Pentair - 10-Q quarterly report FY

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2001

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-11625

Pentair, Inc.

Registrant’s telephone number, including area code: (651) 636-7920

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 [ ]

On April 27, 2001, 49,021,499 shares of the Registrant’s common stock were outstanding.

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Pentair, Inc. and Subsidiaries

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PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Pentair, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Pentair, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

See accompanying notes to condensed consolidated financial statements.

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Pentair, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

1.   Basis of Presentation and Responsibility for Interim Financial Statements

2.   Cumulative Effect of Change in Accounting Principle

3.   Comprehensive Income

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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited) — (continued)

4.   Earnings Per Common Share

5.   Inventories

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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited) — (continued)

6.   Restructuring Charge

7.   Acquisitions

8.   Business Segments

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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 could be materially different from actual results. They can be affected by assumptions we might make or by known or unknown risks or uncertainties. Consequently, 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 OPERATIONS

The following table sets forth information from our condensed consolidated statements of income.

Net sales

The components of the net sales increase were as follows:

Net sales in the first quarter of 2001 totaled $671.4 million, compared with $647.7 million in the first quarter of 2000. The $23.7 million or 3.7 percent increase was primarily due to sales volume growth in our Enclosures and Tools segments, partially offset by volume declines in our Water segment due to unfavorable weather patterns resulting in a late spring. First quarter 2001 volume grew about 4.8 percent, while overall pricing decreased by about 0.2 percent. The negative currency impact on first quarter 2001 sales reflects the year-over-year decline primarily in the value of certain European currencies relative to the U.S. dollar.

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Sales by segment and the change from the prior year period were as follows:

Tools

The 3.8 percent increase in Tools segment sales in the first quarter of 2001 from 2000 was primarily due to:

This increase was partially offset by:

In order to increase profitability in the Tools segment, some of the tasks we are undertaking include:

Water

The 4.8 percent decline in Water segment sales in the first quarter of 2001 from 2000 was primarily due to:

These decreases were partially offset by:

Enclosures

The 14.1 percent increase in Enclosures segment sales in the first quarter of 2001 from 2000 was primarily due to:

These increases were partially offset by:

Late in the first quarter of 2001, we saw a decline in sales activity to customers in the datacom and telecom markets, reflecting a softening economy. This has resulted in many new customer programs being pushed out until later in the year. While we remain cautious about the near-term Enclosures outlook, our strategy has been to continue serving many broad and diverse markets in enclosures.

Gross margin

Gross margin was 24.4 percent in the first quarter of 2001, compared with 27.8 percent for the same period last year.

The 3.4 percentage point decline in the first quarter of 2001 from 2000 was primarily the result of:

SG&A and R&D

SG&A and R&D expenses were 16.6 percent of sales in the first quarter of 2001, down 1.1 percentage points from the fourth quarter of 2000, exclusive of fourth quarter one-time charges of $16.6 million for establishing additional accounts receivable reserves, and down 0.3 percentage points from the first quarter of 2000. The improvement is the result of implementing cost control actions, somewhat offset by additional spending to redefine and streamline business processes related to our fourth quarter 2000 restructuring activity.

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Operating income

Operating income by segment and the change from the prior year period were as follows:

Tools

The 66.1 percent decrease in Tools segment operating income in the first quarter of 2001 from 2000 was primarily due to:

These decreases were partially offset by:

Water

The 8.3 percent decline in Water segment operating income in the first quarter of 2001 from 2000 was primarily due to:

These decreases were partially offset by:

Enclosures

The 13.1 percent decrease in Enclosures segment operating income in the first quarter of 2001 from 2000 was primarily due to:

These decreases were partially offset by:

Net interest expense

Net interest expense decreased 6.5 percent in the first quarter of 2001, compared with 2000. The year-over-year decline primarily reflects lower average borrowings.

Other expense

In the first quarter of 2001, we incurred a non-cash charge of $2.5 million for the write-off of our business-to-business e-commerce equity investment that we made in early 2000.

Discontinued operations

In December 2000, we adopted a plan to sell our Equipment segment businesses, Century/Lincoln and Lincoln Industrial. We are actively marketing these operations with expected sales by mid-2001. The proceeds from these sales will be used to reduce our debt.

We have accounted for the Equipment segment as discontinued operations in these financial statements. The disposition, net of estimated losses during the disposal period, are expected to result in a net gain. Accordingly, recognition of such gain will be deferred until the disposition is completed. In the first quarter of 2001, we had a net loss from discontinued operations of $0.4 million, which was deferred and is included as part of the net assets of discontinued operations in the condensed consolidated balance sheets. The loss from discontinued operations includes an allocation of Pentair’s interest expense. Net assets of discontinued operations at March 31, 2001, consisted of net current assets of $66.4, net property, plant and equipment of $27.1 million, and net noncurrent assets of $13.1 million.

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LIQUIDITY AND CAPITAL RESOURCES

To fund investing and financing activities, committed revolving credit facilities are used to complement operating cash flows. In maintaining this financial flexibility, levels of debt will vary depending on operating results. Because of the seasonality of some of our businesses, particularly the pool and spa business and a portion of the tools business, we generally experience negative cash flows from operations in the first half of any given year. This is more than offset in the remaining half of the year.

The following table presents selected measures of our liquidity and capital resources:

Operating activities

Operating activities used $40.1 million in the first quarter of 2001, compared with a use of $151.1 million in the first quarter of 2000. The $111 million increase in the first quarter of 2001 over 2000 was primarily due to better management of receivables, inventories and accounts payable. We reduced days of sales in accounts receivable and days inventory on hand by 8 days and 3 days, respectively, and increased days in accounts payable by 5 days.

Investing activities

Capital expenditures in the first quarter of 2001 were $12.9 million, compared with $10.8 million for the same period in 2000. We anticipate capital expenditures in 2001 to be between $85 and $90 million. The anticipated expenditures are expected to be in the areas of tooling for new product development, factory expansion, and additional machinery and equipment for cost reductions and capacity expansion. We are reviewing all capital projects in light of current economic conditions and are making adjustments to plans as appropriate.

In the first quarter of 2001, we acquired Taunus, a Brazilian enclosures manufacturer for $6.9 million. The acquisition was financed through borrowings under our credit facilities.

Financing activities

As of the end of the first quarter of 2001, our capital structure was comprised of $170.1 million in short-term borrowings, $806.7 million in long-term debt (including current maturities), and $1,023.4 million in shareholders’ equity. The ratio of debt-to-total capital was 48.8 percent, compared with 47.5 percent as of the end of 2000 and 53.7 percent as of the end of the first quarter of 2000. Our targeted debt-to-total capital ratio range is 30 to 40 percent. The 1.3 percentage point increase in the first quarter of 2001 from December 31, 2000, reflects higher first quarter borrowings because of the seasonality of some of our businesses.

Dividends paid in the first quarter of 2001 were $8.3 million, or $0.17 per common share, compared with $7.8 million, or $0.16 per common share for the same period in 2000.

In addition to measuring our cash flow generation or usage based upon operating, investing, and financing classifications included in the condensed consolidated statements of cash flows, we also measure our free cash flow. We define free cash flow as cash flow from operating activities less capital expenditures, including both continuing and discontinued operations. We had negative free cash flow of $53.0 million in the first quarter of 2001, compared with a negative $161.9 million for the same period in 2000. We intend to increase our free cash flow by reducing inventories, improving collection of receivables, and working with suppliers to increase payment terms. We also have changed our management incentive targets to include more emphasis on improving free cash flow.

We believe cash generated from operating activities, together with credit available under committed credit facilities and our current cash position, will provide adequate short-term and long-term liquidity.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk during the three months ended March 31, 2001. For additional information, refer to Item 7A on page 19 of our 2000 Annual Report on Form 10-K.

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PART II OTHER INFORMATION

ITEM 6.    Exhibits and Reports on Form 8-K

          (a)    Exhibits

          (b)    Reports on Form 8-K

                   None.

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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 May 15, 2001.

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