UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 Commission File No. 001-11625 PENTAIR, INC. (Exact name of Registrant as specified in its charter) Minnesota 41-907434 (State of incorporation) (IRS Employer Identification No.) 1500 County B2 West, Suite 400 St. Paul, Minnesota 55113-3105 (Address of principal executive offices) (Zip Code) (612) 636-7920 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of Registrant's only class of common stock on March 31, 1998 was 38,370,265.
PENTAIR, INC. AND SUBSIDIARIES FORM 10-Q TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Consolidated Statement of Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations PART II - OTHER INFORMATION Item 4. Results of Votes of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signature Page
PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS PENTAIR, INC. CONSOLIDATED STATEMENT OF INCOME (Unaudited) ($ expressed in thousands except per share amounts) <TABLE> <CAPTION> Quarter Ended March 31 1998 1997 <S> <C> <C> Net sales $ 464,965 $ 411,139 Operating costs: Cost of goods sold 320,155 285,188 Selling, general and administrative 100,921 88,472 Total operating costs 421,076 373,660 Operating Income 43,889 37,479 Interest expense - net 5,353 5,118 Income before income taxes 38,536 32,361 Provision for income taxes 14,827 12,944 Net income 23,709 19,417 Preferred dividend requirements 1,184 1,218 Income available to common shareholders $ 22,525 $ 18,199 Basic Earnings per Common Share $0.59 $0.48 Diluted Earnings per Common Share $0.54 $0.45 Weighted Average Common Shares Outstanding 38,291 37,843 Outstanding Assuming Dilution 43,291 42,940 </TABLE>
PENTAIR, INC. CONSOLIDATED BALANCE SHEET (Unaudited) (in thousands) <TABLE> <CAPTION> March 31, December 31, 1998 1997 ASSETS <S> <C> <C> Current assets Cash and cash equivalents $ 25,554 $ 34,340 Accounts and notes receivable 395,305 369,220 Inventories 271,750 266,409 Other current assets 36,316 35,401 Total current assets 728,925 705,370 Property, Plant & Equipment - net 283,332 293,554 Goodwill 423,248 429,279 Other assets 48,837 44,659 TOTAL ASSETS $1,484,342 $1,472,862 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts and notes payable $ 119,905 $ 152,592 Compensation and other benefits accruals 60,945 70,758 Income taxes 10,326 15,158 Accrued product claims and warranties 34,455 35,114 Accrued rebates 10,704 21,658 Accrued expenses and other liabilities 66,950 62,194 Current maturities of long-term debt 29,108 34,703 Total current liabilities 332,393 392,177 Long-term debt 348,320 294,549 Pensions and other retirement compensation 53,316 52,470 Postretirement medical and other benefits 44,600 45,135 Reserves - insurance subsidiary 30,478 32,313 Other liabilities 25,826 25,656 Commitments and contingencies Preferred stock - at liquidation value 58,765 59,696 Unearned compensation relating to ESOP (5,340) (6,315) Common stock - par value, $.16 2/3 6,396 6,365 Additional paid-in capital 188,456 186,486 Accumulated other comprehensive income (5,177) (5,085) Retained earnings 406,309 389,415 Total shareholders' equity 649,409 630,562 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,484,342 $1,472,862 </TABLE> See Notes to Consolidated Financial Statements.
PENTAIR, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (in thousands) <TABLE> <CAPTION> Three Months Ended March 31 1998 1997 <S> <C> <C> Cash provided by (used for) Operating activities Net income $ 23,709 $ 19,417 Adjustments to reconcile to cash flow: Depreciation 13,922 14,194 Amortization 4,620 3,141 Deferred income taxes 187 680 Changes in assets and liabilities, net of effects of acquisitions/dispositions Accounts receivable (26,660) (25,869) Inventories (6,034) (14,090) Accounts payable (33,158) 3,102 Compensation and benefits (9,765) (3,674) Income taxes (4,967) (2,088) Pensions and other retirement compensation 1,449 1,884 Reserves - insurance subsidiary (1,835) 1,167 Other assets/liabilities - net (10,876) (2,538) Cash used for operating activities (49,408) (4,674) Investing activities Capital expenditures (4,570) (21,540) Payments for acquisition of businesses (12) (16,391) Other 0 (1,434) Cash used for investing activities (4,582) (39,365) Financing activities Borrowings 69,058 42,252 Debt payments (21,438) (3,959) Unearned ESOP compensation decrease 975 990 Employee stock plans and other 1,175 2,825 Dividends paid (6,920) (6,325) Cash provided by financing activities 42,850 35,783 Effects of currency exchange rate changes 2,354 2,553 (Decrease) in cash and cash equivalents (8,786) (5,703) Cash and cash equivalents - beginning of period 34,340 22,973 - end of period $25,554 $17,270 </TABLE> See Notes to Consolidated Financial Statements. <PAGE PENTAIR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions for Form 10-Q and, accordingly, do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included. These statements should be read in conjunction with the financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, previously filed with the Commission. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of the operating results to be expected for the full year. Income tax provisions for interim periods are based on the current best estimate of the annual effective federal, state and foreign income tax rates. 2. Adoption of New Accounting Standards In 1997, the Company adopted the following new accounting standards: Statement of Financial Accounting Standard (FAS) No. 128, "Earnings per Share", Statement of Financial Accounting Standard (FAS) No. 130 "Reporting Comprehensive Income", and Statement of Financial Accounting Standard (FAS) No. 131 "Disclosures about Segments of an Enterprise and Related Information". FAS 128 requires the reporting of earnings per share (EPS) in two forms: basic EPS and diluted EPS. Pentair has historically reported its EPS on a fully diluted basis, which reflects the dilution resulting from employee stock options and convertible securities related to employee benefit plans, and is directly comparable to the new diluted EPS reported. See also Note 3. FAS 130 establishes standards for the reporting of comprehensive income and its components. Comprehensive income is defined as the change in equity during the period from transactions and other events and circumstances from non-owner sources. See also Note 4. FAS 131 requires the Company to report information about its operating segments based upon how the Company manages its operations. The Company manages its businesses in three distinct operating groups and has realigned its external reportable segments to conform with these internal management structures. The three reportable segments -- Professional Tools and Equipment, Water and Fluid Technologies, and Electrical and Electronic Enclosures - replace the Specialty Products and General Industrial Equipment segments which had been reported since 1991. Prior year financial statements have been restated accordingly. 3. Earnings per common share Basic earnings per common share is computed by dividing net income, after deducting preferred stock dividends, by the average common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income after adjusting the tax benefits on deductible ESOP dividends by the average common shares outstanding plus the incremental shares that would have been outstanding upon the assumed exercise of dilutive stock options and upon the assumed conversion of each series preferred stock. The tax benefits applicable to preferred dividends paid to ESOPs are recorded in the following ways: for allocated shares, they are credited to income tax expense and included in the earnings per share calculation; for unallocated shares, they are credited to retained earnings and excluded from the earnings per share calculation. Effective December 15, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (FAS No. 128). Earnings per share amounts presented for 1997 have been restated for the adoption of FAS No. 128. The following table reflects the calculation of basic and diluted earnings per share. (In thousands except per share amounts) March 31 1998 1997 Earnings per share Income from continuing operations $23,709 $19,417 Preferred dividend requirements 1,184 1,218 Income available to common shareholders 22,525 18,199 Weighted average shares outstanding 38,291 37,843 Basic Earnings per Common Share $0.59 $0.48 Earnings per share - assuming dilution Income available to common shareholders 22,525 18,199 Add back preferred dividend requirements due to conversion into common shares 1,184 1,218 Elimination of tax benefit on preferred ESOP dividend due to conversion into common shares (407) (372) Addition of tax benefit on ESOP dividend assuming conversion to common shares - at common dividend rate 235 194 Income available to common shareholders assuming dilution 23,537 19,239 Weighted average shares outstanding 38,291 37,843 Dilutive impact of stock options outstanding 496 404 Assumed conversion of preferred stock 4,504 4,693 Weighted average shares and potentially dilutive shares outstanding 43,291 42,940 Diluted Earnings per Common Share $0.54 $0.45 4. Comprehensive Income (in thousands) Quarter ended March 31 1998 1997 Total Comprehensive Income 23,617 13,258 5. Inventories (In thousands) March 31, December 31, 1998 1997 Finished goods $146,582 $131,847 Work in process 58,398 58,047 Raw materials and supplies 66,770 76,515 Total $271,750 $266,409 6. Property Plant and Equipment (In thousands) March 31, December 31, 1998 1997 Land and land improvements $ 14,254 $ 14,278 Buildings 119,944 119,996 Machinery and equipment 378,609 374,967 Construction in progress 18,087 19,113 Accumulated depreciation (247,562) (234,800) Net Property Plant and Equipment $283,332 $293,554 7. The long-term debt is summarized as follows (in thousands): March 31, December 31, 1998 1997 Revolving credit facilities $161,868 $102,119 Private placement debt 197,858 197,858 Other 17,702 29,275 TOTAL 377,428 329,252 Current maturities (29,108) (34,703) Total long-term debt $348,320 $294,549 Debt agreements contain various restrictive covenants, including a limitation on the payment of dividends and certain other restricted payments. Under the most restrictive covenants, $143 million of the March 31, 1998 retained earnings were unrestricted for such purposes. 8. Capital Stock Preferred - authorized 2,800,000 outstanding - Series 1988 111,267 outstanding - Series 1990 1,574,836 Common - authorized 122,200,000 outstanding 38,370,265 On December 29, 1997, the Company announced that the Pentair board had authorized the repurchase within the next 12 months of up to 350,000 shares of Pentair common stock. Any purchases would be made periodically in the open market, by block purchases or private transactions. The share repurchase is intended to offset the dilution caused by stock issuances under employee stock compensation plans. The Company repurchased 25,000 shares on December 30 and 31, 1997, which transactions settled in January 1998. 9. Supplemental Statement of Cash Flows Information The following is supplemental information relating to the Statement of Cash Flows ($000's): Three Months Ended March 31 1998 1997 Interest paid $ 4,947 $ 2,538 Income tax payments 21,062 10,981 10. Reclassifications Certain reclassifications have been made to prior years' financial statements to conform to the current year presentation. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION BUSINESS SEGMENT INFORMATION Selected information for business segments for the three months ended March 31, 1998 and 1997 follows: Segment Information ($000s): <TABLE> <CAPTION> 1998 PTE WFT EEE Other Total <S> <C> <C> <C> <C> <C> Net sales from external customers $185,668 $133,875 $145,422 $ 0 $464,965 Intersegment net sales 2,521 1,751 0 (4,272) 0 Segment profit (loss) - operating income 21,061 15,578 15,221 (7,971) 43,889 Segment assets 423,686 514,561 470,344 75,761 1,484,342 1997 Net sales from external customers $160,888 $ 79,310 $141,735 $29,206 $ 411,139 Intersegment net sales 2,436 1,845 0 (4,281) 0 Segment profit (loss) - operating income 15,811 9,972 14,786 (3,091) 37,478 Segment assets 370,574 284,359 496,924 187,844 1,339,701 </TABLE> PTE = Professional Tools and Equipment WFT = Water and Fluid Technologies EEE = Electrical and Electronic Enclosures Other = Corporate expenses, captive insurance company, intermediate financial companies, charges that do not relate to current operations, divested operations (Federal Cartridge 1997), intercompany eliminations, and all cash and cash equivalents RESULTS OF OPERATIONS Consolidated Results. Consolidated net sales increased to $465.0 million in 1998, representing a 13.1% increase over 1997; taking the divestiture of Federal Cartridge into account, the sales increase exceeded 20%. The double digit growth rate is attributed to excellent performance in the tools and equipment businesses and acquisitions (primarily the pump businesses purchased from General Signal). Operating income increased to $43.9 million in 1998, up 17.1% over 1997, and operating income as a percent of sales improved from 9.1% to 9.4%. Gross profit margins increased in 1998 to 31.1% versus 30.6% in 1997. This is primarily due to internal cost reduction efforts. Selling, general and administrative expense (SG&A) as a percent of sales was 21.7% in 1998 as compared to 21.5% in 1997. Net income increased 22.1% over first quarter 1997. Earnings per share of $.54 was an increase of 20.0%. The first quarter of 1998 is Pentair's 18th consecutive quarter in which earnings per share improved over the same quarter in prior years. The effect of foreign currency traslation for the first quarter of 1998 on Pentair's operations has been unfavorable, but except for the impact on Electrical and Electronic Enclosures sales, has not been material. Professional Tools and Equipment Segment This segment continued to perform extremely well as a result of high consumer confidence levels and several new tool introductions, such as Porter-Cable's cordless nailer, called the Bammer. As a result, a strong backlog has been built going into the second quarter. In the equipment businesses, the benefits of recent acquisitions and closer cooperation among these units are beginning to be reflected in improved results. Net sales increased to $188.2 million in 1998, representing a 15.2% increase over 1997. Operating income increased to $21.1 million in 1998, up 33.2% over 1997, and operating income as a percent of sales improved from 9.7% to 11.2%. Water and Fluid Technologies Segment In this segment, efforts are continuing to focus on bringing the pump businesses we acquired from General Signal up to our performance standards. Great progress has been made in rationalizing the Pump Group product line, streamlining manufacturing operations, and taking advantage of joint purchasing opportunities among all the pump businesses. Similarly, the results of efforts to improve production capacity in the water conditioning control valve business favorably impacted the first quarter. As for overseas markets, European orders have been particularly strong this quarter. Net sales increased to $135.6 million in 1998, representing a 67.1% increase over 1997. Excluding the effects of acquisitions, sales grew modestly over 1998. Operating income increased to $15.6 million in 1998, up 56.2% over 1997, but operating income as a percent of sales declined from 12.3% to 11.5%. This decrease is due to lower initial margins from newly acquired businesses. Electrical and Electronic Enclosures Segment Sales in North American enclosure markets were level in the first quarter compared to the same period last year. The European enclosure situation is improving and order intake has been stronger in 1998. European enclosure sales in the first quarter of this year increased by double digits in local currency, but only single digit growth when converted to US dollars due to continued unfavorable currency translation. Net sales increased to $145.4 million in 1998, representing a 2.6% increase over 1997. Operating income increased to $15.2 million in 1998, up 2.9% over 1997, and operating income as a percent of sales improved from 10.4% to 10.5%. LIQUIDITY AND CAPITAL RESOURCES Cash flow from operating activities was negative $49.4 million in 1998 compared to negative $4.7 million in 1997, including a one-time $17 million tax payment associated with the Federal Cartridge divestiture. Capital expenditures were $4.6 million in 1998 compared to $21.5 million in 1997. The Company had a negative free cash flow of $54.0 million in 1998 compared to a negative $26.2 million in 1997. Free cash flow, a measure of the internal financing of operational cash needs, is defined as cash from operations less capital expenditures. One of Pentair's primary financial goals is to maximize free cash flow within the framework of supporting the operations of all of its businesses. Historically, free cash flow is negative during the first few months of each fiscal year and positive thereafter. Borrowings in the first quarter of 1998 financed approximately half of the operating needs and all capital expenditures. The percentage of long-term debt to total capital was 35% at March 31, 1998 compared to 32% at December 31, 1997. OUTLOOK While the outlook for each of its segments in 1998 is encouraging, Pentair believes it must improve its performance on a company-wide basis in managing total capital and generating free cash flow. The Company has adopted a plan to reduce the costs of operations over the next two years and to maintain those reductions in future years through improvements in productivity and delivery of corporate services. In addition, Pentair continues to look for synergistic acquisitions in each of its business segments, in line with its pattern over the past three years. Pentair will continue to pursue complementary acquisitions to fold into current operations, but will also carefully review larger targets which would significantly expand its current segments. Other acquisitions are possible, but only if they present Pentair extraordinary opportunities. Acquisition and internal growth initiatives, coupled with the savings anticipated from cost reduction activities, should generate consistent and attractive results for Pentair shareholders in 1998 and beyond. NOTIFICATION REGARDING FORWARD-LOOKING INFORMATION Except for historical information contained herein, certain statements are forward-looking statements that involve risks and uncertainties, including, but not limited to, the effect of economic conditions, product demand and market acceptance risks, customer mix, the impact of competitive products and pricing, product development, commercialization and technological difficulties, capacity and supply constraints or difficulties, production efficiency improvement opportunities, the results of financing efforts, actual purchases under agreements and the effect of the Company's accounting policies. The actual results that the Company achieves may differ materially from these forward-looking statements due to such risks and uncertainties. The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other filings with the Securities and Exchange Commission from time to time that advise interested parties of the risks and uncertainties that may affect the Company's financial condition and results of operations.
PART II - OTHER INFORMATION ITEM 4 -Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of Pentair, Inc. was held on April 22, 1998, for the purpose of electing certain members to the board of directors, approving the appointment of auditors, and voting on the proposals described below. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934. PROPOSAL 1 All of management's nominees for directors as listed in the proxy statement were elected with the following vote: Shares Shares Broker Voted For Withheld Non-Votes Quentin J. Hietpas 33,860,588 360,377 0 Richard M. Schulze 33,882,848 338,117 0 Karen E. Welke 33,095,374 1,125,592 0 PROPOSAL 2 The appointment of Deloitte & Touche LLP as independent auditors of the Company for 1998 was ratified by the following vote: Shares Shares Voted Voted Shares Broker For Against Abstaining Non-Votes 34,074,007 44,064 102,895 0 ITEM 5 - Other Information On April 30, 1998, Century Manufacturing acquired the assets of T-Tech Industries, which designs, manufactures, and markets automatic transmission fluid exchanger systems and accessories. The company is profitable and results will be accretive to Pentair's 1998 earnings. On May 5, 1998, the board of directors of Pentair announced its intention to make a cash offer for the entire issued and to-be-issued share capital of VERO Group plc, of Southampton, England, a supplier of racks, subracks, and enclosures to the general electronics, networking and telecommunications industries. Following a subsequent increased offer by a competing bidder, Pentair declined to increase its offer, which it considered to have been fully-priced. ITEM 6 - Exhibits and Reports on Form 8-K (a) Exhibits. The following exhibits are included with this Form 10-Q Report as required by Item 601 of Regulation S-K. Exhibit Description Number 27 Financial Data Schedule (b) Reports on Form 8-K. A report on Form 8-K was filed on January 13, 1998 regarding the Company's announced stock repurchase plan.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. /s/ Richard W. Ingman Executive Vice President and Chief Financial Officer May 15, 1998