UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
For the Quarterly Period Ended September 30, 2000
OR
Commission file number 1-11625
Pentair, Inc.
(Exact name of Registrant as specified in its charter)
Registrant’s telephone number, including area code: (612) 338-5100
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 No
On October 28, 2000 there were 48,650,155 shares of the Registrant’s common stock outstanding.
TABLE OF CONTENTS
PENTAIR, INC. AND SUBSIDIARIES
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENTAIR, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
See accompanying notes to condensed consolidated financial statements.
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PENTAIR, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS
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PENTAIR, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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PENTAIR, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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PENTAIR, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (CONTINUED)
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[Additional columns below]
[Continued from above table, first column(s) repeated]
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our disclosure and analysis in this report may contain some “forward-looking statements”. 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 may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. Actual results may vary materially. 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.
Any change in the following factors may impact the achievement of results:
The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business.
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RESULTS OF OPERATIONSFirst Nine Months 2000 Compared with 1999Net sales for the nine-month period increased to $2.2 billion, up $622 million, or 39.3%, over the comparable period ending September 25, 1999. This increase is primarily due to the following:
Overall, organic growth sales growth for the period was slightly less than 7%.
Operating income for the first nine months of 2000, after taking first quarter restructuring charges into account of $0.2 million, was $191.5 million, an increase of $68.8 million from the corresponding 1999 period that included a $38.0 million restructuring charge. Operating income before restructuring charges was $191.7 million for the first nine months of 2000, up 19.3% from the corresponding year-earlier period. The increase in operating income is attributable to the 1999 acquisitions. As a percent of sales, pre-charge operating income dropped in the nine-month period from 10.2% in 1999 to 8.7% in 2000. Organic operating income fell during the period from 1999 levels, attributable to operating problems in our Tools and Equipment segments, which were not overcome by the improved performance in our other two segments, and recording a $16.0 million charge to increase accounts receivable and inventory valuation reserves in our Equipment segment.
Gross profit margins decreased for the first nine months of 2000 to 28.5% versus 31.3% for the same period a year ago, attributable in part to the acquisitions made in 1999, as these businesses have lower gross profit margins than our previously existing businesses. Excluding businesses acquired in 1999, gross margins declined 80 basis points year-over-year, attributable to lower selling prices and operating difficulties in our Tools and Equipment segments. Selling, general and administrative expense (SG&A) as a percent of sales was 18.5% in the first nine months of 2000 compared with 20.0% in the year-earlier period primarily due to lower SG&A costs in our newly acquired businesses.
Net income for the first nine months of 2000 after restructuring charge ($0.1 million after-tax) increased to $83.2 million from $60.3 million in 1999 after restructuring charge ($24.1 million after-tax). Interest expense increased for the first nine months from $26.2 million to $60.5 million, primarily due to higher interest costs as a result of increased indebtedness incurred for the 1999 acquisitions. In addition, exchange rates, primarily between the US dollar and the Euro and pound sterling, adversely impacted European operations in both sales and operating income for the nine month period by about $28.0 million and $3.0 million, respectively. Our tax rate for the first nine months of 2000 was 36.5%, a decrease from 37.5% in the year-earlier period. The decrease is due to a number of factors, including global tax planning initiatives.
Diluted earnings per share for the first nine months of 2000 increased to $1.71 from $1.40. Weighted average common shares outstanding, assuming full dilution, were 48.6 million for the 2000 year-to-date period, compared with 43.1 million in the year-earlier period. The increase is primarily attributable to the public offering of 5.5 million shares completed in October 1999.
Third Quarter 2000 Compared with 1999Net sales increased to $715.9 million in the third quarter of 2000, an increase of $111.0 million or 18.4% over the same period a year ago. Acquisitions made in the third quarter of 1999 accounted for most of the increase, although organic sales growth in the quarter increased in the low single-digits over the year-earlier period.
Third quarter operating income fell to $39.1 million in 2000, a decrease of 37.5% over the corresponding 1999 period, attributable to operating problems in our Tools and Equipment segments, which were not overcome by the improved performance in our other two segments, and recording a $16.0 million charge to increase accounts receivable and inventory valuation reserves in our Equipment segment. Organic operating income fell 58.5% from year-earlier levels for the same reasons. Net income in the quarter decreased $17.1 million to $12.7 million in 2000 from $29.8 million in 1999, a decrease of 57.5%. Third quarter diluted earnings per share in 2000 showed a decrease of 62.3% from the corresponding period in 1999, primarily due to lower selling prices and poor operating performance in our Tools and Equipment segments, the reserve taken in the current period and an increase in interest costs, offset somewhat by a lower tax rate for the quarter of 33.6% to lower the effective tax rate for the entire year-to-date period to 36.5%
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SEGMENT INFORMATIONTools SegmentTools segment net sales increased to $766.0 million in 2000 year-to-date, representing a 50.6% increase over net sales for the corresponding nine-month period in 1999. Net sales in the third quarter of 2000 grew 26.9% to $265.5 million from $209.3 million in the same period in 1999. Organic sales in 2000 year-to-date were up only slightly year-over-year, largely resulting from a chain of events linked to difficulties encountered during the first quarter start-up of the new Tools distribution center and price discounting in some markets on some products over the past three quarters. As a result of these continuing difficulties, Tools segment net sales for the third quarter decreased slightly on an organic basis compared with the third quarter of 1999 due to sluggish industrial market sales offset somewhat by more than a 20% increase in retail market shipments. Net sales of the acquired business were also below expectations as a result of:
Tools segment operating income in 2000 year-to-date after the restructuring charge was $50.4 million, a decrease of $2.4 million over the prior year. Before taking restructuring charges into account ($6.3 million expense in 1999 compared with $1.2 million income in 2000), operating income in 2000 for the nine-month period decreased 16.7% from $59.1 million to $49.3 million. As a percent of sales, pre-charge operating income decreased from 11.6% to 6.4%, largely attributable to unfavorable product mix, special pricing and promotional programs and higher material costs in 2000.
Operating income in the third quarter of 2000 fell 62.5% to $9.3 million from $24.7 million in the same period in 1999. Operating income as a percent of sales in the third quarter declined to 3.5% in 2000 from 11.8% in the corresponding period in 1999, largely as a result of some loss of volume, special pricing and promotional programs, increases in raw material costs and delay in the anticipated benefits of cost-reduction programs instituted in the second and third quarters.
The outlook for retail market demand for our Tools segment products remains good, though there are weaknesses in this segment’s industrial markets, due in part to a slowdown in economic activity, and inventory reduction efforts in all markets served by this segment. We are optimistic that core sales growth through increased sales efforts, new products and cross-selling will continue. We are aggressively implementing actions to return our Tools segment to traditional high levels of performance.
Equipment SegmentEquipment segment net sales decreased from $226.2 million to $190.9 million in 2000 year-to-date, representing a 15.6% decrease over the corresponding nine-month period in 1999. Net sales in the third quarter of 2000 decreased 29.9% to $51.3 million from $73.1 million in the same period in 1999. The poor sales performance is attributable to competitive and pricing pressures in the automotive and industrial markets we serve.
Our Equipment segment reported an operating loss in 2000 year-to-date after the restructuring charge of $21.5 million (or $5.5 million loss before reserves of $16.0 million) compared with operating income of $5.7 million in the corresponding period. Before taking restructuring charges into account ($15.0 million in 1999 compared with $2.7 million in 2000), the operating loss in 2000 for the nine-month period was $18.8 million (or $2.8 million loss before reserves of $16.0 million) compared to operating income of $20.7 million in the prior year. This poor performance resulted from reduced unit volumes, pricing reductions, delays in the closing of operations at the Jonesboro, Arkansas plant, unfavorable manufacturing variances, inefficiencies associated with consolidating two service equipment businesses and Asian product sourcing difficulties.
Our Equipment segment reported an operating loss in the third quarter of 2000 of $20.7 million (or $4.7 million loss before reserves of $16.0 million) compared with operating income of $6.5 million in the same period in 1999 attributable largely to reduced unit volumes, pricing reductions, delays in the closing of the Jonesboro plant, unfavorable manufacturing variances, inefficiencies associated with consolidating two service equipment businesses and Asian product sourcing difficulties.
We have largely completed the consolidation of our automotive service equipment businesses, and we are focusing on combining the industrial and automotive lubrication businesses to eliminate market overlaps (scheduled to be completed in
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the fourth quarter), closing manufacturing operations at the Jonesboro facility (largely completed in October 2000) and reducing working capital. Once these structural changes are completed, the businesses should be in a position to regain sales momentum and market position.
Water SegmentWater segment net sales increased to $690.2 million in 2000 year-to-date, representing a 78.6% increase over the corresponding period in 1999. Net sales for the third quarter of 2000 grew to $208.6 million from $160.9 million in the same period in 1999. While the large sales increases for the respective periods are largely attributable to the 1999 third-quarter acquisition of the pressure vessel and pool and spa equipment businesses, organic net sales did experience high single-digit year-over-year sales growth for the quarter and year-to-date.
Water segment operating income in 2000 year-to-date was $100.7 million, an increase of 94.6% over the first nine months of 1999. Operating income as a percent of sales improved to 14.6% from 13.4%. Operating income in the third quarter of 2000 grew 41.8% to $28.5 million from $20.1 million in the same period in 1999, and as a percentage of sales rose to 13.7% from 12.5%. While the 1999 acquisitions are largely responsible for the magnitude of the increase in operating income, our Water segment achieved organic operating income growth in the mid-teens for both the third quarter and the first nine months.
The outlook for our Water segment is very good. As a result of the 1999 Essef acquisition, we greatly expanded the capabilities of this segment and are focusing more of our resources on growth in overseas markets and the market for complete systems, while continuing to implement our operating improvement initiatives and completing the integration of the acquired businesses into existing operations.
Enclosures SegmentEnclosures segment net sales increased to $557.7 million in 2000 year-to-date, representing a 20.9% increase over the corresponding period in 1999. Third quarter net sales in 2000 grew 17.8% to $190.5 million from $161.7 million in the same period in 1999. Sales increased in the third quarter across all of the businesses and all geographic markets in this segment, although the increases are strongest in the telecom and data networking equipment markets.
Enclosures segment operating income in 2000 year-to-date after the restructuring charge was $74.0 million, an increase from $26.5 million in the prior year nine-month period. Operating income before restructuring charges ($16.7 million expense in 1999 and $1.3 million income in 2000) increased to $72.7 million, up 68.2% over 1999 year-to-date. Pre-charge operating income for the nine-month period increased as a percent of sales to 13.0% from 9.4%. Operating income in the third quarter of 2000 grew 51.1% to $24.8 million from $16.4 million in the same period in 1999. Operating margins for the third quarter increased from 10.1% in 1999 to 13.0% in 2000.
We expect strong growth in our Enclosures segment over the balance of the year and in 2001, especially in the telecom and data networking markets. Enclosures segment backlogs at the end of the third quarter increased nearly 50.0% over backlogs on the same date in 1999. The expansion of our Enclosure businesses around the world will be critical to our future success in the rapidly growing datacom and telecom fields, especially in creating a world-wide capability to serve these markets, whether in the Americas, Europe or Asia. Our Enclosure businesses plan to continue process improvement actions, coordinated utilization of world-wide manufacturing capacity and some capacity expansions to optimize growth and profitability.
Restructuring ChargeIn the first quarter of 1999, we recorded a restructuring charge of $38.0 million ($24.1 million after-tax) and in the first quarter of 2000 recorded an additional net restructuring charge of $0.2 million ($0.1 million after-tax). The status and progress of the projects implemented in 1999 were re-evaluated in the first quarter of 2000 and a reduction for a change in the original estimate of $6.3 million was recorded. Additionally, three new related projects were determined as restructuring items and an additional $6.5 million charge was recorded.
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The components of the restructuring charge and utilization in 1999 and first nine months of 2000 are as follows:
The unused portion of the restructuring charge of $5.2 million is included in other accrued liabilities on the condensed consolidated balance sheets. We expect to complete restructuring activities and utilize a majority of the remaining reserve by the end of 2000. We will fund the remaining charge through cash from operations or borrowings under our existing credit facilities.
As of September 30, 2000, approximately 850 employees have been terminated (or in Europe are working under statutory notice periods). We expect the remaining 130 employees affected by the restructuring to be terminated during the fourth quarter of 2000 with the final shutdown of the Jonesboro manufacturing operation.
Asset disposals consist of the write-down of the carrying value of the buildings held for resale and the write-off of special-use manufacturing support assets that are no longer needed and will be scrapped or abandoned. We expect to dispose of the real estate held for resale in early 2001. All of these assets are currently classified as property, plant and equipment.
Restructuring benefits (largely personnel cost savings) realized were approximately $7.9 million and $5.9 million in the first nine months of 2000 and full year 1999, respectively. We anticipate benefits of $12.0 million in 2000 and an additional $15.0 million in 2001, primarily related to reduced labor costs and efficiencies in consolidating distribution and administrative functions. These benefits are net of additional costs for adding 200 employees at other Pentair locations and exclude one-time costs of approximately $7.0 million, of which over half has been incurred to date.
LIQUIDITY AND CAPITAL RESOURCESPentair seeks to maintain a total debt to capital ratio around 40.0% as appropriate for our financing needs and business plans, although we will exceed this target ratio from time to time as needed for operational purposes or acquisitions. Our total debt to capital ratio is 50.4% at the end of the third quarter of 2000, up slightly from 50.3% at the end of the second quarter and down from 51.0% at the end of 1999 and 53.5% at the end of the first quarter of 2000. Our available capital resources are deemed adequate for our anticipated uses for the remainder of 2000.
We have targeted a reduction in indebtedness as a key objective in 2000 in order increase our financial flexibility and reduce interest expense. We expect this reduction in to be achieved by significantly increasing the amount of our free cash flow (net cash provided by operating activities less purchases of property, plant and equipment) throughout the year. We are projecting 2000 free cash flow to be 3.0% of net sales, including a significant reduction in working capital from the first quarter of about $100.0 million.
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Of our total indebtedness at the end of the third quarter of 2000, about 81% ($850.6 million, including $22.6 million in current maturities) is long-term and has an average life to maturity of 6 years. This long-term indebtedness has interest rates varying from 7.0% to 9.0%, with an average interest rate of 7.33%. We believe that currently outstanding long-term indebtedness is and will continue to be adequate for our financing needs for the foreseeable future. We also believe that we will be able to obtain additional long-term indebtedness as our needs may increase or our current indebtedness matures.
Short-term indebtedness stands at $198.3 million as of September 30, 2000, up slightly from $196.1 million at the end of the second quarter of 2000. This short-term indebtedness has an average interest rate of 7.20%. We believe that we will generate substantial cash flow from operations during the fourth quarter of 2000 that will primarily be used to reduce current indebtedness. We renewed our current short-term credit agreements at the time of their scheduled expiration in August 2000. In addition, we instituted a commercial paper program in January 2000 for the issuance of short-term notes at favorable interest rates compared with the rates on our revolving debt.
We expect capital spending in 2000 to be in the $80-85 million range and will relate to e-business initiatives, computer hardware and software investments, manufacturing cost reduction projects, new product development and reconfiguration of manufacturing facilities.
At the end of the first nine months of 2000, free cash flow was negative by $16.3 million, with free cash flow in the third quarter of $16.0 million, net of an inventory build of power tools for retailer orders for the Christmas season. Our fourth quarter has been historically the quarter in which we experience our largest free cash flow. We anticipate free cash flow of approximately $100 million for full year 2000 compared with $85.4 million in full year 1999.
Our focused effort on collection of receivables, negotiation of better payment terms and reductions in inventory showed positive results, helped in part by normal customer payments for seasonal purchases in our Water segment. We intend to continue to emphasize controlling working capital and maximizing free cash flow.
In 2000, Pentair paid two quarterly dividends of $0.16 per share and recently announced an increase in our quarterly dividend rate of six percent to $0.17 per share. The increased cash dividend was paid November 10, 2000 to shareholders of record at the close of business on October 27, 2000.
OutlookWe operate in four segments. This diversification enables Pentair to consistently improve results despite difficult markets in one or more businesses. Continuing demand for power tools in the Do-It-Yourself (DIY) channel, ever-rising needs for clean water throughout the world, and the critical importance of protecting sensitive electronics give our businesses excellent prospects for strong long-term performance. Markets for lubrication and automotive equipment continue to remain static. Our basic operating strategies – ongoing cost containment, new product development, multi-channel distribution, and the pursuit of value-added acquisitions – drive our businesses in both growing and softer economies.
We continue to look for synergistic acquisitions in each of our business segments, in line with our pattern over the past five years. Of the fifteen acquisitions made since 1994, most were smaller businesses or product lines that fit with existing operations, offering new products or expanded geographic scope. In addition, three transactions over the last three years were stand-alone acquisitions of large established businesses. We intend to continue to pursue smaller, bolt-on purchases, but will also carefully review larger targets that have the capability to significantly expand our current segments, or in appropriate cases, that establish an additional business segment.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk during the nine months ended September 30, 2000. For additional information, refer to Item 7A on pages 22-23 of our 1999 Form 10-K.
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PART II OTHER INFORMATION
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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, thereunto duly authorized, on November 14, 2000.
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