UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
Commission file number 1-11625
Pentair, Inc.
(Exact name of Registrant as specified in its charter)
Minnesota
41-0907434
5500 Wayzata Boulevard, Suite 800,
Golden Valley, Minnesota
55416-1259
Title of each class
Name of each exchange on which registered
Common Shares, $0.16 2/3 par value
Common Share Purchase Rights
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 ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in PART III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨
Aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of $39.38 per share as reported on the New York Stock Exchange on June 28, 2003 (the last day of Registrant’s most recently completed second quarter): $1,813,237,884.
The number of shares outstanding of Registrant’s only class of common stock on February 18, 2004, was 49,834,191.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the company’s definitive proxy statement for its annual meeting to be held on April 30, 2004, are incorporated by reference in this Form 10-K in response to Part III, Item 10, 11, 12 and 14.
Annual Report on Form 10-K
For the Year Ended December 31, 2003
PART I
Business
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Market for Registrant’s Common Stock and Related Security Holder Matters
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters
Certain Relationships and Related Transactions
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures
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ITEM 1. BUSINESS
Unless otherwise indicated, all references to “Pentair,” “we,” “our,” and “us” refer to Pentair, Inc., a Minnesota corporation (incorporated in 1966), and its subsidiaries.
Overview
We are a focused diversified industrial manufacturer operating in three segments:
Our Water segment manufactures and markets essential products and systems used in the movement, treatment, storage and enjoyment of water and generates approximately 39 percent of total revenues. Trade names within the Water segment include Myers®, Fairbanks Morse®, Hydromatic®, Aurora®, Water Ace®, Shur-Dri®, Fleck®, SIATA™, CodeLine™, Structural™, WellMate™, Verti-line™, Layne & Bowler™, American Plumber™, Armor™, National Pool Tile™, Rainbow Lifegard™, Paragon Aquatics™, Kreepy Krauly™, Pentair Pool Products™, PENTEK™, and Everpure®.
Our Enclosures segment accounts for approximately 21 percent of total revenues, and designs, manufactures, and markets standard, modified and custom enclosures that protect sensitive controls and components for markets that include industrial machinery, data communications, networking, telecommunications, test and measurement, automotive, medical, security, defense, and general electronics. The segment goes to market under four primary trade names: Hoffman®, Schroff®, Pentair Electronic Packaging™, and Taunus™.
Our Tools segment designs, manufactures and markets a wide range of power tools under several well established trade names — Porter-Cable™, Delta®, Delta Shopmaster™, Delta Industrial™, Biesemeyer®, FLEX™, Ex-Cell™, Air America®, Charge Air Pro®, 2 x 4™, Oldham®, Contractor SuperDuty™, Viper®, Hickory Woodworking®, and The Woodworker’s Choice®, — generating approximately 40 percent of total revenues.
Pentair Strategy
Our basic operating strategies include:
Pentair Financial Objectives
Our long-term financial objectives are:
Ÿ EBIT Margin
Ÿ Net Return on Sales (NROS)
Ÿ Return on Invested Capital (ROIC)
Ÿ Free Cash Flow (FCF)
Ÿ EPS Growth
Ÿ Debt/Total Capital
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RECENT DEVELOPMENTS
Growth of our business
We continually look at each of our businesses to determine whether they fit with our evolving strategic vision. Our primary focus is on businesses with strong fundamentals and growth opportunities. We seek growth through product and service innovation, market expansion, and acquisitions. Acquisitions have played an important part in the growth of our business and will continue to be an important part of our growth in the future.
Recent announcements
On February 3, 2004, we entered into an agreement to acquire WICOR Inc. (“WICOR”), a unit of Wisconsin Energy Corporation, Milwaukee, Wisconsin. WICOR, which manufactures water system, filtration, and pool equipment products under the Sta-Rite, SHURflo, and Hypro brands, generated sales of approximately $746 million in 2003. The $850 million cash transaction, which we plan to complete in the second or third quarter of 2004, is subject to satisfaction of customary conditions and regulatory approvals. As part of the transaction, we will assume approximately $24 million of WICOR debt.
We also announced that we have engaged Goldman Sachs to explore strategic alternatives for our Tools Segment, comprising the Porter-Cable, Delta, DeVilbiss Air Power Company, Oldham Saw, and Flex businesses with $1,081.4 million in net sales in 2003.
Acquisitions
On December 31, 2003, we acquired all of the common stock of Everpure, Inc. (Everpure), from United States Filter Corporation, a unit of Veolia Environnement, for $217.3 million in cash, including cash acquired of $5.5 million. Everpure is a manufacturer of water filtration products for the commercial and consumer sectors and they generated approximately $60 million in net sales for fiscal 2003.
During 2003, we also completed four product line acquisitions in our Water segment for total consideration of $21.4 million in cash: Hydrotemp Manufacturing Co., Inc., Letro Products, Inc. and certain assets of TwinPumps, Inc. and K&M Plastics, Inc.
We have invested approximately $30.5 million to acquire a 49 percent interest in the joint venture operations of a long time Asian supplier for bench top power tools, of which $5.6 million was paid in 2003, $4.5 million was paid in 2002 and $20.4 million was paid in 2001. In February 2004, we signed a letter of intent to purchase the remaining 51 percent ownership interest in this supplier.
On September 30, 2002, we acquired all of the common stock of Plymouth Products, Inc. and affiliated entities (Plymouth Products) from USF Consumer & Commercial WaterGroup, a unit of Vivendi Environnement (now Veolia Environnement), for total consideration of $121.7 million in cash, including debt assumed of $1.2 million. Plymouth Products is a manufacturer of water filtration products used in residential, commercial, and industrial applications. In the first quarter of 2003, we received $1.9 million in purchase price adjustments relative to our fourth quarter 2002 acquisition of Plymouth Products. The adjustments primarily related to final determination of closing date net assets.
On October 1, 2002, we acquired all of the common stock of privately held Oldham Saw Co., Inc. and affiliated entities (Oldham Saw) for total consideration of $53.0 million cash, including debt assumed of $1.5 million and cash acquired of $1.7 million. Oldham Saw designs, manufactures, and markets router bits, circular saw blades, and related accessories for the do-it-yourself (DIY) and professional power tool markets.
These acquisitions were financed through available lines of credit, supported by strong cash flow.
Also refer to ITEM 7, Management’s Discussion and Analysis, and ITEM 8, Note 2 of the Notes to Consolidated Financial Statements, included in this Form 10-K.
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Discontinued operations/divestitures
In December 2000, we adopted a plan to sell our Equipment segment businesses, Service Equipment (Century Mfg. Co./Lincoln Automotive Company) and Lincoln Industrial, Inc. (Lincoln Industrial). In October 2001, we completed the sale of the Service Equipment businesses to Clore Automotive, LLC for total consideration of $18.2 million. In December 2001, we completed the sale of Lincoln Industrial to affiliates of The Jordan Company LLC (Jordan), other investors, and members of management of Lincoln Industrial for total consideration of $78.4 million, including a preferred stock interest. The selling price of Lincoln Industrial was subject to a final purchase price adjustment that was finalized in January 2003, in which we paid Jordan $2.4 million. In the fourth quarter of 2003, we reported an additional loss from discontinued operations of $2.9 million, or $0.06 per diluted share, primarily due to a reduction in estimated proceeds related to exiting two remaining facilities.
Also refer to ITEM 7, Management’s Discussion and Analysis, and ITEM 8, Note 3 of the Notes to Consolidated Financial Statements, included in this Form 10-K.
BUSINESS SEGMENTS
We classify our continuing operations into the following business segments:
Business segment and geographical financial information is contained in ITEM 8, Note 15 of the Notes to Consolidated Financial Statements, included in this Form 10-K.
WATER SEGMENT
Strategy
Our Water segment strategies are to:
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Seasonality
We experience strong seasonal demand in our Water segment for pool and spa equipment products in the March through July time period, with some advance sales occurring in earlier months, which generally include extended payment terms. We also experience increased sales in our pump group during droughts and heavy flooding in North America.
Competition
Our Water segment faces numerous competitors, some of which are larger, and have more resources. Competition in commercial and residential pumps focuses on brand names, product performance, quality, and price. While home center and national retailers are important for residential lines of water and wastewater pumps, they are much less important in commercial pumps. In municipal pumps, competition focuses on performance to meet required specifications, service, and price. Competition in water treatment and filtration components focuses on product performance and design, quality, delivery, and price. In pool and spa equipment, there are a number of competitors. We compete by offering a wide variety of innovative and high-quality products, which are competitively priced. We believe our existing distribution channels and reputation for quality also contribute to our continuing industry penetration.
Customer concentration
Information regarding significant customers in our Water segment is contained in ITEM 8, Note 15 of the Notes to Consolidated Financial Statements, included in this Form 10-K.
ENCLOSURES SEGMENT
Our Enclosures segment strategies are to:
The Enclosure segment is not significantly impacted by any seasonal demand fluctuations.
Competition in the enclosures markets can be intense, particularly in telecom and datacom markets, where product design, prototyping, global supply, and customer service are significant factors. The overall global decline in market demand over the last three years has created excess capacity throughout the industry. Despite the retrenchment of virtually all participants in these markets, the need to generate fixed-cost absorption in this period of weakened demand has caused increased price competition in many markets. Our Enclosures segment has continued to focus on cost control and improving profitability on a sequential quarter to quarter basis, while
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many competitors have faced financial constraints and even bankruptcy stemming from significant volume declines. Recent growth in the Enclosures segment is a result of continued channel penetration, growth in targeted market segments, new product development, and geographic expansion. Consolidation, globalization, and outsourcing are visible trends in the enclosures marketplace and typically play to the strengths of a large and globally positioned supplier. We believe our Enclosures business has the broadest array of products available, as well as the capability to deploy them globally.
Information regarding significant customers in our Enclosure segment is contained in ITEM 8, Note 15 of the Notes to Consolidated Financial Statements, included in this Form 10-K.
TOOLS SEGMENT
Our Tools segment strategies are to:
We experience strong seasonal demand for our pressure washer product line in the March through August time period. Demand for woodworking machinery, portable power tools, accessories, and compressors are strongest during spring, fall, and holiday promotional seasons. As a result, we typically experience stronger sales in the second and fourth quarters and weaker sales in the first and third quarters. This seasonality also drives higher inventories and accounts receivable levels in the second and third quarters of each year.
The Tools segment faces numerous competitors and strong distributors, many of which are larger and have more resources. Competition in the Tools segment has been intense and continues to increase, especially as these industries consolidate. Many competitors have extensive product lines. We anticipate growth to come from existing channel customers, product development, and continued penetration of expanding market channels.
Competition at the end-user level focuses primarily on trade names, product performance and features, quality, service, and price. The competition for shelf space at home centers and national retailers is particularly intense, demanding continuing product innovation, special inventory and delivery programs, and competitive pricing. Our strategy is to be the quality leader at a competitive price in our selected markets. We believe our success in maintaining our position in the marketplace is primarily due to strong trade names, developing product feature innovations, new products, promotions, and productivity gains.
Information regarding significant customers in our Tools segment is contained in ITEM 8, Note 15 of the Notes to Consolidated Financial Statements, included in this Form 10-K.
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INFORMATION REGARDING ALL BUSINESS SEGMENTS
Backlog
Our backlog of orders from continuing operations as of December 31 by segment was:
Water
Enclosures
Tools
Total
The $32.5 million increase in Water segment backlog was primarily due to the timing of orders in our pool business. The $5.7 million increase in Enclosures segment backlog was largely driven by the impacts of foreign currency fluctuations. The $19.0 million increase in Tools segment backlog was primarily due to the timing of orders. We expect our backlog at December 31, 2003 will be filled in 2004.
Research and development
Research and development costs during 2003, 2002, and 2001 were $43.9 million, $36.9 million, and $31.2 million, respectively.
Environmental
Environmental matters are discussed in ITEM 3, ITEM 7, and in ITEM 8, Note 16 of the Notes to Consolidated Financial Statements, included in this Form 10-K.
Raw materials
The principal materials used in the manufacturing of products are electric motors, mild steel, stainless steel, plastic, electronic components, plastics, and paint (powder and liquid). In addition to the purchase of raw materials, some finished goods are purchased for distribution through our sales channels.
The materials used in the various manufacturing processes are purchased on the open market, and the majority are available through multiple sources and are in adequate supply. We have not experienced any significant work stoppages to date due to shortages of materials. We have certain long-term commitments, principally price commitments, for the purchase of various component parts and raw materials and believe that it is unlikely that any of these agreements would be terminated prematurely. Alternate sources of supply at competitive prices are available for most materials for which long-term commitments exist, and we believe that the termination of any of these commitments would not have a material adverse effect on operations.
Certain commodities, such as steel, are subject to a degree of market and duty-driven price fluctuations. These fluctuations are managed through several mechanisms, including long-term agreements with escalator / de-escalator clauses. Prices for raw materials, such as steel, are expected to trend higher in the future.
Distribution
We sell products through numerous distribution channels. Products are sold directly to users and through numerous wholesalers, retailers, jobbers, distributors and dealers in a wide variety of trades in many countries around the world.
Intellectual property
Patents, non-compete agreements, proprietary technologies, customer relationships, trade marks, and trade names are important to our business. However, we do not regard our business as being materially dependent upon any single patent, non-compete agreement, proprietary technology, customer relationship, trade mark, or trade name.
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Employees
At the end of 2003, we employed approximately 12,300 people worldwide. Total employees in the United States were approximately 9,450, of which approximately 1,200 were represented by trade unions having collective bargaining agreements. We consider our employee relations to be very good.
Captive Insurance Subsidiary
We insure general and product liability, property, workers’ compensation, and automobile liability risks through our regulated wholly owned captive insurance subsidiary, Penwald Insurance Company (Penwald). Reserves for policy claims are established based on actuarial projections of ultimate losses.
Matters pertaining to Penwald are discussed in ITEM 3 and ITEM 8, Note 1 of the Notes to Consolidated Financial Statements, included in this Form 10-K.
Available information
We make available free of charge (other than an investor’s own Internet access charges) through our Internet website (http://www.pentair.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the 1934 Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Reports of beneficial ownership filed by our directors and executive officers pursuant to Section 16(a) of the 1934 Act are also available on our website. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K.
ITEM 2. PROPERTIES
Our corporate office is located in Golden Valley, Minnesota. Manufacturing operations are carried out at approximately 22 plants located throughout the United States and at 17 plants located in 10 other countries. Through a 49 percent-owned joint venture with a long time Asian tool supplier, we have an interest in three additional factories in Asia. In addition, we have approximately 23 warehouse facilities and numerous distribution facilities and sales offices. We also own or lease four idle facilities.
We believe that our production facilities are suitable for their purpose and are adequate to support our businesses.
ITEM 3. LEGAL PROCEEDINGS
We have been made parties to a number of actions filed or have been given notice of potential claims relating to the conduct of our business, including those pertaining to commercial disputes, product liability, environmental, safety and health, patent infringement, and employment matters.
Some of these lawsuits and proceedings raise difficult and complex factual and legal issues, and are subject to many uncertainties, such as the facts and circumstances of the particular lawsuit, the jurisdiction and forum in which the lawsuit is pending and the applicable law. We record liabilities in those instances where we can reasonably estimate the amount of the loss and where liability will likely arise.
We cannot always definitively determine possible liabilities that exceed recorded amounts related to the legal proceedings to which we are a party. There can be no certainty that Pentair may not ultimately incur charges, whether related to products liability, antitrust, or other litigation, environmental matters, or other actions, in excess of presently recorded liabilities. However, we believe it is unlikely, based upon the nature of the legal proceedings and our current knowledge of relevant facts and circumstances, that the possible liabilities exceeding the recorded amounts would be material individually or in the aggregate to our consolidated financial position, results of operations, or cash flows. With respect to product liability claims, such a conclusion about possible liabilities considers insurance coverage available for such liabilities.
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While we believe that a material adverse impact on our consolidated financial position, results of operations, or cash flows from any such future charges is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future adverse ruling or unfavorable development could result in future charges that could have a material adverse impact. We do and will continue to periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our consolidated financial position, results of operations, and cash flows for the proceedings and claims described in “Legal Proceedings” could change in the future.
We have been named as defendants, targets, or potentially responsible parties (PRPs) in a small number of environmental cleanups, in which our current or former business units have generally been given deminimis status. To date, none of these claims have resulted in cleanup costs, fines, penalties, or damages in an amount material to our financial position or results of operations. We have disposed of a number of businesses over the past ten years and in certain cases, such as the disposition of the Cross Pointe Paper Corporation uncoated paper business in 1995, the disposition of the Federal Cartridge Company ammunition business in 1997, and the disposition of Lincoln Industrial in 2001, we have retained responsibility and potential liability for certain environmental obligations. We have received claims for indemnification from purchasers both of the paper business and the ammunition business and have established what we believe to be adequate accruals for potential liabilities arising out of retained responsibilities. We settled one such claim in 2003 and our recorded accrual was adequate.
In addition, there are pending environmental issues concerning a limited number of sites, including one site acquired in the acquisition of Essef Corporation in 1999, that relates to operations no longer carried out at that site. We have established what we believe to be adequate accruals for remediation costs at this and other sites. We do not believe that projected response costs will result in a material liability.
We may be named as a PRP at other sites in the future, for both divested and acquired businesses. When it has been possible to provide reasonable estimates of our liability with respect to environmental sites, provisions have been made in accordance with generally accepted accounting principles in the United States. As of December 31, 2003, our reserve for such environmental liabilities was approximately $11.2 million, measured on an undiscounted basis. We cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmental cleanup costs and liabilities will not exceed the amount of our current reserves.
Product liability claims
As of February 8, 2004, we are involved in approximately 152 product liability lawsuits and personal injury claims. We believe we have in place insurance coverage adequate for our needs. A substantial number of these lawsuits and claims are insured and accrued for by Penwald. See discussion in ITEM 1 and ITEM 8, Note 1 of the Notes to the Consolidated Financial Statements – Insurance subsidiary. Accounting accruals covering the deductible portion of liability claims not covered by Penwald have been established and are reviewed on a regular basis. We have not experienced significant unfavorable trends in either the severity or frequency of product liability lawsuits or personal injury claims.
Horizon litigation
Twenty-eight separate lawsuits involving 29 primary plaintiffs, a class action, and claims for indemnity by Celebrity Cruise Lines, Inc. (Celebrity) were brought against Essef Corporation (Essef) and certain of its subsidiaries prior to our acquisition of Essef in August 1999. These lawsuits alleged exposure to Legionnaires bacteria by passengers aboard the cruise ship M/V Horizon, a ship operated by Celebrity. The lawsuits included a class action brought on behalf of all passengers aboard the ship during the relevant time period, individual “opt-out” passenger suits, and a suit by Celebrity. Celebrity alleged in its suit that it had sustained economic damages due to loss of use of the M/V Horizon while it was dry-docked.
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The claims against Essef and its involved subsidiaries were based upon the allegation that Essef designed, manufactured, and marketed two sand swimming pool filters that were installed as a part of the spa system on the Horizon, and allegations that the spa and filters contained bacteria that infected certain passengers on cruises from December 1993 through July 1994.
Prior to the acquisition of Essef, a settlement was reached in the class action. With regard to the individual “opt out” passenger suits, the claims of one plaintiff were tried under a stipulation among all remaining parties provided that the liability findings would be applicable to all plaintiffs and defendants. The trial resulted in a jury verdict on June 13, 2000 finding liability on the part of the Essef defendants (70%) and Celebrity and its sister company, Fantasia (together 30%). Compensatory damages in the total amount of $2.7 million were awarded, with each defendant being accountable for its proportionate share of liability. The Essef defendant’s proportionate share was covered by insurance. Punitive damages were separately awarded against the Essef defendants in the total amount of $7.0 million, with 60% awarded to all remaining plaintiffs and 40% to Celebrity.
After exhaustion of post-trial appeals, we paid all outstanding punitive damage awards of $7.0 million in the Horizon cases, plus interest of approximately $1.6 million in January 2004. We had reserved for the amount of punitive damages awarded at the time of the Essef acquisition. A reserve for the $1.6 million interest cost was recorded in 2003.
All of the personal injury cases have now been resolved through either settlement or trial. The only remaining unresolved case is that brought by Celebrity for interruption of its business. That case had been dormant, but was recently activated. One of Essef’s insurance carriers has issued a notice of rights letter. We believe we have reserves sufficient to cover the amount of any uninsured awards or settlements.
Ellerbrake et al v. DeVilbiss Air Power Company
In August 2001, a national class action was brought against DeVilbiss Air Power Company (DAPC) and four other manufacturers of retail air compressors on behalf of consumers that had purchased certain air compressors. Plaintiffs alleged that the manufacturers mislabeled horsepower ratings on compressors they manufacture. Plaintiffs sought to represent a class of all persons who had purchased since August 1996 an air compressor for which the horsepower ratings were allegedly mislabeled.
Without admitting any liability, DAPC settled with plaintiffs and the settlement was preliminarily approved by the Court in January 2004. Terms of the settlement include changes in labeling, an education program for consumers, attorney’s fees and tools or accessories for qualifying claimants. While certain elements of the settlement have specific dollars assigned to them, the ultimate cost of some elements is still unknown at this time. We believe reserves recorded in 2003 are sufficient to cover the cost of this settlement based on the information available to us at this time.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Current executive officers of Pentair, their ages, current position, and their business experience during at least the past five years are as follows:
Name
Current Position and Business Experience
Randall J. Hogan
David D. Harrison
Richard J. Cathcart
Michael V. Schrock
Charles M. Brown
Louis L. Ainsworth
Frederick S. Koury
Karen A. Durant
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
Pentair’s common stock is listed for trading on the New York Stock Exchange and trades under the symbol “PNR.” As of December 31, 2003, there were 3,980 shareholders of record.
The high, low, and closing sales price for our common stock and the dividends declared for each of the quarterly periods for 2003 and 2002 were as follows:
High
Low
Close
Dividends declared
Pentair has paid 112 consecutive quarterly dividends. See ITEM 8, Note 9 of the Notes to Consolidated Financial Statements for certain dividend restrictions.
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ITEM 6. SELECTED FINANCIAL DATA
Dollars in thousands, except per-share data
Statement of operations
Net sales Water
Sales growth
Cost of goods sold
Gross profit
Margin %
Selling, general and administrative
Restructuring charge Water
Operating income Water
Gain on sale of business
Net interest expense
Other expense, write-off of investment
Provision for income taxes
Income from continuing operations
Income (loss) from discontinued operations, net of tax
Cumulative effect of accounting change, net of tax
Net income
Preferred dividends
Income available to common shareholders
Common share data
Basic EPS — continuing operations
Basic EPS — discontinued operations
Basic EPS — cumulative effect of accounting change
Basic EPS — net income
Diluted EPS — continuing operations
Diluted EPS — discontinued operations
Diluted EPS — cumulative effect of accounting change
Diluted EPS — net income
Cash dividends declared per common share
Stock dividends declared per common share
Market value per share (December 31)
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ITEM 6. SELECTED FINANCIAL DATA – (continued)
Balance sheet data
Accounts receivable
Inventories
Property, plant and equipment, net
Goodwill
Total assets
Total debt
Shareholders’ equity
Other data
Debt/total capital
Depreciation Water
Goodwill amortization(1)
Tax effect of goodwill amortization(1)
Diluted EPS effect of goodwill amortization(1)
Other amortization
Net cash provided by operating activities
Capital expenditures
Employees of continuing operations
Days sales outstanding in receivables(2)
Days inventory on hand(2)
In fiscal 2001, we discontinued our Equipment segment (Century Mfg. Co./Lincoln Automotive and Lincoln Industrial businesses). Historical financial information has been adjusted to reflect this change. The 2001 results reflect a pre-tax loss on the sale of these businesses of $36.3 million ($24.6 million after tax, or $0.50 per share).
Capital expenditures in 2002 includes $23.0 million for the acquisition of a previously leased facility.
Cost of goods sold in 2001 includes $1.0 million related to the 2001 restructuring charge for our Enclosures segment.
The 2000 results reflect a non-cash pre-tax cumulative effect of accounting change related to revenue recognition that reduced income by $1.9 million ($1.2 million after tax, or $0.02 per share).
The 1997 results include a pre-tax gain on the sale of Federal Cartridge of $10.3 million ($1.2 million after tax, or $0.03 per share).
Reference should be made to the Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.
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This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expected,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” or the negative thereof or similar words. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results. They can be affected by assumptions we might make or by known or unknown risks or uncertainties. Consequently, we cannot guarantee any forward-looking statements. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties.
The following factors may impact the achievement of forward-looking statements:
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The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. We assume no obligation, and disclaim any duty, to update the forward-looking statements in this report.
We are a focused diversified industrial manufacturer operating in three segments: Water, Enclosures, and Tools. Our Water segment manufactures and markets essential products and systems used in the movement, treatment, storage and enjoyment of water and generates approximately 39 percent of total revenues. Our Enclosures segment accounts for approximately 21 percent of total revenues and designs, manufactures and markets standard, modified and custom enclosures that protect sensitive controls and components for markets that include industrial machinery, data communications, networking, telecommunications, test and measurement, automotive, medical, security, defense, and general electronics. Our Tools segment designs, manufactures and markets a wide range of power tools under several well established trade names generating approximately 40 percent of total revenues.
Our Water segment has progressively become a more important part of our business portfolio with sales increasing from $100 million in 1995 to approximately $1 billion in 2003. We have identified target industry segments totaling $50 billion, representing a small portion of the $350 billion global water market. We continue to capitalize on growth opportunities in the water industry as evidenced by four product line acquisitions in our Water segment in 2003 as well as the acquisition of Everpure on December 31, 2003. In February 2004, we announced our agreement to acquire WICOR, the completion of which would mark a dramatic shift in our water segment. We anticipate that the assimilation of these acquisitions into our business operations will create a $2 billion business in the water industry.
Our Enclosures segment operates in a large global market with significant headroom in the industry niches such as defense, security, medical, and networking. We believe we have the largest industrial and commercial distribution network in North America and highest brand recognition in the industry. During the past few years, the Enclosures segment experienced significantly lower sales volumes as a result of severely reduced capital spending in the industrial market and over-capacity and weak demand in the datacom and telecom markets. However, this segment did experience growth in 2003 across the electrical and electronic markets and we believe it is well-positioned to continue improved performance. In addition, through the success of our Pentair Integrated Management System (PIMS) and supply management initiatives we have increased Enclosures segment margins for the eighth sequential quarter.
Our Tools segment has been operating in a very competitive marketplace during the past few years. Pricing pressures and higher raw material costs have caused our operating margins to decline. In February 2004, we announced our intent to explore strategic alternatives for our Tools segment. We will continue to operate the Tools segment for the long-term and provide all appropriate management support and resources. We continue to seek opportunities to expand operating margins through cost reductions and productivity improvements as part of our PIMS initiatives. In addition, we plan to continue to launch innovative new products and pursue significant incremental volume opportunities.
Key Trends and Uncertainties
The following trends and uncertainties affected our financial performance in 2003 and will likely impact our results in the future:
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Business Transformation
On February 3, 2004, we entered into an agreement to acquire WICOR Inc. (“WICOR”), a unit of Wisconsin Energy Corporation, Milwaukee, Wisconsin. WICOR, which manufactures water system, filtration, and pool equipment products under the Sta-Rite, SHURflo, and Hypro brands, generated sales of approximately $746 million in 2003. The $850 million cash transaction, which we plan to complete in the second or third quarter of 2004, is subject to satisfaction of customary conditions and applicable regulatory approvals. As part of the transaction, we will assume approximately $24 million of WICOR debt.
The water industry is structurally attractive as a result of its large global market, approximating $350 billion, and a growing demand for clean water. Our vision is to become the leading global provider of innovative products and systems used in the movement, treatment, storage, and enjoyment of water.
We expect to achieve $30 million in synergies with respect to the WICOR acquisition in the first 18 months of operations via key initiatives including PIMS, material cost savings and administrative cost savings. We also expect to achieve significant working capital reductions, fixed asset reductions and capital expenditure savings as a result of the acquisition.
We also announced that we have engaged Goldman Sachs to explore strategic alternatives for our Tools segment, comprising the Porter-Cable, Delta, DeVilbiss Air Power Company, Oldham Saw and Flex businesses with $1,081.4 in net sales in 2003.
Outlook
In 2004, our operating objectives include the following:
Financial Measures
In our Management’s Discussion and Analysis, we make reference to certain non-GAAP (generally accepted accounting principles) financial measures, including gross profit, operating income, selling, general and administrative (SG&A), income from continuing operations before income taxes, and provision for income taxes, in each case “excluding goodwill amortization and restructuring charges” or “excluding restructuring charge.” We believe that these non-GAAP financial measures are useful to investors because they provide investors with
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other measures to consider, in conjunction with the GAAP results, which may be helpful to meaningfully compare our operating performance between periods. We also use these non-GAAP financial measures when assessing our own operating performance. A description of the accounting standards applicable to the elimination of the amortization of goodwill is included below under “New Accounting Standards.” A description of the restructuring charges that we exclude from GAAP results is included below under “Results of Operations – Restructuring Charges.” In each case below when we make reference to a non-GAAP financial measure, we also provide reconciliation to the comparable GAAP financial measure.
RESULTS OF OPERATIONS
Net sales
The components of the net sales change were:
Percentages
Volume
Price
Currency
Net sales in 2003 totaled $2,724 million, compared with $2,581 million in 2002, and $2,574 million in 2001. In 2003, volume increased by approximately 4.4 percent primarily due to increased demand in our Water segment and acquisitions in both our Water and Tools segments. Price declined by approximately 1.0 percent driven by promotional programs for our Tools segment products. In addition, the continued weakening of the U.S. dollar against the Euro in 2003 favorably impacted the dollar value of sales at our foreign subsidiaries by about 2.2 percent.
In 2002, volume increased by 0.2 percent primarily due to increased demand and acquisitions in both our Tools and Water segments. These increases were mostly offset by the continued weak demand for our Enclosures segment products. Price declined by 0.3 percent primarily due to the introduction of lower price point products and promotional programs for our Tools segment products. In addition, the continued weakening of the U.S. dollar in 2002 favorably impacted the dollar value of sales by about 0.4 percent.
Sales by segment and the year-over-year changes were as follows:
In thousands
The 13.7 percent increase in Water segment sales in 2003 from 2002 was primarily due to:
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The 5.6 percent increase in Water segment sales in 2002 from 2001 was primarily due to:
The 4.8 percent increase in Enclosures segment sales in 2003 from 2002 was primarily due to:
The 19.4 percent decline in Enclosures segment sales in 2002 from 2001 was primarily due to:
These decreases were partially offset by:
The 1.0 percent decrease in Tools segment sales in 2003 from 2002 was primarily due to:
The 9.1 percent increase in Tools segment sales in 2002 from 2001 was primarily due to:
These increases were partially offset by:
Percentage point change
The 1.0 percentage point increase in gross profit as a percent of sales in 2003 from 2002 was primarily the result of:
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These increases were offset by:
The 0.4 percentage point increase in gross profit as a percent of sales in 2002 from 2001 was primarily the result of:
Selling, general and administrative (SG&A)
SG&A as reported
Less goodwill amortization
SG&A excluding goodwill amortization
The 0.5 percentage point increase in SG&A expense as a percent of sales in 2003 from 2002 was primarily the result of:
The 0.1 percent point increase in SG&A expense as a percent of sales in 2002 from 2001 was primarily the result of:
Research and development (R&D)
R&D
The 0.2 percentage point increase in R&D expense as a percent of sales in 2003 from 2002 and in 2002 from 2001 was primarily the result of:
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Restructuring charge
In the fourth quarter of 2001, we initiated a restructuring program designed to consolidate manufacturing operations and eliminate non-critical support facilities in our Enclosures segment. We also wrote off internal-use software development costs at corporate for the abandonment of a company-wide human resource system. Consequently, we recorded a restructuring charge of $42.8 million, of which $1 million is included in cost of goods sold on the consolidated statement of income for the write-down of inventory on certain custom enclosures product that were discontinued as a result of plant closures. In the fourth quarter of 2001, we also recorded a final change in estimate related to our 2000 restructuring charge that reduced the restructuring charge by $1.7 million primarily due to favorable negotiation of contract termination costs. As of the end of 2001, the restructuring program initiated in 2000 was complete.
Included in other current liabilities on the consolidated balance sheets is the remaining portion of the restructuring charge liability of $3.3 million, primarily related to severance obligations not yet paid to certain terminated individuals and other charges as we are awaiting the results of pending and threatened claims by former employees of the affected facilities. Therefore, we are uncertain when this remaining liability will be paid. Payments in 2003 of $0.3 million are comprised of the payout of severance obligations and legal expenses. Funding of future payments will be paid from cash generated from operating activities.
See ITEM 8, Note 4 of the Notes to Consolidated Financial Statements for further information regarding restructuring charges.
Operating income
The following table and discussion provides a comparison of our Water segment operating income as reported, and those results excluding goodwill amortization.
Operating income as reported
Add back goodwill amortization
Operating income excluding goodwill amortization
The unchanged operating income percentage in the Water segment as a percent of net sales in 2003 from 2002 was primarily due to:
These benefits were offset by:
The 0.9 percentage point decline in Water segment operating income as a percent of net sales in 2002 from 2001 was primarily due to:
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The following table and discussion provides a comparison of our Enclosures segment operating income as reported, and those results excluding goodwill amortization and restructuring charges.
Add back restructuring charge
Operating income excluding goodwill amortization and restructuring charge
The 3.4 percentage point increase in Enclosures segment operating income as a percent of net sales in 2003 from 2002 was primarily due to:
The 1.8 percentage point decline in Enclosures segment operating income as a percent of net sales in 2002 from 2001 was primarily due to:
The decline was partially offset by:
The following table and discussion provides a comparison of our Tools segment operating income as reported, and those results excluding goodwill amortization.
The 1.3 percentage point decrease in Tools segment operating income as a percent of net sales in 2003 from 2002 was primarily due to:
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The 1.7 percentage point increase in Tools segment operating income as a percent of net sales in 2002 from 2001 was primarily due to:
The 0.2 percentage point decrease in interest expense in 2003 from 2002 was primarily the result of:
The 0.7 percentage point decrease in interest expense in 2002 from 2001 was primarily the result of:
The following table and discussion provides a comparison of our provision for income taxes for continuing operations as reported, and those results excluding goodwill amortization.
Income from continuing operations before income taxes
Income from continuing operations before income taxes, excluding goodwill amortization
Provision for income taxes as reported
Effective tax rate as reported
Tax effect of goodwill amortization
Provision for income taxes excluding goodwill amortization
Effective tax rate excluding goodwill amortization
The 1.5 percentage point increase in the tax rate in 2003 from 2002 was primarily the result of:
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The 1.7 percentage point increase in the tax rate in 2002 from 2001 was primarily the result of:
Before any effects of our planned acquisition of WICOR, we expect our effective tax rate on continuing operations to be approximately 34 percent in 2004. Our ultimate effective tax rate will depend on the timing of the planned WICOR acquisition and WICOR’s actual tax attributes.
LIQUIDITY AND CAPITAL RESOURCES
Cash requirements for working capital, capital expenditures, equity investments, acquisitions, debt repayments, and dividend payments are generally funded from cash generated from operations, availability under existing committed revolving credit facilities, and in certain instances, equity and debt transactions.
The following table presents selected working capital measurements calculated from our monthly operating results based on a 13-month moving average and indicates our emphasis on working capital management:
Days
December 31
2003
2002
2001
Days of sales in accounts receivable
Days inventory on hand
Days in accounts payable
Cash conversion cycle
Operating activities
Operating activities provided cash flow of $262.9 million in 2003, compared with $270.8 million in 2002 and $232.3 million in 2001. The $7.9 million decrease in 2003 from 2002 was primarily due to smaller benefits from working capital improvements offset by an increase in net income. The $38.5 million increase in 2002 from 2001 was primarily due an increase in net income and better working capital management.
Investing activities
Capital expenditures in 2003, 2002, and 2001 were $43.6 million or 1.6 percent of sales, $56.7 million (including $23.0 million for the acquisition of a previously leased facility) or 2.2 percent of sales, and $53.7 million or 2.1 percent of sales, respectively. We anticipate capital expenditures in 2004 to be approximately $50.0 million primarily in the areas of new product development and general maintenance capital.
On December 31, 2003, we acquired all of the common stock of Everpure, Inc. (Everpure), from United States Filter Corporation, a unit of Veolia Environnement, for $217.3 million in cash, including cash acquired of $5.5 million.
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In the first quarter of 2003, we received $1.9 million in purchase price adjustments relative to our fourth quarter 2002 acquisition of Plymouth Products. The adjustments primarily related to final determination of closing date net assets.
In January 2003, we paid $2.4 million for a final adjustment to the selling price related to the disposition of Lincoln Industrial. This had no effect on earnings for the twelve months ended December 31, 2003 as the amount was offset by previously established reserves.
In the fourth quarter of 2002, we acquired Plymouth Products and Oldham Saw for $174.7 million total consideration, including debt assumed of $2.7 million and cash acquired of $1.7 million.
We periodically review our array of businesses in comparison to our overall strategic and performance objectives. As part of this review, we may routinely acquire or divest certain businesses.
Financing activities
Net cash provided by financing activities approximated $33.8 million in 2003 compared with net cash used by financing activities of $38.6 million in 2002 and $222.9 million in 2001. Financing activities in 2003 were comprised of a $200 million private placement of senior notes with 10-year maturities and a new committed $500 million revolving credit facility (the “Credit Facility”) which matures in three years. The $500 million Credit Facility replaced two existing revolving credit facilities totaling $652 million of credit availability. Interest rates and fees on the Credit Facility vary based on our credit ratings. The $200 million private placement included $100 million of variable rate senior notes with an interest rate equal to the three-month LIBOR rate plus 1.15 percent and $100 million of fixed rate senior notes with an average interest rate of 4.98 percent. We used the $200 million proceeds received in the second half of 2003 from the private placement to pay down debt under the Credit Facility.
Financing activities included draw downs and repayments on the revolver to fund our operations in the normal course of business. We used the revolver to fund our acquisitions of Everpure for $217.3 million in 2003 and Plymouth Products and Oldham Saw for $174.7 million in 2002.
We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. The Credit Facility is used as back-up liquidity to support 100% of commercial paper outstanding. As of December 31, 2003, we have $64.8 million of commercial paper outstanding that matures within 30 days. All of the commercial paper is classified as long-term as we intend and have the ability to refinance such obligations on a long-term basis.
Credit available under our Credit Facility, as limited by our most restrictive financial covenant, was approximately $228 million and is based on a ratio of total debt to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). In addition, our debt agreements contain certain financial covenants that restrict the amount we may pay for dividends and require us to maintain certain financial ratios and a minimum net worth. We were in compliance with all covenants as of December 31, 2003.
In addition to the Credit Facility, we have $55 million of uncommitted credit facilities, under which we had $10 million outstanding as of December 31, 2003.
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At December 31, 2003, our capital structure consisted of $806.5 million in total indebtedness and $1,261.5 million in shareholders’ equity. The ratio of debt-to-capital was 39.0 percent, compared with 39.9 percent at December 31, 2002. Our targeted debt-to-total capital ratio range is approximately 40 percent. We will exceed this target from time to time as needed for operational purposes and/or acquisitions.
The following summarizes our significant contractual obligations that impact our liquidity:
Long-term debt obligations
Capital lease obligations
Operating lease obligations, net of sublease rentals
Purchase obligations
Other long-term liabilities
Total contractual cash obligations, net
A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on us that specifies all significant terms. The purchase obligation amounts do not represent our total anticipated future purchases, but represent those purchases for which we are contractually obligated. As of December 31, 2003, we did not have any purchase obligations requiring cash outflows of $1 million or greater per year.
Dividends paid in 2003 were $40.5 million, compared with $36.4 million in 2002, and $34.3 million in 2001. The year-over-year increases reflect an increase in our annual per-share dividend of $0.82 in 2003, compared with $0.74 in 2002, and $0.70 in 2001. We have paid dividends for the past 28 years and anticipate paying future dividends.
On February 4, 2004, we announced that we had entered into an agreement to acquire WICOR Inc. (“WICOR”), a unit of Wisconsin Energy Corporation, Milwaukee, Wisconsin. We expect to fund the WICOR acquisition through our currently available and newly committed lines of credit. We have obtained a commitment, subject to customary conditions, in the aggregate amount of $850 million (the “Bridge Facility”), for the payment of the purchase price. The Bridge Facility is available for a period up to the earlier of (i) September 1, 2004, (ii) the closing of the acquisition without the use of the Bridge Facility or (iii) the sale of the Pentair Tools Group.
The term loan to be made under the Bridge Facility (the “Loan”), pursuant to a formal loan agreement to be negotiated, is contemplated to be available in a single disbursement upon closing of the WICOR acquisition and is for the purpose of payment of the purchase price and related fees and expenses. The closing of the Loan must occur before September 1, 2004. Any balance due under the Loan is repayable in full, with accrued interest, no later than December 31, 2004. We will need to fund the repayment of the Bridge Facility by December 31, 2004 through a disposition of our Tools Group or through equity issuance.
As a result of our announcement of an agreement to acquire WICOR, see Note 18, Moody’s Investor Services has confirmed our long-term bank rating of Baa3 and changed the outlook to negative from stable. At the same time, Standard and Poor’s Rating Services has placed our BBB corporate credit and other ratings on CreditWatch with negative implications. The change in rating outlook to negative from stable reflects the increased financial and integration risks associated with the planned acquisition of WICOR. In addition, the timing and nature of any outcome resulting from the exploration of strategic alternatives for the Tools segment remains uncertain and
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subject to execution risk. In a related action, Moody’s Investor Services placed the Baa3 senior unsecured rating on our $250 million notes and the Baa3 rating on senior notes under our $225 million shelf registration under review for possible downgrade, due to the structural subordination thereof. Existing lenders under our Credit Facility and private placement notes benefit from guarantees from our domestic subsidiaries, while the $250 million senior note holders do not benefit from such guarantees. We are putting in place a similar guarantee for the benefit of the $250 million senior note holders to avoid the downgrade due to the structural subordination.
We are seeking to obtain an amendment to the Credit Facility to allow an increase to the ratio of total debt to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for the period of the Bridge Facility, which we believe will be granted by the banks participating in our Credit Facility. In addition, during the period the Bridge Facility is outstanding, additional limitations will be placed on share repurchases, dividends, acquisitions and sales of assets.
In 2004, interest expense will be primarily driven by the timing of the closing of the WICOR acquisition and any strategic alternative we pursue for our Tools segment.
We expect to continue to have cash requirements to support working capital needs and capital expenditures, to pay interest and service debt and to pay dividends to shareholders. In order to meet these cash requirements, we intend to use available cash and internally generated funds and to borrow under our committed and uncommitted credit facilities.
Long-term debt and lines of credit are explained in detail in ITEM 8, Note 9 of the Notes to Consolidated Financial Statements. Operating leases are explained in detail in ITEM 8, Note 16 of the Notes to Consolidated Financial Statements.
Other financial measures
In addition to measuring our cash flow generation or usage based upon operating, investing, and financing classifications included in the consolidated statements of cash flows, we also measure our free cash flow. Free cash flow is a non-GAAP financial measure that we use to assess our cash flow performance and have a long-term goal to consistently generate free cash flow that equals or exceeds 100 percent conversion of net income. We believe our ability to convert net income into free cash flow gives us opportunities to invest in new growth initiatives to create shareholder value. We believe free cash flow is an important measure of operating performance because it provides us and our investors a measurement of cash generated from operations that is available to fund acquisitions and repay debt. In addition, free cash flow is used as criteria to measure and pay compensation-based incentives. The following table is a reconciliation of free cash flow with cash flows from operating activities:
Cash flow provided by operating activities
Capital Expenditures
Free Cash Flow
Before any effects of our planned acquisition of WICOR, we expect 2004 free cash flow to exceed $200 million.
Off-balance sheet arrangements
At December 31, 2003, we had no off-balance sheet financing arrangements.
COMMITMENTS AND CONTINGENCIES
We have been named as defendants, targets, or potentially responsible parties (PRPs) in a small number of environmental cleanups, in which our current or former business units have generally been given deminimis
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status. To date, none of these claims have resulted in cleanup costs, fines, penalties, or damages in an amount material to our financial position or results of operations. We have disposed of a number of businesses over the past ten years and in certain cases, such as the disposition of the Cross Pointe Paper Corporation uncoated paper business in 1995, the disposition of the Federal Cartridge Company ammunition business in 1997, and the disposition of Lincoln Industrial in 2001, we have retained responsibility and potential liability for certain environmental obligations. We have received claims for indemnification from purchasers both of the paper business and the ammunition business and have established what we believe to be adequate accruals for potential liabilities arising out of retained responsibilities. We have recently settled one such claim in 2003 and our recorded accrual was adequate.
In addition, there are pending environmental issues concerning a limited number of sites, including one site acquired in the acquisition of Essef Corporation in 1999 that relates to operations no longer carried out at that site. We have established what we believe to be adequate accruals for remediation costs at this and other sites. We do not believe that projected response costs will result in a material liability.
Stand-by letters of credit
In the ordinary course of business, predominantly in our pumps business, we are required to commit to bonds that require payments to our customers for any non-performance. The outstanding face value of the bonds fluctuates with the value of our projects in process and in our backlog. In addition, we issue financial stand-by letters of credit to secure our performance to third parties under self-insurance programs and certain legal matters. As of December 31, 2003 and 2002, the outstanding value of these instruments totaled $35.0 million and $19.8 million, respectively.
NEW ACCOUNTING STANDARDS
See ITEM 8, Note 1 of the Notes to Consolidated Financial Statements for information pertaining to recently adopted accounting standards or accounting standards to be adopted in the future.
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CRITICAL ACCOUNTING POLICIES
We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are more fully described in Item 8, Note 1 to our consolidated financial statements. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry, and information available from other outside sources, as appropriate. We consider an accounting estimate to be critical if:
Our critical accounting estimates include the following:
Impairment of Goodwill
The fair value of each of our reporting units was estimated by an independent third party using a combination of the discounted cash flow, market comparable, and market capitalization approaches. The test for impairment requires us to make several estimates about projected future cash flows and appropriate discount rates. If these estimates change, we may incur charges for impairment of goodwill. During the fourth quarter of 2003, we completed our annual impairment test of goodwill and determined there was no impairment.
Impairment of Long-lived Assets Including Cost and Equity Method Investments
We review the recoverability of long-lived assets to be held and used, such as property, plant and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced for the cost to dispose of the assets. The measurement of impairment requires us to estimate future cash flows and the fair value of long-lived assets.
At the end of 2003, we have $57.4 million invested in certain privately held companies accounted for under the equity and cost methods. We write down or write off an investment and recognize a loss when events or circumstances indicate there is impairment in the investment that is other-than-temporary. This requires significant judgment, including assessment of the investees’ financial condition, and in certain cases the possibility of subsequent rounds of financing, as well as the investees’ historical results of operations, and projected results and cash flows. If the actual outcomes for the investees are significantly different from projections, we may incur future charges for the impairment of these investments.
Pension
We sponsor domestic and foreign defined-benefit pension and other post-retirement plans. The amounts recognized in our consolidated financial statements related to our defined-benefit pension and other post-retirement plans are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates, rate of increase in future compensation levels, and health care cost trend rates. These assumptions are updated annually and are disclosed in Item 8, Note 12 to the Consolidated Financial Statements. Changes to these assumptions will affect pension expense.
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Discount rate
The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of year based on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to payments from a stream of AA or higher bonds available in the marketplace, adjusted to eliminate the effects of call provisions. As a relatively young company, with a longer duration of liabilities than older companies with more mature workforces, this produced a discount rate of 6.25 percent. There are no known or anticipated changes in our discount rate assumption that will impact our pension expense in 2004. A 25 basis point decrease (increase) in our discount rate, holding constant our expected long-term return on plan assets and other assumptions, would increase (decrease) pension expense by approximately $1.4 million per year. We elected to utilize a 25 basis point hypothetical change as the assumption difference to demonstrate the sensitivity of our pension expense to a change in the discount rate.
Expected rate of return
The expected rate of return on plan assets is designed to be a long-term assumption that may be subject to considerable year-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical ten year compounded return of 9.5 percent, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader longer term market indices. In 2003, the pension plan assets yielded a positive return of 24.8 percent, compared to negative returns of 10.5 percent and 4.1 percent in 2002 and 2001, respectively. Our expected rate of return in 2003 equaled 8.5 percent, which remained unchanged from 2002 and 2001. In 2003, the significant difference between our expected return on plan assets of $24.7 million compared to our actual return on plan assets of $55.5 million was primarily due to the economic recovery and the resurgence of the financial markets. There are no known or anticipated changes in our return assumption that will impact our pension expense in 2004. A one percent decrease (increase) in the expected return on plan assets assumption, holding constant our discount rate and other assumptions, would increase (decrease) pension expense by approximately $3.1 million per year. We elected to use a one percent hypothetical change as the assumption difference facilitates extrapolation of changes in the expected rate of return assumption.
We base our determination of pension expense or income on a market-related valuation of assets which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market-related value of assets. Since the market-related value of assets recognizes gains or losses over a five-year-period, the future value of assets will be impacted as previously deferred gains or losses are recorded.
Pension-related adjustments to equity
In 2002, our discount rate was lowered from 7.25 percent to 6.25 percent and we realized a negative 10.5 percent return on plan assets which caused the accumulated benefit obligation to exceed the fair market value of plan assets as of December 31, 2002. This unfunded accumulated benefit obligation, plus the existing prepaid asset, was the primary cause of a $29.2 million net-of-tax charge to shareholders’ equity for 2002. The recovery of the financial markets in 2003 and positive return on plan assets of 24.8 percent eliminated $20.9 million of the charge to shareholders’ equity. The charge did not impact earnings.
Net periodic benefit cost
Total net periodic pension benefits cost was $15.7 million in 2003, $12.6 million in 2002, and $10.6 million in 2001. Total net periodic pension benefits cost is expected to be approximately $17.0 million in 2004. The increasing trend in net periodic pension cost from 2001 forward is largely driven by the downturn in the financial markets in 2002 and 2001 and the decrease in the discount rate in 2002. The net periodic pension benefit cost for 2004 has been estimated assuming a discount rate of 6.25 percent and an expected return on plan assets of 8.5 percent.
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Unrecognized pension losses
As of December 31, 2003 measurement date, our pension plans have $75.7 million of cumulative unrecognized losses of which approximately $20 million relates to the use of the market related value method and is not immediately subject to amortization. The remaining unrecognized loss, to the extent it exceeds 10% of the projected benefit obligation, will be amortized into expense each year on a straight-line basis over the remaining expected future-working lifetime of active participants (currently approximately 12 years). The amount included in pension expense for loss amortization in 2003 was $0.5 million.
Pension contributions in 2003 total $19.1 million, including $15.1 million of contributions to domestic defined benefit pension plans. In 2002, pension contributions totaled $18.9 million, including $15.3 million of contributions to domestic defined benefit plans. The contributions in 2003 and 2002 exceeded the minimum funding requirement. Our 2004 pension contributions are expected to be in the range of $10 million to $15 million.
Asset allocation
Our actual overall asset allocation for the plans as compared to our investment policy goals is as follows:
Large Capitalization U.S. Stocks
Small/Mid Capitalization, U.S. Stocks
Pentair Stock
International (Non-U.S.) Stocks
Private Equity
Fixed Income (Bonds)
Other Investments
Cash
We regularly review our asset allocation and periodically rebalance our investments to our targeted allocation when considered appropriate. Our cash balance is higher than normal due to a $15.1 million contribution made to our domestic defined benefit plans as of December 31, 2003. From time to time, we may be outside our targeted ranges by amounts we deem acceptable.
Equity securities include Pentair common stock in the amount of $21.6 million (8 percent of total plan assets) and $16.3 million (7 percent of total plan assets) at December 31, 2003, and 2002, respectively.
See ITEM 8, Note 12 of the Notes to Consolidated Financial Statements for further information regarding pension plans.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk
Market risk is the potential economic loss that may result from adverse changes in the fair value of financial instruments. We are exposed to various market risks, including changes in interest rates and foreign currency rates. We use derivative financial instruments to manage and reduce the impact of some of these risks. We do not hold or issue derivative financial instruments for speculative or trading purposes.
Interest rate risk
We are exposed to changes in interest rates primarily as a result of our borrowing activities used to fund operations. Interest rate swaps are used to manage a portion of our interest rate risk. The table below presents principal cash flows and related interest rates by year of maturity for variable rate and fixed rate debt obligations. Variable interest rates disclosed represent the weighted-average rate of the portfolio at each period end. Notional amounts and related interest rate of interest rate swaps are presented by year of maturity. For the swaps, variable rates are the average forward rates for the term of each contract.
Long-term debt, including current portion
Variable rate
Average interest rate
Fixed rate
Portion subject to interest rate swaps
Variable to fixed
Average rate to be received
Average rate to be paid
Fixed to variable
Foreign currency risk
We are exposed to foreign exchange risk as a result of transactions in currencies other than the functional currency of certain subsidiaries, including subsidiary debt. We have entered into foreign currency forward exchange agreements with a major financial institution to hedge firm foreign currency commitments. In 2003, the following forward exchange agreements matured: receive $50.0 million U.S. dollars, pay $69.4 million Canadian dollars, receive $69.4 million Canadian dollars, and pay $45.3 million Euros. As of December 31, 2003, the following table presents principal cash flows and fair values of our open currency forward exchange agreements:
Forward exchange agreements (1)
Pay Euros
Pay Singapore dollars
Pay Swiss Francs
Pay British Pounds
Receive USD
Total exchange loss
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
We are responsible for the integrity and objectivity of the financial information presented in this report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and include certain amounts based on our best estimates and judgment.
We are also responsible for establishing and maintaining our accounting systems and related internal controls, which are designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded. These systems and controls are reviewed by the internal auditors. In addition, our code of conduct states that our affairs are to be conducted under the highest ethical standards.
The independent auditors provide an independent review of the financial statements and the fairness of the information presented therein. The Audit and Finance Committee of the Board of Directors, composed solely of outside directors, meets regularly with us, our internal auditors, and our independent auditors to review audit activities, internal controls, and other accounting, reporting, and financial matters. Both the independent auditors and internal auditors have unrestricted access to the Audit and Finance Committee.
Chairman and Chief Executive Officer
Executive Vice President and Chief Financial Officer
March 4, 2004
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INDEPENDENT AUDITORS’ REPORT
Board of Directors and Shareholders of Pentair, Inc.
We have audited the accompanying consolidated balance sheets of Pentair, Inc. and subsidiaries (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of income, cash flows, and changes in shareholders’ equity for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Pentair, Inc. and subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
Minneapolis, Minnesota
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Pentair, Inc. and Subsidiaries
Consolidated Statements of Income
Interest income
Interest expense
Loss from discontinued operations, net of tax
Earnings per common share
Basic
Continuing operations
Discontinued operations
Basic earnings per common share
Diluted
Diluted earnings per common share
Weighted average common shares outstanding
See accompanying notes to consolidated financial statements.
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Consolidated Balance Sheets
Current assets
Cash and cash equivalents
Accounts and notes receivable, net of allowance of $15,359 and $16,676, respectively
Deferred tax assets
Prepaid expenses and other current assets
Total current assets
Other assets
Intangibles, net
Other
Total other assets
Current liabilities
Short-term borrowings
Current maturities of long-term debt
Accounts payable
Employee compensation and benefits
Accrued product claims and warranties
Income taxes
Other current liabilities
Total current liabilities
Long-term debt
Pension and other retirement compensation
Post-retirement medical and other benefits
Deferred tax liabilities
Other noncurrent liabilities
Total liabilities
Commitments and contingencies
Common shares par value $0.16 2/3;49,502,542 and 49,222,450 shares issued and outstanding, respectively
Additional paid-in capital
Retained earnings
Unearned restricted stock compensation
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
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Consolidated Statements of Cash Flows
Depreciation
Goodwill amortization
Deferred income taxes
Stock compensation
Loss from discontinued operations
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable
Pension and post-retirement benefits
Other assets and liabilities
Net cash provided by continuing operations
Net cash provided by (used for) discontinued operations
Acquisition of previously leased facility
Proceeds (payments) from sale of businesses
Acquisitions, net of cash acquired
Equity investments
Net cash used for investing activities
Net short-term borrowings (repayments)
Proceeds from long-term debt
Repayment of long-term debt
Proceeds from exercise of stock options
Repurchases of common stock
Dividends paid
Net cash provided by (used for) financing activities
Effect of exchange rate changes on cash
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
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Consolidated Statements of Changes in Shareholders’ Equity
Balance — December 31, 2000
Cumulative effect of accounting change (SFAS 133)
Change in cumulative translation adjustment
Adjustment in minimum pension liability, net of $399 tax benefit
Changes in market value of derivative financial instruments
Comprehensive income
Tax benefit of stock options
Cash dividends — $0.70 per common share
Share repurchases
Exercise of stock options, net of 174,407 shares tendered for payment
Issuance of restricted shares, net of cancellations
Amortization of restricted shares
Balance — December 31, 2001
Adjustment in minimum pension liability, net of $18,670 tax benefit
Cash dividends — $0.74 per common share
Exercise of stock options, net of 45,547 shares tendered for payment
Shares surrendered by employees to pay taxes
Balance — December 31, 2002
Adjustment in minimum pension liability, net of $13,339 tax expense
Cash dividends — $0.82 per common share
Exercise of stock options, net of 104,189 shares tendered for payment
Balance — December 31, 2003
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Pentair, Inc. and subsidiaries
Notes to consolidated financial statements
Fiscal year
Our fiscal year ends on December 31. Additionally, we report our interim quarterly periods on a 13-week basis ending on a Saturday.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of Pentair and all subsidiaries, both U.S. and non-U.S., that we control. Intercompany accounts and transactions have been eliminated. Investments in companies of which we own 20 percent to 50 percent of the voting stock and have the ability to exercise significant influence over operating and financial policies of the investee are accounted for using the equity method of accounting and, as a result, our share of the earnings or losses of such equity affiliates is included in the statement of income. The cost method of accounting is used for investments in which Pentair has less than a 20 percent ownership interest and we do not have the ability to exercise significant influence. These investments are carried at cost and are adjusted only for other-than-temporary declines in fair value.
Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the current year’s presentation.
Use of estimates
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires us to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that could differ from those estimates. The critical accounting policies that require our most significant estimates and judgments include:
Revenue recognition
We recognize revenue when it is realized or realizable and has been earned. Revenue is recognized when persuasive evidence of an arrangement exists; shipment or delivery has occurred (depending on the terms of the sale); the seller’s price to the buyer is fixed or determinable; and collectibility is reasonably assured.
Generally, there is no post-shipment obligation on product sold other than warranty obligations in the normal, ordinary course of business. In the event significant post-shipment obligations were to exist, revenue recognition would be deferred until substantially all obligations were satisfied.
Sales returns
The right of return may exist explicitly or implicitly with our customers. Revenue from a transaction is recognized only if our price is fixed and determinable at the date of sale; the customer has paid or is obligated to pay; the customer’s obligation would not be changed in the event of theft or physical destruction or damage of the product, the customer has economic substance apart from our Company; we do not have significant obligations for future performance to directly bring about resale of the product by the customer; and the amount of returns can reasonably be estimated.
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Notes to consolidated financial statements — (continued)
In general, our return policy allows for customer returns only upon our authorization. Goods returned must be product we continue to market and must be in salable condition. Returns of custom or modified goods are normally not allowed.
At the time of sale, we reduce revenue for the estimated effect of returns. Estimated sales returns include consideration of historical sales levels, the timing and magnitude of historical sales return levels as a percent of sales, type of product, type of customer, and a projection of this experience into the future.
Pricing and sales incentives
We record estimated reductions to revenue for customer programs and incentive offerings including pricing arrangements, promotions, and other volume-based incentives at the later of the date revenue is recognized or the incentive is offered. Sales incentives given to our customers is recorded as a reduction of revenue unless we (1) receive an identifiable benefit for the goods or services in exchange for the consideration and (2) we can reasonably estimate the fair value of the benefit received. The following represents a description of our pricing arrangements, promotions, and other volume-based incentives:
Pricing arrangements
Pricing is established up front with our customers and we record sales at the agreed upon net selling price. However, one of our businesses allows customers to apply for a refund of a percentage of the original purchase price if they can demonstrate sales to a qualifying OEM customer. At the time of sale, we estimate the anticipated refund to be paid based on historical experience and reduce sales for the probable cost of the discount. The cost of these refunds is recorded as a reduction in gross sales.
Promotions
Our primary promotional activity is what we refer to as cooperative advertising. Under this cooperative advertising program, we agree to pay the customer a fixed percentage of sales as an allowance to be used to advertise and promote our products. The customer is not required to provide evidence of the advertisement or promotion. We recognize the cost of this cooperative advertising at the time of sale. The cost of this program is recorded as a reduction in gross sales.
Volume-based incentives
These incentives involve rebates that are negotiated up front with the customer and are redeemable only if the customer achieves a specified cumulative level of sales. Under these incentive programs, at the time of sale, we reforecast the anticipated rebate to be paid based on forecasted sales levels. These forecasts are updated at least monthly, for each customer and sales are reduced for the anticipated cost of the rebate. If the forecasted sales for a customer changes, the accrual for rebates is adjusted to reflect the new amount of rebates expected to be earned by the customer.
There has been no material accounting revisions for revenue-recognition related estimates.
Shipping and handling costs
Amounts billed to customers for shipping and handling is recorded in net sales in the accompanying consolidated statements of income. Shipping and handling costs incurred by Pentair for the delivery of goods to customers are included in cost of goods sold in the accompanying consolidated statements of income.
Cash equivalents
We consider highly liquid investments with original maturities of three months or less to be cash equivalents.
Trade receivables and concentration of credit risk
We record an allowance for doubtful accounts, reducing our receivables balance to an amount we estimate is collectible from our customers.
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We perform periodic credit evaluations of our customer’s financial condition and generally do not require collateral. In addition, we encounter a certain amount of credit risk as a result of a concentration of receivables among a few significant customers. Approximately 23 percent and 25 percent of our receivables were due from three large home improvement retailers as of December 31, 2003 and 2002, respectively.
Inventories are stated at the lower of cost or market. Inventories of United States subsidiaries are generally determined by the last-in, first-out (LIFO) method. Inventories of foreign-based subsidiaries are determined by the first-in, first-out (FIFO) and moving average methods.
Property, plant, and equipment
Property, plant, and equipment is stated at historical cost. We compute depreciation by the straight-line method based on the following estimated useful lives:
Years
Land improvements
Buildings and leasehold improvements
Machinery and equipment
Significant improvements that add to productive capacity or extend the lives of properties are capitalized. Costs for repairs and maintenance are charged to expense as incurred. When property is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any related gains or losses are included in income.
Goodwill and identifiable intangible assets
Goodwill represents the excess of the cost of acquired businesses over of the fair value of identifiable tangible net assets and identifiable intangible assets purchased.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142,Goodwill and Other Intangible Assets. Under the provisions of this statement, effective January 1, 2002, goodwill is no longer amortized but tested for impairment on an annual basis. During the fourth quarter of 2003, we completed our annual impairment test of goodwill and determined no impairment charge was necessary. The fair value of each of our reporting units was estimated by an independent third party using a combination of the discounted cash flow, market comparable, and market capitalization approaches.
The primary identifiable intangible assets of Pentair include trademarks and trade names acquired in business combinations, patents, non-compete agreements, proprietary technology and customer relationships. Under the provisions of SFAS No. 142, identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are
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evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment annually, or more frequently if events warrant. The impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount. During the fourth quarter of 2003, we completed our annual impairment test for those identifiable assets not subject to amortization and determined there was no impairment charge.
The following table illustrates the pro forma impact of the adoption of SFAS No. 142 on our income from continuing operations as well as basic and diluted earnings per share:
Less income taxes
Adjusted income from continuing operations
Reported earnings per share — basic (continuing operations)
Goodwill amortization, net of taxes
Adjusted earnings per share — basic (continuing operations)
Reported earnings per share — diluted (continuing operations)
Adjusted earnings per share — diluted (continuing operations)
Our accounting policy prior to the adoption of SFAS No. 142 was to amortize goodwill on a straight-line basis over the estimated future periods to be benefited, principally between 25 and 40 years.
Cost and equity method investments
We have investments that are accounted for at historical cost or, if we have significant influence over the investee, using the equity method. Pentair’s proportionate share of income or losses from investments accounted for under the equity method is recorded in the consolidated statements of income. We write down or write off an investment and recognize a loss when events or circumstances indicate there is impairment in the investment that is other-than-temporary. This requires significant judgment, including assessment of the investees’ financial condition, and in certain cases the possibility of subsequent rounds of financing, as well as the investees’ historical results of operations, and projected results and cash flows. If the actual outcomes for the investees are significantly different from projections, we may incur future charges for the impairment of these investments.
Pentair uses the asset and liability approach to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in our tax provision in the period of change.
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We recognize environmental cleanup liabilities on an undiscounted basis when a loss is probable and can be reasonably estimated. Such liabilities generally are not subject to insurance coverage. The cost of each environmental cleanup is estimated by engineering, financial, and legal specialists based on current law. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the likelihood that, where applicable, other potentially responsible parties (PRPs) will be able to fulfill their commitments at the sites where Pentair may be jointly and severally liable. For closed or closing plants owned by Pentair and properties being sold, an estimated liability is typically recognized at the time the closure decision is made or sale is recorded and is based on an environmental assessment of the plant property. The process of estimating environmental cleanup liabilities is complex and dependent primarily on the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, the uncertainty as to what remedy and technology will be required, and the outcome of discussions with regulatory agencies and other PRPs at multi-party sites. In future periods, new laws or regulations, advances in cleanup technologies, and additional information about the ultimate cleanup remedy that is used could significantly change our estimates.
Insurance subsidiary
We insure general and product liability, property, workers’ compensation, and automobile liability risks through our wholly owned captive insurance subsidiary. Reserves for policy claims are established based on actuarial projections of ultimate losses. As of the end of 2003 and 2002, reserves for policy claims were $32.4 million ($10.0 million included in accrued product claims and warranties and $22.4 million included in other noncurrent liabilities) and $27.0 million ($10.0 million included in accrued product claims and warranties and $17.0 million included in other noncurrent liabilities).
Stock-based compensation
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, we apply the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, to our stock options and other stock-based compensation plans.
In accordance with APB Opinion No. 25, cost for stock based compensation is recognized in income based on the excess, if any, of the quoted market price of the stock at the grant date of the award or other measurement date over the amount an employee must pay to acquire the stock. The exercise price for stock options granted to employees equals the fair market value of Pentair’s common stock at the date of grant, thereby resulting in no recognition of compensation expense by Pentair. Restricted stock awards are recorded as compensation cost over the requisite vesting periods based on the market value on the date of grant. Unearned compensation cost on restricted stock awards is shown as a reduction to shareholders’ equity.
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The following table illustrates the effect on income from continuing operations and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. The estimated fair value of each Pentair option is calculated using the Black-Scholes option-pricing model.
Income from continuing operations — as reported
Less estimated stock-based employee compensation determined under fair value based method, net of tax
Income from continuing operations — pro forma
Earnings per common share — continuing operations
Basic — as reported
Basic — pro forma
Diluted — as reported
Diluted — pro forma
The weighted-average fair value of options granted in 2003, 2002, and 2001 was $11.49, $10.37, and $7.17 per option, respectively. We estimated the fair values using the Black-Scholes option-pricing model, modified for dividends and using the following assumptions:
Risk-free interest rate
Dividend yield
Expected stock price volatility
Expected lives
Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted average number of common shares outstanding, including the dilutive effects of stock options and restricted stock. Unless otherwise noted, references are to diluted earnings per share.
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Basic and diluted earnings per share were calculated using the following:
Earnings per common share — basic
Earnings per common share — diluted
Weighted average common shares outstanding — basic
Dilutive impact of stock options and restricted stock
Weighted average common shares outstanding — diluted
Derivative financial instruments
Effective January 1, 2001, we adopted the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. These standards require us to recognize all derivatives, including those embedded in other contracts, as either assets or liabilities at fair value in our balance sheet. If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and the hedged item are recognized in earnings. If the derivative is designated and is effective as a cash-flow hedge, changes in the fair value of the derivative are recorded in other comprehensive income (OCI) and are recognized in the consolidated statements of income when the hedged item affects earnings. SFAS No. 133 defines new requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting. For a derivative that is not designated as or does not qualify as a hedge, changes in fair value are reported in earnings immediately.
The financial statements of subsidiaries located outside of the United States are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date. The resultant translation adjustments are included in accumulated other comprehensive income, a separate component of stockholders’ equity. Income and expense items are translated at average monthly rates of exchange.
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Cumulative effect of accounting change
The adoption of SFAS No. 133 on January 1, 2001, resulted in an increase to other assets and other noncurrent liabilities of $7.5 million and $0.8 million, respectively, and a cumulative transition adjustment of $6.7 million in OCI. The transition adjustment relates to our hedging activities through December 31, 2000. Prior to the adoption of SFAS No. 133, financial instruments designated as hedges were not recorded in the financial statements, but cash flows from such contracts were recorded as adjustments to earnings as the hedged items affected earnings.
We use derivative financial instruments for the purpose of hedging interest rate and currency exposures, which exist as part of ongoing business operations. All hedging instruments are designated and effective as hedges, in accordance with the provisions of SFAS No. 133, as amended. We do not hold or issue derivative financial instruments for trading or speculative purposes. All other contracts that contain provisions meeting the definition of a derivative also meet the requirements of, and have been designated as, normal purchases or sales. Our policy is to not enter into contracts with terms that cannot be designated as normal purchases or sales.
Other newly adopted accounting standards
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This new standard addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of this standard on January 1, 2003 did not have a material impact on our consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This new standard nullifies EITF Issue No. 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144, be recognized when the liability is incurred, rather than the date of an entity’s commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with earlier application encouraged. The adoption of this standard on January 1, 2003 did not have a material impact on our consolidated financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. Interpretation No. 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that at the time an entity issues a guarantee, the issuing entity must recognize an initial liability for the fair value of the obligations it assumes under that guarantee. However, the provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations does not apply to product warranties, guarantees accounted for as derivatives, or other guarantees of an entity’s own future performance. We have adopted the disclosure requirements of the interpretation as of December 31, 2002. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of the initial recognition and measurement provisions were not material to our consolidated financial position or results of operations.
In December 2003, the FASB revised SFAS No. 132, Employers’ Disclosures about Pensions and Other Post-retirement Benefits. The revised standard requires new disclosures in addition to those required by the original standard about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans
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and other defined benefit post-retirement plans. As revised, SFAS No. 132 is effective for financial statements with fiscal years ending after December 15, 2003. The interim-period disclosures required by this standard are effective for interim periods beginning after December 15, 2003. However, disclosure of the estimated future benefit payments is effective for fiscal years ending after June 15, 2004. See Item 8, Note 12 for disclosures regarding our defined benefit pension plans and other post-retirement benefits.
New accounting standards to be adopted in the future
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (VIE), an Interpretation of ARB No. 51, which requires all VIEs to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the VIE.
In December 2003, the FASB revised FIN 46, delaying the effective dates for certain entities created before February 1, 2003, and making other amendments to clarify application of the guidance. For potential variable interest entities other than any Special Purpose Entities (SPEs), the revised FIN 46 (FIN 46R) is now required to be applied no later than the end of the first fiscal year or interim reporting period ending after March 15, 2004. The original guidance under FIN 46 is still applicable, however, for all SPEs created prior to February 1, 2003 at the end of the first interim or annual reporting period ending after December 15, 2003. FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date it is first applied, or by restating previously issued financial statements with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46R also requires certain disclosures of an entity’s relationship with variable interest entities. We will adopt FIN 46R for non-SPE entities in our first quarter ending April 3, 2004. We have not yet determined the effect of adopting the provisions of FIN 46R. However, we do not believe it will have a material effect on our consolidated financial position or results of operations.
On January 12, 2004, the FASB issued FASB Staff Position (FSP) No. 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The FSP permits a sponsor of a post-retirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. We do not believe the FSP will have a material effect on our financial statements because we do not expect to receive significant subsidies under the Act.
2. Acquisitions
On December 31, 2003, we acquired all of the common stock of Everpure, Inc. (Everpure), from United States Filter Corporation, a unit of Veolia Environnement, for $217.3 million in cash, including cash acquired of $5.5 million. We believe Everpure will enhance our future growth in the commercial filtration segment. It is anticipated Everpure’s strong trade name, industry leading technology, rapid product development capabilities, and broad footprint in North America, Europe, and Asia, will leverage the strengths of our Water segment and accelerate the long-term growth and profitability of Pentair.
The initial allocation of purchase price for the Everpure acquisition was based on preliminary estimates and may be revised as better information becomes available in 2004. The closing date balance sheet is expected to be delivered by March 31, 2004.
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The initial purchase price of Everpure has been allocated based on management’s estimates and independent appraisals as follows:
Intangible assets
Other noncurrent assets
Total assets acquired
Deferred taxes
Total liabilities assumed
Net assets acquired
A preliminary valuation of the acquired intangible assets was performed by a third party valuation specialist to assist us in determining the fair value of each identifiable intangible. Standard valuation procedures were utilized in determining the fair value of the acquired intangibles. The following table summarizes the identified intangible asset categories and their weighted average amortization period:
Finite-life intangible assets
Patents
Non-compete agreements
Proprietary technology
Customer relationships
Indefinite-life intangible assets
Trade marks and trade names
During 2003, we also completed four product line acquisitions in our Water segment for total consideration of approximately $21.4 million in cash.
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We acquired HydroTemp and Letro Products in March 2003 to complement our existing pool and spa equipment business of our Water segment. We acquired certain assets of TwinPumps in July 2003. We will combine the assets of TwinPumps with our existing pump business of our Water segment to pursue replacement parts, replacement pumps, and new projects in the municipal wastewater business. We acquired certain assets of K&M Plastics, in July 2003, with the intent of establishing pressure vessel manufacturing capacity in China to better serve the fast growing Asian water market. The aggregated annual revenue of the acquired businesses is approximately $22.0 million.
The allocation of the purchase price of these four product line acquisitions resulted in goodwill of $17.3 million, all of which is tax deductible. We continue to evaluate the initial purchase accounting allocations for these acquisitions and will adjust the allocations as additional information relative to the fair market values of the assets and liabilities of the businesses become known.
In the first quarter of 2003, we received $1.9 million in purchase price adjustments relative to our fourth quarter 2002 acquisition of Plymouth Products, Inc. (Plymouth Products) which was credited to reduce goodwill initially recorded at closing. The adjustments primarily related to final determination of closing date net assets.
On September 30, 2002, we acquired all of the common stock of Plymouth Products and affiliated entities from USF Consumer & Commercial WaterGroup, a unit of Vivendi Environnement (now Veolia Environnement), for total consideration of $121.7 million, including debt assumed of $1.2 million. Plymouth Products is a manufacturer of water filtration products used in residential, commercial, and industrial applications. Identifiable intangible assets acquired as part of the acquisition were $8.0 million. Goodwill recorded as part of the initial purchase price allocation was $79.7 million as of December 31, 2003. The purchase price allocation was finalized in the fourth quarter of 2003.
On October 1, 2002, we acquired all of the common stock of privately-held Oldham Saw Co., Inc. and affiliated entities (Oldham Saw) for total consideration of $53.0 million cash, including debt assumed of $1.5 million and cash acquired of $1.7 million. Oldham Saw designs, manufactures, and markets router bits, circular saw blades, and related accessories for the do-it-yourself (DIY) and professional power tool markets. Identifiable intangible assets acquired as part of the acquisition were $9.6 million. Goodwill recorded as part of the initial purchase price allocation was $29.9 million. Pursuant to an earn-out provision, the purchase price could increase depending on Oldham Saw achieving certain net sales and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) targets in 2003 and 2004. In 2003, there were no contingent payments made. In 2004, the maximum total contingent payments based on these targets could be $1 million.
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The following pro forma consolidated condensed financial results of operations for the years ended December 31, 2003, and 2002 are presented as if the acquisitions had been acquired at the beginning of each period presented.
Loss on disposal of discontinued operations, net of tax
These pro forma consolidated condensed financial results have been prepared for comparative purposes only and include certain adjustments, such as increased interest expense on acquisition debt. They do not reflect the effect of synergies that would have been expected to result from the integration of these acquisitions. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the combination occurred on January 1 of each year presented, or of future results of the consolidated entities.
3. Discontinued Operations/Divestitures
In December 2000, we adopted a plan to sell our Equipment segment businesses, Service Equipment (Century Mfg. Co./Lincoln Automotive Company) and Lincoln Industrial, Inc. (Lincoln Industrial). In October 2001, we completed the sale of the Service Equipment businesses to Clore Automotive, LLC for total consideration of $18.2 million. In December 2001, we completed the sale of Lincoln Industrial to affiliates of The Jordan Company LLC (Jordan), other investors, and members of management of Lincoln Industrial for total consideration of $78.4 million, including a preferred stock interest. The selling price of Lincoln Industrial was subject to a final purchase price adjustment that was finalized in January 2003, in which we paid Jordan $2.4 million which was charged to a previously established reserve.
Our financial statements have been restated to reflect the Equipment segment as a discontinued operation for all periods presented. Operating results of the discontinued Equipment segment are summarized below. The amounts exclude general corporate overhead previously allocated to the Equipment segment. The amounts include an allocation of interest based on a ratio of the net assets of the discontinued operations to the total net assets of Pentair.
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In the fourth quarter of 2003, we reported an additional loss from discontinued operations of $2.9 million primarily due to a reduction in estimated proceeds related to exiting two remaining facilities. One facility is owned and the other facility is under an operating lease.
Pre-tax loss on disposal of discontinued businesses
Tax benefit
Net (liabilities) assets of the discontinued Equipment segment consisted of the following:
Property, plant, and equipment, net
Long-term liabilities
Net (liabilities) assets of discontinued operations
The net liabilities or assets of discontinued operations are included in the respective categories of other current assets, other current liabilities and other long-term liabilities in the consolidated balance sheets for 2003 and 2002.
At December 31, 2003, accruals totaling $4.1 million represent the estimated future cash outflows associated with the exit from the leased facility. The owned facility is recorded at its estimated net realizable value.
4. Restructuring Charge
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The major components of the 2001 restructuring charges and remaining restructuring liability follows:
December 31, 2000 liability
Change in estimate (fourth quarter)
2001 restructuring charge (fourth quarter)
Utilization of 2000 and 2001 restructuring charges
December 31, 2001 liability
Utilization of 2001 restructuring charge
December 31, 2002 liability
December 31, 2003 liability
Included in other current liabilities on the consolidated balance sheets is the remaining portion of the restructuring charge liability of $3.3 million, primarily related to severance obligations not yet paid to certain terminated individuals and other charges as we are awaiting the results of pending and threatened claims by former employees of the affected facilities. Therefore, we are uncertain when this remaining liability will be paid. Payments in 2003 are comprised of the payout of severance obligations and legal expenses. Funding of future payments will be paid from cash generated from operating activities.
Workforce reductions related to the 2001 restructuring charge are for approximately 870 employees, terminated primarily in 2001 and 2002. Employee termination benefits consist primarily of severance and outplacement counseling fees. Employee termination benefits for the 2001 restructuring charge includes a $0.4 million non-cash charge for the intrinsic value of stock options modified as part of a severance agreement.
Non-cash asset disposals for the 2001 restructuring charges were for the write-down of equipment, leasehold improvements, and inventory as a direct result of our decisions to exit certain facilities and the abandonment of internal use software under development. Exit costs are primarily related to contract and lease termination costs.
The following table summarizes the components of the 2001 restructuring charges by segment, net of changes in estimates:
Employee termination benefits
Non-cash asset disposals
Impaired goodwill
Exit costs
2001 restructuring charge
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5. Goodwill and Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill for the year ended December 31, 2003 by segment is as follows:
Balance December 31, 2002
Acquired
Foreign currency translation
Net purchase adjustments
Balance December 31, 2003
The detail of acquired intangible assets consisted of the following:
Total finite-life intangible assets
Trademarks
Total intangibles, net
Amortization expense in 2003 was $1.8 million. The estimated future amortization expense for identifiable intangible assets during the next five years is as follows:
Estimated amortization expense
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6. Supplemental Balance Sheet Information
Raw materials and supplies
Work-in-process
Finished goods
Total inventories
Property, plant and equipment
Land and land improvements
Construction in progress
Total property, plant and equipment
Less accumulated depreciation and amortization
Equity method investments
Cost method investments
Certain inventories are valued at LIFO. If all inventories were valued at FIFO as of the end of 2003 and 2002, inventories would have been $287.2 million and $296.7 million, respectively.
We have invested approximately $30.5 million to acquire a 49 percent interest in the joint venture operations of a long time Asian supplier for bench top power tools, of which $5.6 million was paid in 2003, $4.5 million was paid in 2002 and $20.4 million was paid in 2001. In February 2004, we signed a letter of intent to purchase the remaining 51 percent ownership interest in this supplier. Our portion of the losses for these joint ventures is included in cost of goods sold; however, it is not material.
As part of the sale of Lincoln Industrial in 2001, we received 37,500 shares of 5% Series C Junior Convertible Redeemable Preferred Stock convertible into a 15 percent equity interest in the new organization—LN Holdings Corporation. The preferred stock is recorded at $18.4 million, which represents the estimated fair value of that investment at the time of sale.
In July 2002, we invested an additional $5.0 million for a total investment of $10.0 million in the preferred stock of a privately held developer and manufacturer of laser leveling and measuring devices.
7. Supplemental Cash Flow Information
The following table summarizes supplemental cash flow information:
Interest payments
Income tax payments
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Supplemental disclosure of non-cash investing and financing activities
As part of the sale of Lincoln Industrial in 2001, we received 37,500 shares of 5% Series C Junior Convertible Redeemable Preferred Stock convertible into a 15 percent equity interest in the new organization – LN Holdings Corporation. The preferred stock is recorded at $18.4 million, which represents the estimated fair value of that investment at the time of sale.
8. Accumulated Other Comprehensive Income (Loss)
Components of accumulated other comprehensive income (loss) consist of the following:
Minimum pension liability adjustments, net of tax
Foreign currency translation adjustments
Market value of derivative financial instruments
In 2003, the minimum pension liability adjustment decreased by $20.9 million largely due to improved pension asset performance. In 2002, the decrease in the discount rate and poor pension plan asset performance caused the $29.2 million increase in the minimum pension liability adjustment. The net foreign currency translation gain in 2003 and 2002 of $27.2 million and $25.2 million, respectively, was primarily the result of the continued weakening of the U.S. dollar against the Euro and Canadian dollar currencies. Changes in the market value of derivative financial instruments was impacted primarily by the maturities of derivatives and changing interest rates. Fluctuations in the value of hedging instruments are generally offset by changes in the cash flows of the underlying exposures being hedged.
9. Debt
Long-term debt and the average interest rate on debt outstanding as of December 31 is summarized as follows:
Maturity
(Year)
Commercial paper, maturing within 30 days
Revolving credit facilities
Private placement — fixed rate
Private placement — floating rate
Senior notes
Total contractual debt obligations
Interest rate swap monetization deferred income
Fair value of interest rate swap
Total long-term debt, including current portion per balance sheet
Less current maturities
On July 25, 2003, we completed new financing arrangements totaling $700 million, comprised of a $200 million private placement of senior notes with 10-year maturities (of which $150 million was funded during the third quarter and $50 million was funded during the fourth quarter of 2003) and a new committed $500 million
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revolving credit facility (the “Credit Facility”) which matures in three years. The $500 million Credit Facility replaced two existing revolving credit facilities totaling $652 million of credit availability. Interest rates and fees on the Credit Facility vary based on our credit ratings. The $200 million private placement included $100 million of variable rate senior notes with an interest rate equal to the three-month LIBOR rate plus 1.15 percent and $100 million of fixed rate senior notes with an average interest rate of 4.98 percent. We used the $200 million proceeds received in the second half of 2003 from the private placement to pay down debt under the Credit Facility.
Our current credit ratings are as follows:
Rating Agency
Long-Term Debt Rating
Standard & Poor’s
Moody’s
As a result of our announcement of an agreement to acquire WICOR (see Note 18), Moody’s Investor Services has confirmed the our long-term bank rating of Baa3 and changed our outlook to negative from stable. At the same time, Standard and Poor’s Rating Services has place our BBB corporate credit and other ratings on CreditWatch with negative implications. The change in rating outlook to negative from stable reflects the increased financial and integration risks associated with the planned acquisition of WICOR. In addition, the timing and nature of any outcome resulting from the exploration of strategic alternatives for the Tools segment remains uncertain and subject to execution risk. In a related action, Moody’s Investor Services placed the Baa3 senior unsecured rating on our $250 million notes and the Baa3 rating on our senior notes under our $225 million shelf registration under review for possible downgrade, due to structural subordination thereof. Existing lenders under our Credit Facility and private placement notes benefit from guarantees from our domestic subsidiaries, while the $250 million senior note holders do not benefit from such guarantees. We are pursuing putting in place a similar guarantee for the benefit of the $250 million senior note holders to avoid the downgrade due to the structural subordination.
We expect to fund the WICOR acquisition through our currently available and newly committed lines of credit. We have obtained a commitment, subject to customary conditions, in the aggregate amount of $850 million (the “Bridge Facility”) for the payment of the purchase price. The Bridge Facility is available for a period up to the earlier of (i) September 1, 2004, (ii) the closing of the acquisition without the use of the Bridge Facility or (iii) the sale of the Pentair Tools Group.
The term loan to be made under the Bridge Facility (the “Loan”), pursuant to a formal loan agreement to be negotiated, is contemplated to be available in a single disbursement upon closing of the WICOR acquisition and
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is for the purpose of payment of the purchase price and related fees and expenses. The closing of the Loan must occur before September 1, 2004. Any balance due under the Loan is repayable in full, with accrued interest, no later than December 31, 2004. We will need to fund the repayment of the Bridge Facility by December 31, 2004 through a disposition of our Tools Group or through equity issuance.
Long-term debt outstanding at December 31, 2003 matures as follows (excluding anticipated effects of the new facility or term loan):
Contractual debt obligation maturities
Other maturities
Total maturities
10. Derivative and Financial Instruments
Cash-flow hedges
We have entered into interest rate swap agreements with a major financial institution to exchange variable rate interest payment obligations for fixed rate obligations without the exchange of the underlying principal amounts in order to manage interest rate exposures. As of the end of 2003, we had variable to fixed rate swap agreements outstanding with an aggregate notional amount of $40 million that expire in various amounts through June 2005. The swap agreements have a fixed interest rate of 6.31 percent. The fair value of this swap was a liability of $1.9 million at December 31, 2003.
The variable to fixed interest rate are designated as and are effective as cash-flow hedges. The fair values of these swaps are recorded on the balance sheet, with changes in fair values included in other comprehensive income (OCI). Derivative gains and losses included in OCI are reclassified into earnings at the time the related interest expense is recognized or the settlement of the related commitment occurs. We estimate $1.4 million of net derivative losses will be reclassified into earnings in 2004. No hedging relationships were de-designated during 2003.
Fair value hedge
In March 2002, we entered into an interest rate swap agreement to effectively convert interest rate expense on $100 million of Senior notes for the term of the notes (maturing October 2009) from a 7.85 percent fixed annual rate to a floating annual rate equal to the six-month LIBOR rate plus 2.49 percent. This swap agreement was designated and accounted for as a fair value hedge. In September 2002, we terminated this swap agreement and received $8.2 million. This amount, net of accumulated amortization, is recorded as a premium to the carrying amount of the notes in the consolidated balance sheets and is being amortized as a reduction of interest expense over the remaining term of the Senior notes. The $8.2 million was illustrated in the 2002 consolidated statement of cash flows as an increase in other assets and liabilities.
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Concurrent with the termination of the interest rate swap, we entered into a new interest rate swap agreement to effectively convert $100 million of Senior notes for the term of the notes (maturing October 2009) from a 7.85 percent fixed annual rate to a floating annual rate equal to the six-month LIBOR rate plus 3.69 percent. The fair value of the swap was a liability of $1.0 million at December 31, 2003. This swap agreement has been designated and accounted for as a fair value hedge. Since this swap qualifies for the short-cut method under SFAS No. 133, changes in the fair value of the swap (included in other long-term liabilities in the consolidated balance sheets) are offset by changes in the fair value of the designated debt being hedged. Consequently, there is no impact on net income or shareholders’ equity.
Fair value of financial instruments
The recorded amounts and estimated fair values of financial instruments, including derivative financial instruments, were as follows:
Recorded
amount
Fair
value
Variable to fixed interest rate swap liability
Fixed to variable interest rate swap asset
Forward exchange agreements
The following methods were used to estimate the fair values of each class of financial instrument:
11. Income Taxes
Income from continuing operations before income taxes consisted of the following:
United States
International
Income from continuing operations before taxes
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The provision for income taxes from continuing operations consisted of the following:
Currently payable
Federal
State
Total current taxes
Deferred
Total deferred taxes
Total provision for income taxes
Reconciliation of the U.S. statutory income tax rate to our effective tax rate for continuing operations follows:
U.S. statutory income tax rate
State income taxes, net of federal tax benefit
Tax effect of international operations
Non-deductible goodwill
ESOP dividend benefit
Non-deductible restructuring charge items
Tax credits
All other, net
Effective tax rate on continuing operations
Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as “temporary differences.” We record the tax effect of these temporary differences as “deferred tax assets” (generally items that can be used as a tax deduction or credit in future periods) and “deferred tax liabilities” (generally items that we received a tax deduction for, but not yet been recorded in the consolidated statements of income).
United States income taxes have not been provided on undistributed earnings of international subsidiaries. It is our intention to reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to do so. Accordingly, we believe that any U.S. tax on repatriated earnings would be substantially offset by U.S. foreign tax credits.
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The tax effects of the major items recorded as deferred tax assets and liabilities are as follows:
Accounts receivable allowances
Inventory reserves
Accelerated depreciation/amortization
Employee benefit accruals
Other, net
Net deferred tax (liability) asset
The determination of annual income tax expense takes into consideration amounts, which may be needed to cover exposures for open tax years. The Internal Revenue Service (IRS) has examined our U.S. federal income tax returns through 1997 with no material adjustments and is currently auditing 1998 to 2001. We do not expect any material impact on earnings to result from the resolution of matters related to open tax years; however, actual settlements may differ from amounts accrued.
At December 31, 2003, approximately $11.0 million non-U.S. tax losses were available for carryforward. Valuation allowances in the amount of $1.5 million have been set up on these tax losses. No valuation allowance existed at December 31, 2002. We believe that sufficient taxable income will be generated in the respective countries to allow us to fully recover the remainder of the tax losses.
We made net cash payments for income taxes in fiscal 2003, 2002, and 2001 of $46.6 million, $20.4 million, and $3.2 million, respectively.
12. Benefit Plans
We sponsor domestic and foreign defined-benefit pension and other post-retirement plans. Pension benefits are based principally on an employee’s years of service and/or compensation levels near retirement. In addition, we also provide certain post-retirement health care and life insurance benefits. Generally, the post-retirement health care and life insurance plans require contributions from retirees. We use a December 31 measurement date.
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Obligations and Funded Status
The following tables present reconciliations of the benefit obligation of the plans, the plan assets of the pension plans, and the funded status of the plans:
Change in benefit obligation
Benefit obligation beginning of year
Service cost
Interest cost
Plan amendments
Liability transfer
Actuarial (gain) loss
Translation loss
Benefits paid
Benefit obligation end of year
Change in plan assets
Fair value of plan assets beginning of year
Actual return on plan assets
Company contributions
Fair value of plan assets end of year
Funded status
Plan assets less than benefit obligation
Unrecognized cost:
Net transition obligation
Net actuarial (gain) loss
Prior service cost (benefit)
Net amount recognized
Of the $124.2 million underfunding at December 31, 2003, $78.6 million relates to foreign pension plans and our supplemental executive retirement plan which are not commonly funded.
Amounts recognized in the consolidated balance sheets of:
Prepaid benefit cost
Accrued benefit liability
Intangible asset
Accumulated other comprehensive income — pre-tax
The accumulated benefit obligation for all defined benefit plans was $363,374 and $339,053 at December 31, 2003, and 2002, respectively.
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Information for pension plans with an accumulated benefit obligation or projected benefit obligation in excess of plan assets are as follows:
Pension plans with an accumulated benefit obligation in excess of plan assets:
Fair value of plan assets
Accumulated benefit obligation
Pension plans with a projected benefit obligation in excess of plan assets:
Projected benefit obligation
Components of net periodic benefit cost are as follows:
Expected return on plan assets
Amortization of transition (asset) obligation
Amortization of prior year service cost (benefit)
Recognized net actuarial (gain) loss
Special termination benefits
Additional Information
Decrease (increase) in minimum liability included in other comprehensive income, net of tax
Assumptions
Weighted-average assumptions used to determine benefit obligations at December 31 are as follows:
Rate of compensation increase
Weighted-average assumptions used to determine net periodic benefit cost for years ending December 31 are as follows:
Expected long-term return on plan assets
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The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of year based on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to payments from a stream of AA or higher bonds available in the marketplace, adjusted to eliminate the effects of call provisions. As a relatively young company, with a longer duration of liabilities than older companies with more mature workforces, this produced a discount rate of 6.25 percent. There are no known or anticipated changes in our discount rate assumption that will impact our pension expense in 2004.
The expected rate of return on plan assets is designed to be a long-term assumption that may be subject to considerable year-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical ten year compounded return of 9.5 percent, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader longer term market indices. In 2003, the pension plan assets yielded a positive return of 24.8 percent, compared to negative returns of 10.5 percent and 4.1 percent in 2002 and 2001, respectively. Our expected rate of return in 2003 equaled 8.5 percent, which remained unchanged from 2002 and 2001. In 2003, the significant difference between our expected return on plan assets of $24.7 million compared to our actual return on plan assets of $55.5 million was primarily due to the economic recovery and the resurgence of the financial markets. There are no known or anticipated changes in our return assumption that will impact our pension expense in 2004.
Total net periodic pension benefits cost was $15.7 million in 2003, $12.6 million in 2002, and $10.6 million in 2001. Total net periodic pension benefits cost is expected to be approximately $17.0 million in 2004. The increasing trend in net periodic pension cost from 2001 forward is largely driven by increasing service and interest costs, the downturn in the financial markets in 2002 and 2001, and the decrease in the discount rate in 2002. The net periodic pension benefit cost for 2004 has been estimated assuming a discount rate of 6.25 percent and an expected return on plan assets of 8.5 percent.
As of the December 31, 2003 measurement date, our pension plans have $75.7 million of cumulative unrecognized losses of which approximately $20 million relates to the use of the market related value method and is not immediately subject to amortization. The remaining unrecognized loss, to the extent it exceeds 10% of the projected benefit obligation, will be amortized into expense each year on a straight-line basis over the remaining expected future-working lifetime of active participants (currently approximately 12 years). The amount included a pension expense for loss amortization in 2003 was $0.5 million.
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The assumed health care cost trend rates at December 31 are as follows:
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
The assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:
1-Percentage-
Point Increase
Point Decrease
Effect on total of service and interest cost
Effect on postretirement benefit obligation
Plan Assets
Objective
The primary objective of our pension plans is to meet commitments to our employees at a reasonable cost to the company. This is primarily accomplished through growth of capital and safety of the funds invested. The plans will therefore be actively invested to achieve real growth of capital over inflation through appreciation of securities held and through the accumulation and reinvestment of dividend and interest income.
Cash Flows
Contributions
Pension contributions in 2003 total $19.1 million, including $15.1 million of contributions to domestic defined benefit pension plans. In 2002, pension contributions totaled $18.9 million, including $15.3 million of
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contributions to domestic defined benefit plans. The contributions in 2003 and 2002 exceeded the minimum funding requirement. Our 2004 pension contributions are expected to be in the range of $10 million to $15 million.
Savings plan
We have a 401(k) plan (the plan) with an employee stock ownership (ESOP) bonus component, which covers certain union and nearly all-nonunion U.S. employees who meet certain age requirements. Under the plan, eligible U.S. employees may voluntarily contribute a percentage of their eligible compensation. Matching contributions are made in cash to employees who meet certain eligibility and service requirements. Our matching contribution is based on our financial performance and ranges from 30 percent to 90 percent of eligible employee contributions, limited to 4 percent of compensation contributed by employees.
In addition to the matching contribution, all employees who meet certain service requirements receive a discretionary ESOP contribution equal to 1.5 percent of annual eligible compensation.
Our combined expense for the 401(k) and ESOP were approximately $9.8 million, $9.0 million, and $9.8 million in 2003, 2002, and 2001, respectively.
13. Shareholders’ Equity
Authorized shares
We may issue up to 250 million shares of common stock. Our Board of Directors may designate up to 15 million of those shares as preferred stock.
Common share purchase rights
We have a ten-year Rights Agreement dated July 31, 1995. Under this agreement, each outstanding share of our common stock has one common share purchase right attached to it and entitles the holder to purchase one share of our common stock, currently at a price of $80 per share, subject to adjustment. However, these rights are not exercisable unless certain change-in-control events transpire, such as a person acquiring or obtaining the right to acquire beneficial ownership of 15 percent or more of our outstanding common stock.
The rights are redeemable by us for $0.01 per right until ten business days after certain defined change-in-control events transpire, or at any time prior to the expiration of the rights.
In 2003, the Board of Directors authorized the development of a program and process to annually purchase up to 500,000 shares of our common stock in open market or negotiated transactions to partially offset dilution due to normal grants of restricted shares and options to employees. In 2003, we repurchased 40,000 shares of our common stock. In 2002 and 2001, respectively, we repurchased no shares and 50,000 shares of our common stock under similar plans.
14. Stock Plans
Omnibus stock incentive plan
In April 2003, the Omnibus Stock Incentive Plan as Amended and Restated (the Plan) was approved. The Plan authorizes the issuance of additional shares of our common stock and extends through February 2006. The Plan allows for the granting of:
• nonqualified stock options;
• incentive compensation units (ICUs);
• incentive stock options;
• stock appreciation rights;
• restricted stock;
• performance shares; and
• rights to restricted stock;
• performance units.
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The Plan is administered by our Compensation Committee (the Committee), which is made up of independent members of our Board of Directors. Employees eligible to receive awards under the Plan are managerial, administrative, or other key employees who are in a position to make a material contribution to the continued profitable growth and long-term success of Pentair. The Committee has the authority to select the recipients of awards, determine the type and size of awards, establish certain terms and conditions of award grants, and take certain other actions as permitted under the Plan. The Plan provides that no more than 20 percent of the total shares available for issuance under the Plan may be used to make awards other than stock options and limits the Committee’s authority to reprice awards or to cancel and reissue awards at lower prices.
Incentive stock options
Under the Plan we may grant stock options to any eligible employee with an exercise price equal to the market value of the shares on the dates the options were granted. Options generally vest over a three-year period commencing on the first anniversary of the grant date and expire ten years after the grant date.
Restricted stock, rights to restricted stock and ICUs
Under the Plan, eligible employees are awarded restricted shares or rights to restricted shares (awards) of our common stock and ICUs. Restrictions on awards and ICUs generally expire from two to five years after issuance, subject to continuous employment and certain other conditions. Restricted stock awards are recorded at market value on the date of the grant as unearned compensation. Unearned compensation is shown as a reduction of shareholders’ equity in our consolidated financial statements and is being amortized to expense over the restriction period. The value of ICUs is based on a matrix, which takes into account growth in operating income and return on invested capital. Annual expense for the value of restricted stock and ICUs was $4.6 million in 2003, $7.9 million in 2002, and $5.8 million in 2001.
Outside directors nonqualified stock option plan
Nonqualified stock options are granted to outside directors under the Outside Directors Nonqualified Stock Option Plan (the Directors Plan) with an exercise price equal to 100 percent of the market value of the shares on the dates the options were granted. Options generally vest over a three-year period commencing on the first anniversary of the grant date and expire ten years after the grant date. The Directors Plan extends to January 2008.
Stock options
The following table summarizes stock option activity under all plans:
Balance January 1
Granted
Exercised
Canceled
Balance December 31
Options exercisable December 31
Shares available for grant December 31
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The following table summarizes information concerning stock options outstanding as of the end of 2003 under all plans:
Exercise
price (1)
$ 20.01 – $ 25.00
25.01 – 30.00
30.01 – 35.00
35.01 – 40.00
40.01 – 45.00
45.01 – 50.00
15. Business Segments
The accounting policies of our operating segments are the same as those described in the summary of significant accounting policies. We evaluate performance based on the operating income of the segment and use a variety of ratios to measure performance. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented.
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Financial information by reportable business segment is included in the following summary:
Consolidated
Other (1)
Enclosures segment operating income includes:
Other segment operating loss includes:
The following table presents certain geographic information:
Germany
Canada
France
China
Japan
India
All other
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Net sales are based on the location in which the sale originated. Long-lived assets represent property, plant, and equipment, net of related depreciation.
We sell our products through various distribution channels including home centers and retail chains. In our Water segment, two customers accounted for about 17 percent of segment sales in 2003 and 2002 and 18 percent of segment sales in 2001. In our Enclosure segment, no single customer accounted for more than 10 percent of segment sales in 2003, 2002, or 2001. Three customers accounted for about 56 percent of our Tools segment net sales in 2003 and 62 percent and 58 percent, respectively, in 2002 and 2001. In 2003, sales to The Home Depot, a major customer of our Tools segment, accounted for approximately 14 percent of total consolidated net sales. Sales to The Home Depot accounted for approximately 13 percent of total consolidated net sales in 2002 and 2001. If these customers were lost, it would have a material adverse effect on our business.
16. Commitments and Contingencies
Operating lease commitments
Net rental expense under operating leases follows:
Gross rental expense
Sublease rental income
Net rental expense
Future minimum lease commitments under non-cancelable operating leases, principally related to facilities, vehicles, and machinery and equipment, is as follows:
Minimum lease payments
Minimum sublease rentals
Net future minimum lease commitments
We have been named as defendants, targets, or potentially responsible parties (PRPs) in a small number of environmental cleanups, in which our current or former business units have generally been given de minimis status. To date, none of these claims have resulted in cleanup costs, fines, penalties, or damages in an amount material to our financial position or results of operations. We have disposed of a number of businesses over the past ten years and in certain cases, such as the disposition of the Cross Pointe Paper Corporation uncoated paper business in 1995, the disposition of the Federal Cartridge Company ammunition business in 1997, and the disposition of Lincoln Industrial in 2001, we have retained responsibility and potential liability for certain environmental obligations. We have received claims for indemnification from purchasers both of the paper business and the ammunition business and have established what we believe to be adequate accruals for potential liabilities arising out of retained responsibilities. We have recently settled one such claim in 2003 and our recorded accrual was adequate.
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We are occasionally a party to litigation arising in the normal course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities based on the expected eventual disposition of these matters. We believe the effect on our consolidated results of operations and financial position, if any, for the disposition of all currently pending matters will not be material.
Warranties and guarantees
From time to time in connection with the disposition of businesses or product lines, Pentair may agree to indemnify purchasers for various potential liabilities relating to the sold business, such as pre-closing tax, product liability, warranty, environmental, or other obligations. The subject matter, amounts, and duration of any such indemnification obligations vary for each type of liability indemnified and may vary widely from transaction to transaction. Pentair currently has outstanding indemnification obligations for environmental matters relating to certain sold businesses that have four- to five-year indemnification periods, and one that lasts indefinitely. Other currently outstanding indemnity obligations have a one-year duration. The maximum potential payment for these obligations is unlimited.
We accrue for costs associated with guarantees when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts, and where no amount within a range of estimates is more likely, the minimum is accrued.
We provide service and warranty policies on our products. Liability under service and warranty policies is based upon a review of historical warranty and service claim experience. Adjustments are made to accruals as claim data and historical experience warrant. In addition, we incur discretionary costs to service our products in connection with product performance issues.
The changes in the carrying amount of service and product warranties for the year ended December 31, 2003 and 2002 are as follows:
Balance at beginning of the year
Service and product warranty provision
Payments
Translation
Balance at end of the year
In the ordinary course of business, predominantly in our pump business, we are required to commit to bonds that require payments to our customers for any non-performance. The outstanding face value of the bonds fluctuates
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with the value of our projects in process and in our backlog. In, addition, we issue financial stand-by letters of credit to secure our performance to third parties under self-insurance programs and certain legal matters. As of December 31, 2003 and 2002, the outstanding value of these instruments totaled $35.0 million and $19.8 million, respectively.
17. Selected Quarterly Financial Data (Unaudited)
Earnings per common share (1)
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18. Subsequent Events
On February 3, 2004, we entered into an agreement to acquire WICOR Inc. (“WICOR”), a unit of Wisconsin Energy Corporation, Milwaukee, Wisconsin. WICOR, which manufactures water system, filtration and pool equipment products under the Sta-Rite, SHURflo and Hypro brands, generated sales of approximately $746 million in 2003. The $850 million cash transaction, which we plan to complete in the second or third quarter of 2004, is subject to satisfaction of customary conditions and regulatory approvals. As part of the transaction, we will assume approximately $24 million of WICOR debt.
The term loan to be made under the Bridge Facility (the “Loan”), pursuant to a formal loan agreement to be negotiated, is contemplated to be available in a single disbursement upon closing of the WICOR acquisition and is for the purpose of payment of the purchase price and related fees and expenses. The closing of the Loan must occur before September 1, 2004. Any balance due under the Loan is repayable in full, with accrued interest, no later than December 31, 2004. We will need to fund the repayment of the Bridge Facility by December 31, 2004 through a disposition of our Tools Group through equity issuance.
We also announced that we have engaged Goldman Sachs to explore strategic alternatives for our Tools segment, comprising the Porter-Cable, Delta, DeVilbiss Air Power Company, Oldham Saw and Flex businesses with $1,081.4 million in net sales in 2003.
We are seeking to obtain an amendment to the Credit Facility for our most restrictive financial covenant to increase our required ratio of total debt to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as a result of the Bridge Facility, which we believe will be granted by the banks participating in our Credit Facility. In addition, during the period the Bridge Facility is outstanding, additional limitations will be placed on share repurchases, dividends, acquisitions and sales of assets.
In February 2004, we signed a letter of intent to purchase the remaining 51 percent ownership interest in the joint venture operations of a long time Asian supplier for bench top power tools.
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Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the year ended December 31, 2003, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934. Based upon their evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the year ended December 31, 2003 in timely alerting them to material information relating to Pentair, Inc. (including its consolidated subsidiaries) required to be included in reports we file with the Securities and Exchange Commission.
There was no significant change in our internal control over financial reporting that occurred during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART III
Information required under this item with respect to directors is contained in our Proxy Statement for our 2004 annual meeting of shareholders under the captions “Corporate Governance Matters”, “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference.
Information required under this item with respect to executive officers is contained in Part I of this Form 10-K under the caption “Executive Officers of the Registrant.”
Our Board of Directors has adopted Pentair’s Code of Business Conduct and Ethics and designated it as the code of ethics for the Company’s Chief Executive Officer and senior financial officers in accordance with SEC rules. The Code of Business Conduct and Ethics also applies to all employees and directors in accordance with New York Stock Exchange Listing Standards. We have posted a copy of Pentair’s Code of Business Conduct and Ethics on our website atwww.pentair.com/corp.html. Pentair’s Code of Business Conduct and Ethics is also available in print to any shareholder who requests it in writing from our Secretary. We intend to satisfy the disclosure requirements under Item 10 of Form 8-K regarding amendments to, or waivers from, Pentair’s Code of Business Conduct and Ethics by posting such information on our website at www.pentair.com/corp.html.
Our Board of Directors has also adopted Corporate Governance Principles and written charters for our Audit and Finance Committee, Compensation Committee, Governance Committee and International Committee. We have posted copies of those documents on our website at www.pentair.com/corp.html. Copies of these documents are also available in print to any shareholder who requests them in writing from our Secretary.
We are not including the information contained on our website as part of, or incorporating it by reference into, this report.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is contained in our Proxy Statement for our 2004 annual meeting of shareholders under the captions “Election of Directors” and “Executive Compensation” and is incorporated herein by reference.
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Information required under this item is contained in our Proxy Statement for our 2004 annual meeting of shareholders under the captions “Security Ownership of Management and Beneficial Ownership” and “Securities Authorized for Issuance under Equity Compensation Plans” and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No matters require disclosure here.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required under this item is contained in our Proxy Statement for our 2004 annual meeting of shareholders under the captions “Independent Auditor Fees” and is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)
Consolidated Statements of Income for the Years Ended December 31, 2003, 2002, and 2001
Consolidated Balance Sheets as of December 31, 2003 and December 31, 2002
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002, and 2001
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2003, 2002, and 2001
Notes to Consolidated Financial Statements
Schedule II — Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
The exhibits of this Annual Report on Form 10-K included herein are set forth on the attached Exhibit Index beginning on page 79.
(b)
Pentair filed a Form 8-K dated October 16, 2003 reporting under Item 9 and Item 12 the earnings results for the third quarter and first nine months of 2003.
Pentair filed a Form 8-K dated November 24, 2003 reporting under Item 5 the appointment of David A. Jones and Glynis Bryan to the Board of Directors of the Company and the resignation of William H. Hernandez from the Board of Directors of the Company.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 4, 2004.
By /s/
Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on March 4, 2004
Signature
Title
/s/
*
Glynis A. Bryan
Barbara B. Grogan
Charles A. Haggerty
David A. Jones
Stuart Maitland
Augusto Meozzi
William T. Monahan
Karen E. Welke
*By /s/
Attorney-in-fact
77
Allowances for doubtful accounts
Year ended December 31, 2003
Year ended December 31, 2002
Year ended December 31, 2001
78
Exhibit Index
Exhibit
Number
79
80
81