UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 27, 1999 Commission File No. 001-11625 PENTAIR, INC. (Exact name of Registrant as specified in its charter) Minnesota 41-0907434 (State of incorporation) (IRS Employer Identification No.) 1500 County B2 West, Suite 400 St. Paul, Minnesota 55113-3105 (Address of principal executive offices) (Zip Code) (651) 636-7920 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of Registrant's only class of common stock on March 27, 1999 was 42,604,349.
PENTAIR, INC. AND SUBSIDIARIES FORM 10-Q TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Consolidated Statement of Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations PART II - OTHER INFORMATION Item 4. Results of Votes of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signature Page
PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS PENTAIR, INC. CONSOLIDATED STATEMENT OF INCOME <TABLE> <CAPTION> (Unaudited) ($ expressed in thousands except per share amounts) First Quarter Ended March 27, 1999 March 31, 1998 <S> <C> <C> Net sales $470,493 $464,965 Operating costs: Cost of goods sold 320,659 320,155 Selling, general and administrative 103,396 100,921 Restructuring charge 38,000 0 Total operating costs 462,055 421,076 Operating Income 8,438 43,889 Interest expense - net 4,910 5,353 Income before income taxes 3,528 38,536 Provision for income taxes 1,288 14,827 Net income 2,240 23,709 Preferred dividend requirements 0 1,184 Income available to common shareholders $ 2,240 $ 22,525 Basic Earnings per Common Share $0.05 $0.59 Diluted Earnings per Common Share $0.05 $0.54 Weighted Average Common Shares Outstanding 42,225 38,291 Outstanding Assuming Dilution 43,074 43,291 </TABLE>
PENTAIR, INC. CONSOLIDATED BALANCE SHEET <TABLE> <CAPTION> (Unaudited) (in thousands) March 27, December 31, 1999 1998 <S> <C> <C> ASSETS Current assets Cash and cash equivalents $31,059 $32,039 Accounts and notes receivable 406,994 396,062 Inventories 282,311 278,581 Deferred income taxes 43,386 30,397 Other current assets 12,274 11,490 Total current assets 776,024 748,569 Property, Plant & Equipment - net 295,098 308,258 Goodwill 460,021 474,488 Other assets 56,476 23,351 TOTAL ASSETS $1,587,619 $1,554,666 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts and notes payable $125,448 $155,962 Compensation and other benefits accruals 61,904 69,893 Income taxes 18,404 7,111 Accrued product claims and warranties 29,029 29,475 Accrued rebates 8,994 19,682 Accrued restructuring charge 37,561 0 Accrued expenses and other liabilities 62,263 59,796 Current maturities of long-term debt 48,667 52,874 Total current liabilities 392,270 394,793 Long-term debt 312,544 288,026 Pensions and other retirement compensation 60,412 60,564 Postretirement medical and other benefits 41,636 41,868 Reserves - insurance subsidiary 30,694 29,441 Other liabilities 46,433 30,162 Deferred income taxes 0 447 Commitments and contingencies Preferred stock-at liquidation value 0 53,638 Common stock - par value, $.16 2/3 7,101 6,417 Additional paid-in capital 236,064 184,145 Accumulated other comprehensive income (4,062) (3,962) Retained earnings 464,527 469,127 Total shareholders' equity 703,630 709,365 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,587,619 $1,554,666 </TABLE> See Notes to Consolidated Financial Statements.
PENTAIR, INC. CONSOLIDATED STATEMENT OF CASH FLOWS <TABLE> <CAPTION> (Unaudited) (in thousands) First Quarter Ended March 27 March 31 1999 1998 <S> <C> <C> Cash provided by (used for) Operating activities Net income $2,240 $23,709 Adjustments to reconcile to cash flow: Restructuring charge 38,000 0 Depreciation 14,188 13,922 Amortization 4,422 4,620 Deferred income taxes 930 187 Changes in assets and liabilities, net of effects of acquisitions/dispositions Accounts receivable (24,853) (26,660) Inventories (8,521) (6,034) Accounts payable (27,963) (33,158) Compensation and benefits (6,748) (9,765) Income taxes (3,844) (4,967) Pensions and other retirement compensation 2,123 1,449 Reserves - insurance subsidiary 1,253 (1,835) Other assets/liabilities - net (15,405) (10,876) Cash used for operating activities (24,178) (49,408) Investing activities Capital expenditures (7,427) (4,570) Payments for acquisition of businesses (33) (12) Other 88 0 Cash used for investing activities (7,372) (4,582) Financing activities Borrowings 29,000 69,058 Debt payments (3,694) (21,438) Unearned ESOP compensation decrease 0 975 Employee stock plans and other 3,404 1,175 Repurchase of stock (3,351) 0 Dividends paid (6,840) (6,920) Cash provided by financing activities 18,519 42,850 Effects of currency exchange rate changes 12,051 2,354 (Decrease) in cash and cash equivalents (980) (8,786) Cash and cash equivalents - beginning of period 32,039 34,340 - end of period $31,059 $25,554 </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, 1998, previously filed with the Commission. The results of operations for the three months ended March 27, 1999 are not necessarily indicative of the operating results to be expected for the full year. Income tax provisions for interim periods are based on the current best estimate of the effective annual federal, state and foreign income tax rates. 2. Subsequent Events Web Tool & Manufacturing, Inc. Pentair significantly increased its penetration of fast-growing technology markets with the acquisition of WEB Tool & Manufacturing, Inc. of Elk Grove Village, Illinois which closed on April 2, 1999. WEB designs, manufactures, and markets custom server subracks and chassis for computer technology applications. The purchase price was not disclosed, but Pentair said that WEB is profitable and is expected to be accretive to Pentair earnings in 1999. The cash transaction was financed through bank borrowings. Essef Corporation On April 30, 1999, Pentair announced that it had entered into a merger agreement to acquire Essef Corporation (Nasdaq: ESSF) of Chardon, Ohio, for $19.09 per share, payable in cash. Essef is a global leader in the manufacture of composite water tanks, pumps, filters, and other water equipment. The merger excludes Essef's Anthony & Sylvan pool construction business, which will be split off to its shareholders at the time of closing of this acquisition. The cash purchase price will be approximately $312 million. Pentair will also assume approximately $100 million of Essef debt. Pentair, which will finance the acquisition through available lines of credit, expects Essef to be accretive to earnings over the first 12 months after acquisition. The merger agreement, which was approved by the boards of both Pentair and Essef, is subject to Essef shareholder approval, regulatory approval under the Hart-Scott-Rodino Act, and completion of due diligence by Pentair. Essef's annual sales, for the businesses being acquired, are estimated by industry analysts to be approximately $350 million. Completion of the transaction is currently targeted for July 31, 1999. 3. Earnings per common share Basic earnings per common share is computed by dividing net income, after deducting preferred stock dividends, by the average common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income after adjusting the tax benefits on deductible ESOP dividends by the average common shares outstanding plus the incremental shares that would have been outstanding upon the assumed exercise of dilutive stock options and upon the assumed conversion of each series preferred stock. The tax benefits applicable to preferred dividends paid to ESOPs are recorded in the following ways: for allocated shares, they are credited to income tax expense and included in the earnings per share calculation; for unallocated shares, they are credited to retained earnings and excluded from the earnings per share calculation. The following table reflects the calculation of basic and diluted earnings per share. (In thousands except per share amounts) <TABLE> <CAPTION> March 27, March 31, 1999 1998 <S> <C> <C> Earnings per share Income from continuing operations $2,240 $23,709 Preferred dividend requirements 0 1,184 Income available to common shareholders 2,240 22,525 Weighted average shares outstanding 42,225 38,291 Basic Earnings per Common Share $0.05 $0.59 Earnings per share - assuming dilution Income available to common shareholders 2,240 22,525 Add back preferred dividend requirements due to conversion into common shares 0 1,184 Elimination of tax benefit on preferred ESOP dividend due to conversion into common shares 0 (407) Addition of tax benefit on ESOP dividend assuming conversion to common shares - at common dividend rate 0 235 Income available to common shareholders assuming dilution 2,240 23,537 Weighted average shares outstanding 42,225 38,291 Dilutive impact of stock options outstanding 298 496 Assumed conversion of preferred stock 551 4,504 Weighted average shares and potentially dilutive shares outstanding 43,074 43,291 Diluted Earnings per Common Share $0.05 $0.54 </TABLE> 4. Comprehensive Income (in thousands) First Quarter Ended March 27, 1999 March 31, 1998 Net Income $2,240 $23,709 Other Comprehensive Income, net of tax: Foreign Currency Translation Adjustments (100) (92) Minimum Pension Liability Adjustment 0 0 Total Comprehensive Income $2,140 $23,617 5. Inventories (In thousands) March 27,December 31, 1999 1998 Finished goods $160,893 $147,780 Work in process 66,474 64,421 Raw materials and supplies 54,944 66,380 Total $282,311 $278,581 6. Property Plant and Equipment (In thousands) March 27,December 31, 1999 1998 Land and land improvements $15,040 $15,699 Buildings 129,292 131,989 Machinery and equipment 418,948 419,418 Construction in progress 25,706 25,883 Accumulated depreciation (293,888) (284,731) Net Property Plant and Equipment$295,098 $308,258 7. The long-term debt is summarized as follows: (in thousands) March 27,December 31, 1999 1998 Revolving credit facilities$130,495 $103,479 Private placement debt 180,716 180,716 Other 50,000 56,705 TOTAL 361,211 340,900 Current maturities (48,667) (52,874) Total long-term debt $312,544 $288,026 Debt agreements contain various restrictive covenants, including a limitation on the payment of dividends and certain other restricted payments. Under the most restrictive covenants, $153 million of the March 27, 1999 retained earnings were unrestricted for such purposes. 8. Capital Stock Preferred - authorized 0 outstanding - Series 1988 0 outstanding - Series 1990 0 Common - authorized 122,200,000 outstanding 42,604,349 Subsequent to year-end, both Series 1988 and Series 1990 preferred stock classes were redeemed and all shares were converted to common stock on January 4, 1999 and January 15, 1999, respectively. On December 14, 1998, the Company announced that the Pentair board had authorized the Company to repurchase on an annual basis up to 400,000 shares of Pentair common stock. Any purchases would be made periodically in the open market, by block purchases or private transactions. The share repurchase is intended to offset the dilution caused by stock issuances under employee stock compensation plans. As of March 27, 1999, the Company had repurchased 95,500 shares under the authorization. 9. Supplemental Statement of Cash Flows Information The following is supplemental information relating to the Statement of Cash Flows ($000's): First Quarter Ended March 27, 1999 March 31, 1998 Interest paid $3,134 $4,947 Income tax payments 5,561 21,062 10. Reclassifications Certain reclassifications have been made to prior years' financial statements to conform to the current year presentation. 11. Accounting Developments In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company must adopt this standard no later than January 1, 2000. The Company is reviewing the requirements of this standard, which are quite complex. Although the Company expects that this standard will not materially affect its financial position and results of operations, it has not yet determined the impact of this standard on its financial statements. 12. Special Restructuring Charge In the first quarter of 1999, the Company recorded a special restructuring charge of $38.0 million ($24.1 million after-tax or $.56 per share). As shown below, only $.4 million had been spent through March 27, 1999. The restructuring plan comprises consolidation of certain operations, overhead reductions, and outsourcing of specific product lines in each of the Company's three business segments. Pentair anticipates a net reduction of approximately 700 jobs, less than seven percent of the company's global workforce. Pentair's Electrical and Electronic Enclosures Group already has initiated a major overhead reduction in its European enclosure businesses -- principally at the Schroff operation in Straubenhardt, Germany -- and manufacturing rationalization in its North American facilities. This Group will absorb $16.7 million of the charge, with anticipated savings of more than $4.0 million in the remaining quarters of 1999 and more than $9.0 million in 2000. The Professional Tools and Equipment Group will accelerate its already-strong performance by consolidating distribution operations, and by combining the headquarters of the two power tool businesses, Delta and Porter-Cable. In the service equipment businesses, products are being outsourced to offshore manufacturers, and the Jonesboro, Arkansas, manufacturing operation of Lincoln Automotive will be closed. Restructuring charges of $16.8 million in this Group will deliver anticipated savings of more than $14.0 million in 2000. The Water and Fluid Technologies Group will reduce the workforce at its Lincoln Industrial business and outsource some product manufacturing. Approximately 50 percent of the company's U.S. manufacturing facility will be closed. This Group's charge will be $4.5 million, with anticipated savings of $0.4 million in late 1999 and more than $2.0 million in the year 2000. The components of the restructuring charge and related reserve balances remaining at March 27, 1999 were (in millions): Personnel Asset Exit Costs Disposals Costs Total 1999 Restructuring Charge $27.5 $7.0 $3.5 $38.0 1999 Spending To Date (0.4) 0.0 0.0 (0.4) Remaining Reserve $27.1 $7.0 $3.5 $37.6 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION BUSINESS SEGMENT INFORMATION Selected information for business segments for the quarter ended March 27, 1999 and March 31, 1998 follows: Segment Information ($000s): <TABLE> 1999 PTE WFT EEE Other Total <S> <C> <C> <C> <C> <C> Net sales from external customers $199,531 $127,609 $143,353 $ 0 $470,493 Intersegment net sales 1,014 898 0 (1,912) 0 Segment profit (loss) - operating income 5,437 12,012 (4,350) (4,661) 8,438 Segment assets 484,106 508,090 509,762 85,661 1,587,619 1998 Net sales from external customers $185,668 $133,875 $145,422 $ 0 $464,965 Intersegment net sales 2,521 1,751 0 (4,272) 0 Segment profit (loss) - operating income 19,149 14,223 13,722 (3,205) 43,889 Segment assets 423,686 514,561 470,344 75,751 1,484,342 </TABLE> PTE = Professional Tools and Equipment WFT = Water and Fluid Technologies EEE = Electrical and Electronic Enclosures Other = Corporate leadership expenses, captive insurance company, intermediate financial companies, charges that do not relate to current operations, intercompany eliminations and all cash and cash equivalents RESULTS OF OPERATIONS Consolidated Results. Sales and income in the first quarter of 1999 were affected by our adoption of a standard "4-4-5 week" quarter for Pentair reporting. The first quarter ended on March 27, 1999, with about 4 percent fewer work days than the same period last year. Pentair's fiscal year will continue to end on December 31. Also, operating profits of the segments are now reported net of all their administrative and related costs. The prior year segment data was restated for such reporting change. Consolidated net sales increased to $470.5 million in 1999, representing a 1.2% increase over 1998. Operating income for 1999 includes a restructuring charge of $38.0 million ($24.1 million after-tax or $.56 per share). Excluding the restructuring charge, operating income increased 5.8%, and operating income as a percent of sales improved from 9.4% to 9.9%. Gross profit margins increased in 1999 to 31.8% versus 31.1% in 1998. This is primarily due to internal cost reduction efforts. Selling, general and administrative expense (SG&A) as a percent of sales was 22.0% in 1999 as compared to 21.7% in 1998. Net income excluding the restructuring charge increased 11.2% over first quarter 1998. Earnings per share excluding the restructuring charge was $.61, an increase of 13.0%. The tax rate reduction to 36.5 percent is consistent with the pattern of reductions effected over the last two years. It is anticipated that the tax rate in the future quarters of 1999 will remain at approximately 36.5 percent, before the effect of new acquisitions. The Essef acquisition will add approximately 1.4 percentage points to the full year tax rate, due to non-deductible amortization of goodwill. Professional Tools and Equipment Segment First quarter sales in the Professional Tools and Equipment Group continued relatively strong, driven by a good domestic economy and demand for newly introduced products. A healthy economic outlook, an array of new products, and continued distribution expansion are expected to maintain high single-digit sales growth in the second quarter of 1999. Net sales increased to $200.5 million in 1999, representing a 6.6% increase over 1998. Operating income excluding the restructuring charge increased to $22.2 million in 1999, up 16.0% over 1998, and operating income as a percent of sales improved from 10.2% to 11.1%. Housing starts are one critical factor driving performance in the tools businesses. Although starts in 1999 are expected to be down slightly from the high levels we experienced in 1998, retail markets will likely make up for slower construction markets. Water and Fluid Technologies Segment While 1998 was a year of consolidating new operations, building efficiency, and outsourcing, 1999 will be a year for accelerating internal sales growth. Working from the strong base established last year, a step up in top line growth is expected through entry into new markets and accelerated product development. Net sales decreased to $128.5 million in 1999, representing a 5.2% decrease from 1998. Operating income excluding the restructuring charge increased to $16.5 million in 1999, up 15.9% over 1998, and operating income as a percent of sales improved from 10.5% to 12.8%. Profits in the Group benefited from continued productivity improvements and cost reductions, while the diminution in overall sales is largely attributable to the deliberate reduction in the sales of the formerly unprofitable Layne & Bowler pump line, begun in the second quarter of 1998. First quarter orders rose strongly in the pump and control valve businesses. This level of order intake, driven in part by the recent introduction of new products, is expected to generate second quarter sales growth in the mid-to-high single digits for this segment. Electrical and Electronic Enclosures Segment In the Electrical and Electronic Enclosures Group, reduced capital spending in key industrial and electronic markets, and continued weakness in European enclosure markets, resulted in first quarter sales below those of the same period last year. Net sales decreased to $143.4 million in 1999, representing a 1.4% decrease from 1998. In North American markets, a high level of quoting activity late in the first quarter, much of which originated from the automotive industry, may indicate a return to higher industrial capital spending for the second quarter of 1999. Although European markets are expected to continue to be weak, Pentair is improving its competitive position by implementing overhead reductions in its underperforming German enclosures operation. Initial savings from that reduction are expected in the third quarter of 1999. Operating income excluding the restructuring charge decreased to $12.4 million in 1999, down 9.7% from 1998, as operating income as a percent of sales declined from 9.4% to 8.7%. In summary, the Company is encouraged by what is happening in the North American market and organic sales are expected to grow in the mid-to-high single digits in the second quarter of 1999. In Europe, necessary actions are being taken to structure the business appropriately for the conditions there, and there is cautious optimism about sales growth in that market. SPECIAL RESTRUCTURING CHARGE In the first quarter of 1999, the Company recorded a special restructuring charge of $38.0 million ($24.1 million after-tax or $.56 per share). The restructuring plan comprises consolidation of certain operations, overhead reductions, and outsourcing of specific product lines in each of the Company's three business segments. Pentair anticipates a net reduction of approximately 700 jobs, less than seven percent of the company's global workforce. Pentair's Electrical and Electronic Enclosures Group already has initiated a major overhead reduction in its European enclosure businesses -- principally at the Schroff operation in Straubenhardt, Germany -- and manufacturing rationalization in its North American facilities. This Group will absorb $16.7 million of the charge, with anticipated savings of more than $4.0 million in the remaining quarters of 1999 and more than $9.0 million in 2000. The Professional Tools and Equipment Group will accelerate its already-strong performance by consolidating distribution operations, and by combining the headquarters of the two power tool businesses, Delta and Porter-Cable. In the service equipment businesses, products are being outsourced to offshore manufacturers, and the Jonesboro, Arkansas, manufacturing operation of Lincoln Automotive will be closed. Restructuring charges of $16.8 million in this Group will deliver anticipated savings of more than $14.0 million in 2000. The Water and Fluid Technologies Group will reduce the workforce at its Lincoln Industrial business and outsource some product manufacturing. Approximately 50 percent of Lincoln's U.S. manufacturing facility will be closed. This Group's charge will be $4.5 million, with anticipated savings of $0.4 million in late 1999 and more than $2.0 million in the year 2000. The components of the restructuring charge and related reserve balances remaining at March 27, 1999 were (in millions): Personnel Asset Exit Costs Disposals Costs Total 1999 Restructuring Charge $27.5 $7.0 $3.5 $38.0 1999 Spending To Date (0.4) 0.0 0.0 (0.4) Remaining Reserve $27.1 $7.0 $3.5 $37.6 LIQUIDITY AND CAPITAL RESOURCES Cash flow from operating activities was negative $24.2 million in 1999 compared to negative $49.4 million in 1998. The Company believes that cash flow from operations will continue to exceed its needs for capital programs, smaller acquisitions and dividends during the year. Capital expenditures were $7.4 million in 1999 compared to $4.6 million in 1998. The Company had a negative free cash flow of $31.6 million in 1999 compared to a negative $54.0 million in 1998. Free cash flow, a measure of the internal financing of operational cash needs, is defined as cash from operations less capital expenditures. The Company is targeting continued growth in free cash flow as a percent of sales through improved profitability and working capital ratios. Historically, free cash flow is negative during the first few months of each fiscal year and positive thereafter. Borrowings in the first quarter of 1999 financed operating needs and capital expenditures. The percentage of long-term debt to total capital was 31% at March 27, 1999 compared to 29% at December 31, 1998. The Company has sufficient financing capacity to continue its current acquisition program and to support its ongoing stock repurchase program. The stock repurchase is intended to offset the dilution caused by stock issuances under employee stock compensation plans. Significant acquisitions (above approximately $250 million), such as Essef, require increased credit facilities. The Company believes it can obtain adequate financing for acquisitions. OUTLOOK While the outlook for each of its segments in 1999 is encouraging, Pentair believes it must improve its management of total capital and thereby increase free cash flow. Pentair's top line growth in the coming months will be driven by new product introductions in the tools and water businesses, and expanded distribution and improved productivity in the enclosures businesses. Improved order levels and stronger backlogs in our tool and water segments, combined with several growth initiatives in place across the organization, should accelerate revenues in the second quarter and beyond. Meanwhile, the benefits of the $60 million cost savings project and our restructuring activities will reinforce the profitability of all the operating groups. In addition, Pentair continues to look for synergistic acquisitions in each of its business segments, in line with its pattern over the past three years. Pentair will continue to pursue complementary acquisitions to fold into current operations, but will also carefully review larger targets which would significantly expand its current segments. Other acquisitions are possible, but only if they present Pentair extraordinary opportunities. Acquisition and internal growth initiatives, coupled with the savings anticipated from our cost-reduction activities, are expected to generate consistent and attractive results for Pentair shareholders in 1999 and beyond. YEAR 2000 Background The Year 2000 issue is the result of computer programs and embedded computer chips originally having been designed and developed using two digits rather than four digits to define the applicable year. Any of the Company's internal use computer programs and hardware as well as its products that are date sensitive may recognize a date using "00" as the Year 1900 rather than the Year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities for both the Company and its customers who rely on its products. State of Readiness The Company's businesses have had "Y2K Project" programs in place since as long ago as 1995 to address Year 2000 problems in critical business areas for information management systems, non- information systems with embedded technology, suppliers and customers. The Company has largely completed its review and compliance planning for its critical information systems (IS). Certain of the Company's larger businesses have completed the implementation of required actions for compliance; the balance of the business units are in the process of implementation. In many cases, implementation includes installation of new Enterprise Resource Planning ("ERP") systems designed to enable these businesses to operate more efficiently and to provide better management reporting. Pentair anticipates that implementation and testing phases will be substantially complete throughout the company by the third quarter of 1999. The Company is also in the process of reviewing and replacing, where necessary, its other automated communications and manufacturing systems. The Company estimates that it will complete this phase by the second quarter of 1999. None of the Company's products are believed to be date dependent. The Company has close working relationships with a large number of suppliers and customers. These include, among others, utility and telecommunication providers, raw materials and components suppliers, and financial institutions, managed care organizations and large retail establishments. The Company has been reviewing, and continues to review, with its critical suppliers and major customers the status of their Year 2000 readiness. The Company's business units have established plans for ongoing monitoring of suppliers during 1999. Costs to Address the Year 2000 Issue As a result of the numerous different IS systems used by businesses that the Company has acquired in recent years and also as a result of changing business requirements, the Company has an ongoing development plan with scheduled replacements of hardware and software occurring in 1999 throughout the organization. Year 2000 compliance is a by- product of our development plan. The estimated cost associated with the total IS development plan over the five-year period from 1995 to 1999 is anticipated to be approximately $55 million, which is approximately 80% complete. The estimated cost specifically attributable to Year 2000 compliance, apart from other IS development activities, amounts to approximately $10 million, of which $8 million had been spent through December 31, 1998. Pentair has not deferred any significant IS projects as a result of the implementation of the Y2K Project. Risks Represented by the Year 2000 Issue Pentair believes that completed and planned modifications and conversions of its internal systems and equipment will allow it to be Year 2000 compliant in a timely manner. However, there can be no assurance that the Company's systems or equipment, nor those of third parties on which Pentair relies, will be Year 2000 compliant , in all material respects, in a timely manner. Nor can Pentair give any assurance that its own or third parties' contingency plans will mitigate the effects of any noncompliance. Pentair believes that non- compliance with Year 2000 issues would likely result in some reduction of the Company's operations for the first part of the year 2000, which could have a material adverse effect on the Company's businesses or their financial condition. Based on its assessments to date, Pentair believes it will not experience any material disruption as a result of Y2K issues in internal manufacturing processes, information processing, interfacing with major customers or processing orders and billing. However, if critical utility service providers experience difficulties, which affect Pentair, or its business units, a shutdown of some or all operations at individual facilities could occur. Pentair is developing contingency plans to provide for continuity of processing (in the event of a Y2K disruption) which will be based on the outcome of its Y2K compliance reviews and the results of third party verification efforts. Assuming no major disruption in service from utility companies or similar critical third-party providers, Pentair believes that it will be able to manage its Year 2000 transition without material effect on Pentair's results of operations or financial condition. The most reasonably likely worst case scenario of failure by Pentair or its suppliers or customers to resolve Year 2000 issues would be a temporary slowdown or cessation of manufacturing operations at one or more of Pentair's facilities, and/or a temporary inability on the part of Pentair to timely process orders and to deliver finished products to customers. Delays in meeting customer orders would reduce or delay sales and affect the timing of billings to and payments received from customers and could result in complaints, charges or claims, or temporarily increasing working capital. Contingency Plans Pentair's businesses are in the process of developing Year 2000 contingency plans, based on their review of their internal and external compliance progress. A full review will be done following the end of the second quarter of 1999 to assess Pentair's vulnerability to internal non- compliance and potential third-party failures and actions which can be taken to reduce unfavorable impacts. Possible plans may include arranging alternative or additional suppliers and service providers, increasing inventory levels, providing additional back-up systems and replacing or upgrading equipment and software. NOTIFICATION REGARDING FORWARD-LOOKING INFORMATION It should be noted that certain statements herein which are not historical facts, including without limitation those regarding 1) the timeliness of product introductions and deliveries; 2) expectations regarding market growth and developments; 3) expectations for growth and profitability; and 4) statements preceded by "believes", "anticipates", "expects", "estimates" or similar expressions are forward-looking statements. Because such statements involve risks and uncertainties, actual results may differ materially from the results currently expected by the Company. Factors that could cause such differences include, but are not limited to, 1) general economic conditions, such as the rate of economic growth in the Company's principal geographic markets or fluctuations in exchange rates; 2) industry conditions, such as the strength of product demand, the intensity of competition, pricing pressures, the acceptability of new product introductions, the introduction of new products by competitors, changes in technology or the ability of the Company to source components from third parties without interruption and at reasonable prices and the financial condition of the Company's customers; 3) operating factors, such as continued improvement in manufacturing activities and the achievement of related efficiencies therein, and inventory risks due to shifts in market demand; and, 4) the expectations, uncertainties, costs and risks associated with Year 2000 issues, such as the Company's expectations as to when it will complete the remediation and testing phases of its Year 2000 programs as well as contingency plans; its estimated costs of achieving Year 2000 readiness; and the Company's belief that its internal systems and equipment will be compliant in a timely manner. Factors that may cause these differences include, but are not limited to, the availability of qualified personnel and other IT resources; the ability to identify and remediate all date-sensitive computer coding or the ability to identify and replace all embedded computer chips in affected systems or equipment; and the actions of governmental agencies or other third parties with respect to Year 2000 problems. The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date hereof. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other filings with the Securities and Exchange Commission from time to time that advise interested parties of the risks and uncertainties that may affect the Company's financial condition and results of operations.
PART II - OTHER INFORMATION ITEM 4 -Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of Pentair, Inc. was held on April 28, 1999, for the purpose of electing certain members to the board of directors, approving the appointment of auditors, and voting on the proposals described below. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934. PROPOSAL 1 All of management's nominees for directors as listed in the proxy statement were elected with the following votes. Shares Shares Broker Voted For Withheld Non-Votes Winslow H. Buxton32,464,778294,129 0 Barbara B. Grogan32,427,686331,221 0 Stuart Maitland32,471,620287,287 0 Augusto Meozzi32,345,416 413,491 0 Joseph R. Collins32,458,713300,194 0 PROPOSAL 2 The appointment of Deloitte & Touche LLP as independent auditors of the Company for 1999 was ratified with the following vote. Shares Shares Voted Shares Broker Voted For Against Abstaining Non-Votes 32,565,699 92,231 100,977 0 PROPOSAL 3 To amend the Restated Articles of Incorporation increasing the total number of shares authorized to be issued from 125,000,000 to 250,000,000. PROPOSAL 3 PASSED. Shares Shares Voted Shares Broker Voted For Against Abstaining Non-Votes 29,831,342 2,776,978 150,587 0 PROPOSAL 4 To amend the Restated Articles of Incorporation to increase from 15,000,000 to 30,000,000 the number of authorized shares designated as preferred shares. PROPOSAL 4 DID NOT PASS. Shares Shares Voted Shares Broker Voted For Against Abstaining Non-Votes 17,027,720 13,272,044 191,760 2,267,382 PROPOSAL 5 To amend the Restated Articles of Incorporation to eliminate all currently authorized series of preferred shares of the Company. PROPOSAL 5 PASSED. Shares Shares Voted Shares Broker Voted For Against Abstaining Non-Votes 29,238,861 1,007,373 245,290 2,267,382 ITEM 5 - Other Information On April 30, 1999, Pentair announced that it had entered into a merger agreement to acquire Essef Corporation (Nasdaq: ESSF) of Chardon, Ohio, for $19.09 per share, payable in cash. Essef is a global leader in the manufacture of composite water tanks, pumps, filters, and other water equipment. The cash purchase price will be approximately $312 million. Pentair will also assume approximately $100 million of Essef debt. Pentair, which will finance the acquisition through available lines of credit, expects Essef to be accretive to earnings over the first 12 months after acquisition. The merger agreement, which was approved by the boards of both Pentair and Essef, is subject to Essef shareholder approval, regulatory approval under the Hart-Scott- Rodino Act, and completion of due diligence by Pentair. Essef's 1999 sales are estimated by industry analysts to be approximately $350 million, exclusive of its Anthony & Sylvan pool construction business, which will be split-off by Essef to its current shareholders at the closing of the acquisition. Completion of the transaction is targeted for July 31, 1999. ITEM 6 - Exhibits and Reports on Form 8-K (a) Exhibits. The following exhibits are included with this Form 10-Q Report as required by Item 601 of Regulation S-K. Exhibit Description Number 3.1 Restated Articles of Incorporation as amended through April 28, 1999. 27 Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed during the first quarter of 1999.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. /s/ Richard W. Ingman Executive Vice President and Chief Financial Officer May 11, 1999