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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File No. 001-11625
PENTAIR, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0907434
(State of incorporation) (I.R.S. Employer
Identification Number)
1500 County Road B2 West, Suite 400, Saint Paul, Minnesota 55113-3105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 612-636-7920
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, Par Value $.16 2/3 New York Stock Exchange
Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant on February 23, 1998 was $1.4 billion. For purposes of this
calculation, all shares held by officers and directors of the Registrant and by
the trustees of employee stock ownership plans (ESOPs) and pension plans
of the Registrant and subsidiaries were deemed to be shares held by
affiliates.
The number of shares outstanding of Registrant's only class of common
stock on February 23, 1998 was 38,319,608.
The exhibit index as required by Item 601(a) of Regulation S-K is included
in Item 14 of Part IV of this report.
Documents Incorporated by Reference: Portions of the registrant's definitive
Proxy Statement for the 1998 Annual Meeting of Shareholders are
incorporated by reference in Part III of this Report.
PART I
ITEM 1. BUSINESS
(a) General Development of the Business.
The Registrant was incorporated in 1966 under the laws of Minnesota. In
the past year, the Registrant has not changed its form of organization or
mode of conducting business. The Registrant grows through internal
development and acquisitions. As in the past, periodic dispositions of
assets or business units are possible when they no longer fit with the
long-term strategies of the Registrant.
Effective January 1, 1994, the Registrant acquired the net assets and the
subsidiaries of Schroff GmbH (Schroff) from Fried. Krupp AG Hoesch-Krupp.
Schroff manufactures and sells enclosures, cases, subracks and
accessories for commercial electronic and instrumentation applications.
In September 1994, Pentair announced that it was exploring strategic
alternatives for its paper businesses, including their possible sale. In the
second quarter of 1995, all of the Pentair paper businesses were sold. On
April 1, 1995 the Company sold its Cross Pointe Paper Corporation
subsidiary to Noranda Forest, Inc. On June 30, 1995 the Company sold its
Niagara of Wisconsin Paper Corporation, its 50% share of Lake Superior
Paper Industries (LSPI) joint venture and its 12% share of Superior
Recycled Fiber Industries (SRFI) to Consolidated Papers, Inc.
The sale of its paper businesses has permitted Pentair to focus its
commitments and resources on its industrial products businesses, building
upon the strong growth and leading market positions these businesses have
achieved.
Effective November 1, 1995, the Company acquired Fleck Controls, Inc., a
manufacturer of control valves which are major components in residential
water softeners, and commercial and industrial water conditioning systems.
Fleck Controls was Pentair's first entry into the water treatment industry.
During 1996, the Company completed four strategic acquisitions that
strengthened market positions throughout the world. In January, Myers
acquired Aplex to broaden its industrial pump line. In June, Porter-Cable
acquired FLEX, a German power tool company. In November, the
Company acquired Century Manufacturing, a manufacturer which serves
service equipment markets, complementing its Lincoln Automotive
subsidiary. In December, Fleck Controls purchased SIATA, an Italian
manufacturer of water conditioning control equipment.
During 1997, the Company completed 3 strategic acquisitions. In January,
Schroff France acquired Transrack S.A., a maker of complementary cases
and enclosures. In July, Century Manufacturing acquired P & F
Technologies , a maker of refrigerant recycling equipment. In August,
Pentair acquired the General Signal Pump Group in a significant acquisition
designed to create a critical mass in the water and wastewater pump
markets.
Also in 1997, in another strategic development, the Company divested its
Federal Cartridge sporting ammunition business.
In the fourth quarter of 1997, the Company realigned its subsidiaries into 3
operating groups to reflect its growing focus in its addressed markets:
Professional Tools and Equipment, Water and Fluid Technologies and
Electrical and Electronic Enclosures. Delta International, Porter-Cable,
Lincoln Automotive and Century Manufacturing make up the Professional
Tools and Equipment segment, which markets its products to professional
users and sophisticated individual users through similar channels. The
Water and Fluid Technologies segment consists of the Pentair pump
businesses, Fleck Controls, and Lincoln Industrial, all of which share
aspects of manufacturing process, applied technology, and distribution
channels. Pentair's Hoffman and Schroff enclosures businesses comprise
the Electrical and Electronic Enclosures segment.
(b) Financial Information about Industry Segments.
Pentair Inc. has three reportable segments: Professional Tools and
Equipment (PTE), Water and Fluid Technologies (WFT), and Electrical and
Electronic Enclosures (EEE). Other includes corporate expenses, captive
insurance company, intermediate financial companies, charges that do not
relate to current operations, divested operations (Federal Cartridge), and
intercompany eliminations. Other assets include all cash and cash
equivalents.
In evaluating financial performance, management focuses on operating
income as a segment's measure of profit or loss. Operating income is
before interest expense, interest income and income taxes. Management
uses a variety of balance sheet ratios to measure the business. The primary
focus is on maximizing the return from each segment's assets, excluding
cash and temporary investments. The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies (see Note 1 of Notes to the Consolidated Financial Statements
included in Item 8). Most intersegment sales are component parts and are
sold at cost plus an equitable division of manufacturing and marketing
profits. The remaining intercompany sales are finished product and are sold
based on current market pricing.
Segment Information:
(in thousands) PTE WFT EEE Other Total
1997
Net sales from external customers $737,323 $397,286 $579,209 $125,238 $1,839,056
Intersegment net sales 9,743 6,693 157 (16,593) 0
Depreciation and
amortization expense 14,307 16,703 30,265 6,561 67,836
Segment profit (loss)
- operating income 84,355 45,987 53,313 (13,853) 169,802
Segment assets 410,037 508,357 473,906 80,562 1,472,862
Capital expenditures 22,947 8,492 43,815 2,207 77,461
1996
Net sales from external customers $572,349 $316,167 $548,695 $129,854 $1,567,065
Intersegment net sales 10,340 6,085 103 (16,528) 0
Depreciation and
amortization expense 11,605 12,219 28,297 7,399 59,520
Segment profit (loss)
- operating income 60,556 44,445 59,592 (21,674) 142,919
Segment assets 360,766 280,819 464,475 182,954 1,289,014
Capital expenditures 15,270 10,701 40,522 5,153 71,646
1995
Net sales from external customers $483,565 $232,441 $542,452 $144,413 $1,402,871
Intersegment net sales 8,833 5,094 0 (13,927) 0
Depreciation and
amortization expense 9,408 5,356 27,247 6,923 48,934
Segment profit (loss)
- operating income 49,239 25,111 55,951 (14,054) 116,247
Segment assets 248,251 249,815 440,827 313,600 1,252,493
Capital expenditures 16,592 4,561 32,713 9,972 63,838
(c) Narrative Description of Business.
Description of the Professional Tools and Equipment Segment:
Products; markets; competition
Products include: a full line of homeshop products, contractor tools, general
purpose stationary woodworking machinery, and accessories; air-powered
nailing products, portable electric tools including saws, routers, sanders,
grinders, drills, and cordless tools; and lubricating tools and equipment,
battery charging and testing equipment, lifting equipment, portable power
supplies, refrigerant and coolant recyclers, arc and MIG welders, plasma
cutters, and welding accessories.
The products are sold in the United States, Canada, and overseas under the
brand names Delta, Biesemeyer, Porter-Cable, FLEX, Lincoln, Blackhawk
Automotive, Marquette, Porto-Power, Banner, Winner, Pro-Arc, Century,
Solar, Booster Pac, Cobra, and Viper.
Products are sold through various channels, including networks of
independent industrial and warehouse distributors, home centers and
national retailers, hardware stores, and through mail order and catalogues.
Certain service equipment is sold under private label programs. The
explosive growth in the home center channel in the last few years has resulted
in a significant increase in PTE tool sales through this channel.
Nationwide, home centers have become the primary channel for all sales of
power and bench top tools to end users. While warehouse distributors
continue to be the most significant channel for service equipment sales,
product entry into retail and home center stores has continued to grow.
Tool markets include do-it-yourself(DIY)/homeshop; residential, commercial,
and industrial construction; remodeling and cabinet, case good and furniture
makers. Service equipment markets include industrial fabrication and
maintenance, automotive repair and vehicle maintenance, farm and
industrial equipment; and aftermarket and retail channels for professional
and do-it-yourself automotive and body repair.
Competition in the PTE segment has been intense and growing more so for
the past few years, especially as these industries consolidate. The tool
markets have become extremely competitive as a few large players remain,
having more complete product lines. The Company's tool businesses are no
longer perceived as niche players, but have become significant general
competitors, even though their addressed market of professional users and
higher-end DIY customers does not extend into the larger general consumer
tool markets. Each of the businesses in the PTE segment faces a number of
competitors, many of whom are larger, have more resources and are more
fully integrated. Growth in these markets should come from product
development, continued penetration of expanding market channels and
acquisitions.
Competition at the end-user level focuses primarily on brand names, product
performance and features, quality, service and, most importantly, price. The
competition for shelf space at home centers and national retailers is
particularly intense, demanding continuing product innovation, special
inventory and delivery programs, after-sale service capability and
competitive pricing. The strategy of the businesses in the PTE segment is
to be the price/quality leader in its selected markets. Their success in
maintaining their respective positions in the marketplace is largely due to
continuing product feature innovations, new products, and outsourcing and
other cost-reduction measures. As leaders in their markets, these
businesses are able to command access for their products in the most
important channels in the face of growing competition.
Description of the Water and Fluid Technologies Segment:
Products; markets; competition
Products include: pumps for wells, sump pumps for residential service,
submersible non-clog and grinder pumps and systems for residential,
commercial, and municipal service, pumps for water treatment and
wastewater solid handling, fire pumps, and reciprocating, turbine,
submersible, and centrifugal pumps for commercial and industrial services;
a complete line of control valves used in the manufacture of water softeners
and filtration, deionization, and desalination systems; and automated and
manual lubrication systems and equipment, pumps and pumping stations for
thick fluid transfer applications.
The products are sold in the United States, Canada, and overseas under the
brand names Myers, Aplex, Fairbanks Morse, Aurora, Water Ace, Shur Dri,
Hydromatic, Fleck, SIATA, Lincoln, Lincoln Industrial, ORSCO, Air Brake,
BearingSaver, Centro-Matic, Cobra, Dispense Pak, Ecolub, Helios, Magna-Ram,
Modular Lube, Multi-Luber, PowerMaster, PileDriver, PL2000,
Quicklink, Quicklub, System Sentry, and Zerk-lock.
Products are sold through various channels including the do-it-yourself
market for retail sale through home centers and hardware stores, by specially
qualified systems distributors with design, installation and service capability,
through industrial supply and specialty distributors and stores, directly by
internal sales organizations, and through national catalog distribution.
Markets include wholesale and retail distribution to residential users;
commercial HVAC, plumbing, and fire pump markets; municipal waste and
water treatment facilities and industrial companies; manufacturers who
supply residential and commercial markets with standard and custom
designed water softener products; and heavy industry (steel mills, cement
plants, pulp and paper, power plants), automobile manufacturers,
commercial vehicles, agriculture, construction equipment, food and
beverage, mining, printing, and general lubrication markets.
The water and waste water pump industry has experienced a significant
trend toward consolidation, evidenced in part by the acquisitions of Gould's
by ITT and of the former General Signal Pump Group by Pentair in 1997.
This acquisition by the Company significantly expanded the number, range
and targeted markets of Pentair's pump business. The Company is
currently in the process of rationalizing the product lines, facilities and
manufacturing operations of these businesses to cut costs and increase
efficiencies. The water treatment industry is also experiencing rapid
consolidation, as evidenced by U.S. Filter's acquisition of Culligan, both
current customers of the Company's water conditioning valve business.
There are two major independent valve suppliers, including the Company,
and a restricted number of small independent suppliers. In addition, there
are a number of captive valve manufacturers whose production is used to
support their own sales of water conditioning systems. Growth will come
largely from niche acquisitions and product development.
Competition in the commercial and residential pump markets focuses on
brand names, product performance, quality and price. While home center
and national retailers are important for residential lines of water and
wastewater pumps, they are much less important in commercial pump markets.
In municipal pump markets, competition focuses on performance to required
specification, service and price. Competition in the water treatment
component market focuses on product performance and design, quality,
delivery and price.
Description of the Electrical and Electronic Enclosures Segment:
Products; markets; competition
Products include metallic and composite enclosures and cabinets that house
electrical and electronic controls, instruments, and components, cabinets,
cases, subracks, microcomputer packaging systems as well as a full line of
accessories including backplanes, power supplies, and technical
workstations.
The products are sold in the United States, Canada, and overseas under the
brand names Hoffman, Schroff and Transrack.
Segment products are sold in three primary markets: electrical enclosures
in North America, the channel which is primarily through industrial
electrical distribution; electronic enclosures, sold primarily through
electronic equipment distributors and to original equipment manufacturers
(OEMs); and information and communication technology (ICT) products, marketed
primarily to OEMs. Currently, the greater sales for the latter two product
groups is in Europe.
Industrial markets include manufacturing industries in which electrical and
electronic controls require protection from harsh factory floor environments,
plant maintenance and repair, commercial construction and electrical
equipment manufacturers. Commercial electronic markets include
computer, test and measurement, industrial control and factory automation,
and medical industries. Finally, ICT products are found in the LAN, data
communication and telecommunication industries.
Competition in selected product markets can be very intense, especially in
European electronic and ICT markets. In addition, the enclosure industry
in North America is in the middle of its own consolidation trend, although the
impact of this is not foreseeable at this time. Finally, growth in the EEE
segment will likely come from geographic expansion, product development
and acquisitions.
Competition in each of the three product markets focuses on price, product
features and innovation, service, quality and delivery.
Information Regarding All Segments:
Status of new products.
The industries in which the segments participate are essentially mature and
do not experience the introduction of new products or technologies that
materially change the nature of the industry. Nonetheless, new product
development or improvement becomes more important for sales growth and
channel penetration. The Company emphasizes product development in all
its segments, with products introduced within the last five years averaging
25-50% of annual sales, although no new product alone constitutes a
material amount of sales.
Raw materials.
The raw materials used in Pentair's manufacturing processes include steel
(bar and sheet), brass, copper, aluminum and various other metals and
plastics. Selected motors, castings, plastic parts and components are also
purchased. The supply of all raw materials and components is currently
adequate. The PTE and WFT segments import selected products and
components from Taiwan and China, the supply of which is currently adequate.
Patents, trademarks, licenses, franchises and concessions.
Pentair's businesses own a number of U.S. and foreign patents and trademarks.
They have been acquired over many years and relate to many products and
improvements. No single patent or trademark is of material importance to
any segment, though patent protection is a significant competitive tool in
each of the segments.
Seasonal aspects and working capital items.
No material portion of Pentair's business is of a highly seasonal nature,
since the disposition of Federal Cartridge. The PTE segment, however, has
historically experienced strong fourth quarter sales and billings, due in
part to holiday retail sales. Reflecting the somewhat seasonal impact
of the PTE segment and the growing importance of home center business,
there is a buildup of inventory in the third quarter in anticipation
of fourth quarter shipments.
Dependence on limited number of customers.
The Company as a whole is not dependent on a single customer or on a
few customers. The loss of a limited number of customers would not have
a material adverse impact on the Company's results of operations.
Backlog.
The segments normally do not experience backlogs for substantial periods
of time. The nature of the businesses emphasizes maintaining inventories
sufficient to satisfy customer needs on a timely basis. Production and
sourcing is geared towards providing adequate inventories in order to
minimize customer back orders. Accordingly, backlogs are not material to
understanding the sales trends or manufacturing fluctuations of the
segments.
Government contracts.
The Registrant has no significant portion of sales under federal government
contracts that may be subject to renegotiation of profits or termination of
contracts at the election of the government.
Research and Development.
Pentair's businesses have not historically undertaken any significant basic
or applied research, since the products and processes involved are more
traditional and are well-known to all competitors. As discussed above,
however, each of the segments, especially PTE, undertakes extensive
product development work in order to continue improvements in features
and costs. Overall, Pentair's businesses spent over one percent of sales on
such development in 1997, up slightly over the prior year. See also Note
1 of Notes to the Consolidated Financial Statements included in Item 8.
Environmental Matters
See Management's Discussion and Analysis and Note 9 of Notes to the
Consolidated Financial Statements included in Item 8.
Employees.
As of December 31, 1997, the Registrant and its subsidiaries employed
approximately 10,433 persons, of which 2,750 were represented by unions
having collective bargaining agreements.
Labor contracts negotiated in 1997: GMP Local 45 - Ashland, Ohio
(extended to 1 April 2000) approximately 70 employees; UAW Local 691 -
St. Louis, Missouri (extended to 2 June 2000) approximately 150
employees; GMP Local 19 - Guelph, Ontario, Canada (extended to 30 June
2001) approximately 10 employees; United Steelworkers of America -
Kansas City, Kansas (extended to 30 September 2001) approximately 250
employees; IAM Local Lodge 1202 - Aurora, Illinois (extended to 25 June
2002) approximately 275 employees; and UAW Local 1932 - Ashland, Ohio
(extended to 30 September 2002) approximately 250 employees.
Contracts expiring in 1998: IAM Local 59 - Ashland, Ohio (expires 6 April
1998) approximately 300 employees; IAM Local 9 - St. Louis, Missouri
(expires 30 April 1998) approximately 230 employees; United Steelworkers
of America Local 8630 - Tupelo, Mississippi (expires 1 May 1998)
approximately 260 employees; Teamsters Local 984 - Memphis, Tennessee
(expires 31 December 1998) approximately 50 employees.
The Registrant considers its employee and labor relations to be good and
believes future contracts will be able to be negotiated on terms beneficial to
the businesses and their employees.
(d) Financial Information about Foreign Operations.
The Registrant operates primarily in North America, Europe and Asia.
Geographic Information:
Revenues Assets
(In millions) 1997 1996 1995 1997 1996 1995
United States $1,275.5 $1,047.1 $921.6 $1,031.0 $761.9 $646.0
Canada 98.3 77.7 70.3 27.9 24.6 21.8
Germany 99.4 115.7 106.4 200.6 240.0 218.7
Other Europe 164.5 136.0 107.9 116.9 65.0 39.2
Pacific Rim 49.5 38.9 36.3 15.9 14.5 13.2
Rest of World 26.6 21.8 16.0 0.0 0.0 0.0
Total $1,713.8 $1,437.2 $1,258.5 $1,392.3 $1,106.0 $938.9
Revenues are attributed to countries based on location of customer. Assets
are based on the geographic location of the subsidiary and have been
translated into U.S. dollars.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the executive officers of the Registrant. Their term of
office extends until the next annual meeting of the Board of Directors,
scheduled for April 22, 1998, or until their successors are elected and
have qualified.
Louis L. Ainsworth 50
Senior Vice President and General Counsel since July, 1997;
Shareholder and Officer of Henson & Efron, P.A. November 1985 - June
1997.
Winslow H. Buxton 58
Chairman since January, 1993; President and Chief Executive Officer
since August 1992.
Richard J. Cathcart 53
Executive Vice President since February 1996; Executive Vice President,
Corporate Development March 1995 - February 1996; Vice President,
Business Development of Honeywell, Inc. 1994 - March 1995; Vice
President and General Manager of Honeywell's Worldwide Building
Control Division 1992 - 1994.
Joseph R. Collins 56
Executive Vice President since March 1995; Acting Chief Financial
Officer, June 1993 - March 1994; Senior Vice President - Specialty
Products August 1991 - February 1995.
George M. Danko 47
Vice President, Corporate Development since October, 1997; General
Manager of Sales Operations of General Electric's Electrical Distribution
and Control Division September 1994 - October 1997; General Manager
Tektronix Test & Measurement Division June 1992 - August 1994; Vice
President General Manager Square Co. February 1990 - June 1992.
Karen A. Durant 38
Vice President, Controller since September 1997; Controller January
1996 - August, 1997; Assistant Controller September 1994 - December
1995; Director of Financial Planning and Control of Hoffman Enclosures
Inc. (subsidiary of Registrant) October 1989 - August 1994.
Richard W. Ingman 53
Executive Vice President and Chief Financial Officer since August 1996;
President of Hoffman Enclosures Inc. (subsidiary of Registrant) March
1994 - July 1996; Vice President of Corporate Development August 1989
- - February 1994.
Gerald C. Kitch 60
Executive Vice President, President International Business Development
since February 1996; Executive Vice President March 1995 - February
1996; Senior Vice President - General Industrial Equipment March 1989 -
February 1995.
Debby S. Knutson 43
Vice President, Human Resources since September 1994; Assistant Vice
President, Human Resources , August 1993 - September 1994; Vice
President, Human Resources of Hoffman Enclosures Inc. (subsidiary of
Registrant) July 1990 - August 1993.
Roy T. Rueb 57
Vice President, Treasurer since October 1986 and Secretary since June
1994.
James A. White 52
Senior Vice President, Professional Tools Businesses since July 1997;
President of Porter-Cable Corporation (subsidiary of Registrant)
December 1991 - June 1997.
There is no family relationship between any of the executive officers or
directors.
Item 2. Properties
The Corporation and its subsidiaries operate in 50 manufacturing and
distribution locations in North America, Europe and Asia. The
Corporation owns most of its facilities with the exception of the following
major facilities which are leased or leased under special tax increment
financing: in the United States - Mt. Sterling, KY; Jackson, TN; Kansas
City, KS; Aurora, IL; Ashland, OH (Hydromatic) and in France -
Betschdorf, France.
The number, type, location and estimated size of the Company's
properties are shown on the following charts, by segment. (Professional
Tools and Equipment - PTE; Water and Fluid Technologies - WFT;
Electrical and Electronic Enclosures - EEE)
Number and Nature of Facilities Mfg. and Distribution
Segment HQ & Mfg. Distribution Sales/Service Square Footage (000's)
PTE 9 3 29 2,094
WFT 12 9 15 2,132
EEE 13 4 41 2,326
Other:
Corporate Office 1 22
Locations of HQ, Manufacturing and Distribution Facilities
North
Segment America Europe Asia
PTE 11 1 0
WFT 16 5 0
EEE 8 6 3
HQ Offices 1
Management believes that its owned and leased facilities are well
maintained and suitable for the operations conducted.
Item 3. Legal Proceedings.
The Registrant or its subsidiaries have been made parties to actions filed,
or have been given notice of potential claims, relating to the conduct of its
business, including those pertaining to product liability, environmental,
safety and health and employment matters. Major matters which may
have an impact on the Registrant are discussed below. The Registrant
believes that the outcome of such legal proceedings and claims will not
have a material adverse effect on the Registrant's financial position,
liquidity, or future results of operations, based on current circumstances
known to the Registrant.
Environmental Claims. The Registrant and its current subsidiaries have
been named as defendants, targets or potentially responsible parties
(PRPs) in a small number of environmental cleanups. None of these
claims have resulted to date in cleanup costs, fines, penalties or
damages in an amount material to Registrant's financial condition or
results of operations. The Registrant has disposed of a number of
businesses over the past ten years; in certain cases, such as the
disposition of Registrant's Cross Pointe uncoated paper business in 1995
and the disposition of its Federal Cartridge ammunition business in 1997,
Registrant has retained responsibility for some or all environmental
obligations and potential liability. The Registrant has established what it
believes to be, based on current circumstances known to it, adequate
accruals for potential liabilities arising out of these retained
responsibilities, based upon studies of the sites involved.
In addition to retained obligations relating to these disposed operations,
there are pending environmental issues concerning two sites, in Guelph,
Ontario and Jackson, Tennessee, at which Provincial or state
environmental agencies have opened investigations. In each case, the
Registrant acquired the sites from Rockwell International, whom the
Registrant has notified of the issues and from whom it has claimed
indemnification. No estimate of the projected response costs can be
made based on information currently known to the Registrant. The
Registrant believes, however, that these matters are unlikely to result in
material liability or material changes in operations at one site still
occupied by one of Registrant's subsidiaries.
Product Liability Claims. As of March 1, 1998, the Registrant or its
subsidiaries are defendants in approximately 167 product liability lawsuits
and have been notified of approximately 164 additional claims. The
Registrant has had and currently has in place insurance coverage it
deems adequate for its needs. A substantial number of these lawsuits
and claims are insured and accrued for by Penwald, a regulated
insurance company wholly owned by the Registrant. See discussion in
Item 7 (MD&A - Insurance Subsidiary) and Item 8 (Note 1 of Notes to the
Consolidated Financial Statements). Accounting accruals covering the
deductible portion of liability claims not covered by Penwald have
been established and are reviewed on a regular basis. The Registrant
has not experienced unfavorable trends in either the severity or
frequency of product liability claims.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter, no matter was submitted to a vote of security
holders.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
(a) Market Information
Pentair Common Stock is listed on the New York Stock
Exchange under the symbol "PNR". The price information
below represents closing sale prices reported in the Dow Jones
Historical Stock Quote Reporter Service for the calendar year
1997.
1997 High Low Close
First Quarter $31 3/4 $28 7/8 $28 7/8
Second Quarter $35 $27 1/2 $32 7/8
Third Quarter $37 1/2 $33 7/8 $36 7/8
Fourth Quarter $39 5/8 $34 1/8 $35 15/16
1996
First Quarter $28 3/4 $23 1/16 $25 1/4
Second Quarter $31 $25 3/8 $30
Third Quarter $30 $24 3/4 $26 1/2
Fourth Quarter $32 1/4 $24 5/8 $32 1/4
(b) Holders of the Corporation's Capital Stock
As of December 31, 1997, there were 4,119 holders of record
of the Corporation's Common Stock.
(c) Dividends
In December 1997, the board of directors increased the cash
dividend to $.15 per share quarterly for an indicated annual rate
of $.60 per share. Pentair has now paid 88 consecutive
quarterly dividends, and each year the amount of the dividend
payment has increased. See Note 6 of Notes to the
Consolidated Financial Statements for certain dividend
restrictions.
Quarterly dividends per common share for the most recent two
years are as follows:
1997 1996
First Quarter $.135 $.125
Second Quarter .135 .125
Third Quarter .135 .125
Fourth Quarter .135 .125
TOTAL $.540 $.500
(d) Annual Meeting of Stockholders
The 1998 Annual Meeting of Shareholders of the Corporation
is scheduled to be held on April 22, 1998 at 10:00 a.m. at the
Northland Inn & Conference Center, Minneapolis, Minnesota.
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA
Pentair, Inc. and Subsidiaries
(In millions, except per share data)
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Income Statement Data
Net Sales
Professional Tools
and Equipment . . . . . . . 747.1 582.7 492.4 453.5 408.1
Water and Fluid
Technologies. . . . . . . . 404.0 322.3 237.5 210.6 184.4
Electrical and Electronic
Enclosures . . . . . 579.4 548.8 542.5 460.5 236.7
Other. . . . . . . 108.6 113.3 130.5 137.1 117.4
Total. . . . . . . 1,839.1 1,567.1 1,402.9 1,261.7 946.6 864.0 802.9 805.2 798.4 445.0
Operating Income
Professional Tools
and Equipment . . . . . 84.4 60.6 49.2 44.1 37.8
Water and Fluid
Technologies. . . . 46.0 44.4 25.1 17.5 10.2
Electrical and Electronic
Enclosures. . . . . 53.3 59.6 56.0 44.2 20.7
Other. . . . . . . (13.9) (21.7) (14.1) (0.2) (0.6)
Total. . . . . . . 169.8 142.9 116.2 105.6 68.1 61.9 53.1 47.9 52.1 29.1
Earnings before income taxes 158.4 124.6 101.7 83.5 55.1 47.7 38.4 31.6 35.2 21.7
Income From Continuing
Operations . . . . . . . 91.6 74.5 60.5 50.1 32.7 27.2 18.8 16.9 19.4 10.7
Net Income (a) . . . . . . . 91.6 74.5 77.2 53.6 46.6 42.8 41.1 33.0 36.4 39.8
Common Share Data
EPS - Diluted (a) (b). . . . . 2.11 1.73 1.41 1.17 .76 .64 .47 .42 .50 .32
Cash Dividends . . . . . . . . .54 .50 .40 .36 .34 .32 .30 .29 .26 .22
Stock Dividends. . . . . . . . -- 100 -- -- 50 -- -- -- -- 10
Book Value . . . . . . . 15.12 13.69 12.37 10.71 9.29 8.21 8.79 7.97 7.42 6.67
Stock Price . . . . . . 35 15/16 32 1/4 24 21 16 1/2 13 3/16 13 7/16 8 1/4 9 3/16 10 7/16
Market Capitalization. . . . . 1,548 1,378 1,045 899 692 549 558 342 352 395
Balance Sheet Data
Preferred Equity (net) . . . 53.4 47.6 44.6 40.9 33.9 77.4 74.1 68.4 65.9 67.6
Common Equity. . . . . . 577.2 516.2 458.3 391.1 336.9 260.0 275.7 247.8 241.0 214.2
ROE %(a) . . . . . 15.9 14.3 16.9 13.2 13.6 12.8 13.3 11.1 14.1 19.8
Capital Expenditures . . . . 77.5 71.6 63.8 57.8 28.1 28.0 26.5 28.0 28.7 20.2
Total Assets . . . . . . 1,472.9 1,289.0 1,252.5 1,161.1 863.1 769.5 698.4 696.5 708.9 675.2
Long-Term Debt . . . . . . . . 294.5 279.9 219.9 408.5 236.7 209.3 191.2 217.5 243.4 242.9
Debt to Capital %. . . . . . . 32 33 31 49 39 38 35 41 44 46
All Share and Per Share Data adjusted for stock dividends.
(a) 1992 - before the cumulative effects of accounting changes.
(b) From continuing operations.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Management's Discussion and Analysis
Strategic Direction
Pentair grows its businesses through innovative marketing and product
design and intensive productivity improvement, coupled with capital
investment, and employee training and participation. Pentair has chosen to
focus these skills on its three core markets of Professional Tools and
Equipment, Water and Fluid Technologies, and Electrical and Electronic
Enclosures. Following the divestiture of its paper businesses in 1995,
Pentair has made nine acquisitions in these chosen fields.
Results of Operations
Professional Water and Electrical and
Tools and Fluid Electronic
(In thousands) Equipment Technologies Enclosures Other* Total
NET SALES
1997 $747,066 $403,979 $579,366 $108,645 $1,839,056
1996 582,689 322,252 548,798 113,326 1,567,065
1995 492,398 237,535 542,452 130,486 1,402,871
OPERATING INCOME
1997 $84,355 $45,987 $53,313 $(13,853) $169,802
1996 60,556 44,445 59,592 (21,674) 142,919
1995 49,239 25,111 55,951 (14,054) 116,247
*Other includes corporate expenses, captive insurance company,
intermediate financial companies, charges that
do not relate to current operations, divested operations (Federal) and
intercompany eliminations.
CONSOLIDATED
1997 VERSUS 1996
Consolidated net sales increased to $1,839.1 million in 1997, representing
a 17.4% increase over 1996. The double digit growth rate is attributable to
additional strategic acquisitions and continued growth in North America.
Outside of North America, difficult European markets and weak local
currencies limited the growth of sales in dollar terms.
Operating income increased to $169.8 million in 1997, up 18.8% over 1996.
Operating income as a percent of sales improved slightly from 9.1% to
9.2%. Significant margin gains in most existing businesses were nearly
offset by the lower operating margins of our recent acquisitions. Strategic
investments were made throughout all the operating segments to position
the Company for continued productivity gains, increased capacity and
improved customer service and satisfaction. Gross profit margins were
maintained, remaining nearly flat at 29.8% in 1997 versus 29.9% in 1996.
Research and development expenses increased to 1.2% of net sales versus
1.0% in 1996 due to the increasing stream of new products. Selling, general
and administrative expense (SG&A) as a percent of sales was 19.4% in
1997 as compared to 19.8% in 1996. The Company continues to incur
costs to support major information system upgrades, which are starting to
be offset by the associated cost improvements.
Interest expense was higher in 1997 as compared to 1996 due to slightly
higher effective interest rates and higher average outstanding debt levels in
1997, influenced by the acquisition of the pump business in August and the
sale of Federal in November.
Pentair sold its Federal Cartridge Company to Blount International, Inc., in
November 1997, realizing a $10.3 million pre-tax gain. This gain was
reduced by $9.1 million of taxes, resulting in a net gain of $1.2 million, or
$.03 per share. Sales and operating income for Federal through the first 10
months of 1997 improved over the levels of their very difficult 1996.
Taxes on the gain from the sale of Federal were greater than the Company's
normal tax rate due to non-deductible goodwill created as part of the original
structure of the 1988 Federal-Hoffman acquisition. The Company's effective
income tax rate of 42.2% includes this incremental tax from the gain on sale.
The tax rate excluding the gain on the sale of Federal is 39.0% as compared
to 40.2% in 1996.
Net income increased 22.9% to $91.6 million versus $74.5 million in 1996.
EPS of $2.11 in 1997 represented an increase of 22.0% over 1996 EPS of
$1.73. EPS without the gain from the sale of Federal is $2.08, a 20 percent
increase over 1996.
1996 VERSUS 1995 Consolidated net sales from continuing operations
increased to $1,567.1 million in 1996, representing an 11.7% increase over
1995. The double digit growth rate is attributable to continued strength in
North American markets and strategic acquisitions that strengthened our
market positions throughout the world.
Operating income from continuing operations increased to $142.9 million in
1996, up 22.9% over 1995, and operating income as a percent of sales
improved from 8.3% to 9.1%. Gross profit margins improved nearly 1% in
1996 to 29.9% versus 29.0% in 1995. This was primarily due to productivity
gains and volume efficiencies. Selling, general and administrative expense
(SG&A) as a percent of sales was 19.8% in 1996 as compared to 19.7% in
1995. Extra selling effort was expended during 1996 to support new product
introductions and new market expansion activities. In addition, the
Company incurred expenses to support major information system upgrades.
Interest expense was lower in 1996 as compared to 1995 due to lower
interest rates and a slightly lower average debt level. Interest income was
lower in 1996 as compared to the prior year. 1995 included interest income
received on the note receivable held in relation to the sale of the paper
businesses.
Income from continuing operations increased 23.2% to $74.5 million versus
$60.5 million in 1995. EPS of $1.73 in 1996 represented an increase of
22.7% over 1995 EPS from continuing operations of $1.41.
OUTLOOK
The Company is targeting to surpass the $2 billion sales level for 1998,
before the impact of 1998 acquisitions.
While the outlook for each of its segments is very encouraging in 1998, as
noted below, Pentair has determined that to achieve financial results
comparable to those of top-performing benchmark companies, it must
improve its performance on a company-wide basis. To do so, the Company
is targeting significant improvements in free cash flow and management of
total capital. In addition, the Company has adopted a 2-year target to
achieve a $60 million reduction from its planned cost structure. These gains
are anticipated to come from improved cooperation and standardization
across all operating units in such areas as: transportation, administrative
services, outsourcing, and purchasing. This effort will alter historical
management patterns, enabling synergies between all businesses.
The Company continues to look for synergistic acquisitions in each of its
business segments, in line with its pattern over the past three years. Of the
past nine acquisitions, most were smaller businesses or product lines which
fit with existing operations, offering new products or expanded geographic
scope. Two, however, were stand-alone strategic acquisitions of large
established businesses, and helped create Pentair's latest business
segment, Water and Fluid Technologies. Pentair intends to continue to
pursue smaller, bolt-on purchases, but will also carefully review larger
targets which have the capability to significantly expand its current
segments. Other acquisitions are possible, but only if they present
extraordinary opportunities to Pentair.
SEGMENT DISCUSSION
Pentair has realigned its operating businesses into three segments to reflect
its growing focus in its chosen markets: Professional Tools and Equipment
(PTE), Water and Fluid Technologies (WFT), and Electrical and Electronic
Enclosures (EEE).
PROFESSIONAL TOOLS and EQUIPMENT
The PTE segment includes Delta International Machinery, Porter-Cable,
Lincoln Automotive and Century Manufacturing. Products manufactured
include woodworking machinery, portable power tools, battery charging and
testing equipment, welding equipment, and lubricating and lifting equipment.
1997 VERSUS 1996
PTE sales increased $164.4 million or 28.2%. The full year effect of 1996
acquisitions contributed to less than half of the growth in sales. Substantial
growth was achieved in the tool business due to the introduction of new
products, increased brand awareness and continued expansion of the home
center channel.
Operating income as a percent of sales increased to 11.3% in 1997 from
10.4% in 1996. Profitability improved across the entire segment due to
volume efficiencies, cost control activities and continued productivity
improvement.
1996 VERSUS 1995
PTE sales increased $90.3 million or 18.3%, propelled by new product
introductions, expanded distribution in home center and hardware channels,
and the partial year effect of 1996 acquisitions.
Operating income as a percent of sales increased to 10.4% in 1996 from
10.0% in 1995 due to favorable product mix, volume efficiencies, and
productivity gains.
OUTLOOK
The Professional Tools and Equipment segment has tremendous
momentum going into 1998 and sales growth is expected to continue to be
in double digits due to product line expansions and cross marketing through
multiple channels of distribution. Margins are anticipated to improve slightly,
especially from the full impact of improvements currently being made in
recent acquisitions.
WATER and FLUID TECHNOLOGIES
The WFT segment includes the Pentair pump business, Fleck Controls and
Lincoln Industrial. Products manufactured include pumps for wells and
water treatment, sump pumps, valves for water softeners, and automated
and manual lubrication systems and equipment.
1997 VERSUS 1996
WFT sales increased $81.7 million or 25.4%, primarily due to acquisitions.
In particular, 1997 results included 4 months of operations from the pump
businesses purchased from General Signal. Otherwise, this segment
experienced moderate growth, dampened by the effects of a stronger U.S.
dollar on the results of the European operations.
Operating income as a percent of sales decreased to 11.4% in 1997 from
13.8% in 1996. Recent acquisitions have lower margins than the overall
1996 percentage for this segment. In addition, one plant experienced
temporary production difficulties in meeting customer demand. Investments
were made in 1997 across the segment addressing plant and product
rationalization, process redesign, and production capacity. Profitability was
also impacted by the weak European economy and the effects of a stronger
U.S. dollar.
1996 VERSUS 1995
WFT sales increased $84.7 million or 35.7%, including the full year impact
of 1995 acquisitions and small 1996 acquisitions. In addition to the
contributions from acquisitions, North American operations growth outpaced
that of the market and this was slightly offset by the weak economic
conditions in Europe in 1996.
Operating income as a percent of sales increased to 13.8% in 1996 from
10.6% in 1995 due to favorable business mix, volume efficiencies, and
productivity gains in all operations throughout the world.
OUTLOOK
The Water and Fluid Technologies segment will benefit from full year
operations from the recently acquired pump businesses as the overall
integration of the Pentair pump business continues, driving down costs and
improving productivity via rationalization of products, redesign of processes,
and the anticipated divestiture or closure of unprofitable product lines. The
automated lubrication and material dispensing business will work to increase
its presence in global markets and will expand its product offerings as a
result of its January 1998 acquisition of ORSCO, Inc., a manufacturer of
automated lubricating equipment. Overall profitability of this segment should
improve due to the synergies within the pump business and improvements
in operations.
ELECTRICAL and ELECTRONIC ENCLOSURES
The EEE segment includes Hoffman Enclosures and Schroff. Products
manufactured include metallic and composite cases, subracks and cabinets
that house and protect electrical and electronic controls, instruments, and
components.
1997 VERSUS 1996
EEE sales increased $30.6 million or 5.6% including a 1997 acquisition. In
addition, North American sales were the highest in history and outpaced the
overall growth in the markets served. The European operations, as
measured in local currencies, also experienced year-over-year sales growth
despite a continued weak economy in Europe. However, European sales
(excluding acquisitions),as measured in a stronger U.S. dollar, were less
than 1996.
Operating income as a percent of sales decreased to 9.2% in 1997 from
10.9% in 1996. This was due to the impact of the weak European economy,
with intense competition affecting pricing and product mix of sales. There
were also strategic, one-time costs related to the following: implementation
of a new world-wide business system; start-up of the new 300,000-square-foot
production facility in Mt. Sterling, Kentucky; integration of the Transrack
acquisition including reorganization of the French sales and marketing
activities; the cost of employment reductions in Europe; introduction of
outdoor enclosures for the telecommunications market; and start up of the
North American manufacture of a new flagship product, the ProLine
enclosure.
1996 VERSUS 1995
EEE sales increased $6.3 million or 1.2%. European sales (especially as
measured in a stronger U.S. dollar) reflected weak economic conditions in
Europe in 1996. North American sales growth was strong enough to result
in a small total worldwide sales increase over 1995.
Operating income as a percent of sales increased to 10.9% in 1996 from
10.3% in 1995 due to cost control measures and strong productivity gains.
OUTLOOK
The Electrical and Electronic Enclosures segment has a solid leadership
position in the global enclosures market. This segment is expected to
benefit from the strategic investments made in 1997, economic recovery in
Europe, new product introductions and cost savings.
Liquidity and Capital Resources
The Company's free cash flow (cash from operations less capital
expenditures) was $40 million in 1997, up from $30 million in 1996. The
Company is targeting continued growth in free cash flow as a percent of
sales through improved profitability and working capital ratios. The
Company believes that cash flow from operations will continue to exceed its
needs for capital programs, smaller acquisitions and dividends in the next
year.
The Company's financial position was strengthened in 1997, even taking
into account the acquisition of the pump businesses from General Signal.
As of December 31, 1997, the long-term debt to total capital ratio was 32
percent, compared to 33 percent at the end of 1996. The Company has
significant financing capacity to continue its acquisition program and to
support its announced stock repurchase program.
Capital spending chart here
($ millions)
93 28.1
94 57.8
95 63.8
96 71.6
97 77.5
Pentair invests capital to maintain existing businesses, implement
productivity improvements, introduce new products and develop new
businesses. In the last five years, approximately $300 million has been
invested in Pentair's businesses (excluding acquisitions) as shown above.
The Company does not currently have any planned expansions of the
magnitude of the Mt. Sterling facility, which should allow Pentair to reduce
its 1998 capital expenditures to 1996 spending levels. Contemplated uses
include computer systems, cost reduction projects, new product
development and reconfiguration of manufacturing facilities.
Dividends since 1976 chart here
($ per share, restated for stock dividends)
76 0.03
77 0.04
78 0.06
79 0.09
80 0.11
81 0.13
82 0.14
83 0.15
84 0.16
85 0.18
86 0.20
87 0.21
88 0.22
89 0.26
90 0.29
91 0.30
92 0.32
93 0.34
94 0.36
95 0.40
96 0.50
97 0.54
98 0.60
The Company raised its anticipated 1998 quarterly dividend to 15 cents per
share to an indicated annual rate of $.60 per share. This is an 11% increase
over 1997.
Pentair has increased its dividend payment each year since 1976. Since the
first cash dividend in 1976, dividends have increased at an average
annualized growth rate of 15%.
INFLATION
The impact of inflation on the Company's results of operations is not
considered material given the current inflationary outlook.
INSURANCE SUBSIDIARY
The Company's captive insurance subsidiary provides a cost effective
means of obtaining insurance coverage for general and product liability,
product recall, workers' compensation and auto liability. The insurance
subsidiary insures directly and reinsures an admitted carrier. Loss reserves
are established based on actuarial projections of ultimate loss.
ENVIRONMENTAL MATTERS
Under current laws and regulations, Pentair's obligations relating to
environmental matters are not expected to have a material impact on the
Company's operations, financial condition or operating results. Some
subsidiaries face remediation of soil and groundwater as a result of
predecessors' or their own previous disposal practices. In addition, Pentair
subsidiaries have been named as potentially responsible parties at a small
number of Superfund or other sites being studied or remediated. In all
cases to date, the affected business has been deemed to be a de minimis
defendant or its share of remediation costs has not been material to Pentair.
Pentair contractually retained certain obligations pertaining to environmental
issues of discontinued paper businesses and the divested sporting
ammunition business. Costs and capital expenditures related to
environmental obligations were not material to the Company's operations in
either 1997 or 1996, and are not anticipated to be material in 1998.
Pentair engages environmental professionals to perform periodic audits of
its facilities to assist Pentair in complying with the various environmental
laws and regulations faced by its businesses. For purposes of maintaining
appropriate reserves against liabilities associated with environmental issues,
whether involving on- or off-site locations, Pentair management reviews
each individual site, taking into consideration the number of parties involved
with the site, the joint and several liability imposed by certain environmental
laws, the expected level of contributions of the other parties, the nature and
quantities of wastes involved, the expected method and extent of
remediation, the estimated professional expenses involved and the time
period over which any costs would be incurred. Based on this evaluation,
reserves are established when loss amounts are probable and reasonably
estimable. Insurance recoveries are recorded only when claims for recovery
are settled.
YEAR 2000 and "Euro" CURRENCY ISSUES
The Company has been evaluating its computer, telecommunications, and
embedded logic systems since 1995 for compliance with Year 2000
requirements and over the past year for the new "Euro" currency. The
Company has determined that expected costs for compliance will not be
material to its results of operations, liquidity or capital expenditures. Most
of the businesses have installed or are in the process of installing complete
new business management systems which go beyond just Year 2000 and
"Euro" compliance. Some businesses have chosen to upgrade existing
systems to be compliant. Under current plans, the Company does not
anticipate significant risks to its operations from internal noncompliance with
these issues. In addition, the Company is proactively requiring key suppliers
to certify their compliance.
NOTIFICATION REGARDING FORWARD-LOOKING INFORMATION
Except for historical information contained herein, certain statements are
forward-looking statements that involve risks and uncertainties, including,
but not limited to, product demand and market acceptance risks, customer
mix, the effect of economic conditions, the impact of competitive products
and pricing, product development, commercialization and technological
difficulties, capacity and supply constraints or difficulties, the results of
financing efforts, actual purchases under agreements and the effect of the
Company's accounting policies. The actual results that the Company
achieves may differ materially from these forward-looking statements due
to such risks and uncertainties. The Company undertakes no obligation to
revise any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this Annual Report. Readers
are urged to carefully review and consider the various disclosures made by
the Company in this report and in the Company's other filings with the
Securities and Exchange Commission from time to time that advise
interested parties of the risks and uncertainties that may affect the
Company's financial condition and results of operations.
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements of the Corporation and its
subsidiaries are included herein as indicated below:
Consolidated Financial Statements
Consolidated Statements of Income for Years Ended December 31, 1997,
1996 and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Comprehensive Income for Years Ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Independent Auditors' Report
CONSOLIDATED STATEMENTS OF INCOME
Pentair, Inc. and Subsidiaries
Years Ended December 31
(In thousands, 1997 1996 1995
except per share amounts)
Net sales $1,839,056 $1,567,065 $1,402,871
Operating costs
Cost of goods sold 1,290,798 1,098,064 996,576
Selling, general and administrative 357,125 310,606 276,683
Research and development 21,331 15,476 13,365
Total operating costs 1,669,254 1,424,146 1,286,624
Operating income 169,802 142,919 116,247
Gain on sale of business 10,313 -- --
Interest expense (22,261) (19,537) (21,861)
Interest income 528 1,220 7,308
Income from continuing operations
before income taxes 158,382 124,602 101,694
Provision for income taxes 66,782 50,093 41,194
Income from continuing operations 91,600 74,509 60,500
Discontinued operations:
Income from discontinued operations
(net of applicable income taxes of $2,740) -- -- 4,566
Gain on sale of discontinued operations
(net of applicable income taxes of $7,734) -- -- 12,134
Net income 91,600 74,509 77,200
Preferred dividend requirements 4,867 4,928 5,203
Income available to common shareholders $ 86,733 $ 69,581 $ 71,997
Basic Earnings per Common Share
Continuing operations $ 2.28 $ 1.86 $ 1.51
Discontinued operations .00 .00 .45
Net Income $ 2.28 $ 1.86 $ 1.96
Diluted Earnings per Common Share
Continuing operations $ 2.11 $ 1.73 $ 1.41
Discontinued operations .00 .00 .40
Net Income $ 2.11 $ 1.73 $ 1.81
Average Common Shares
Outstanding 37,989 37,491 36,812
Outstanding Assuming Dilution 43,067 42,752 42,380
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
Pentair, Inc. and Subsidiaries
(In thousands) December 31
Assets 1997 1996
Current assets
Cash and cash equivalents $ 34,340 $ 22,973
Accounts and notes receivable 369,220 299,055
Inventories 266,409 256,715
Deferred income taxes 23,401 23,084
Other current assets 12,000 12,428
Total current assets 705,370 614,255
Property, plant and equipment
Land and land improvements 14,278 19,314
Buildings 119,996 110,983
Machinery and equipment 374,967 364,953
Construction in progress 19,113 30,668
Property, plant and equipment - gross 528,354 525,918
Less accumulated depreciation 234,800 227,069
Property, plant and equipment - net 293,554 298,849
Marketable securities - insurance subsidiary 0 40,764
Goodwill 429,279 298,372
Deferred income taxes 12,110 2,381
Other assets 32,549 34,393
Total assets $1,472,862 $1,289,014
Liabilities and Shareholders' Equity
Current liabilities
Accounts and notes payable $152,592 $ 98,146
Compensation and other benefits accruals 70,758 61,713
Income taxes 15,158 24,919
Accrued product claims and warranties 35,114 25,167
Accrued rebates 21,658 15,172
Accrued expenses and other liabilities 62,194 43,593
Current maturities of long-term debt 34,703 32,928
Total current liabilities 392,177 301,638
Long-term debt 294,549 279,889
Pensions and other retirement compensation 52,470 47,018
Postretirement medical and other benefits 45,135 47,045
Reserves - insurance subsidiary 32,313 32,322
Other liabilities 25,656 17,251
Commitments and Contingencies (Notes 9 and 19)
Preferred stock - at liquidation value
Outstanding: 1,704,578 shares in 1997 and
1,769,983 shares in 1996 59,696 62,058
Unearned ESOP compensation (6,315) (14,440)
Common stock - par value, $.16
Outstanding: 38,184,804 in 1997 and
37,717,022 in 1996 6,365 6,287
Additional paid-in capital 186,486 179,143
Accumulated other comprehensive income (5,085) 8,053
Retained earnings 389,415 322,750
Total shareholders' equity 630,562 563,851
Total liabilities and shareholders' equity $1,472,862 $1,289,014
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Pentair, Inc. and Subsidiaries
Years Ended December 31
(In thousands) 1997 1996 1995
Preferred Stock
Beginning Balance $ 62,058 $ 65,656 $ 68,444
Conversions into common (2,362) (3,598) (2,788)
Ending Balance 59,696 62,058 65,656
Unearned ESOP Compensation $ (6,315) $(14,440) $(21,074)
Common Stock - Par
Beginning Balance $ 6,287 $ 6,172 $ 6,082
Employee stock plans - net 48 69 54
Conversions into common 30 46 36
Ending Balance 6,365 6,287 6,172
Additional Paid in Capital
Beginning Balance $179,143 $169,832 $163,273
Employee stock plans - net 5,019 5,770 3,828
Conversions into common 2,324 3,541 2,731
Ending Balance 186,486 179,143 169,832
Foreign Currency Translation Adjustment
Beginning Balance $ 7,892 $ 10,964 $ 11,729
Current period change (10,504) (3,072) (765)
Ending Balance (2,612) 7,892 10,964
Unrealized Gains on Securities
Beginning Balance $ 1,965 $ 1,090 $ (602)
Current period change ( 1,965) 875 1,692
Ending Balance 0 1,965 1,090
Minimum Liability Pension Adjustment
Beginning Balance $ (1,804) $ (1,034) $ (3,094)
Current period change (669) (770) 2,060
Ending Balance (2,473) (1,804) (1,034)
Retained Earnings
Beginning Balance $322,750 $271,249 $213,670
Net Income 91,600 74,509 77,200
Dividends
Common (20,513) (18,735) (14,718)
Preferred (4,867) (4,928) (5,203)
Payment for redemption of stock rights -- -- (558)
Tax Benefit of preferred dividends 445 655 858
Ending Balance 389,415 322,750 271,249
TOTAL SHAREHOLDERS' EQUITY $630,562 $563,851 $502,855
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Pentair, Inc. and Subsidiaries
Years Ended December 31
(In thousands) 1997 1996 1995
Operating activities
Net income $ 91,600 $ 74,509 $ 77,200
Adjustment for Discontinued Operations -- -- (16,700)
Adjustments to reconcile to cash flow
Depreciation 53,723 47,925 41,570
Amortization of intangible assets 14,113 11,595 7,364
Gain on sale of securities (5,932) -- --
Deferred income taxes (11,268) 484 5,725
Changes in assets/liabilities, net of
effects of acquisitions/dispositions
Receivables (61,647) (16,791) (34,103)
Inventories (22,409) (16,345) (9,257)
Other assets (6,946) (13,488) (10,060)
Accounts payable 46,673 2,615 10,038
Accrued compensation and benefits 12,157 (9,277) 17,735
Income taxes (14,081) 7,025 9,692
Accrued rebates 6,486 6,365 2,907
Pensions and other retirement compensation 8,578 8,695 12,038
Reserves - insurance subsidiary 2,902 6,211 7,837
Other liabilities 3,945 (7,818) (16,343)
Cash from operations - continuing operations 117,894 101,705 105,663
Payments related to discontinued operations -- -- (34,925)
Total Cash from Operating Activities 117,894 101,705 70,738
Investing activities
Capital expenditures (77,461) (71,646) (63,838)
Proceeds from sale of businesses 112,000 100,000 216,086
Payments for acquisition of businesses (210,620) (195,917) (16,517)
Construction funds held in escrow 7,055 (9,251) --
Purchase of marketable securities (2,031) (15,966) (13,081)
Proceeds from sale of marketable securities 48,727 6,274 6,091
Cash provided by (used for) investing activities (122,330) (186,506) 128,741
Financing activities
Long-Term Borrowings 107,353 91,528 30,792
Payments of Long-Term Debt (70,333) (15,425) (210,236)
Unearned ESOP compensation decrease 8,124 6,634 6,454
Employee stock plans and other 5,514 6,483 4,161
Dividends (25,380) (23,663) (19,921)
Cash provided by (used for) financing activities 25,278 65,557 (188,750)
Effects of currency exchange rate changes (9,475) 5,569 (6,758)
Increase (decrease) in cash and cash equivalents 11,367 (13,675) 3,971
Cash and cash equivalents - beginning of period 22,973 36,648 32,677
Cash and cash equivalents - end of period $ 34,340 $ 22,973 $ 36,648
Supplemental Cash Flow Information: Cash payments for interest were
$18,507,000, $25,591,000, and $22,571,000 for the years ending December 31,
1997, 1996 and 1995, respectively. Cash payments for income taxes were
$73,374,000, $38,127,000, and $34,754,000 for the years ending December 31,
1997, 1996 and 1995, respectively.
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Pentair, Inc. and Subsidiaries
Years Ended December 31
(In thousands) 1997 1996 1995
Net Income $91,600 $74,509 $77,200
Other comprehensive income, net of tax:
Foreign currency translation adjustments (10,504) (3,072) (765)
Unrealized gains on securities:
Unrealized holding gains arising during
the period 1,891 906 1,581
Less reclassification adjustment for
(gains)/losses included in net income (3,856) (31) 111
Minimum pension liability adjustment (669) (770) 2,060
Other comprehensive income(loss) (13,138) (2,967) 2,987
Comprehensive Income $78,462 $71,542 $80,187
Related Tax (Expense)/Benefit of
Other Comprehensive Income:
Foreign currency translation adjustments $ 6,716 $2,065 $ 521
Unrealized gains on securities:
Unrealized holding gains
arising during the period (1,018) (488) (851)
Less reclassification adj-
ustment for (gains)/losses
included in net income 2,076 17 (60)
Minimum pension liability 427 492 (1,317)
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pentair, Inc. and Subsidiaries
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include Pentair, Inc. and its wholly-
owned subsidiaries. All significant intercompany balances and transactions
have been eliminated.
Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is
computed using the straight-line method. Estimated useful lives are: land
improvements - 5 to 20 years, buildings - 5 to 50 years, and machinery
and equipment - 3 to 15 years.
Insurance Subsidiary
The Company's wholly-owned insurance subsidiary , Penwald Insurance
Company, insures general and product liability, product recall, workers'
compensation, and auto liability risks.
Reserves for policy claims ($43,305,000 with $32,313,000 noncurrent as
of December 31, 1997 and $40,403,000 with $32,322,000 noncurrent as
of December 31, 1996) are established based on actuarial projections of
ultimate loss.
In order to maximize investment earnings from insurance reserves,
Penwald now has a long-term receivable from Pentair (established in
July, 1997) in lieu of its former marketable securities portfolio. The
intercompany receivable is interest-bearing and payable on demand and
eliminated in consolidation. Prior to July 1997, the insurance subsidiary
invested in marketable securities including debt and equity securities
classified as available-for-sale in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Debt and equity securities classified as
available-for-sale were carried at fair value on the balance sheet with
unrealized gains and losses reported in a component of shareholders'
equity.
These investments are treated as operating assets of the insurance
subsidiary and the related earnings ($2,864,000, $1,824,000, and
$1,470,000 in 1997, 1996 and 1995, respectively) are recorded as a
reduction of the insurance component of cost of sales. The gain on sale
of securities from the liquidation of the portfolio ($5,932,000) is recorded
as other income and included as a reduction of selling, general and
administrative costs.
The cost and market value of debt and equity securities of the insurance
subsidiary at December 31, 1996, by contractual maturity, is shown
below:
In Thousands
Cost Market
Debt Securities:
Due during the next year $ 2,105 $ 2,103
Due after one year through five years 17,381 17,408
Due after five years through ten years 8,020 8,160
27,506 27,671
Equity Securities: 10,262 13,093
Total $37,768 $40,764
Goodwill
The excess purchase price paid over the fair value of net assets of
businesses acquired is amortized on a straight-line basis over periods
ranging from 25 to 40 years. The amortization recorded for 1997, 1996
and 1995 was $14,113,000, $11,160,000, and $7,253,000, respectively.
Accumulated amortization was $44,658,000 and $36,685,000 at
December 31, 1997 and 1996, respectively. The Company periodically
reviews goodwill to assess recoverability. The Company evaluates the
recoverability by measuring the unamortized balance of such goodwill
against estimated future cash flows. If events or changes in
circumstances indicated that the carrying amount of such asset may not
be recoverable, the asset would be adjusted to the present value of the
estimated future cash flows. Based on evaluations performed, there was
no adjustment to the carrying value of goodwill during any of the three
years ended December 31, 1997.
Long-Lived Assets
Pentair evaluates the carrying value of long-lived assets. When the
carrying value exceeds the projected undiscounted cash flows from the
assets, an impairment is recognized to reduce the carrying value to the
fair market value. Losses on long-lived assets to be disposed of are
determined in a similar manner, except that the fair market values are
reduced for the cost to sell. Based on evaluations performed, there was
no adjustment to the carrying value of such assets during any of the three
years ended December 31, 1997.
Foreign Currency Translation
Translation gains or losses resulting from translating foreign currency
financial statements are reported as a component of shareholders' equity.
Foreign currency transaction gains and losses are included in earnings
as incurred.
Revenue Recognition
Revenue from sales is generally recognized at the time the product is
shipped.
Product Warranty Costs
Provision for estimated warranty costs is recorded at the time of sale and
periodically adjusted to reflect actual experience.
Research and Development
Research and development expenditures are expensed as incurred.
Development activities generally relate to creating new products,
improving or creating variations of existing products, or modifying existing
products to meet new applications.
Earnings per Common Share
Basic earnings per common share is computed by dividing net income,
after deducting preferred stock dividends, by the average common
shares outstanding during the period.
Diluted earnings per common share is computed by dividing net income,
after adjusting the tax benefits on deductible ESOP dividends, by the
average common shares outstanding plus the incremental shares that
would have been outstanding upon the assumed exercise of dilutive
stock options and upon the assumed conversion of each series preferred
stock. The tax benefits applicable to preferred dividends paid to ESOPs
are recorded in the following ways. For allocated shares, they are
credited to income tax expense and included in the earnings per share
calculation. For unallocated shares, they are credited to retained
earnings and excluded from the earnings per share calculation. See also
Note 20.
Reclassifications
Certain reclassifications have been made to prior years' financial
statements to conform to the current year presentation.
2. Adoption of New Accounting Standards
In 1997, the Company adopted the following new accounting standards:
Statement of Financial Accounting Standard (FAS) No. 128, "Earnings
per Share", Statement of Financial Accounting Standard (FAS) No. 130
"Reporting Comprehensive Income", and Statement of Financial
Accounting Standard (FAS) No. 131 "Disclosures about Segments of an
Enterprise and Related Information".
FAS 128 requires the reporting of earnings per share (EPS) in two forms:
basic EPS and diluted EPS. Pentair has historically reported its EPS on
a fully diluted basis, which reflects the dilution resulting from employee
stock options and convertible securities related to employee benefit
plans, and is directly comparable to the new diluted EPS reported. See
also Note 20.
FAS 130 establishes standards for the reporting of comprehensive
income and its components. Comprehensive income is defined as the
change in equity during the period from transactions and other events
and circumstances from non-owner sources.
FAS 131 requires the Company to report information about its operating
segments based upon how the Company manages its operations. The
Company manages its businesses in three distinct operating groups and
has realigned its external reportable segments to conform with these
internal management structures. The three reportable segments --
Professional Tools and Equipment, Water and Fluid Technologies, and
Electrical and Electronic Enclosures - replace the Specialty Products and
General Industrial Equipment segments which had been reported since
1991. See also Note 17.
Prior year financial statements have been restated accordingly.
3. Acquisitions/Divestitures
1997
In 1997, the Company paid $210,620,000 to acquire 3 new businesses,
all accounted for as purchase acquisitions with $180,348,000 of goodwill
recorded during 1997 for these acquisitions. The pro forma effect of
these acquisitions is not deemed material to the Company.
In 1997, the Company sold its Federal Cartridge business for
$112,000,000 cash plus receivables approximating $16,000,000 for final
closing adjustments. Federal's operating results are included in the
Company's results through October 31, 1997.
1996
In 1996, the Company paid $75,185,000 to acquire 4 new businesses, all
accounted for as purchase acquisitions with $33,176,000 of goodwill
recorded during 1996 for these acquisitions. The pro forma effect of
these acquisitions is not deemed material to the Company.
1995
In 1995, the Company paid $16,517,000 in cash and issued promissory
notes for $120,732,000 to acquire 2 new businesses, both accounted for
as purchase acquisitions with $111,682,000 of goodwill recorded during
1995 for these acquisitions.
4. Discontinued Operations - Paper Businesses
On April 1, 1995 the Company sold its Cross Pointe Paper Corporation
subsidiary for $203,300,000. On June 30, 1995 the Company sold its
Niagara of Wisconsin Paper Corporation, its 50% share of Lake Superior
Paper Industries (LSPI) joint venture and its 12% share of Superior
Recycled Fiber Industries (SRFI) joint venture for $115,600,000.
The gain on the sales was $12,134,000 after income tax expense of
$7,734,000. The transaction added 28 cents to diluted earnings per
share in 1995.
5. Balance Sheet Information
Accounts receivable are stated net of allowances for doubtful accounts of
$12,446,000 in 1997 and $7,348,000 in 1996.
Inventories are stated at the lower of cost or market. All non-US
companies use the first-in, first-out - FIFO and moving average methods.
The US companies use the last-in, first-out - LIFO method.
(In thousands) 1997 1996
Finished goods $131,847 $159,617
Work in process 58,047 47,689
Raw materials and supplies 76,515 49,409
Total $266,409 $256,715
If all LIFO inventories were valued at FIFO, aggregate inventory would
have been $269,653,000 and $261,664,000 at December 31, 1997 and
1996, respectively.
6. Long-Term Debt and Credit Facilities
Revolving credit agreements with seven banks provide credit facilities of
US $390,000,000 which can be borrowed in US$ or any other G7
currency. G7 currencies include any of Deutschemarks, French Francs,
British Pounds Sterling, Japanese Yen, Canadian Dollars, or Italian Lira.
The Company must pay a commitment fee rate ranging from .100 to .150
of 1% per annum on the total amount of the credit facility. The rate is
assessed pursuant to a sliding scale based on the Company's debt to
total capital ratio as calculated quarterly. Borrowings under the revolving
credit facility mature on June 30, 2001.
Debt is summarized as follows:
(In thousands) 1997 1996
Revolving credit facilities, average
interest rate of 5.02% $102,119 $168,413
Private placement debt, due 1998
to 2007, average interest rate
of 7.09% 197,858 115,000
Other, due periodically to 2005,
average interest rate 5.27% 29,275 29,404
Total 329,252 312,817
Current maturities 34,703 32,928
Total long-term debt $294,549 $279,889
At December 31, 1997, outstanding revolving credit facility debt included
$50,000,000 in U.S. dollars with an average current interest rate of
6.085% and $52,119,000 in various foreign currencies with an average
current local interest rate of 3.99%. The weighted average credit facilities
borrowing rates were 4.87% in 1997 and 4.51% in 1996. See also
interest rate swap agreements at Note 7.
Various debt agreements have restrictions relating to minimum net worth,
certain financial ratios, and dividends and certain other restricted
payments. Under the most restrictive covenants, $137,000,000 of the
December 31, 1997 retained earnings were unrestricted for such
purposes. The Company has remained in compliance with these
covenants.
Total long-term debt maturities, excluding revolving credit facilities, are
$34,703,000, $42,896,000, $23,464,000, $18,017,000, and $2,865,000
for the years 1998 to 2002, respectively.
7. Financial Instruments
The Company utilizes various derivatives such as interest rate swap
agreements, currency swap agreements, and interest rate cap
agreements. The Company uses these derivatives in a strategic manner
to minimize interest rate and foreign currency risk. The instruments are
not purchased as speculative investments.
Interest Rate Risk Management
The Company has entered into interest rate swap agreements with major
financial institutions to exchange variable rate interest payment
obligations for fixed rate obligations without the exchange of the
underlying principal amounts in order to manage interest rate exposures.
Net payments or receipts under the agreements are recorded as
adjustments to interest expense and credit risk is considered remote.
As of December 31, 1997, the Company has swap agreements
outstanding with an aggregate notional amount of $25,000,000 which
expire in varying amounts through June 2005. The Company also has in
place forward starting swap agreements, which activate during the period
from December 1998 through June 1999, with an aggregate notional
amount of $49,500,000. The swap agreements have a fixed interest rate
of 6.56% and an average maturity of 6 years. Under the interest rate
environment existing as of December 31, 1997, the net fair value of the
Company's swap agreements was a net liability of $550,000.
As of December 31, 1997, the Company has one arrears interest rate cap
agreement outstanding. It is a 35,000,000 Deutschemark cap that
expires in November 2001 with a capped interest rate of 7.29% DEM-LIBOR.
Foreign Exchange Risk Management
The Company has entered into currency swap agreements with major
financial institutions to hedge net assets in foreign subsidiaries,
principally those denominated in Deutschemarks and Italian Lira. The
notional amounts set forth in the table below serve solely as a basis for
the calculation of interest payments which are exchanged over the life of
the swap transaction and are equal to the amount of foreign currency or
dollar principal exchanged at maturity. Gains or losses are deferred and
are recognized in income as part of the related transaction. Deferred
unrealized gains and losses, based on dealer-quoted prices, are
presented in the following table:
(in thousands) 1997 1996
Notional amounts $138,431 $16,496
Gains 3,433 0
Losses 3,084 146
Fair Value of Financial Instruments
The estimated fair value of long-term debt represents the present value of
debt service at rates currently available to the Company for issuance of
debt with similar terms. The fair value of interest rate swap agreements
and currency swap agreements were estimated based on quotes
obtained from dealers for those or similar instruments. Except for those
listed, all other financial instruments are carried at amounts that
approximate estimated fair value.
1997 1996
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
Long-term debt $329,252 $339,450 $312,817 $318,610
Interest rate swaps 0 (550) 0 (1,309)
Currency swaps 0 349 0 (146)
Interest rate cap 0 (121) 0 65
8. Lease Commitments
Rent expense related to operating leases amounted to $15,737,000,
$11,400,000, and $13,117,000 in 1997, 1996 and 1995, respectively.
The majority of the lease commitments are for information systems.
Future minimum rental payments under all operating leases are
$16,530,000, $12,860,000, $9,725,000, $7,756,000, and $6,233,000 for
the years 1998 to 2002, respectively.
9. Commitments and Contingencies
Various lawsuits, claims and proceedings have been or may be instituted
or asserted against the Company relating to the conduct of its
businesses, including those pertaining to product liability, environmental,
safety and health, and employment matters. The Company records
liabilities when loss amounts are determined to be probable and
reasonably estimable. Insurance recoveries are recorded only when
claims for recovery are settled. Although the outcome of litigation cannot
be predicted with certainty and some lawsuits, claims or proceedings may
be disposed of unfavorably to the Company, management believes,
based on facts presently known, that the outcome of such legal
proceedings and claims will not have a material adverse effect on the
Company's financial position, liquidity, or future results of operations.
Under a $382,000,000 leveraged-lease financing for its former joint
venture, LSPI, the Company had committed to provide up to $95,000,000
additional cash to LSPI if needed to meet its lease obligations. In
connection with the 1995 sale of LSPI, Consolidated Papers, Inc. (the
purchaser) had agreed to indemnify the Company for any required
payments. In 1997 and January 1998, the midterm purchase options
under all of the leases involved were exercised by the purchaser;
therefore, the Company has no significant continuing indemnity
obligations in connection with this financing.
10. Capital Stock
Preferred Stock
The two classes of preferred stock (par value - $.10) are: $7.50 Callable
Cumulative Convertible Preferred Stock, Series 1988; and 8% Callable
Cumulative Voting Convertible Preferred Stock, Series 1990. Both issues
are held by ESOPs (see Note 12). The preferred shares are convertible
into common stock and are redeemable, in whole or in part, at the option
of the Company on or after the dates indicated below, and at redemption
prices declining to the original price per share after ten years.
Series Series
1988 1990
Shares
Authorized 300,000 2,500,000
Issued and outstanding 116,593 1,587,985
Liquidation value $100.00 $30.25
Conversion
Price of common $10.66 to $13.34 $13.11
Shares of common 9.375 to 7.5 2.3077
Early redemption date January 1991 March 1994
Upon the retirement or other termination of an ESOP participant, the
shares of preferred stock (Series 1988 and 1990) in which he or she is
vested are automatically converted into common shares and distributed
in that form, with fractional shares paid in cash.
Common Stock
The authorized stock of the Company also consists of 122,200,000
shares of Common Stock with a par value of $.16 . On January 22,
1996, the board of directors approved a two-for-one stock split in the form
of a 100% stock dividend. The dividend was payable February 16, 1996
to shareholders of record at the close of business on February 2, 1996.
Changes in outstanding common shares are summarized as follows (in
thousands):
1997 1996 1995
Beginning Balance 37,717 37,035 36,496
Employee stock plans - net 288 409 325
Conversion of preferred stock 180 273 214
Ending Balance 38,185 37,717 37,035
On December 29, 1997, the Company announced that the Pentair board
had authorized the repurchase within the next 12 months of up to
350,000 shares of Pentair common stock. Any purchases would be
made periodically in the open market, by block purchases or private
transactions. The share repurchase is intended to offset the dilution
caused by stock issuances under employee stock compensation plans.
The Company repurchased 25,000 shares on December 30 and 31,
1997, which transactions settled in January 1998.
11. Share Rights Plan
On July 21, 1995, the board declared a dividend of one common share
purchase right for each outstanding share of common stock. The
dividend was effective July 31, 1995 for shareholders of record on that
date. Each Right entitles the registered holder to purchase from the
Company one common share at a price of $80.00, subject to adjustment.
Such rights only become exercisable ten business days after a person or
group acquires beneficial ownership of, or commences a tender or
exchange offer for, 15 percent or more of the Company's common stock.
The Company can redeem the rights for $.01 per right. The Rights will
expire on July 31, 2005, unless the Rights are earlier redeemed or
exchanged by the Company.
12. Employee Stock Ownership Plan (ESOP)
The Company has an Employee Stock Ownership Plan (ESOP) covering
non-bargaining and some bargaining U.S. employees. The employees
receive Series 1990 Preferred Stock in lieu of cash 401(k) matching
contributions and other cash compensation.
To finance the plan, the ESOP borrowed $56,500,000 from the Company
and exchanged it for 1,867,768 shares of Callable Cumulative Voting
Convertible Preferred Stock, Series 1990 at $30.25 per share. The
unpaid balance of the twenty-year, 8.75% loan is included in the
Company's balance sheet as unearned ESOP compensation.
Gross compensation expense (i.e. the value of shares allocated to
participants' accounts) was $7,081,000, $5,561,000, and $5,391,000 in
1997, 1996 and 1995, respectively. The stock held by the ESOP is
released for allocation to the participants' accounts as principal and
interest is paid from dividends on unallocated shares ($1,140,000,
$1,679,000, and $2,202,000 in 1997, 1996 and 1995, respectively) and
Company contributions. Through December 31, 1997, the loan has been
reduced $54,468,000; of this, $50,185,000 (1,659,000 shares) has been
allocated to participant accounts as compensation and dividends; and the
difference is included in unearned compensation.
A separate frozen ESOP holds the Series 1988 Preferred Stock.
13. Stock Incentive Plans
Omnibus Stock Incentive Plan
In April 1996, shareholders approved amendments to the Omnibus Stock
Incentive Plan (the Plan) to authorize the issuance of additional shares of
the Company's common stock. The Plan extends to February 14, 2006.
At December 31, 1997, there were 2,856,265 shares available for grant
under the Plan.
The Plan allows for the granting of nonqualified stock options, incentive
stock options, restricted stock, rights to restricted stock, incentive
compensation units (ICUs), stock appreciation rights, performance shares
and performance units.
Restricted Shares, Rights to Restricted Stock and ICUs
Restrictions on the restricted shares, rights to restricted stock and ICUs
generally expire in the third, fourth and fifth years after issuance.
Beginning with 1993 grants, ICU restrictions will expire at the end of three
years. The value of each ICU is based on the increase in book value of
common stock during the restriction period and is payable when the
restrictions lift. Compensation expense consists of (a) amortization of the
market value of the stock on the date of award over the period in which
the restrictions lapse, and (b) the annual increase in ICU value.
Compensation expense was $4,991,000 in 1997, $4,909,000 in 1996 and
$5,040,000 in 1995. The Company records incremental tax benefits
resulting from the program as additional paid-in capital.
Options
Options are granted to purchase shares at not less than fair market value
of shares on date of grant. Options generally expire after five years but
may expire up to ten years from date of grant.
Outside Directors Nonqualified Stock Option Plan
The Outside Directors Nonqualified Stock Option Plan (the Directors
Plan) allows for the granting of nonqualified stock options. Options are
granted to purchase shares at not less than fair market value of shares
on date of grant. Options generally expire after five years but may expire
up to ten years from date of grant. The Directors Plan extends to January
2008. At December 31, 1997, there were 407,448 shares available for
grant under the Directors Plan.
Details of options for both plans are as follows:
Number Weighted Average
of
Shares Exercise Price
1995
Granted 451,718 $21.50
Exercised 427,192 $11.0967
Forfeited 40,392 $20.2416
Outstanding, end of year 1,457,058 $16.8973
Exercisable, end of year 690,738
1996
Granted 398,278 $25.00
Exercised 456,031 $14.0283
Forfeited 51,546 $22.2582
Outstanding, end of year 1,347,759 $19.9397
Exercisable, end of year 602,412
1997
Granted 372,314 $31.0791
Exercised 342,077 $15.7225
Forfeited 18,174 $29.3324
Outstanding, end of year 1,359,822 $23.9256
Exercisable, end of year 660,542
Options Outstanding and Exercisable by Price Range
as of December 31, 1997:
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
$13.50 - $17.75 297,775 0.89 $17.03 297,775 $17.03
$21.375 - $21.50 348,569 2.05 $21.50 227,730 $21.50
$25.00 361,706 3.06 $25.00 125,912 $25.00
$29.125 - $33.9375 351,772 4.07 $31.375 9,125 $31.00
$13.50 - $33.9375 1,359,822 2.59 $23.93 660,542 $20.30
In accordance with generally accepted accounting principles, the
Company has chosen to continue accounting for its plans using the
"intrinsic method" in accordance with Accounting Principles Board
Opinion No. 25 which requires no compensation expense to be recorded
for the issuance of stock options when exercise prices are equal to
market value on the date of grant. Had compensation cost for the plans
been determined using the "fair value" method as defined in Statement of
Financial Accounting Standards (FAS) No. 123, "Accounting for Stock-Based
Compensation", compensation expense would have been accrued
and the effect on the Company's income from continuing operations and
earnings per share would have been as follows:
(In thousands) 1997 1996 1995
Income from continuing operations As reported $91,600 $74,509 $60,500
Pro forma 89,900 73,120 59,021
Basic EPS - continuing operations As reported $2.28 $1.86 $1.51
Pro forma 2.24 1.82 1.46
Diluted EPS - continuing operations As reported $2.11 $1.73 $1.41
Pro forma 2.07 1.69 1.37
The weighted average fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model and
represents the difference between the fair market value on the date of
grant and the estimated market value on the exercise date. The model
uses the following weighted-average assumptions:
1997 1996 1995
Volatility 26% 25% 25%
Risk-free interest rate 5.5% 5.2% 7.75%
Expected life (years)
Plan 2.0 2.0 2.0
Directors Plan 2.5 2.5 2.5
Dividend yield 1.7% 2.0% 2.0%
14. Provision for Income Taxes
The components of earnings before income taxes were as follows:
(In thousands) 1997 1996 1995
U.S. $139,006 $ 89,833 $ 76,294
International 19,376 34,769 25,400
$158,382 $124,602 $101,694
The provisions for income taxes, excluding tax benefits credited directly
to shareholders' equity, were as follows:
(In thousands) 1997 1996 1995
Current
U.S.(less foreign tax credits) $ 60,640 $ 33,897 $ 23,751
State 9,573 6,760 4,127
International 7,837 8,962 7,591
Current provision 78,050 49,609 35,469
Deferred
U.S. (11,592) (4,687) 2,421
International 324 5,171 3,304
Deferred provision (11,268) 484 5,725
Total provision $ 66,782 $ 50,093 $ 41,194
A reconciliation of the statutory federal tax rate to the effective rate
follows:
1997 1996 1995
Statutory federal
income tax rate 35.0% 35.0% 35.0%
State and local income taxes,
net of U.S. income tax benefit 3.6 3.3 3.1
Incremental international tax rate 0.6 1.6 2.0
Non-deductible amortization of goodwill 1.6 2.0 1.2
ESOP dividend benefit (0.8) (0.9) (1.1)
Other (1.0) (0.8) 0.3
39.0 40.2 40.5
Incremental Tax - gain on sale of business 3.2 0.0 0.0
Effective Rate 42.2% 40.2% 40.5%
The tax effect of the primary temporary differences giving rise to the
Company's deferred tax assets and liabilities at December 31 are as
follows:
(In thousands) 1997 1996
Deferred Tax Assets:
Accounts receivable allowances $ 4,737 $ 4,026
Retiree medical liability 17,480 19,376
Warranty/product liability accruals 19,991 15,632
Employee benefit accruals 20,098 17,173
Other 10,829 14,232
Gross deferred tax assets 73,135 70,439
Deferred Tax Liabilities:
Inventory allowances (5,878) (5,376)
Accelerated depreciation (16,886) (22,300)
Other (14,860) (17,298)
Gross deferred tax liabilities (37,624) (44,974)
Net Deferred Tax Assets $35,511 $25,465
15. Retirement Plans
The Company has several non-contributory defined benefit employee
pension plans covering substantially all employees of its U.S. and certain
non-U.S. subsidiaries. Employees covered under the bargaining plans
are eligible to participate at the time of employment and the benefits are
based on a fixed amount for each year of service. Employees covered
under the non-bargaining pension plans are eligible to participate upon
the attainment of age 21 and the completion of one year of service; and
benefits are based upon final average salary and years of service. All
employees are fully vested in the plans after 5-7 years of service. The
Company's funding policy is to make quarterly contributions as required
by applicable regulations.
Assumptions used to develop pension data were:
1997 1996 1995
Expense:
Discount rate 7.5% 7.0% 8.5%
Long-term rate of return on assets 8.5% 8.5% 8.5%
Rate of increase in compensation 5.0% 5.0% 6.0%
PBO discount rate year-end 7.0% 7.5% 7.0%
The components of pension cost are as follows:
(In thousands) 1997 1996 1995
Service cost $11,058 $11,128 $9,020
Interest cost on projected
benefit obligation 18,900 18,023 16,772
Actual return on assets (46,655) (41,358) (43,012)
Net amortization and deferral 23,245 22,778 28,165
Net periodic pension cost $ 6,548 $10,571 $10,945
The funded status and accrued pension cost at December 31 are as
follows:
Plans Whose Plans Whose
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
(In thousands) 1997 1996 1997 1996
Plan assets at fair value $307,537 $272,135 $187 $146
Accumulated benefit obligation (ABO):
Vested benefits $208,942 $177,743 $16,967 $17,523
Nonvested benefits 3,370 2,885 16,118 13,175
Total ABO 212,312 180,628 33,085 30,698
Provision for salary increases 47,782 44,687 5,810 5,645
Projected benefit
obligation (PBO) $260,094 $225,315 $38,895 $36,343
Plan assets (in excess of)
less than PBO $(47,443) $(46,820) $38,708 $36,197
Net transition (liability) asset 491 671 (172) (233)
Unrecognized prior service cost (3,057) (2,669) (301) (454)
Unrecognized net gains (losses) 50,550 48,032 (7,965) (6,890)
Minimum liability adjustment - - 4,383 3,517
Accrued pension liability $ 541 $ (786) $34,653 $32,137
Approximately $21,000,000 of the $38,708,000 underfunding shown
above (Plan assets less than PBO) relates to the German pension plans.
In German practice, it is uncommon to fund pension plans.
At December 31, 1997, approximately 96% of the plan assets are
invested in listed stocks and bonds or cash and short-term investments.
The rest of the plan assets are invested primarily in fixed-rate guaranteed
investment type contracts purchased from insurance companies. The
Company's own common stock accounted for 10% of plan assets.
16. Postretirement Medical and Other Benefits
The Company provides certain health care and life insurance benefits for
retired employees. Employees become eligible for these benefits if they
meet minimum age and service requirements and are eligible for
retirement benefits.
The components of the net periodic cost are as follows:
(In thousands) 1997 1996 1995
Service cost $567 $630 $624
Interest cost on projected
benefit obligation 2,794 2,921 3,870
Amortization of plan amendment (1,076) (948) (913)
Net periodic postretirement cost $2,285 $2,603 $3,581
The accrued postretirement medical and other benefits costs that are not
funded were as follows at December 31:
(In thousands) 1997 1996
Accumulated postretirement
benefit obligation (APBO):
Retirees $20,246 $24,864
Fully eligible active plan participants 5,615 7,768
Other active plan participants 9,364 8,311
Total APBO 35,225 40,943
Unrecognized prior service cost 7,652 5,084
Unrecognized net gains (losses) 5,064 2,939
Accrued postretirement medical
and other benefits liability $47,941 $48,966
The discount rate used in determining actuarial present value of the
benefit obligations was 7.0% in 1997 and 7.5% in 1996. The assumed
health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 8.58 percent in 1997, declining to
5.25 percent by the year 2020. If the health care cost trend rate
assumptions were increased by 1 percent, the accumulated
postretirement benefit obligation as of December 31, 1997 would be
increased by 1.5 percent. The effect of this change on the sum of the
service cost and interest cost would be an increase of 2.6 percent.
17. Disclosure about Segments of an Enterprise and Related Information
Pentair Inc. has three reportable segments: Professional Tools and
Equipment (PTE), Water and Fluid Technologies (WFT), and Electrical
and Electronic Enclosures (EEE). The PTE segment includes Delta
International Machinery, Porter-Cable, Lincoln Automotive and Century
Manufacturing. Products manufactured include woodworking machinery,
portable power tools, battery charging and testing equipment, welding
equipment, and lubricating and lifting equipment. The WFT segment
includes the Pentair pump business, Fleck Controls and Lincoln
Industrial. Products manufactured include pumps for wells and water
treatment, sump pumps, valves for water softeners, and automated and
manual lubrication systems and equipment. The EEE segment includes
Hoffman Enclosures and Schroff. Products manufactured include
metallic and composite cases, subracks, and cabinets that house and
protect electrical and electronic controls, instruments, and components.
Other includes corporate expenses, captive insurance company,
intermediate financial companies, charges that do not relate to current
operations, divested operations (Federal Cartridge), and intercompany
eliminations. Other assets include all cash and cash equivalents.
In evaluating financial performance, management focuses on operating
income as a segment's measure of profit or loss. Operating income is
before interest expense, interest income and income taxes. Management
uses a variety of balance sheet ratios to measure the business. The
primary focus is on maximizing the return from each segment's assets,
excluding cash and temporary investments. The accounting policies of
the segments are the same as those described in the summary of
significant accounting policies (Note 1). Most intersegment sales are
component parts and are sold at cost plus an equitable division of
manufacturing and marketing profits. The remaining intercompany sales
are finished product and are sold based on current market pricing.
Segment Information:
(in thousands) PTE WFT EEE Other Totals
1997
Net sales from external customers $737,323 $397,286 $579,209 $125,238 $1,839,056
Intersegment net sales 9,743 6,693 157 (16,593) 0
Depreciation and
amortization expense 14,307 16,703 30,265 6,561 67,836
Segment profit (loss)
- operating income 84,355 45,987 53,313 (13,853) 169,802
Segment assets 410,037 508,357 473,906 80,562 1,472,862
Capital expenditures 22,947 8,492 43,815 2,207 77,461
1996
Net sales from external customers $572,349 $316,167 $548,695 $129,854 $1,567,065
Intersegment net sales 10,340 6,085 103 (16,528) 0
Depreciation and
amortization expense 11,605 12,219 28,297 7,399 59,520
Segment profit (loss)
- operating income 60,556 44,445 59,592 (21,674) 142,919
Segment assets 360,766 280,819 464,475 182,954 1,289,014
Capital expenditures 15,270 10,701 40,522 5,153 71,646
1995
Net sales from external customers $483,565 $232,441 $542,452 $144,413 $1,402,871
Intersegment net sales 8,833 5,094 0 (13,927) 0
Depreciation and
amortization expense 9,408 5,356 27,247 6,923 48,934
Segment profit (loss)
- operating income 49,239 25,111 55,951 (14,054) 116,247
Segment assets 248,251 249,815 440,827 313,600 1,252,493
Capital expenditures 16,592 4,561 32,713 9,972 63,838
Segment Geographic Information:
Revenues Assets
(In millions) 1997 1996 1995 1997 1996 1995
United States $1,275.5 $1,047.1 $921.6 $1,031.0 $761.9 $646.0
Canada 98.3 77.7 70.3 27.9 24.6 21.8
Germany 99.4 115.7 106.4 200.6 240.0 218.7
Other Europe 164.5 136.0 107.9 116.9 65.0 39.2
Pacific Rim 49.5 38.9 36.3 15.9 14.5 13.2
Rest of World 26.6 21.8 16.0 0.0 0.0 0.0
Total $1,713.8 $1,437.2 $1,258.5 $1,392.3 $1,106.0 $938.9
Revenues are attributed to countries based on location of customer.
Assets are based on the geographic location of the subsidiary and have
been translated into $U.S. dollars.
18. Quarterly Financial Data (unaudited)
(In thousands, except per share amounts)
1997 1st 2nd 3rd 4th Total
Net sales $411,139 $422,305 $482,089 $523,523 $1,839,056
Gross profit 125,951 128,951 142,290 151,066 548,258
Operating income 37,479 38,568 42,757 50,998 169,802
Net Income 19,417 20,484 22,207 29,492 91,600
Earnings per common share
Basic $.48 $.51 $.55 $.74 $2.28
Diluted .45 .47 .51 .68 2.11
1996 1st 2nd 3rd 4th Total
Net sales $366,290 $362,900 $410,970 $426,905 $1,567,065
Gross profit 114,736 106,486 115,988 131,791 469,001
Operating income 32,625 32,852 35,623 41,819 142,919
Net Income 16,500 17,109 18,578 22,322 74,509
Earnings per common share
Basic $.41 $.42 $.46 $.57 $1.86
Diluted .38 .40 .43 .52 1.73
19. Disclosure of Risks and Uncertainties
Pentair, Inc. is engaged principally in the design, engineering, and
manufacturing of various industrial products. The diversified businesses
manufacture woodworking equipment, power tools, service equipment,
pumps, water conditioning control valves, industrial lubrication systems
and material dispensing equipment, and enclosures for electrical and
electronic equipment.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain obligations of discontinued and divested businesses have been
retained by the Company. Based on evaluations by management and
environmental professionals, amounts for currently estimable and
probable risks or obligations have been accrued.
Although the individual subsidiaries deal with major customers throughout
North America and Europe, Pentair as a whole has mitigated any
significant impact or potential risk of concentration of customers or
products, or in certain markets or geographic areas. This is due to the
diversified nature of the Company and its product lines.
20. Earnings Per Share
Effective December 15, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
No. 128). Earnings per share amounts presented for 1996 and 1995
have been restated for the adoption of SFAS No. 128. The following
table reflects the calculation of basic and diluted earnings per share.
(In thousands) 1997 1996 1995
Earnings per share
Income from continuing operations $91,600 $74,509 $60,500
Preferred dividend requirements 4,867 4,928 5,203
Income available to common shareholders 86,733 69,581 55,297
Weighted average shares outstanding 37,989 37,491 36,812
Basic Earnings per Common Share
- continuing operations $2.28 $1.86 $1.51
Earnings per share - assuming dilution
Income available to common shareholders 86,733 69,581 55,297
Addback preferred dividend requirements
due to conversion into common shares 4,867 4,928 5,203
Elimination of tax benefit
on preferred ESOP dividend
due to conversion into common shares (1,420) (1,333) (1,243)
Addition of tax benefit on ESOP
dividend assuming conversion to
common shares - at common dividend rate 740 644 481
Income available to common shareholders
assuming dilution 90,920 73,820 59,738
Weighted average shares outstanding 37,989 37,491 36,812
Dilutive impact of stock options outstanding 456 458 488
Assumed conversion of preferred stock 4,622 4,803 5,080
Weighted average shares
and potentially dilutive
shares outstanding 43,067 42,752 42,380
Diluted Earnings per Common Share
- continuing operations $2.11 $1.73 $1.41
Management's Responsibility for Financial Reporting
The consolidated financial statements of Pentair, Inc. have been prepared
by Company management who are responsible for their integrity and
objectivity. These statements have been prepared in accordance with
generally accepted accounting principles and, where appropriate, reflect
estimates based on judgments of management.
Pentair maintains a system of internal controls. Our systems provide
reasonable assurance that assets are protected, transactions are
appropriately reported, and established procedures are followed.
The financial statements have been audited by Deloitte & Touche LLP,
independent auditors, whose report appears on this page.
The Audit Committee of the Board of Directors, comprised of outside
directors, meets periodically with the independent auditors, the Company's
internal auditors, and management to monitor activities and to ensure that
each is properly discharging its responsibilities. The independent auditors
have free access to the Audit Committee, without management present, to
discuss the results of their audit, the adequacy of internal accounting
controls, and the quality of financial reports.
Winslow H. Buxton
Chairman of the Board, President
and Chief Executive Officer
Richard W. Ingman
Executive Vice President
and Chief Financial Officer
Independent Auditors' Report
To the Board of Directors and Shareholders of Pentair, Inc.:
We have audited the accompanying consolidated balance sheets of Pentair,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, cash flows and
comprehensive income for each of the three years in the period ended
December 31, 1997. Our audits also included the financial statement
schedule listed in the Index at Item 14. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Pentair, Inc. and subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedules when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
Minneapolis, Minnesota
February 9, 1998
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information regarding nominees and directors appearing under "Election of
Directors" in the Pentair, Inc. Notice of Annual Meeting of Shareholders and
Proxy Statement for the April 1998 annual shareholders' meeting (the "1998
Proxy Statement") is hereby incorporated by reference. Information
regarding executive officers is set forth in Item 1 of Part I of this report.
Item 11. Executive Compensation.
Information appearing under "Election of Directors" and "Executive
Compensation" in the 1998 Proxy Statement is hereby incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information appearing under "Security Ownership of Management and
Beneficial Ownership" in the 1998 Proxy Statement is hereby incorporated
by reference.
Item 13. Certain Relationships and Related Transactions.
No relationships or transactions existed that require disclosure under Item
13.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements and Exhibits.
1. List of Financial Statements
The following consolidated financial statements of Pentair, Inc.
and subsidiaries are included in Item 8 or Part II:
Consolidated Statements of Income for Years Ended December
31, 1997, 1996 and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Comprehensive Income for Years
Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. List of Financial Statement Schedules
The following financial statement schedules of Pentair, Inc. and
subsidiaries are included herein.
Schedule II- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under
the related instructions or inapplicable and, therefore, have been
omitted.
3. List of Exhibits
The following exhibits are either included in this report or
incorporated by reference as indicated below:
Exhibit
Number Description
(3.1) Restated Articles of Incorporation as amended through
April 19, 1995. (Incorporated by reference to Exhibit 3.1
to the Company's Form 10-Q for the quarter ended June
30, 1995).
(3.2) Resolution Establishing and Designating $7.50 Callable
Cumulative Convertible Preferred Stock, Series 1988, as
a series of Preferred Stock of Pentair, Inc. (Incorporated
by reference to Exhibit 4.1 to Amendment No. 1 to the
Company's Current Report on Form 8-K filed December
30, 1988).
(3.3) Resolution Establishing and Designating 8% Callable
Cumulative Voting Convertible Preferred Stock, Series
1990, as a series of Preferred Stock of Pentair, Inc.
(Incorporated by reference to Exhibit 4 to the Company's
Current Report on Form 8-K filed March 21, 1990).
(3.4) Second Amended and Superseding By-Laws as
amended through July 21, 1995. (Incorporated by
reference to Exhibit 3.2 to the Company's Form 10-Q for
the quarter ended June 30, 1995).
(4.1) Rights Agreement as of July 21, 1995 between Norwest
Bank N.A. and Pentair, Inc. (Incorporated by reference to
Exhibit 4.1 to the Company's Form 10-Q for the quarter
ended June 30, 1995).
The Corporation agrees to furnish a copy of any other documents with
respect to long-term debt instruments of the Corporation and its
subsidiaries upon request.
(10.1) * Company's Supplemental Employee Retirement Plan
effective June 16, 1988. (Incorporated by reference to
Exhibit 10.10 to the Company's Annual Report on Form
10-K for the year ended December 31, 1989).
(10.2) * Company's Omnibus Stock Incentive Plan as Amended
and Restated. (Incorporated by reference to Exhibit 10.1
to the Company's Form 10-Q for the quarter ended
March 31, 1996).
(10.3) * Company's Management Incentive Plan as amended to
January 12, 1990. (Incorporated by reference to Exhibit
10.17 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1989).
(10.4) * Employee Stock Purchase and Bonus Plan as amended
and restated effective January 1, 1992. (Incorporated by
reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1991).
(10.5) * Company's Flexible Perquisite Program as amended to
January 1, 1989. (Incorporated by reference to Exhibit
10.20 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1989).
(10.6) * Form of 1986 Management Assurance Agreement
(Revised 1990) between the Company and certain key
employees. (Incorporated by reference to Exhibit 10.22 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1989).
(10.7) * Fourth Amended and Restated Compensation Plan for
Non-Employee Directors. (Incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996).
(10.8) * Pentair, Inc. Outside Directors Nonqualified Stock Option
Plan dated January 15, 1998.
(10.9) * Pentair, Inc. Deferred Compensation Plan effective
January 1, 1993. (Incorporated by reference to Exhibit
10.21 to the Company's Form 10-K for the year ended
December 31, 1992).
(10.10) * Pentair, Inc. Non-Qualified Deferred Compensation Plan
effective January 1, 1996. (Incorporated by reference to
Exhibit 10.17 to the Company's Form 10-K for the year
ended December 31, 1995).
(10.11) * Trust Agreement for Pentair, Inc. Non-Qualified Deferred
Compensation Plan between Pentair, Inc. And State
Street Bank and Trust Company. (Incorporated by
reference to Exhibit 10.18 to the Company's Form 10-K
for the year ended December 31, 1995).
(10.12) Loan and Stock Purchase Agreement dated March 7,
1990 between the Company and the Pentair, Inc.
Employee Stock Ownership Plan Trust, acting through
State Street Bank and Trust Company, as Trustee.
(Incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed March 21,
1990).
(10.13) $56,499,982 Promissory Note dated March 7, 1990 of the
Pentair, Inc. Employee Stock Ownership Plan Trust,
acting through State Street Bank and Trust Company, as
Trustee, to the Company. (Incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K
filed March 21, 1990).
(10.14) * Executive Officer Performance Plan
(21) Subsidiaries of Registrant.
(23) Consent of Deloitte & Touche LLP.
(27) Financial Data Schedules.
* Management contract or compensatory plan.
EXHIBIT INDEX
Exhibit
Number Description
(10.8) Pentair, Inc. Outside Directors Nonqualified Stock Option
Plan dated January 15, 1998.
(10.14) Company's Executive Officer Performance Plan
(21) Subsidiaries of Registrant.
(23) Consent of Deloitte & Touche LLP.
(27.1) Financial Data Schedule for year 1997.
(27.2) Restated Financial Data Schedule for quarters 1997.
(27.3) Restated Financial Data Schedule for year 1996.
(27.4) Restated Financial Data Schedule for quarters 1996.
(27.5) Restated Financial Data Schedule for year 1995.
(b) Reports on Form 8-K.
A report on Form 8-K was filed on November 13, 1997 regarding the sale
of Federal Cartridge to Blount International, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PENTAIR, INC.
By /s/ Richard W. Ingman
Richard W. Ingman
Executive Vice President and
Chief Financial Officer
Dated: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has also been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By /s/ Winslow H. Buxton Dated: March 27, 1998
Winslow H. Buxton,
Chairman, President and
Chief Executive Officer, Director
By /s/ George N. Butzow Dated: March 27, 1998
George N. Butzow,
Director
By /s/ William J. Cadogan Dated: March 27, 1998
William J. Cadogan,
Director
By /s/ Barbara B. Grogan Dated: March 27, 1998
Barbara B. Grogan,
Director
By /s/ Charles A. Haggerty Dated: March 27, 1998
Charles A. Haggerty,
Director
By /s/ Harold V. Haverty Dated: March 27, 1998
Harold V. Haverty,
Director
By /s/ Quentin J. Hietpas Dated: March 27, 1998
Quentin J. Hietpas,
Director
By /s/ Walter Kissling Dated: March 27, 1998
Walter Kissling,
Director
By /s/ Richard M. Schulze Dated: March 27, 1998
Richard M. Schulze,
Director
By /s/ Karen E. Welke Dated: March 27, 1998
Karen E. Welke,
Director
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
PENTAIR, INC. AND SUBSIDIARIES
(Thousands of Dollars)
Balance (A)
At Charged Changes Balance
Beginning to Costs Add At End
Description of Period and Expenses Deductions (Deduct) of Period
Allowance for doubtful accounts
Year Ended December 31
1997 $7,348 $2,406 $1,687 $4,379 $12,446
1996 7,840 498 1,546 556 7,348
1995 7,189 782 303 172 7,840
(A) Primarily assumed or established in connection with acquisitions.