UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _______ Commission File No. 001-11625 PENTAIR, INC. (Exact name of Registrant as specified in its charter) Minnesota 41-0907434 (State or other (IRS Employer jurisdiction of Identification No.) incorporation or organization) 1500 County B2 West, Suite 400 St. Paul, Minnesota 55113-3105 (Address of principal executive offices) (Zip Code) (612) 636-7920 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of Registrant's only class of common stock on March 31, 1996 was 37,428,992.
PENTAIR, INC. AND SUBSIDIARIES FORM 10-Q TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Consolidated Statement of Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements Management's Discussion and Analysis of Results of Operations and Financial Condition PART II - OTHER INFORMATION Item 4. Results of Votes of Security Holders Item 6. Exhibits and Reports on Form 8-K Signature Page Exhibit Index
PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS PENTAIR, INC. CONSOLIDATED STATEMENT OF INCOME (Unaudited) ($ expressed in thousands except per share amounts) <TABLE> <CAPTION> Three Months Ended March 31 1996 1995 <S> <C> <C> Net sales $366,290 $333,823 Operating costs Cost of goods sold 251,554 232,624 Selling, general and administrative 82,111 71,971 Total operating costs 333,665 304,595 Operating income 32,625 29,228 Interest expense 5,337 6,058 Interest income 712 292 Income from continuing operations before income taxes 28,000 23,462 Provision for income taxes 11,500 9,611 Income from continuing operations 16,500 13,851 Discontinued operations: Income from operations of discontinued Paper Products and Joint Venture segments (Net of applicable income taxes of $0 and $899, respectively) 0 1,499 Net income 16,500 15,350 Preferred dividend requirements 1,275 1,330 Earnings applicable to common stock $15,225 $14,020 Earnings per share: Primary Income from: continuing operations $.40 $.34 discontinued operations .00 .04 Net income .40 .38 Diluted Income from: continuing operations $.38 $.32 discontinued operations .00 .04 Net income .38 .36 Weighted average common and common equivalent shares: Primary 37,728 37,102 Diluted 42,652 42,286 </TABLE> See Notes to Consolidated Financial Statements.
PENTAIR, INC. CONSOLIDATED BALANCE SHEET (Unaudited) ($ expressed in thousands) <TABLE> <CAPTION> March 31, December 31, ASSETS 1996 1995 <S> <C> <C> Current assets Cash and cash equivalents $28,037 $36,648 Accounts receivable - net 287,143 262,503 Note receivable 0 100,000 Inventories Finished goods 167,756 134,456 Work in process 44,296 40,801 Raw materials and supplies 36,092 37,428 Total inventory 248,144 212,685 Deferred income taxes 26,281 26,017 Other current assets 10,513 9,391 Total current assets 600,118 647,244 Property, plant and equipment 461,224 452,108 Accumulated depreciation 196,834 185,381 PP & E - net 264,390 266,727 Marketable securities - insurance subsidiary 34,508 33,036 Goodwill - net 280,109 282,376 Other assets 22,235 23,110 TOTAL ASSETS $1,201,360 $1,252,493 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $104,342 $90,846 Notes payable 0 120,732 Compensation and other benefits accruals 65,196 68,414 Income taxes 21,928 17,812 Accrued product claims and warranties 20,985 21,684 Accrued expenses and other liabilities 58,675 58,363 Current maturities of long-term debt 13,530 18,950 Total current liabilities 284,656 396,801 Long-term debt 263,960 219,896 Other liabilities 22,870 21,141 Deferred income taxes (234) 68 Pensions and other retirement compensation 37,767 38,220 Postretirement medical and other benefits 46,226 46,158 Reserves - insurance subsidiary 28,526 27,354 Commitments and contingencies Shareholders' equity Preferred stock - at liquidation value Authorized: 2,500,000 shares Outstanding: 1996 - 1,811,241 63,737 65,656 1995 - 1,873,051 Unearned compensation relating to ESOP (20,039) (21,074) Common stock - par value, $.16 2/3 Authorized: 72,500,000 shares Outstanding: 1996 - 37,428,992 6,238 6,172 1995 - 37,035,082 Additional paid-in capital 175,575 169,832 Currency translation and pension adjustments 10,024 11,020 Retained earnings 282,054 271,249 Total shareholders' equity 517,589 502,855 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,201,360 $1,252,493 </TABLE> See Notes to Consolidated Financial Statements.
PENTAIR, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) ($ expressed in thousands) <TABLE> <CAPTION> Three Months Ended March 31 March 31 1996 1995 <S> <C> <C> Cash provided by (used for) Operating activities Net income $16,500 $15,350 Adjustment for discontinued operations 0 (1,499) Adjustments to reconcile to cash flow: Depreciation 11,891 10,259 Amortization 2,722 1,015 Deferred income taxes (378) (939) Changes in assets and liabilities, net of effects of acquisition Accounts receivable (25,600) (19,823) Inventories (35,011) (33,470) Accounts payable 13,853 (2,397) Compensation and benefits (2,961) 409 Income taxes 4,307 9,548 Pensions and other retirement compensation 108 5,079 Reserves - insurance subsidiary 1,172 1,755 Other assets/ liabilities - net (2,487) 7,700 Cash from Operations: continuing operations (15,884) (7,013) Payments related to discontinued operations 0 (8,611) Total cash from operating activities (15,884) (15,624) Investing activities Capital expenditures (9,415) (9,853) Purchase of marketable securities - net (1,471) (986) Proceeds from sale of Discontinued Operations 100,000 0 Acquisition - net of cash acquired (126,883) 0 Net cash (used) for investing activities (37,769) (10,839) Financing activities Borrowings 47,245 24,500 Debt payments (1,985) (6,770) Unearned ESOP compensation decrease 1,035 2,080 Employee stock plans and other 3,891 2,479 Dividends paid (5,920) (4,989) Net cash provided for financing activities 44,266 17,300 Effects of currency exchange rate changes 776 1,678 Increase (decrease) in cash and cash equivalents (8,611) (7,485) Cash and cash equivalents - beginning of period 36,648 32,677 - end of period $28,037 $25,192 </TABLE> See Notes to Consolidated Financial Statements.
PENTAIR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions for Form 10-Q and, accordingly, do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included. These statements should be read in conjunction with the financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995, previously filed with the Commission. 2. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of the operating results to be expected for the full year. 3. Income tax provisions for interim periods are based on the current best estimate of the effective federal, state and foreign income tax rates. 4. Earnings per common share are based on the weighted average number of common and common equivalent shares outstanding during each period. The tax benefits applicable to preferred dividends paid to ESOPs are: for allocated shares credited to income tax expense and for unallocated shares, credited to retained earnings and are not considered earnings applicable to common stock. Fully diluted computations assume full conversion of each series of preferred stock into common stock, the elimination of preferred dividend requirements, and the recognition of the tax benefit on deductible ESOP dividends applicable to allocated shares payable based on the converted common dividend rate. Conversion was assumed during the portion of each period that the securities were outstanding. 5. The long-term debt is summarized as follows ($ millions): <TABLE> <CAPTION> March 31,December 31, 1996 1995 <S> <C> <C> Revolving credit facilities $137 $93 Private placement debt 125 125 Other 16 21 TOTAL 278 239 Current maturities (14) (19) Total long-term debt $264 $220 </TABLE> Debt agreements contain various restrictive covenants, including a limitation on the payment of dividends and certain other restricted payments. Under the most restrictive covenants, $56 million of the March 31, 1996 retained earnings were unrestricted for such purposes. 6.Statement of Cash Flows The following is supplemental information relating to the Statement of Cash Flows ($000's): <TABLE> <CAPTION> Three Months Ended March 31 1996 1995 <S> <C> <C> Interest paid (net of capitalized interest in 1995) $6,187 $8,227 Income tax payments 3,310 4,158 </TABLE> 7. Stock Split On January 22, 1996 the board of directors approved a two-for-one stock split in the form of a 100% stock dividend. The dividend was payable February 16, 1996 to shareholders of record at the close of business on February 2, 1996. All references in the financial statements to shares outstanding and per share amounts have been restated to reflect this split. 8. Reclassifications Certain reclassifications have been made to prior years' financial statements to conform to the current year presentation. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION BUSINESS SEGMENT INFORMATION Selected information for business segments for the three months ended March 31, 1996 and 1995 follows ($ millions): <TABLE> <CAPTION> General SpecialtyIndustrial Products Equipment Corporate Total 1996 <S> <C> <C> <C> <C> Net Sales $153.4 $212.9 $0.0 $366.3 Operating Income 18.9 19.2 (5.5) 32.6 Identifiable Assets 417.5 708.6 75.3 1,201.4 Depreciation and Amortization 4.6 10.0 0.0 14.6 Capital Expenditures 3.6 5.8 0.0 9.4 1995 Net Sales $117.6 $216.2 $ 0.0 $333.8 Operating Income 13.4 21.1 (5.3) 29.2 Identifiable Assets 240.7 677.0 322.5 1,240.2 Depreciation and Amortization 2.5 7.8 0.0 11.3 Capital Expenditures 2.0 7.9 0.0 9.9 </TABLE> RESULTS OF OPERATIONS Pentair reported net income of $16.5 million, or 38 cents per fully diluted share, on consolidated net sales of $366.3 million for the three months ended March 31, 1996. This represented a 19 percent increase in net income and a 10 percent increase in sales over the first quarter of 1995. The first quarter 1995 income from continuing operations was $13.9 million, or 32 cents per fully diluted share, on consolidated net sales of $333.8 million. Specialty Products Segment. Net sales increased $35.8 million or 30% and operating income increased $5.5 million or 41%. The increase is attributable to Fleck Controls, an acquisition made in November 1995 and double digit sales growth over the last year at Delta, Myers and Porter Cable. The improvements reflect new product sales, contributions from smaller acquisitions, and further expansion into major home center distribution channels. General Industrial Equipment Segment. Sales decreased $3.3 million or 1.5% and operating income decreased $1.9 million or 9%. Hoffman and Schroff posted modest sales increases and level earnings as compared to very good 1995 first quarter results. Both Lincoln Industrial and Lincoln Automotive profits increased due to cost reductions and improved productivity. Sales at Federal Cartridge were slow in the seasonally weak first quarter. Federal continues to feel the effects of the industry correction due to abnormally high ammunition sales in 1994. Buying patterns in the ammunition industry are expected to cause a concentration of sales in the late summer/early fall hunting season. FINANCIAL CONDITION In 1996 as in 1995, net income adjusted for non-cash items provided some of the funds for seasonal working capital increases. Accounts receivable levels increased due to dating programs and strong sales in the later part of March. Some subsidiaries were also building inventory levels after high fourth quarter 1995 sales. Borrowings in the first quarter of 1996 financed some operating needs, acquisition payments, along with capital expenditures. The proceeds from the $100 million note receivable from the sale of Cross Pointe Paper offset much of the $120 million notes payable for the purchase of Fleck Controls. Capital expenditures were $9.4 million in 1996 as compared to $9.9 million in 1995. The percentage of long-term debt to total capital was 34% at March 31, 1996 compared to 31% at December 31, 1995. The full year 1996 cash flow from operations is expected to increase with additional net income contributions as compared to last year. Working capital needs are somewhat seasonal during the year and tend to grow over time as sales increase. Capital expenditures are expected to be about $90 million in 1996 as compared to $63.8 million in 1995. This increase is due primarily to the addition of a Hoffman manufacturing facility in Mount Sterling, Kentucky and new product development activities. Based upon current operating expectations, credit available under revolving credit facilities is expected to be adequate to cover seasonal working capital, long-term capital expenditure requirements and acquisitions. OUTLOOK In general, the Company is well-positioned to continue its internal growth. Recent acquisitions are expected to continue to contribute to sales and earnings growth. The strong emphasis on product development and aggressive efforts to expand distribution channels that helped during 1995 are expected to generate growth in market share, sales and profits. In all subsidiaries, sales will continue to grow as a result of new products and enhanced customer service. Pentair continues to search for strategic or synergistic industrial acquisitions. PART II - OTHER INFORMATION ITEM 4 -Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of Pentair, Inc. was held on April 24, 1996, for the purpose of electing certain members to the board of directors, approving the appointment of auditors, and voting on the proposals described below. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934. PROPOSAL 1 All of management's nominees for directors as listed in the proxy statement were elected with the following vote: Shares Shares Broker Voted "For" "Withheld" Non-Votes G. Butzow 32,460,848 162,857 0 W. Buxton 32,452,237 171,468 0 W. Kissling 32,460,139 163,566 0 B. Grogan 32,439,073 184,632 0 W. Cadogan 32,468,001 155,704 0 PROPOSAL 2 A proposal to extend the 1990 Omnibus Stock Incentive Plan and to increase the number of shares and incentive compensation units was passed with the following vote: Shares Shares Voted Shares Broker Voted "For" "Against" "Abstaining" Non-Votes 20,523,262 9,324,358 1,095,922 1,680,163 PROPOSAL 3 A proposal to amend the 1990 Omnibus Stock Incentive Plan to comply with the Internal Revenue Code Section 162(m) was passed with the following vote: Shares Shares Voted Shares Broker Voted "For" "Against" "Abstaining" Non-Votes 30,410,160 1,301,616 905,429 6,500 PROPOSAL 4 A proposal to approve the adoption of the Executive Officers Performance Plan to comply with the Internal Revenue Code Section 162(m) was passed with the following vote: Shares Shares Voted Shares Broker Voted "For" "Against" "Abstaining" Non-Votes 30,784,235 920,464 912,506 6,500 PROPOSAL 5 The appointment of Deloitte & Touche LLP as independent auditors of the Company for 1996 was ratified by the following vote: Shares Shares Voted Shares Broker Voted "For" "Against" "Abstaining" Non-Votes 32,159,536 358,688 105,481 0 ITEM 6 - Exhibits and Reports on Form 8-K (a) Exhibits. The following exhibits are included with this Form 10-Q Report as required by Item 601 of Regulation S-K. Exhibit Description Number 10.1 Pentair, Inc. Omnibus Stock Incentive Plan as Amended and Restated 10.2 Pentair, Inc. Executive Officers Performance Plan 11 Calculation of Earnings per Common and Common Equivalent Share 27 Financial Data Schedule (b) Reports on Form 8-K. A report on Form 8-K was filed on January 23, 1996 disclosing the two-for-one stock split in the form of a 100 percent stock dividend.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. /s/ David D. Harrison Executive Vice President and Chief Financial Officer May 14, 1996
EXHIBIT INDEX Exhibit Number 10.1 Pentair, Inc. Omnibus Stock Incentive Plan as Amended and Restated 10.2 Pentair, Inc. Executive Officers Performance Plan 11 Calculation of Earnings per Common and Common Equivalent Share 27 Financial Data Schedule