Pentair - 10-Q quarterly report FY

 

 

 

 

OR

 

 

Commission file number 1-11625

 

 

Minnesota		41-0907434
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification number)

1500 County Road B2 West, Suite 400, St. Paul, Minnesota		55113
(Address of principal executive offices)		(Zip code)
Registrant’s telephone number, including area code: (651) 636-7920

 

 

 

 

 

				Page
Part I  Financial Information
Item 1.		Financial Statements
		Condensed Consolidated Statements of Income for the three months ended March 30, 2002 and March 31, 2001		3
		Condensed Consolidated Balance Sheets as of March 30, 2002, December 31, 2001, and March 31, 2001		4
		Condensed Consolidated Statements of Cash Flows for the three months ended March 30, 2002 and March 31, 2001		5
		Notes to Condensed Consolidated Financial Statements		6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		14
Part II  Other Information
Item 1.		Legal Proceedings		15
Item 4.		Submission of Matters to a Vote of Security Holders		15
Item 6.		Exhibits and Reports on Form 8-K		15
Signatures				16

2

 

 

 

 

		Three months ended
		March 30			March 31
In thousands, except per-share data		2002			2001
Net sales		$	613,435		$	671,383
Cost of goods sold			466,052			507,396
Gross profit			147,383			163,987
Selling, general and administrative			93,292			103,392
Research and development			8,364			7,739
Operating income			45,727			52,856
Net interest expense			13,730			17,716
Other expense, write-off of investment			—			2,500
Income before income taxes			31,997			32,640
Provision for income taxes			10,559			12,077
Net income		$	21,438		$	20,563
Earnings per common share
Basic		$	0.44		$	0.42
Diluted		$	0.43		$	0.42
Weighted average common shares outstanding
Basic			49,173			49,006
Diluted			49,584			49,127
Cash dividends declared per common share		$	0.18		$	0.17

 

See accompanying notes to condensed consolidated financial statements.

3

 

In thousands, except share and per-share data		March 30 2002 (Unaudited)				December 31 2001				March 31 2001 (Unaudited)
Assets
Current assets
Cash and cash equivalents		$	20,946			$	39,844			$	33,003
Accounts and notes receivable, net			447,483				398,579				508,344
Inventories			295,391				300,923				383,194
Deferred income taxes			67,871				69,953				73,252
Prepaid expenses and other current assets			19,340				20,979				21,295
Net assets of discontinued operations			3,613				5,325				106,633
Total current assets			854,644				835,603				1,125,721
Property, plant and equipment, net			318,758				329,500				346,820
Other assets
Goodwill, net			1,085,463				1,088,206				1,132,070
Other assets			116,833				118,889				66,373
Total assets		$	2,375,698			$	2,372,198			$	2,670,984
Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings		$	—			$	—			$	170,111
Current maturities of long-term debt			5,972				8,729				24,569
Accounts and notes payable			197,407				179,149				224,293
Employee compensation and benefits			59,930				74,888				66,330
Accrued product claims and warranties			37,825				37,590				41,483
Income taxes			15,501				6,252				11,888
Other current liabilities			127,511				121,825				124,281
Total current liabilities			444,146				428,433				662,955
Long-term debt			689,136				714,977				782,173
Pension and other retirement compensation			75,858				74,263				61,141
Post-retirement medical and other benefits			43,367				43,583				34,103
Deferred income taxes			34,040				34,128				36,702
Other noncurrent liabilities			61,664				61,812				70,475
Total liabilities			1,348,211				1,357,196				1,647,549
Shareholders’ equity
Common shares par value $0.16 2/3; 49,211,099, 49,110,859,
and 49,020,742 shares issued and outstanding, respectively			8,201				8,193				8,170
Additional paid-in capital			481,690				478,541				475,520
Retained earnings			579,213				566,626				580,318
Unearned restricted stock compensation			(10,244	)			(9,440	)			(13,310	)
Accumulated other comprehensive loss			(31,373	)			(28,918	)			(27,263	)
Total shareholders’ equity			1,027,487				1,015,002				1,023,435
Total liabilities and shareholders’ equity		$	2,375,698			$	2,372,198			$	2,670,984

 

See accompanying notes to condensed consolidated financial statements.

4

 

		Three months ended
In thousands		March 30 2002				March 31 2001
Operating activities
Net income		$	21,438			$	20,563
Depreciation			15,035				16,854
Amortization of intangibles and unearned compensation			864				9,884
Deferred income taxes			2,089				(880	)
Other expense, write-off of investment			—				2,500
Changes in assets and liabilities, net of effects of business acquisitions
Accounts and notes receivable			(48,583	)			(45,438	)
Inventories			3,255				6,615
Prepaid expenses and other current assets			1,146				(3,969	)
Accounts payable			21,318				(22,866	)
Employee compensation and benefits			(13,768	)			(16,832	)
Accrued product claims and warranties			287				(552	)
Income taxes			9,295				6,791
Other current liabilities			8,051				(3,425	)
Pension and post-retirement benefits			2,506				2,930
Other assets and liabilities			(2,879	)			(2,378	)
Net cash provided by (used for) continuing operations			20,054				(30,203	)
Net cash provided by (used for) discontinued operations			1,712				(9,894	)
Net cash provided by (used for) operating activities			21,766				(40,097	)
Investing activities
Capital expenditures			(6,980	)			(12,859	)
Proceeds from sale of businesses			1,138				—
Acquisitions, net of cash acquired			—				(6,937	)
Equity investments			(2,081	)			—
Other			(165	)			—
Net cash used for investing activities			(8,088	)			(19,796	)
Financing activities
Net short-term borrowings			—				62,016
Proceeds from long-term debt			45				2,413
Repayment of long-term debt			(27,736	)			(1,189	)
Proceeds from exercise of stock options			1,490				251
Dividends paid			(8,851	)			(8,331	)
Net cash provided by (used for) financing activities			(35,052	)			55,160
Effect of exchange rate changes on cash			2,476				2,792
Change in cash and cash equivalents			(18,898	)			(1,941	)
Cash and cash equivalents, beginning of period			39,844				34,944
Cash and cash equivalents, end of period		$	20,946			$	33,003

 

See accompanying notes to condensed consolidated financial statements.

 

5

 

 

 

 

 

 

 

 

		Three months ended
In thousands, except per-share data		March 30 2002			March 31 2001
Reported net income		$	21,438		$	20,563
Add back goodwill amortization, net of tax			—			8,000
Adjusted net income		$	21,438		$	28,563
Reported earnings per share—basic		$	0.44		$	0.42
Goodwill amortization			—			0.16
Adjusted net earnings per share—basic		$	0.44		$	0.58
Reported earnings per share—diluted		$	0.43		$	0.42
Goodwill amortization			—			0.16
Adjusted net earnings per share—diluted		$	0.43		$	0.58

 

 

In thousands		Tools				Water				Enclosures				Consolidated
Balance December 31, 2001		$	344,707			$	576,757			$	166,742			$	1,088,206
Foreign currency translation			(79	)			(1,262	)			(1,402	)			(2,743	)
Balance March 30, 2002		$	344,628			$	575,495			$	165,340			$	1,085,463

 

 

 

6

 

 

 

 

		Three months ended
In thousands, except per-share data		March 30 2002			March 31 2001
Net income		$	21,438		$	20,563
Weighted average common shares outstanding—basic			49,173			49,006
Dilutive impact of stock options and restricted stock			411			121
Weighted average common shares outstanding—diluted			49,584			49,127
Earnings per common share—basic		$	0.44		$	0.42
Earnings per common share—diluted		$	0.43		$	0.42

 

 

 

 

In thousands		March 30 2002 (Unaudited)			December 31 2001			March 31 2001 (Unaudited)
Raw materials and supplies		$	91,847		$	94,404		$	114,545
Work-in-process			36,973			38,760			47,485
Finished goods			166,571			167,759			221,164
Total inventories		$	295,391		$	300,923		$	383,194

 

 

 

		Three months ended
In thousands		March 30 2002				March 31 2001
Net income		$	21,438			$	20,563
Changes in cumulative translation adjustment			(4,318	)			(7,519	)
Changes in market value of derivative financial instruments classified as cash flow hedges			1,863				717
Unrealized loss from marketable securities classified as available for sale			—				(449	)
Cumulative effect of accounting change—SFAS 133			—				6,739
Comprehensive income (loss)		$	18,983			$	20,051

 

 

 

 

					Utilization
In thousands		2001 restructuring charge (fourth quarter)			Year 2001				Three months 2002				Balance March 30 2002
Employee termination benefits		$	16,696		$	(2,464	)		$	(1,522	)		$	12,710
Non-cash asset disposals			11,050			(11,050	)			—				—
Impaired goodwill			7,362			(7,362	)							—
Exit costs			7,649			(769	)			(501	)			6,379
Total			42,757			(21,645	)			(2,023	)			19,089

7

 

 

 

 

 

 

 

 

		Three months ended
In thousands		March 30 2002				March 31 2001
Net sales to external customers
Tools		$	261,069			$	240,392
Water			212,806				220,852
Enclosures			139,560				210,139
Consolidated		$	613,435			$	671,383
Operating income (loss) as reported
Tools		$	16,686			$	7,863
Water			29,747				28,193
Enclosures			4,608				21,237
Other			(5,314	)			(4,437	)
Consolidated		$	45,727			$	52,856
Goodwill amortization
Tools		$	—			$	2,319
Water			—				4,549
Enclosures			—				2,146
Total goodwill amortization			—				9,014
Amortization of unearned compensation			864				870
Total amortization		$	864			$	9,884
Operating income (loss) excluding goodwill amortization
Tools		$	16,686			$	10,182
Water			29,747				32,742
Enclosures			4,608				23,383
Other			(5,314	)			(4,437	)
Consolidated		$	45,727			$	61,870

 

 

8

 

 

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. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. 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.

 

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in our 2001 Annual Report on Form 10-K. The accounting policies used in preparing our interim 2002 condensed consolidated financial statements are the same as those described in our annual report, except as described in Note 2 of this report “New Accounting Standards.”

 

In preparing the financial statements, we follow accounting principles generally accepted in the United States of America, which in many cases require us to make assumptions, estimates and judgments that affect the amounts reported. Many of these policies are relatively straightforward. There are, however, a few policies that are critical because they are important in determining the financial condition and results of operations and they can be difficult to apply. Our critical accounting policies include those related to:

 

9

 

 

 

		% change from 2001
Percentages		First quarter
Volume		(8.3	)
Price		0.2
Currency		(0.5	)
Total		(8.6	)

 

Net sales in the first quarter of 2002 totaled $613.4 million, compared with $671.4 million in the first quarter of 2001. The $58.0 million or 8.6 percent decline was primarily due to volume declines in our Enclosures and Water segments, partially offset by a volume increase in our Tools segment. The stronger U.S. dollar also reduced the dollar value of foreign sales by about 0.5 percent.

 

 

In thousands		Three months ended
		March 30 2002			March 31 2001			$ change				% change
Tools		$	261,069		$	240,392		$	20,677			8.6%
Water			212,806			220,852			(8,046	)		(3.6%)
Enclosures			139,560			210,139			(70,579	)		(33.6%)
Total		$	613,435		$	671,383		$	(57,948	)		(8.6%)

 

 

 

 

 

 

 

While we experienced lower Water segment sales volume in the first quarter of 2002 compared with 2001, backlog was up about 6 percent from prior year levels going into the second quarter, primarily driven by strong orders in our pool and spa equipment business.

 

 

 

Although we experienced significantly lower Enclosures sales volume from first quarter 2001 levels, sales in the North American industrial market increased about 5 percent from the fourth quarter of 2001. In addition, we have also experienced an increase in automotive quote activity over the fourth quarter of 2001 and there may be early signs of recovery in the North American base electronics market as well. The worldwide datacom and telecom markets, however, continue to suffer from over-capacity and a lack of demand.

 

We are pursuing several strategies aimed at improving our Enclosures segment performance by continuing to expand our distribution network, principally in the commercial market. In the first quarter of 2002, we added 99 new distributors and we expect to add another 300 distribution locations in the near future.

10

 

Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. This statement requires that goodwill and intangible assets deemed to have an indefinite life not be amortized. The following supplemental condensed consolidated statements of income are presented as if we had accounted for goodwill under SFAS 142 for all prior periods (i.e., no longer amortizing goodwill). The following table shows selected as reported and as adjusted numbers had we been accounting for goodwill under SFAS 142 for the quarter ended March 31, 2001.

 

		Three months ended March 31, 2001
In thousands, except per-share data		As reported			Goodwill amortization				As adjusted
SG&A		$	103,392		$	(9,014	)		$	94,378
Operating income			52,856			9,014				61,870
Provision for income taxes			12,077			1,014				13,091
Net income			20,563			8,000				28,563
Earnings per share—diluted		$	0.42		$	0.16			$	0.58

 

 

Supplemental Condensed Consolidated Statements of Income		Three months ended
In thousands		March 30 2002				March 31 2001 As adjusted (1)				Percentage point change
Net sales		$	613,435			$	671,383
Cost of goods sold			466,052				507,396
Gross profit			147,383				163,987
% of net sales			24.0%				24.4%			(0.4) pts
Selling, general and administrative (SG&A) (1)			93,292				94,378
% of net sales			15.2%				14.1%			1.1 pts
Research and development (R&D)			8,364				7,739
% of net sales			1.4%				1.2%			0.2 pts
Operating income			45,727				61,870
% of net sales			7.5%				9.2%			(1.7) pts
Net interest expense			13,730				17,716
% of net sales			2.2%				2.6%			(0.4) pts
Other expense, write-off of investment			—				2,500
% of net sales			n/a				0.4%
Income before income taxes			31,997				41,654
% of net sales			5.2%				6.2%			(1.0) pts
Provision for income taxes (1)			10,559				13,091
Effective tax rate			33.0%				31.4%			1.6 pts
Net income		$	21,438			$	28,563
% of net sales			3.5	%			4.3	%		(0.8	) pts

 

Percentages may reflect rounding adjustments.

n/a—not applicable.

 

Gross profit margin was 24.0 percent of net sales in the first quarter of 2002, compared with 24.4 percent of net sales for the same period last year.

 

 

 

SG&A expense in the first quarter of 2002 was $93.3 million, compared with $94.4 million (excluding goodwill amortization of $9.0 million) in the first quarter of 2001, or 15.2 and 14.1 percent of sales, respectively. The 1.1 percentage point increase is largely the result of Enclosures segment sales declining at a much faster rate than the decline in SG&A spending, and higher spending on selling expense in our Tools segment, primarily for advertising.

11

 

R&D expense was $8.4 million in the first quarter of 2002, compared with $7.7 million in the first quarter of 2001, or 1.4 and 1.2 percent of sales, respectively. The year-over-year increase is primarily the result of additional investments related to new product development initiatives in our Tools segment.

 

The following table provides a comparison of Tools segment operating income as reported, and those results as if we had accounted for goodwill under SFAS 142 for all prior periods presented:

 

		Three months ended
In thousands		March 30 2002				March 31 2001
Tools
Operating income as reported		$	16,686			$	7,863
Add back goodwill amortization			—				2,319
Adjusted operating income		$	16,686			$	10,182
% of net sales			6.4%				4.2%
Percentage point change			2.2	pts

 

 

 

 

 

The following table provides a comparison of Water segment operating income as reported, and those results as if we had accounted for goodwill under SFAS 142 for all prior periods presented:

 

		Three months ended
In thousands		March 31 2001				March 31 2001
Water
Operating income as reported		$	29,747			$	28,193
Add back goodwill amortization			—				4,549
Adjusted operating income		$	29,747			$	32,742
% of net sales			14.0%				14.8%
Percentage point change			(0.8	) pts

 

 

 

 

12

 

The following table provides a comparison of Enclosures segment operating income as reported, and those results as if we had accounted for goodwill under SFAS 142 for all prior periods presented:

 

		Three months ended
In thousands		March 30 2002				March 31 2001
Enclosures
Operating income as reported		$	4,608			$	21,237
Add back goodwill amortization			—				2,146
Adjusted operating income		$	4,608			$	23,383
% of net sales			3.3%				11.1%
Percentage point change			(7.8	) pts

 

 

 

 

 

Net interest expense was $13.7 million and $17.7 million in the first quarter of 2002 and 2001, respectively. Included in the $13.7 million, is a write-off of $1.8 million of financing costs related to excess capacity on certain credit facilities that we do not expect to utilize. Excluding the $1.8 million write-off, net interest expense declined $5.8 million reflecting lower average borrowings driven by our strong cash flow performance and lower interest rates on our variable debt. Net interest expense in the fourth quarter of 2001 was $13.1 million.

 

Our effective tax rate was 33.0 percent in the first quarter of 2002, compared with 31.4 percent, as if we had accounted for goodwill under SFAS 142 (37.0 percent as reported), for the comparable period in 2001. The 1.6 percentage point increase reflects a change in U.S. versus foreign earnings mix in 2002 compared to 2001. We expect our effective tax rate to be around 33.0 percent for 2002.

 

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.

 

To fund capital expenditures, acquisitions, repurchase shares, and pay dividends, committed revolving credit facilities are used to complement operating cash flows. Because of the seasonality of some of our businesses, particularly the pool and spa equipment business and the tools business, we generally experience negative cash flows from operations in the first half of any given year. However, due to our emphasis on working capital management, we generated $21.8 million of cash from operating activities in the first quarter of 2002, which (net of $7.0 million of capital expenditures) resulted in a positive free cash flow of $14.8 million.

 

 

Days		March 30 2002		March 31 2001
Days of sales in accounts receivable		64		69
Days inventory on hand		72		80
Days in accounts payable		58		60
Cash conversion cycle		78		89

 

Operating activities provided $21.8 million in the first quarter of 2002, compared with a use of $40.1 million for the same period in 2001 for a year-over-year improvement of $61.9 million. The increase was primarily the result of higher accounts payable balances at the end of the first quarter of 2002 compared with the end of 2001, driven by increased material purchases, higher inventory turnover, and improved sell through of products in our Tools segment. In addition, the disposition of our Equipment segment businesses at the end of 2001 provided a year-over-year improvement of $11.6 million.

13

 

Capital expenditures in the first quarter of 2002 and 2001 were $7.0 million and $12.9 million, respectively. We anticipate capital expenditures in 2002 to be approximately $50 million. Anticipated expenditures in 2002 are expected to be in the areas of tooling for new product development and general maintenance capital.

 

As of the end of the first quarter of 2002, our capital structure was comprised of $695.1 million in long-term debt (including current maturities), and $1,027.5 million in shareholders’ equity. The ratio of debt-to-total capital as of the end of the first quarter of 2002 was 40.4 percent, compared with 41.6 percent as of the end of 2001 and 48.8 percent as of the end of the first quarter of 2001. The 1.2 percentage point decline from the end of 2001 reflects a decrease in our total debt and an increase in our equity resulting from our strong cash flow performance. Our targeted debt-to-total capital ratio is around 40 percent. As of March 30, 2002, we had $705.0 million in committed revolving credit facilities with various banks, of which $403.4 million was unused.

 

In March 2002, we entered into an interest rate swap agreement for senior notes having a notional principal amount of $100 million and maturing in 2009. Under the terms of the interest rate swap agreement, we will pay interest semi-annually at the six month LIBOR rate plus 2.49 percent and we will receive interest semi-annually at the annual rate of 7.85 percent. This swap agreement has been accounted for as a fair value hedge in accordance with SFAS No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, as amended. Since this swap qualifies as an “effective” hedge under SFAS 133, there is no impact on net income or shareholders’ equity.

 

Dividends paid in the first quarter of 2002 were $8.9 million or $0.18 per common share, compared with $8.3 million or $0.17 per common share for the same period in 2001.

 

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 positive free cash flow of $14.8 million in the first quarter of 2002, compared with a negative $53.0 million for the same period in 2001. Our free cash flow goal for 2002 is $200 million, compared with $178.7 million realized in 2001. We intend to achieve this goal through higher earnings and further reductions in working capital. Our management incentive plans include a component that emphasizes free cash flow.

 

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

 

 

 

There have been no material changes in our market risk during the quarter ended March 30, 2002. For additional information, refer to Item 7A on page 24 of our 2001 Annual Report on Form 10-K.

14

 

 

 

 

 

 

 

 

Nominees		Votes For				Votes Withheld
Barbara B. Grogan		42,320,765				1,313,964
Stuart Maitland		42,019,456				1,615,273
Augusto Meozzi		41,976,660				1,658,069
William H. Hernandez		41,748,445				1,886,284
Proposal 2. — Approval of amendments to the Articles of Incorporation and By-Laws to fix the number of the directors at ten.
Votes For		Votes Against				Votes Abstain
43,087,817		392,347				154,565
Proposal 3. — Approval of the Omnibus Stock Incentive Plan for Section 162(m) purposes.
Votes For		Votes Against				Votes Abstain
40,463,447		2,898,214				273,068
Proposal 4. — Approval of an amendment to the Executive Officer Performance Plan.
Votes For		Votes Against				Votes Abstain
39,850,853		3,472,260				311,616
Proposal 5. — Proposal to ratify the selection of Deloitte & Touche LLP as independent auditors of Pentair for 2002.
Votes For		Votes Against				Votes Abstain
41,470,882		2,010,788				153,059

 

 

 

3.1		Second Restated Articles of Incorporation of Pentair, Inc. as amended through May 1, 2002 (Filed herewith).
3.2		Third Amended and Superseding By-Laws of Pentair, Inc. adopted on August 23, 2000 as amended May 1, 2002 (Filed herewith).
10.15		Pentair, Inc. Executive Officer Performance Plan as amended and restated, dated February 27, 2002 and approved by shareholders on May 1, 2002 (Incorporated by reference to Exhibit 10.15 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 2001).

 

 

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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 9, 2002.

 

		PENTAIR, INC.
		Registrant
		By:		/s/    DAVID D. HARRISON
				David D. Harrison
				Executive Vice President and Chief Financial Officer
				(Chief Accounting Officer)

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