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 September 27, 2003
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
Commission file number 1-11625
Pentair, Inc.
(Exact name of Registrant as specified in its charter)
Minnesota
41-0907434
5500 Wayzata Blvd, Suite 800, Golden Valley, Minnesota
55416
Registrant’s telephone number, including area code: (763) 545-1730
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 ¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
On October 25, 2003, 49,376,010 shares of the Registrant’s common stock were outstanding.
Pentair, Inc. and Subsidiaries
Part I Financial Information
Item 1.
Financial Statements
Condensed Consolidated Statements of Income for the three and nine months ended September 27, 2003 and September 28, 2002
Condensed Consolidated Balance Sheets as of September 27, 2003, December 31, 2002, and September 28, 2002
Condensed Consolidated Statements of Cash Flows for the nine months ended September 27, 2003 and September 28, 2002
Notes to Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
Independent Accountants’ Report
Part II Other Information
Legal Proceedings
Item 6.
Exhibits and Reports on Form 8-K
Signature
PART I FINANCIAL INFORMATION
Condensed Consolidated Statements of Income (Unaudited)
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative
Research and development
Operating income
Net interest expense
Income before income taxes
Provision for income taxes
Net income
Earnings per common share
Basic
Diluted
Weighted average common shares outstanding
Cash dividends declared per common share
See accompanying notes to condensed consolidated financial statements.
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Condensed Consolidated Balance Sheets (Unaudited)
December 31
2002
Current assets
Cash and cash equivalents
Accounts and notes receivable, net
Inventories
Deferred tax assets
Prepaid expenses and other current assets
Net assets of discontinued operations
Total current assets
Property, plant and equipment, net
Other assets
Goodwill
Other
Total assets
Current liabilities
Short-term borrowings
Current maturities of long-term debt
Accounts payable
Employee compensation and benefits
Accrued product claims and warranties
Income taxes
Other current liabilities
Total current liabilities
Long-term debt
Pension and other retirement compensation
Post-retirement medical and other benefits
Deferred tax liabilities
Other noncurrent liabilities
Total liabilities
Shareholders’ equity
Common shares par value $0.162/3; 49,377,732, 49,222,450, and 49,238,050 shares issued and outstanding, respectively
Additional paid-in capital
Retained earnings
Unearned restricted stock compensation
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
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Condensed Consolidated Statements of Cash Flows (Unaudited)
Operating activities
Depreciation
Other amortization
Deferred income taxes
Stock compensation
Changes in assets and liabilities, net of effects of business acquisitions
Accounts and notes receivable
Pension and post-retirement benefits
Other assets and liabilities
Net cash provided by continuing operations
Net cash (used for) provided by discontinued operations
Net cash provided by operating activities
Investing activities
Capital expenditures
Proceeds from sale of businesses
Acquisitions, net of cash acquired
Divestitures
Equity investments
Net cash used for investing activities
Financing activities
Net short-term (repayments) borrowings
Proceeds from long-term debt
Repayment of long-term debt
Proceeds from exercise of stock options
Dividends paid
Net cash used for financing activities
Effect of exchange rate changes on cash
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
We prepared the unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States can be condensed or omitted. We made certain reclassifications to the 2002 condensed consolidated financial statements to conform to the 2003 presentation.
We are responsible for the unaudited financial statements included in this document. The financial statements include all normal recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. As these are condensed financial statements, one should also read our consolidated financial statements and notes thereto which are included in our 2002 Annual Report on Form 10-K for the year ended December 31, 2002.
Revenues, expenses, cash flows, assets and liabilities can and do vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This new standard nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144, be recognized when the liability is incurred, rather than the date of an entity’s commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 on January 1, 2003 did not have a material effect on our consolidated financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. Interpretation No. 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that at the time an entity issues a guarantee, the issuing entity must recognize an initial liability for the fair value of the obligations it assumes under that guarantee. However, the provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations does not apply to product warranties, guarantees accounted for as derivatives, or other guarantees of an entity’s own future performance. We adopted the disclosure requirements of this interpretation as of December 31, 2002. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of this new standard did not have an effect on our consolidated financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (VIE), an Interpretation of ARB No. 51, which requires all VIEs to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the VIE. In addition, the interpretation expands disclosure requirements for both VIEs that are consolidated as well as VIEs from which the entity is the holder of a significant amount of the beneficial interests, but not the majority. In October 2003, the FASB agreed to defer the effective date so that a public company would not need to apply the provisions of the interpretation to VIE interests acquired before February 1, 2003, until the end of the first interim or annual period ending after December 15, 2003. Because we believe we have no variable interest entities, we do not expect that the adoption of this new standard will have a material effect on our consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FASB Statement No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance of SFAS No. 148 is effective for our financial statements issued in 2003. As allowed by SFAS No. 123, we will continue to account for stock-based compensation in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, which results in no charge to earnings when options are issued at fair market value. The adoption of this new standard did not have a material effect on our consolidated financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, Amendments of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities under SFAS No. 133. The Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard did not have a material effect on our consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which provides standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The Statement is effective for financial instruments entered into or modified after May 31, 2003 and for
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Notes to condensed consolidated financial statements (unaudited) — (continued)
pre-existing instruments as of the beginning of the first interim period beginning after June 15, 2003. The adoption of this standard did not have a material effect on our consolidated financial position or results of operations.
We offer stock-based employee compensation plans and account for those plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income upon grant, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, had been applied to all outstanding and unvested stock compensation awards in each period:
As reported — net income
Less estimated stock-based employee compensation determined under fair value based method, net of tax
Pro forma — net income
Earnings per common share — basic
As reported
Pro forma
Earnings per common share — diluted
Basic and diluted earnings per share were calculated using the following:
Weighted average common shares outstanding — basic
Dilutive impact of stock options
Weighted average common shares outstanding — diluted
Stock options excluded from the calculation of diluted earnings per
share because the exercise price was greater than the average
market price of the common shares
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Inventories were comprised of:
Raw materials and supplies
Work-in-process
Finished goods
Total inventories
Comprehensive income and its components, net of tax, are as follows:
Changes in cumulative translation adjustment
Changes in market value of derivative financial instruments classified as cash flow hedges
Comprehensive income
Net foreign currency translation loss for the three months ended September 27, 2003 resulted primarily from the weakening of the euro and Canadian dollar currencies against the U.S. dollar. Net foreign currency translation gain for the nine months ended September 27, 2003 resulted primarily from the strengthening of the euro and Canadian dollar currencies against the U.S. dollar. The net gain and net loss on derivative financial instruments for the three months and nine months ended September 27, 2003, respectively, was impacted primarily by changes in the value of outstanding hedging instruments, primarily related to the euro. Fluctuations in the value of hedging instruments are generally offset by changes in the cash flows of the underlying exposures being hedged.
Changes in the carrying amount of goodwill for the nine months ended September 27, 2003 by segment is as follows:
Balance December 31, 2002
Acquired, net of purchase price adjustments
Foreign currency translation
Balance September 27, 2003
The acquired goodwill in the Water segment is driven by four product line acquisitions as further described in Footnote 10 and purchase price adjustments relative to our fourth quarter acquisition of Plymouth Products.
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On July 25, 2003, we completed new financing arrangements totaling $700 million, comprised of a $200 million private placement of senior notes with 10-year maturities (of which $150 million was funded during the third quarter and $50 million was funded on October 15, 2003) and a new committed $500 million revolving credit facility (the Facility) with maturity in three years. The $500 million credit facility replaced two existing revolving credit facilities totaling $652 million of credit availability. Interest rates and fees on the revolving credit facility vary based on our credit ratings. The $200 million private placement included $100 million of variable rate senior notes with an interest rate equal to the three-month LIBOR rate plus 1.15 percent and $100 million of fixed rate senior notes with an average interest rate of 4.98 percent. We used the $200 million proceeds received in the second half of 2003 from the private placement to pay down debt under the revolving credit facility.
We are authorized to sell short-term commercial paper notes to the extent availability exists under the Facility. The Facility is used as back-up liquidity to support 100% of commercial paper outstanding. As of September 27, 2003, we have $73.4 million of commercial paper outstanding that matures within 30 days. All of the commercial paper is classified as long-term as we intend and have the ability to refinance such obligations on a long-term basis.
Our current credit ratings are as follows:
Rating Agency
Standard & Poor’s
Moody’s
Credit available under existing facilities, as limited by our most restrictive financial covenant, was approximately $306 million and is based on a ratio of total debt to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). In addition, our debt agreements contain certain financial covenants that restrict the amount we may pay for dividends and require us to maintain certain financial ratios and a minimum net worth. We were in compliance with all covenants as of September 27, 2003.
In addition to the Facility, we have $55.0 million of uncommitted credit facilities, under which we had $15 million outstanding as of September 27, 2003.
Long-term debt and the average interest rate on debt outstanding as of September 27 is summarized as follows:
Commercial paper, maturing within 30 days
Revolving credit facilities
Private placement - fixed rate
Private placement - floating rate
Senior notes
Total contractual debt obligations
Interest rate swap monetization deferred
income
Fair value adjustment of hedged senior notes
Total long-term debt, including current
portion per balance sheet
Less current maturities
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Long-term debt outstanding on a calendar year basis matures as follows:
Contractual debt obligation maturities
Other maturities
Total maturities
Segment information is presented consistent with the basis described in the 2002 Annual Report on Form 10-K. Segment results for the three and nine months ended September 27, 2003 and September 28, 2002 are shown below:
Net sales to external customers
Tools
Water
Enclosures
Consolidated
Intersegment sales
Operating income (loss)
Other operating income (loss) is primarily composed of unallocated corporate expenses, our captive insurance subsidiary, intermediate finance companies, divested operations, and intercompany eliminations.
We completed four acquisitions during the nine months ended September 27, 2003 in our Water segment. In addition, we acquired two businesses during the year ended December 31, 2002 in our Tools and Water segments. All of the acquisitions during this time period have been accounted for as purchases, and have resulted in the recognition of goodwill and other intangibles in our financial statements. Goodwill arises because the purchase prices for these businesses reflect a number of factors, the greatest of which includes the future earnings and cash flow potential of these companies.
We make an initial allocation of the purchase price at the date of acquisition based upon our understanding of the fair market value of the acquired assets and liabilities. We obtain this information during due diligence and through various other sources. As we obtain additional information about these assets and liabilities and learn more about the newly acquired business, we are able to refine the estimates of fair market value and more accurately allocate the purchase price during the first 12 months of ownership.
The following briefly describes our acquisition activity for the nine months ended September 27, 2003. For a description of our acquisition activity for the year-ended December 31, 2002, refer to our notes to consolidated financial statements included in our 2002 Annual Report on Form 10-K for the year ended December 31, 2002.
During the nine-month period ended September 27, 2003, we completed four product line acquisitions for total consideration of approximately $21.4 million in cash including transaction costs.
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We acquired HydroTemp and Letro Products in March 2003 to complement our existing pool and spa equipment business of our Water segment. We acquired certain assets of TwinPumps in July 2003. We will combine the assets of TwinPumps with our existing pump business of our Water Segment to pursue replacement parts, replacement pumps, and new projects in the municipal wastewater business. We acquired certain assets of K&M Plastics, in July 2003, with the intent of establishing pressure vessel manufacturing capacity in China to better serve the fast growing Asian water market.
The aggregated annual revenue of the acquired businesses is approximately $22 million. We are continuing to evaluate the initial purchase accounting allocations for acquisitions completed during the nine months ended September 27, 2003 and will adjust the allocations as additional information relative to the fair market values of the assets and liabilities of the businesses become known. Pro forma information on these acquisitions and other related disclosures have not been provided as these acquisitions are not considered material to our operations.
In the first quarter of 2003, we received $1.9 million in purchase price adjustments relative to our fourth quarter 2002 acquisition of Plymouth Products. The adjustment primarily related to final determination of closing date net assets.
In January 2003, we paid $2.4 million for a final adjustment to the selling price related to the disposition of Lincoln Industrial. This had no effect on earnings for the nine months ended September 27, 2003 as the amount was offset by previously established reserves.
In April 2003, we invested an additional $5.6 million in certain joint venture operations of an Asian supplier for stationary and bench top power tools. This additional investment increased our ownership percentage to 49 percent from 40 percent. We hold options to increase our ownership interest in these joint ventures to 100 percent. Our portion of the earnings or losses of these joint ventures is included in cost of goods sold; however, it is not material.
The changes in the carrying amount of service and product warranties for the nine months ended September 27, 2003 are as follows:
Accrued
warranties
Service and product warranty provision
Payments
Acquired
Translation
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FORWARD-LOOKING STATEMENTS
This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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, we cannot guarantee any forward-looking statements. 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.
The following factors may impact the achievement of forward-looking statements:
The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. We assume no obligation, and disclaim any duty, to update the forward-looking statements in this report.
BUSINESS OVERVIEW
We are a diversified industrial manufacturer operating in three segments: Tools, Water, and Enclosures. Our Tools segment manufactures and markets a wide range of power tools under several brand names — Porter-Cable™, Delta®, Delta Shopmaster™, Delta Industrial™, Biesemeyer®, FLEX™, Ex-Cell™, Air America®, Charge Air Pro®, 2 x 4™, Oldham®, Contractor SuperDuty™, Viper®, Hickory Woodworking®, The Woodworker’s Choice®, and United States Saw® — generated approximately 40 percent of 2002 total revenues. Our Water segment manufactures and markets essential products for the transport, storage, and treatment of water and wastewater and generated approximately 35 percent of 2002 total revenues. Brand names within the Water segment include Myers®, Fairbanks Morse®, Hydromatic®, Aurora®, Water Ace®, Shur-Dri®, Fleck®, SIATA™, CodeLine™, Structural™, WellMate™, Verti-line™, Layne & Bowler™, American Plumber™, Armor™, National Pool Tile™, Rainbow Lifegard™, Paragon Aquatics™, Kreepy Krauly™, Pentair Pool Products™, and PENTEK™. Our Enclosures segment accounted for approximately 25 percent of 2002 total revenues, and designs, manufactures, and markets standard, modified and custom enclosures that protect sensitive controls and components for markets that include industrial machinery, data communications, networking, telecommunications, test and measurement, automotive, medical, security, defense, and general electronics. The segment goes to market under four primary brands: Hoffman®, Schroff®, Pentair Electronic Packaging™, and Taunus™.
Our diversification has enabled us to provide shareholders with relatively consistent operating results despite difficult markets that may occur in one or another segment at times.
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RESULTS OF OPERATIONS
The components of the net sales change in 2003 from 2002 were as follows:
Volume
Price
Currency
Total
Net sales in the third quarter and first nine months of 2003 totaled $685.0 million and $2,041.5 million, compared with $629.3 million and $1,940.5 million for the same periods in 2002. The $55.7 million or 8.9 percent increase in third quarter 2003 net sales and the $101.0 million or 5.2 percent increase in first nine months of 2003 net sales were primarily due to:
These increases were partially offset by:
Sales by segment and the change from the prior year period were as follows:
The 0.9 percent increase and 2.2 percent decline in Tools segment sales in the third quarter and first nine months of 2003 were primarily driven by:
The 21.1 percent and 15.3 percent increases in Water segment sales in the third quarter and first nine months of 2003 were primarily driven by:
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The 4.4 percent and 2.9 percent increases in Enclosures segment sales in the third quarter and first nine months of 2003 were primarily driven by:
Percentage point change
The 0.7 percentage point and 1.0 percentage point increases in gross profit as a percent of sales in the third quarter and first nine months of 2003 from 2002 were primarily the result of:
Selling, general and administrative (SG&A)
SG&A
The 0.5 percentage point increases in SG&A expense as a percent of sales in the third quarter and first nine months of 2003 from 2002 were primarily due to:
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Research and development (R&D)
R&D
The 0.2 percentage point increases in R&D expense as a percent of sales in the third quarter and first nine months of 2003 from 2002 were primarily due to:
The 1.6 percentage point and 1.1 percentage point declines in Tools segment operating income as a percent of sales in the third quarter and first nine months of 2003 from 2002 were primarily the result of:
These decreases were partially offset by:
The unchanged operating income percentage and 1.0 percentage point decline in Water segment operating income as a percent of sales in the third quarter and first nine months of 2003 from 2002 were primarily the result of:
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The year-to-date decrease was partially offset by:
The 3.0 percentage point and 3.3 percentage point increases in Enclosures segment operating income as a percent of sales in the third quarter and first nine months of 2003 from 2002 were primarily the result of:
Net interest expense was $9.6 million and $29.4 million in the third quarter and first nine months of 2003 compared with $8.2 million and $32.4 million for the same periods in 2002. The $1.4 million increase in interest expense in the third quarter is primarily due to a higher average outstanding debt balance. The $3.0 million decline in interest expense in the first nine months of 2003 compared with the same period of 2002 is the result of lower interest rates on our variable rate debt.
September 28
Effective tax rate
Our effective tax rate in the third quarter and first nine months of 2003 was 34.0 percent compared with 30.2 percent and 32.0 percent for the respective periods in 2002. The increase in the effective tax rate was primarily due to the anticipated mix of our 2003 U.S. and foreign earnings and the fact that many of our tax savings programs have relatively fixed benefits so as profitability improves our effective tax rate trends higher.
LIQUIDITY AND CAPITAL RESOURCES
Cash requirements for working capital, capital expenditures, equity investments, acquisitions, debt repayments, and dividend payments are generally funded from cash generated from operations, availability under existing committed revolving credit facilities, and in certain instances, public and private equity and debt offerings.
The following table presents selected working capital measurements calculated from our monthly operating results based on a 13-month moving average and indicates our emphasis on working capital management:
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Days of sales in accounts receivable
Days inventory on hand
Days in accounts payable
Cash conversion cycle
Cash provided by operating activities was $178.3 million in the first nine months of 2003, or $42.6 million lower compared with the same period in 2002. The decrease was primarily attributable to a year-over-year variance in tax payments and increased working capital resulting from higher inventories in our Tools segment.
Capital expenditures in the first nine months of 2003 were $29.7 million compared with $23.7 million in the prior year period. We anticipate capital expenditures for fiscal 2003 to be approximately $45 million, primarily for new product development and general maintenance capital.
We acquired HydroTemp and Letro Products in March 2003 to complement our existing pool and spa equipment and business of our Water segment. We acquired certain assets of TwinPumps in July 2003. We will combine the assets of TwinPumps with our existing pump business of our Water Segment to pursue replacement parts, replacement pumps, and new projects in the municipal wastewater business. We acquired certain assets of K&M Plastics, in July 2003, with the intent of establishing pressure vessel manufacturing capability in China to better serve the fast growing Asian water market.
In April 2003, we invested an additional $5.6 million in certain joint venture operations of an Asian supplier for stationary and bench top power tools. This additional investment increased our ownership percentage to 49 percent from 40 percent. We hold options to increase our ownership interest in these joint ventures to 100 percent.
At September 27, 2003, our capital structure consisted of $662.6 million in total indebtedness and $1,196.3 million in shareholders’ equity. The ratio of debt-to-total capital at September 27, 2003 was 35.6 percent, compared with 39.9 percent at December 31, 2002 and 34.0 percent at September 28, 2002. Our targeted debt-to-total capital ratio is approximately 40 percent. We will exceed this target from time to time as needed for operational purposes and/or acquisitions.
On July 25, 2003, we completed new financing arrangements totaling $700 million, comprised of a $200 million private placement of senior notes with 10-year maturities (of which $150 million was funded during the third quarter and $50 million was funded on October 15, 2003) and a new committed $500 million revolving credit facility (the Facility) with maturity in three years. The $500 million credit facility replaced two existing revolving credit facilities totaling $652 million of credit availability. Interest rates and fees on the revolving credit facility vary based on our credit ratings. The $200 million private placement included $100 million of variable
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rate senior notes with an interest rate equal to the three-month LIBOR rate plus 1.15 percent and $100 million of fixed rate senior notes with an average interest rate of 4.98 percent. We used the $200 million proceeds received in the second half of 2003 from the private placement to pay down debt under the revolving credit facility.
Interest rate swap monetization deferred income
Total long-term debt, including current portion per balance sheet
In thousands
We will continue to have cash requirements to support working capital needs and capital expenditures, to pay interest and service debt and to pay dividends to shareholders. In order to meet these cash requirements, we intend to use available cash and internally generated funds and to borrow under our committed and uncommitted credit facilities. We believe that cash provided from these sources will be adequate to meet our cash requirements for the foreseeable future.
There have been no material changes with respect to the contractual obligations as described in our Annual Report on Form 10-K for the year ended December 31, 2002 other than the Facility refinancing.
Dividends paid in the first nine months of 2003 were $30.1 million or $0.61 per common share compared with $27.1 million or $0.55 per common share in the prior year period.
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Pension
Total net periodic pension benefits cost is expected to be approximately $15 million for 2003 compared with approximately $13 million in 2002. Our 2003 pension contributions are expected to be approximately the same as the $19 million contributed in 2002.
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NEW ACCOUNTING STANDARDS
See Note 2 (New Accounting Standards) of ITEM 1.
CRITICAL ACCOUNTING POLICIES
In our Annual Report on Form 10-K for the year ended December 31, 2002, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements. We have not changed these policies from those previously disclosed in our annual report.
Market risk
We are exposed to various market risks, including changes in interest rates and foreign currency rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates. We use derivative financial instruments to manage and reduce the impact of some of these risks. We do not hold or issue derivative financial instruments for trading purposes.
Interest rate risk
We are exposed to changes in interest rates primarily as a result of our borrowing activities used to fund operations. Interest rate swaps are used to manage a portion of our interest rate risk. The table below summarizes our floating and fixed rate debt obligations including the impact of interest rate swap agreements as of September 27, 2003. The average variable rates depicted below for the interest rate swaps are based on implied forward rates in the yield curve at September 27, 2003.
Long-term debt, including current portion
Variable rate
Average interest rate
Fixed rate
Portion subject to interest rate swaps
Variable to fixed
Average rate to be received
Average rate to be paid
Fixed to variable
Foreign currency risk
There have been no material changes in our foreign currency risk during the nine months ended September 27, 2003. For additional information, refer to Item 7A on page 30 of our 2002 Annual Report on Form 10-K.
We maintain a system of disclosure controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter ended September 27, 2003 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the quarter ended September 27, 2003 in timely alerting them to material information relating to Pentair, Inc. (including its consolidated subsidiaries) required to be included in reports we file with the Securities and Exchange Commission.
There was no change in our internal control over financial reporting that occurred during the quarter ended September 27, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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INDEPENDENT ACCOUNTANTS’ REPORT
Board of Directors and Shareholders of Pentair, Inc.
We have reviewed the accompanying condensed consolidated balance sheets of Pentair, Inc. and Subsidiaries (the “Company”) as of September 27, 2003 and September 28, 2002, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 27, 2003 and September 28, 2002, and of cash flows for the nine-month periods ended September 27, 2003 and September 28, 2002. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of December 31, 2002, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated January 30, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
November 4, 2003
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PART II OTHER INFORMATION
Environmental and Product Liability Claims
There have been no further material developments regarding the above from that contained in our 2002 Annual Report on Form 10-K.
The following supplements and amends the discussion set forth under Item 3. Legal Proceedings in our Annual Report on Form 10-K for the year ended December 31, 2002.
Horizon Litigation
On June 25, 2003, the United States Court of Appeals for the Second Circuit dismissed Essef’s appeal of the trial verdict. Essef is seeking review by the United States Supreme Court. We believe we have sufficient reserves to cover any uninsured awards or settlements for this matter.
We are occasionally a party to litigation arising in the normal course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities based on the expected eventual disposition of these matters. We believe the effect on our consolidated results of operations and financial position, if any, for the disposition of all currently pending matters will not be material.
(a)
(b)
22
SIGNATURE
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 4, 2003.
PENTAIR, INC.
Registrant
By /s/ David D. Harrison
David D. Harrison
Executive Vice President and Chief Financial Officer
(Chief Accounting Officer)
23
Exhibit Index to Form 10-Q for the Period Ended September 27, 2003
31.1
31.2
32.1
32.2
1