for the same period a year ago. 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 first half 1999 as compared to 21.6%
in the 1998 period.
Net income for the first half 1999 after the restructuring charge
($24.1 million after-tax or $.56 per share) declined from $48.1 million
to $30.5 million for a decrease of 36.6% from the same 1998 period;
before the restructuring charge, net income was $54.6 million, up 13.5%
over the 1998 period. Diluted earnings per share for the 1999 period
after the restructuring charge declined from $1.10 to $0.71, a decrease
of 35.5% from the 1998 period; diluted earnings per share before the
restructuring charge was $1.27, an increase of 15.5% over the 1998
period. Diluted earnings per share for 1999 year-to-date was negatively
impacted 1 cent compared to the prior year period as a result of a
weak Canadian dollar.
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 the Essef acquisition,
which will add approximately 1.4 percentage points to the full year tax
rate, due to non-deductibility of the goodwill amortization for tax
purposes.
SECOND QUARTER ENDED JUNE 26, 1999 COMPARED TO SECOND QUARTER ENDED
JUNE 30, 1998
Net sales increased to $507.2 million in the second quarter of 1999, an
increase of $35.4 million or 7.5% over the same period a year ago.
Second quarter operating income increased to $51.6 million in the 1999
period, an increase of $6.9 million or 15.5% over the corresponding
1998 period. Net income increased to $28.3 million in the second
quarter of 1999, an increase of $3.9 million or 15.9% over the 1998
period. Second quarter diluted earnings per share in 1999 showed a
17.9% increase over the corresponding period in 1998.
13
Segment Information
Professional Tools and Equipment Segment
Net sales increased to $407.0 million in 1999 year-to-date,
representing a 5.4% increase over the corresponding period in 1998. Net
sales in the second quarter of 1999 grew 4.2% to $206.5 million from
$198.0 million in the same period in 1998. Operating income in 1999
year-to-date after the restructuring charge was $26.0 million, a
decline of $13.4 million and such operating income as a percent of
sales decreased from 10.2% to 6.4%. Operating income before the
restructuring charge increased to $42.8 million, up 8.8% over 1998
year-to-date, and as a percent of sales improved from 10.2% to 10.5%.
Operating income in the second quarter of 1999 grew 1.9% to $20.6
million from $20.2 million in the same period in 1998. Operating income
as a percent of sales declined to 10.0% in the second quarter of 1999
from 10.2% in the corresponding period in 1998.
Sales in the Professional Tools and Equipment segment were relatively
strong, driven by a good domestic economy and a healthy demand for
newly introduced products. Both the first half and second quarter 1999
sales and income increased over prior-year periods which periods
included the introduction of the popular Bammer cordless nailer.
For the power tool businesses, housing starts are a key factor driving
performance. Although starts in 1999 are down in the first two quarters
and are expected to continue to be down slightly from the high levels
experienced in 1998, retail markets are projected to make up for slower
construction
14
markets. In particular, second half sales and operating income should
improve due to new product introductions and expanded distribution
through Sears retail stores.
Water and Fluid Technologies Segment
Net sales increased to $275.4 million in 1999 year-to-date,
representing a 0.6% increase over the corresponding period in 1998. Net
sales in the second quarter of 1999 grew 6.3% to $146.9 million from
$138.2 million in the same period in 1998. Operating income in 1999
year-to-date after the restructuring charge was $32.9 million, an
increase of $2.5 million and such operating income as a percent of
sales increased from 11.1% to 11.9%. Operating income before the
restructuring charge increased to $37.4 million, up 23.0% over 1998
year-to-date, and as a percent of sales improved from 11.1% to 13.6%.
Operating income in the second quarter of 1999 grew 29.2% to $20.9
million from $16.2 million in the same period in 1998. Operating income
as a percent of sales increased to 14.3% in the second quarter of 1999
from 11.7% in the corresponding period in 1998.
The relatively constant level of sales growth in the first two quarters
of 1999 compared to the previous year is largely attributable to the
deliberate reduction in sales of the formerly unprofitable Layne &
Bowler pump line, begun in 1998. Profits in this segment benefited from
offshore sourcing and continued productivity improvements and cost
reductions. The Essef acquisition which is expected to close in August
1999 will be added to this segment.
Electrical and Electronic Enclosures Segment
Net sales increased to $299.6 million in 1999 year-to-date,
representing a 5.7% increase over the corresponding period in 1998. Net
sales in the second quarter of 1999 grew 13.2% to $156.3 million from
$138.1 million in the same period in 1998. The increase was due to the
acquisition of Pentair Enclosures UK (the former Walker Dickson Group)
in October 1998 and WEB in April 1999, offset by a reduction in sales
in the existing businesses. These businesses were affected by continued
weakness in capital spending in many North American industrial markets,
as well as slow economic growth in Germany generally.
Operating income in 1999 year-to-date after the restructuring charge
was $10.1 million, a decline of $16.3 million and such operating income
as a percent of sales decreased from 9.3% to 3.4%. Operating income
before the restructuring charge increased to $26.8 million, up 1.4%
over 1998 year-to-date, and as a percent of sales declined from 9.3% to
8.9%. Operating income in the second quarter of 1999 grew 13.3% to
$14.4 million from $12.7 million in the same period in 1998. Operating
margins were unchanged at 9.2%. Operating margins were impacted in both
the first half and the second quarter of 1999 by lower initial margins
from newly acquired businesses.
Operating improvements for the balance of 1999 are expected as a
result of continued productivity gains in North America and of the
restructuring actions taken earlier this year in Europe. In July 1999,
Pentair Electronic Packaging was formed, combining the strengths of
five electronic enclosure operations in North America, in order to
better target opportunities in fast-growing datacom and telecom
markets.
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, $3.0 million has been spent through June
26, 1999.
15
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
reduction of approximately 1,050 jobs, as detailed below, offset by
approximately 350 new jobs at other Pentair facilities in connection
with consolidation and rationalization. The restructuring plan does
not contemplate the Company exiting any of its current lines of
business; the projects involved are designed to make the Company's
existing businesses more efficient.
The Professional Tools and Equipment segment will consolidate North
American distribution operations and combine the headquarters of the
two power tool businesses, Delta and Porter-Cable, in Jackson,
Tennessee. In the service equipment businesses, products are being
outsourced to offshore manufacturers or transferred to other North
American facilities. The Jonesboro, Arkansas manufacturing operation of
Lincoln Automotive will be closed. These actions will result in the
termination of more than 600 employees. Restructuring charges for this
segment amounted to $16.8 million, $10 million of which is attributable
to employee terminations, and the balance of which relates to asset
write-downs and other exit costs. Management currently estimates the
benefits will be approximately $14.8 million in 2000 and $15.5 million
in 2001.
The Water and Fluid Technologies segment will reduce the workforce at
its Lincoln Industrial business and outsource some product
manufacturing, resulting in headcount reduction of approximately 100
employees. Lincoln Industrial plans to eliminate approximately 50
percent of the manufacturing space at its U.S. manufacturing
facilities. The charge for this segment was $4.5 million,
approximately $1.2 million of which relates to terminated employees,
and the balance of which is attributable to demolition and other exit
costs. Management currently estimates the benefits will be
approximately $0.4 million in 1999, $2.1 million in 2000 and $2.1
million in 2001.
The Electrical and Electronic Enclosures segment initiated termination
of employees in its European enclosure businesses and adopted a plan
to rationalize manufacturing at its North American facilities. These
actions will result in the reduction of approximately 350 employees.
This segment absorbed $16.7 million of the charge, largely related to
employee terminations. Management currently estimates the benefits
will be approximately $4.6 million in 1999, $9.2 million in 2000 and
$12.2 million in 2001.
The components of the restructuring charge and related reserve balances
remaining at June 26, 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
Cash spending (2.9) (0.1) (0.0) (3.0)
Non-cash spending (0.0) (0.1) (0.0) (0.1)
------------------------- --------- --------- ----- ------
Remaining Reserve $24.4 $6.8 $3.5 $34.9
========================= ========= ========= ===== ======
"Personnel Costs" consists of severance, medical plan continuation,
pension cash-outs, and outplacement per company policy for the 1,050
employees planned to be terminated. As of June 26, 1999, 185 employees
have been terminated (or in Europe are working under statutory notice
periods).
"Asset Disposals" consists of the write-down of the carrying value of
the Delta headquarters building which is held for resale and the
write-off of special-use manufacturing and support assets which will no
longer be needed and which will be scrapped or abandoned. The real
estate held for resale is expected to be disposed of by mid-2000. All
of these assets are currently classified as property, plant and
equipment. No charge has been taken with respect to the Jonesboro real
estate since the
16
Company believes it will be able to be sold for book value within a
reasonable period.
"Exit Costs" consists of maintenance and security costs of surplus
buildings until leases expire or demolition or disposal of certain
buildings, including the Jonesboro building.
"Personnel Costs" and "Exit Costs" are cash costs and the "Asset
Disposals" are primarily non-cash costs. Our currently anticipated
schedule projects cash expenditures of $14.1 million in 1999, $15.3
million in 2000 and $1.6 million in 2001. These requirements will be
funded through cash from operations or borrowings under our existing
credit facilities.
During the first half of 1999, restructuring benefits (largely
personnel cost savings) of approximately $1.9 million were realized.
Currently anticipated benefits are projected to be a total of $5.0
million in 1999, $26.1 million in 2000 and $29.8 million in 2001. The
major components of anticipated benefits are in reductions in labor
costs and efficiencies in consolidating distribution and administrative
functions.
The anticipated benefits noted above are net of the costs of adding 350
employees at other Pentair locations. The benefits do not, however,
take into account one-time costs associated with these restructuring
plans. The Company anticipates that the associated one-time costs will
amount to approximately $6.2 million, one-half of which is contemplated
to be incurred in fiscal 1999, with most of the balance to be incurred
in the first quarter of 2000. These costs are not included in the
restructuring charge, since they relate to asset relocations, start-up
costs and training and recruiting of employees at other locations.
LIQUIDITY AND CAPITAL RESOURCES
Cash from operating activities for the first two quarters generated
$10.1 million in 1999 compared to the use of $0.2 million in the same
period in 1998. The Company believes that cash flow from operations
will exceed its needs for capital expenditures, smaller acquisitions
and dividends for the full year.
Capital expenditures were $19.0 million in 1999 year-to-date compared
to $15.6 million in 1998. The Company had a negative free cash flow of
$8.9 million in 1999 compared to a negative $15.8 million in the first
two quarters of 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 management. Historically, free cash flow is negative
during the first half of each fiscal year and positive thereafter.
Borrowings in the first two quarters of 1999 financed operating needs,
capital expenditures and the acquisition in April of WEB. The
percentage of long-term debt to total capital was 34% at June 26, 1999
compared to 29% at December 31, 1998. The Company is authorized to
repurchase stock to offset the dilution caused by stock issuances under
employee stock compensation plans. In 1999, the Company acquired
117,000 shares of its common stock for approximately $4.0 million. As
of June 26, 1999, the Company had available to it approximately $240
million under its current revolving credit agreements.
The Company announced on April 30, 1999 the acquisition of two
businesses owned by Essef Corporation, to be acquired following the
split-off of the remaining business, Anthony & Sylvan, to Essef
shareholders at the time of the acquisition. The acquisition will be
accounted for using the purchase method of accounting. While the
Company is continuing its due diligence relating to the acquisition, it
believes that the closing of the transaction will occur in August,
following a vote by Essef shareholders at its special meeting scheduled
to take place on August 6, 1999. The cash
17
portion of the acquisition price is approximately $310 million. The
Company estimates that indebtedness of Essef to be assumed or
refinanced at closing will be approximately $120 million.
On August 2, 1999, the Company entered into a $400 million Bridge Loan
Agreement with Morgan Guaranty Trust Company of New York (the "Bridge
Loan"). The Bridge Loan, plus a portion of the amount available under
the Company's regular revolving credit facilities, will be sufficient
to finance the Essef acquisition. The Bridge Loan provides for
floating rates of interest depending upon the type of loan selected by
the Company and the principal amount of the loan outstanding on
October 1 and December 1 of 1999. The Bridge Loan matures on March 30,
2000, though it is required to be paid down in the event of any
material sale of assets or any new issuance of debt or equity.
The Company is in the process of negotiating with its current lenders
and others for a new five-year $750 million revolving credit facility.
The new credit facility would replace the existing $390 million
revolving credit facility and would continue to be used for normal
operating needs, capital expenditures and acquisitions. The Company
believes that it will be able to complete this refinancing during the
third quarter of 1999. The Company has historically used revolving
bank credit as its primary financing tool.
In addition, on June 8, 1999, the Company filed a registration
statement on Form S-3 for shelf offerings of debt and/or equity in an
aggregate amount of up to $700 million. The Securities and Exchange
Commission has not yet declared the shelf registration statement
effective. Proceeds of any offerings made under such shelf registration
would be available to the Company for repayment
of the Bridge Loan or other outstanding indebtedness.
Historically, the Company has endeavored to maintain its long-term debt
levels at between 30 to 40% of total capital. The Company has in the
past increased its leverage to make significant strategic
acquisitions. The acquisition of Essef will increase its long-term debt
to total capital ratio to 52%, assuming that the acquisition had
occurred on June 26, was financed entirely by long-term debt and the
amount of indebtedness of Essef assumed or refinanced was $120 million.
The Company believes its improving cash flow and the performance of its
newly acquired businesses will permit it over the next few years to
reduce its debt levels. Any equity offering that the Company would make
would reduce its indebtedness levels more quickly. Over the long term,
the Company believes that indebtedness in the target range provides a
strong capital base that gives the Company significant operational and
financing flexibility.
Based on the availability of these sources, the Company believes that
it has sufficient financing to permit it to close the Essef acquisition
and continue to operate its businesses without significant limitations
on its normal operating flexibility.
OUTLOOK
Pentair's top line growth in the coming months will be driven by new
product introductions and expanded distribution. As well, the Essef
acquisition anticipated to close in August 1999 will significantly
increase sales in the Water and Fluid Technologies segment. The
profitability of all three segments will be strengthened by the net
benefits of Pentair's cost savings project initiated in 1998 and the
restructuring plans started in the first quarter of 1999. However,
Pentair will incur higher interest costs as a result of the Essef
acquisition. The acquisition is anticipated to be modestly dilutive
over the balance of 1999, but is expected to be accretive in the first
full twelve months of Pentair ownership.
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
18
acquisitions to integrate with its current operations, but will also
carefully review larger targets, which would significantly expand its
current segments. Other acquisitions are possible, outside existing
segments, but only if they present Pentair extraordinary
opportunities.
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 the Company,
its suppliers and its customers.
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 completed
its review and compliance planning for its critical information systems
(IS). Most of the Company's larger businesses have completed the
implementation of required actions for compliance; the balance of the
business units are in the final stages of implementation.
Currently, 16 out of the current 37 computing locations have completed
their Year 2000 compliance implementation for all systems, including
non-IS automated communications and manufacturing systems. The 16
completed locations represent approximately 60% of the Company's
revenues. All but four of the remaining locations do not require
additional resources to complete implementation by the end of the third
quarter of 1999. The remaining four locations, which represent
approximately 6% of the Company's revenues, have been provided
additional internal or external resources to finish on a timely basis.
No significant difficulties have been encountered to date as a result
of Year 2000 non-compliance in any of Pentair's businesses. The Company
has also reviewed the Year 2000 compliance status of its recent
acquisitions as a part of the due diligence review of those businesses.
Pentair believes that these operations will be Year 2000 compliant on a
timely basis.
In many cases, implementation includes installation or updating of new
Enterprise Resource Planning ("ERP") systems for the Company's 34
current manufacturing locations designed to enable these businesses to
operate more efficiently and to provide better management reporting.
Pentair anticipates that implementation and testing phases for the
installation of the ERP system company-wide will be substantially
complete by the end of the third quarter of 1999. The Company has
installed and tested its ERP systems in 13 locations. Installation is
continuing at another 9 locations, all but one of which is anticipated
to have been completed by the end of the third quarter, with that
remaining site scheduled for completion in October 1999. The remaining
12 manufacturing locations have not converted and did not intend to
convert their ERP systems at this time, but have completed their Year
2000 compliance actions for their current systems. All manufacturing
sites will be converted to the new ERP system over the next few years
as the IS development plan is concluded.
None of the Company's products are believed to be date dependent and
consequently should not be affected by the Year 2000 issue.
19
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 over the 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
over the past few years and continuing into the future throughout the
organization. Year 2000 compliance is a by-product of the Company's
IS 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 $61 million; the plan is approximately 83% complete. This
cost estimate is an increase of approximately $6 million over the
budgeted amount as of the end of 1998. The forecasted increase is
attributable largely to the cost of additional consulting services for
installation or updating of ERP systems both for recent acquisitions
and ERP installations that have taken longer to complete than planned.
The estimated cost specifically attributable to Year 2000 compliance,
apart from other IS development activities, amounts to approximately
$15.5 million, of which $13 million had been spent through June 1999.
Pentair has not deferred any significant IS projects as a result of the
implementation of its Year 2000 project.
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 is underway to assess Pentair's
vulnerability to internal noncompliance and potential third-party
failures and actions that 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.
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 that attainment of
compliance can be done for the amount budgeted by the company. 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
20
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.
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) implementation of plans; 5) anticipated
savings; 6) results achieved from acquisitions; and 7) statements
preceded by "believes", "anticipates", "expects", "estimates", "will"
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 or interest 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; 4) integration of new businesses; 5) unexpected
difficulties in implementing plans; and, 6) 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
21
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
10.1 Morgan Bridge Loan Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K was filed on April 8, 1999 regarding the announced
special restructuring charge of $38.0 million or 56 cents per share to
be recorded in 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
August 2, 1999
22