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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11625
PENTAIR, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-0907434
- ------------------------------------------------- -----------------------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
ORGANIZATION)
1500 COUNTY ROAD B2 WEST, SUITE 400, ST. PAUL, 55113
MINNESOTA -----------------------------------------
- -------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (651) 636-7920
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------------------------------------- -----------------------------------------
Common Shares, $0.16 2/3 par value New York Stock Exchange
Common Share Purchase 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. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant on February 26, 2001, was $1,203,932,854, based upon a closing price
of $27.2813 per share. The number of shares outstanding of Registrant's only
class of common stock on February 26, 2001, was 49,004,429.
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PENTAIR, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
PART I
PAGE
----
ITEM 1. Our Business 3
ITEM 2. Properties 5
ITEM 3. Legal Proceedings 5
ITEM 4. Submission of Matters to a Vote of Security Holders 7
PART II
ITEM 5. Market for Registrant's Common Stock and Related Security
Holder Matters 8
ITEM 6. Selected Financial Data 9
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 19
ITEM 8. Financial Statements and Supplementary Data 20
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 45
PART III
ITEM 10. Directors and Executive Officers of the Registrant 45
ITEM 11. Executive Compensation 45
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management 45
ITEM 13. Certain Relationships and Related Transactions 45
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K 46
Signatures 49
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PART I
ITEM 1. OUR BUSINESS
Unless otherwise indicated, all references to "Pentair," "we," "our," and "us"
refer to Pentair, Inc., a Minnesota corporation (incorporated in 1966), and its
subsidiaries.
We are a diversified manufacturer operating in three segments on a global basis.
Our diversification enables us to provide shareholders with relatively
consistent and improved operating results despite difficult markets in one or
another segment. Continuous demand for power tools, ever-increasing need for
clean water throughout the world, and the critical importance of protecting
sensitive electronics give Pentair excellent prospects for long-term
performance. Our basic operating strategies include:
- - ongoing cost containment;
- - new product development;
- - multi-channel distribution; and
- - portfolio management of our businesses.
Our home page on the Internet is www.pentair.com. You may learn more about us by
visiting this site. The information on our web site is not incorporated into
this annual report on Form 10-K.
RECENT DEVELOPMENTS
GROWTH OF OUR BUSINESS
We continually look at each of our businesses to determine whether they fit with
our evolving strategic vision. Our primary focus is on businesses with strong
fundamentals and growth opportunities. We seek growth both through product and
service innovation and acquisitions. Acquisitions have played an important part
in the growth of our business over the past five years.
DISCONTINUED OPERATIONS
After evaluating our strategic plans for the future, we elected to discontinue
our Equipment segment (Century/Lincoln and Lincoln Industrial businesses) in the
fourth quarter of 2000. Discussions with potential purchasers are currently
being held and we expect to dispose of these businesses in mid-2001. Also refer
to ITEM 7, Management's Discussion and Analysis, and ITEM 8, Note 3 of the Notes
to Consolidated Financial Statements, included in this Form 10-K.
BUSINESS SEGMENTS
We classify our continuing operations into the following business segments:
- - TOOLS -- which manufactures and markets tool products positioned at the
high-end of the market and targets professionals and upscale hobbyists. Tools
segment products include woodworking machinery, portable power tools,
compressors, generators, and pressure washers.
- - WATER -- which manufactures and markets essential products for the transport
and treatment of water, wastewater and fluids. Water segment products include
water and wastewater pumps, control valves, pumps and pumping stations for
thick fluid transfer applications, storage tanks, filtration systems, and pool
and spa accessories.
- - ENCLOSURES -- which designs, manufactures, and markets customized and standard
metal and composite enclosures that house and protect sensitive controls and
components for markets that include data communications, networking,
telecommunications, automotive, and general electronics. Products include
metallic and composite enclosures, cabinets, cases, subracks, thermal
management backplanes and power supplies.
- - OTHER -- is primarily composed of corporate expenses, our insurance
subsidiary, intermediate finance companies, divested operations, discontinued
operations, and intercompany eliminations.
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Business segment and geographical financial information is contained in ITEM 8,
Note 14 of the Notes to Consolidated Financial Statements, included in this Form
10-K and is incorporated herein by reference.
TOOLS SEGMENT
SEASONALITY
In line with the Christmas gift-giving season, we experience strong fourth
quarter and weaker first quarter sales in our Tools segment. Because of this, we
also experience higher inventories in the third quarter and growth in accounts
receivable in the fourth and first quarters of each year.
COMPETITION
The Tools segment faces numerous competitors, some of which are larger and have
more resources. Competition in the Tools segment has been intense and continues
to increase, especially as these industries consolidate. In most markets, only a
few large players remain, each having extensive product lines. Growth is
anticipated to 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.
Our strategy is to be the price/quality leader in our selected markets. Our
success in maintaining our position in the marketplace is primarily due to
developing product feature innovations, new products, outsourcing, and other
cost-reduction measures.
CUSTOMER CONCENTRATION
Information regarding significant customers in our Tools segment is contained in
ITEM 8, Note 14 of the Notes to Consolidated Financial Statements, included in
this Form 10-K and is incorporated herein by reference.
WATER SEGMENT
SEASONALITY
We experience strong seasonal demand in our Water segment for pool and spa
equipment products in the March through July time period, with advance sales
occurring in earlier months, which generally receive longer payment terms.
COMPETITION
Our Water segment faces numerous competitors, some of which are larger, have
more resources, and are more vertically integrated. 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. In the pool and spa
equipment market, there are a number of competitors with one that we consider
our major competitor. We compete by offering a wide variety of innovative and
high quality products, which are competitively priced. Our existing distribution
channels and reputation for quality also contribute to our continuing market
penetration.
ENCLOSURES SEGMENT
COMPETITION
Competition in product markets can be very intense, especially in telecom and
datacom markets, where product design, prototyping, global supply, and customer
service are very significant factors. As we further penetrate the telecom and
datacom markets, the Enclosures segment encounters increasing competition on a
global basis from contract electronics manufacturers. Finally, growth in the
Enclosures segment will
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likely come from continued channel penetration, growth in defined modification
product offerings, product development, geographic expansion, and acquisitions.
Consolidation, globalization, and outsourcing are the most important trends in
the fast-growing electronic enclosures business and we participated by making
several acquisitions in the past few years. The globalization of product demand
increasingly requires worldwide local supply capability and no one competitor
has successfully established that capability, although each of the major
competitors in this market is actively pursuing geographic extension for
customer support purposes.
INFORMATION REGARDING ALL BUSINESS SEGMENTS
BACKLOG
Our backlog of orders from continuing operations was $257.1 million as of the
end of 2000, compared with $221.1 million as of the end of 1999. The increase in
2000 backlog is primarily due to increased orders for our enclosure products.
ENVIRONMENTAL
Matters pertaining to the environment are discussed in ITEM 3, ITEM 7, and in
ITEM 8, Note 15 of the Notes to Consolidated Financial Statements, included in
this Form 10-K and are incorporated herein by reference.
RAW MATERIALS
As a result of our significant diversification, we are not exposed to large
swings in any one raw material price. The materials used in the various
manufacturing processes are purchased on the open market, and the majority are
available through multiple sources and are in adequate supply.
INTELLECTUAL PROPERTY
Patents, trademarks, and proprietary technology are important to our business.
However, we do not regard our business as being materially dependent upon any
single patent, trademark, or technology.
EMPLOYEES
As of the end of 2000 we employed approximately 13,100 people and consider our
employee relations to be good.
ITEM 2. PROPERTIES
Our corporate offices are located in St. Paul, Minnesota. Manufacturing
operations are carried out at approximately 22 plants located throughout the
United States and at some 16 manufacturing plants located in 9 other countries.
In addition, we have approximately 30 warehouse facilities and numerous sales
and service offices throughout the world.
We believe that our production facilities are suitable for their purpose and are
adequate to support our businesses.
ITEM 3. LEGAL PROCEEDINGS
We have been made parties to a number of actions filed or have been given notice
of potential claims relating to the conduct of our business, including those
pertaining to product liability, environmental, safety and health, patent
infringement, and employment matters. Major matters that may have an impact on
Pentair are discussed below. We believe that the outcome of such legal
proceedings and claims will not have a material adverse effect on our financial
position, liquidity, or future results of operations.
ENVIRONMENTAL
We have been named as defendants, targets or potentially responsible parties
(PRPs) in a small number of environmental cleanups, in which we or our current
or former business units have generally been given de minimis status. To date,
none of these claims have resulted in cleanup costs, fines, penalties, or
damages in an amount material to our financial condition or results of
operations. We have disposed of a
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number of businesses over the past ten years; in certain cases, such as the
disposition of Cross Pointe Paper Corporation uncoated paper business in 1995
and the disposition of Federal Cartridge Company ammunition business in 1997, we
have retained responsibility and potential liability for certain environmental
obligations. We have established what we believe to be adequate accruals for
potential liabilities arising out of these retained responsibilities. Claims
since the sale have supported our position on accruals.
In addition to retained obligations relating to these disposed operations, there
are pending environmental issues concerning a site in Jackson, Tennessee, on
which the state environmental agency has opened an investigation. We acquired
the site from Rockwell International Corporation, with whom we have agreed on
division of responsibility for remediation and other future costs relating to
the site. We do not believe, however, that projected response costs will result
in material liability or material changes in operations.
PRODUCT LIABILITY CLAIMS
As of February 28, 2001, we are defendants in approximately 123 product
liability lawsuits and have been notified of approximately 138 additional
claims. We continue to have in place insurance coverage deemed adequate for our
needs. A substantial number of these lawsuits and claims are insured and accrued
for by Penwald Insurance Company (Penwald), a regulated insurance company wholly
owned by Pentair. See discussion in ITEM 8, Note 1 of Notes to the Consolidated
Financial Statements -- Insurance subsidiary. Accounting accruals covering the
deductible portion of liability claims not covered by Penwald have been
established and are reviewed on a regular basis. We have not experienced
unfavorable trends in either the severity or frequency of product liability
claims.
HORIZON LITIGATION
Twenty-eight separate lawsuits involving 29 primary plaintiffs, a class action,
and claims for indemnity by Celebrity Cruise Lines, Inc. (Celebrity), were
brought against Essef Corporation (Essef) and certain of its subsidiaries prior
to our acquisition in August 1999. These lawsuits alleged exposure to
Legionnaires bacteria by passengers aboard the cruise ship M/V Horizon, a ship
operated by Celebrity. The lawsuits included a class action brought on behalf of
all passengers aboard the ship during the relevant time period, individual
"opt-out" passenger suits, and a suit by Celebrity. Celebrity alleges in its
suit that it has sustained economic damages due to loss of usage of the M/V
Horizon while it was dry-docked.
The claims against Essef and its involved subsidiaries, are based upon the
allegation that Essef designed, manufactured, and marketed two sand swimming
pool filters that were installed as a part of the spa system on the Horizon, and
allegations that the spa, and filters, contained bacteria that infected certain
passengers on cruises from December 1993 through July 1994.
Prior to our acquisition of Essef, a settlement was reached in the class action.
Essef and Celebrity have jointly attempted to resolve claims brought by
"opt-out" plaintiffs. To date, all but four of the "opt-out" plaintiffs' claims
have been settled. Compensatory damage trials for the four remaining "opt-out"
plaintiffs are scheduled to commence in late March 2001.
The claims of one plaintiff were tried under a stipulation among all remaining
parties providing that the liability findings would be applicable to all
plaintiffs and defendants. The claims of this plaintiff were unusual because he
alleged that he developed complications that profoundly impaired his mental
functioning. (No other plaintiff asserted similar claims).
The trial resulted in a jury verdict on June 13, 2000 finding liability on the
part of the Essef Defendants (70%) and Celebrity and its sister company Fantasia
(together 30%). Compensatory damages in the total amount of $2.7 million were
awarded, each defendant being accountable for its proportionate share of
liability. The Essef Defendants' proportionate share is covered by insurance.
Punitive damages were separately awarded against the Essef Defendants in the
total amount of $7 million, with 60% awarded to all remaining plaintiffs and 40%
to Celebrity. In any subsequent trial of other plaintiffs in this litigation, no
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further punitive damages will be available. Essef and its subsidiaries filed
post-trial motions challenging the verdict, and if necessary, will file an
appeal.
At the current time, we are optimistic that all of the pending suits will be
resolved within available insurance coverage. With regard to Celebrity's claim
against Essef, Westchester, one of Essef's insurance carriers, has issued a
Notice of Rights letter. This is a pre-acquisition liability and we have
reserves sufficient to cover the amount of any uninsured awards or settlements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
EXECUTIVE OFFICERS OF THE REGISTRANT
Current executive officers of Pentair, their ages, current position, and their
business experience during the past five years are as follows:
NAME AGE CURRENT POSITION AND BUSINESS EXPERIENCE
---- --- ----------------------------------------
Randall J. Hogan 45 President and Chief Executive Officer since January 2001;
President and Chief Operating Officer, December
1999 -- December 2000; Executive Vice President and
President of Pentair's Electrical and Electronic Enclosures
Group, March 1998 -- December 1999; President of United
Technologies' Carrier Transicold Division, February
1995 -- August 1997.
David D. Harrison 53 Executive Vice President and Chief Financial Officer since
February 2000; Executive Vice President and Chief Financial
Officer of Scotts Company, August 1999 -- February 2000;
Executive Vice President and Chief Financial Officer of
Coltec Industries, August 1996 -- August 1999; Executive
Vice President and Chief Financial Officer of Pentair, Inc.,
March 1994 -- July 1996.
Richard J. Cathcart 56 President and Chief Operating Officer of Water Technologies
segment since January 2001; Executive Vice President and
President of Pentair's Water Technologies Group, February
1996 -- December 2000; Executive Vice President, Corporate
Development, March 1995 -- January 1996.
George M. Danko 50 President and Chief Operating Officer of Enclosures segment
since January 2001; Senior Vice President, Corporate
Development & Centralized Services, September
1999 -- December 2000; Vice President, Corporate
Development, October 1997 -- August 1999; General Manager of
Sales Operations of General Electric's Electrical
Distribution and Control Division, September 1994 -- October
1997.
Frank J. Feraco 53 President and Chief Operating Officer of Tools segment since
December 2000; President, Textron Industrial Products
Segment, 1998 -- December 2000; President, Kohler Company
International Plumbing Business, 1996 -- 1998; President,
Danaher Corp. Tools Group, 1994 -- 1996.
Louis L. Ainsworth 53 Senior Vice President and General Counsel since July 1997;
Shareholder and Officer of the law firm of Henson & Efron,
P.A., November 1985 -- June 1997.
Winslow H. Buxton 61 Chairman of the Board of Directors of Pentair since January
1993; Chief Executive Officer, August 1992 -- December 2000;
President, August 1992 -- November 1999.
Joseph R. Collins 59 Vice-Chairman since November 1998; Executive Vice President,
March 1995 -- October 1998.
Karen A. Durant 41 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.
Debby S. Knutson 46 Vice President, Human Resources since September 1994.
Roy T. Rueb 60 Vice President, Treasurer since October 1986 and Secretary
since June 1994.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Our common stock is listed for trading on the New York Stock Exchange and trades
under the symbol "PNR." As of December 31, 2000, there were 4,271 shareholders
of record.
The high, low, and closing sales price for our common stock and the dividends
declared for each of the quarterly periods for 2000 and 1999 were as follows:
2000 1999
----------------------------------------- -----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------------------------------------
HIGH $39.4375 $44.0000 $36.3750 $30.5000 $41.8125 $48.8750 $47.8125 $41.1250
LOW $31.8125 $35.3125 $23.9375 $21.0000 $31.3125 $30.9375 $40.1250 $32.4375
CLOSE $37.0625 $35.5000 $26.7500 $24.1875 $31.3125 $45.3125 $41.4375 $38.5000
DIVIDENDS DECLARED $ 0.16 $ 0.16 $ 0.17 $ 0.17 $ 0.16 $ 0.16 $ 0.16 $ 0.16
Pentair has paid 100 consecutive quarterly dividends. See ITEM 8, Note 8 of
Notes to Consolidated Financial Statements for certain dividend restrictions.
The Annual Meeting of Shareholders of Pentair will be held at the Lutheran
Brotherhood Auditorium, 625 Fourth Avenue South, Minneapolis, Minnesota, on
Wednesday, April 25, 2001, at 10:00 A.M.
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ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth summary consolidated historical data relating to
Pentair and was derived from the audited historical Consolidated Financial
Statements of Pentair.
YEARS ENDED DECEMBER 31
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DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Net sales: Tools $1,066,616 $ 875,643 $ 661,782 $ 573,787 $ 478,107
Water 903,672 582,927 441,030 306,047 218,344
Enclosures 777,725 657,500 586,829 600,491 566,919
Other -- -- -- 128,136 133,360
- --------------------------------------------------------------------------------------------------------------------
Total 2,748,013 2,116,070 1,689,641 1,608,461 1,396,730
- --------------------------------------------------------------------------------------------------------------------
Cost of goods sold 2,051,515 1,529,419 1,227,427 1,189,777 1,032,343
Other costs and expenses 469,679 361,877 297,972 272,578 240,982
Restructuring charge 24,789 23,048 -- -- --
Operating income: Tools 23,751 100,680 80,383 62,669 45,800
Water 120,732 73,362 56,264 32,366 30,562
Enclosures 96,268 46,346 46,026 47,282 53,856
Other (38,721) (18,662) (18,431) 3,789 (6,813)
- --------------------------------------------------------------------------------------------------------------------
Total 202,030 201,726 164,242 146,106 123,405
- --------------------------------------------------------------------------------------------------------------------
Gain on sale of business -- -- -- 10,313 --
Net interest expense 74,899 43,582 19,855 19,729 16,849
Provision for income taxes 45,263 60,056 53,667 58,089 42,860
Income from continuing operations 81,868 98,088 90,720 78,601 63,696
Income (loss) from discontinued operations, net of
tax (24,759) 5,221 16,120 12,999 10,813
Cumulative effect of accounting change, net of tax (1,222) -- -- -- --
Net income 55,887 103,309 106,840 91,600 74,509
Preferred dividends -- -- (4,267) (4,867) (4,928)
Income available to common shareholders 55,887 103,309 102,573 86,733 69,581
- --------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Property and equipment, net $ 352,984 $ 367,783 $ 271,389 $ 261,486 $ 270,071
Total assets 2,644,025 2,706,516 1,484,207 1,413,494 1,236,694
Long-term debt 781,834 857,296 288,026 294,368 279,889
Total debt 913,974 1,035,084 340,721 328,538 312,817
Preferred equity -- -- 53,638 53,381 47,618
Common equity 1,010,591 990,771 653,990 574,272 513,133
Debt/invested capital 47.5% 51.1% 32.5% 34.4% 35.8%
- --------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA
Basic EPS -- continuing operations $ 1.68 $ 2.24 $ 2.25 $ 1.94 $ 1.57
Basic EPS -- discontinued operations (0.51) 0.12 0.42 0.34 0.29
Basic EPS -- cumulative effect of accounting change (0.02) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Basic EPS -- net income 1.15 2.36 2.67 2.28 1.86
- --------------------------------------------------------------------------------------------------------------------
Diluted EPS -- continuing operations 1.68 2.21 2.09 1.81 1.47
Diluted EPS -- discontinued operations (0.51) 0.12 0.37 0.30 0.26
Diluted EPS -- cumulative effect of accounting
change (0.02) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Diluted EPS -- net income 1.15 2.33 2.46 2.11 1.73
- --------------------------------------------------------------------------------------------------------------------
Cash dividends declared per common share 0.66 0.64 0.60 0.54 0.50
Stock dividends declared per common share -- -- -- -- 100.0%
Book value per common share 20.75 20.51 16.99 15.04 13.60
- --------------------------------------------------------------------------------------------------------------------
OTHER DATA
Depreciation and amortization $ 99,028 $ 82,068 $ 62,054 $ 62,817 $ 55,415
Capital expenditures 68,041 53,671 43,335 69,364 67,216
Employees of continuing operations 13,100 12,400 8,800 8,800 8,000
- --------------------------------------------------------------------------------------------------------------------
All financial information reflects our Equipment segment (Century/Lincoln and
Lincoln Industrial businesses) as discontinued operations.
We have restated all financial information for the adoption of a new accounting
standard related to shipping and handling fees and costs.
The 2000 results include a non-cash pre-tax cumulative effect of accounting
change of $1.9 million expense ($1.2 million after tax, or $0.02 per share).
The 1997 results include a pre-tax gain on the sale of Federal Cartridge of
$10.3 million ($1.2 million after tax, or $0.03 per share).
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our disclosure and analysis in this report may contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as "may," "will,"
"expected," "intend," "estimate," "anticipate," "believe," "project," or
"continue," or the negative thereof or similar words. From time to time, we also
may provide oral or written forward-looking statements in other materials we
release to the public. Any or all of our forward-looking statements in this
report and in any public statements we make could be materially different. They
can be affected by assumptions we might make or by known or unknown risks or
uncertainties. Consequently, no forward-looking statements can be guaranteed.
Actual results may vary materially. Investors are cautioned not to place undue
reliance on any forward-looking statements. Investors should also understand
that it is not possible to predict or identify all such factors and should not
consider the following list to be a complete statement of all-potential risks
and uncertainties.
Any change in the following factors may impact the achievement of results:
- changes in industry conditions, such as:
- the strength of product demand;
- the intensity of competition;
- pricing pressures;
- market acceptance of new product introductions;
- the introduction of new products by competitors;
- our ability to source components from third parties without interruption
and at reasonable prices; and
- the financial condition of our customers.
- changes in our business strategies;
- general economic conditions, such as the rate of economic growth in our
principal geographic or product markets or fluctuations in exchange
rates;
- changes in operating factors, such as continued improvement in
manufacturing activities and the achievement of related efficiencies and
inventory risks due to shifts in market demand; and
- our ability to accurately evaluate the effects of contingent liabilities
such as taxes, product liability, environmental, and other liabilities.
The foregoing factors are not exhaustive, and new factors may emerge or changes
to the foregoing factors may occur that would impact our business.
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RESULTS OF OPERATIONS
The following table sets forth information from our consolidated statements of
income.
00/99 99/98
IN THOUSANDS 2000 1999 1998 % CHANGE % CHANGE
- -------------------------------------------------------------------------------------------------------------
Net sales $2,748,013 $2,116,070 $1,689,641 29.9% 25.2%
Cost of goods sold 2,051,515 1,529,419 1,227,427 34.1% 24.6%
- -------------------------------------------------------------------------------------------------------------
Gross profit 696,498 586,651 462,214 18.7% 26.9%
% of net sales 25.3% 27.7% 27.4%
SG&A and R&D 469,679 361,877 297,972 29.8% 21.4%
% of net sales 17.1% 17.1% 17.6%
Restructuring charge 24,789 23,048 -- 7.6% --
% of net sales 0.9% 1.1% --
- -------------------------------------------------------------------------------------------------------------
Operating income 202,030 201,726 164,242 0.2% 22.8%
% of net sales 7.4% 9.5% 9.7%
Net interest expense 74,899 43,582 19,855 71.9% 119.5%
% of net sales 2.7% 2.1% 1.2%
- -------------------------------------------------------------------------------------------------------------
Income from continuing operations before income
taxes 127,131 158,144 144,387 (19.6%) 9.5%
% of net sales 4.6% 7.5% 8.5%
Provision for income taxes 45,263 60,056 53,667 (24.6%) 11.9%
Effective tax rate 35.6% 38.0% 37.2%
- -------------------------------------------------------------------------------------------------------------
Income from continuing operations 81,868 98,088 90,720 (16.5%) 8.1%
% of net sales 3.0% 4.6% 5.4%
Income (loss) from discontinued operations, net
of tax (24,759) 5,221 16,120 (574.2%) (67.6%)
Cumulative effect of accounting change, net of
tax (1,222) -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Net income 55,887 103,309 106,840 (45.9%) (3.3%)
Preferred dividends -- -- (4,267) -- (100.0%)
- -------------------------------------------------------------------------------------------------------------
Income available to common shareholders $ 55,887 $ 103,309 $ 102,573 (45.9%) 0.7%
=============================================================================================================
Percentages may reflect rounding adjustments.
SG&A and R&D -- Selling, general and administrative; and Research and
development.
NET SALES
The components of the net sales increase were:
2000 VS. 1999 1999 VS. 1998
- -------------------------------------------------------------------------------------------
Volume 32.5% 26.0%
Price (1.0%) (0.3%)
Currency (1.6%) (0.5%)
- -------------------------------------------------------------------------------------------
Total net sales increase 29.9% 25.2%
===========================================================================================
Net sales in 2000 totaled $2,748 million, compared with $2,116 million in 1999
and $1,690 million in 1998. In 2000, volume grew about 32.5 percent (up about 8
percent adjusted for acquisitions), with the stronger U.S. dollar reducing sales
by about 1.6 percent. In 1999, volume grew about 26 percent (up about 5 percent
adjusted for acquisitions).
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Sales by segment and the change from the prior year were as follows:
00/99 99/98
IN THOUSANDS 2000 1999 1998 % CHANGE % CHANGE
- --------------------------------------------------------------------------------------------------
Tools $1,066,616 $ 875,643 $ 661,782 21.8% 32.3%
Water 903,672 582,927 441,030 55.0% 32.2%
Enclosures 777,725 657,500 586,829 18.3% 12.0%
- --------------------------------------------------------------------------------------------------
Total $2,748,013 $2,116,070 $1,689,641 29.9% 25.2%
==================================================================================================
TOOLS
The increase in Tools segment sales in 2000 and 1999 was primarily due to:
- - the September 1999 acquisition of DeVilbiss Air Power Company (DAPC); and
- - higher volume in our Porter-Cable/Delta business.
These increases were partially offset by:
- - volume decreases in 2000 for generators due to high inventories at
distributors and retailers at the end of 1999 and lower storm sales in 2000;
and
- - price decreases, primarily in our Porter-Cable/Delta business, due to price
discounting in some markets on some products in 2000 to recover market share.
WATER
The increase in Water segment sales in 2000 and 1999 was primarily due to:
- - the August 1999 acquisition of the pressure vessel and pool and spa equipment
businesses of Essef Corporation (Essef); and
- - increased volume in our pump and valve businesses due to higher demand.
These increases were somewhat offset by:
- - unfavorable impacts of foreign currency translation primarily in our valve and
pressure vessel businesses.
ENCLOSURES
The increase in Enclosures segment sales in 2000 and 1999 was primarily due to:
- - higher volume due to strong demand for our products in the telecom and datacom
markets and with industrial original equipment manufacturers; and
- - the April 1999 acquisition of WEB Tool & Manufacturing, Inc.
These increases were somewhat offset by:
- - unfavorable impacts of foreign currency translation. Excluding the impacts of
foreign currency translation, 2000 Enclosures segment sales increased by 22
percent over 1999.
GROSS MARGIN
Gross margin was 25.3 percent in 2000, compared with 27.7 percent in 1999 and
27.4 percent in 1998.
The 2.4 point decline in 2000 from 1999 was primarily the result of:
- - lower sales volume for generators in our DAPC business;
- - lower selling prices due to price discounting to recover market share in our
Porter-Cable/Delta business;
- - unfavorable product mix in our Tools and Enclosures segments;
- - unfavorable inventory variances, primarily in our Porter-Cable/Delta business,
due in part to the increases in inventory valuation reserves in the fourth
quarter of 2000; and
- - higher costs due to challenges encountered in the setup of our new inventory
distribution center for our Porter-Cable/Delta business in January 2000.
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The slight improvement in 1999 of 0.3 points from 1998 is primarily due to:
- - higher volume in our Porter-Cable/Delta business and Enclosures segment; and
- - material cost savings as a result of supply management initiatives in 1999.
These improvements were partially offset by:
- - unfavorable product mix, primarily the result of the 1999 DAPC and Essef
acquisitions.
SELLING, GENERAL AND ADMINISTRATIVE AND RESEARCH AND DEVELOPMENT (SG&A AND R&D)
SG&A and R&D was 17.1 percent of sales in both 2000 and 1999 and 17.6 percent in
1998. While the overall percentages in 2000 and 1999 were comparable, these
expenses as a percent of sales were higher in our Tools segment as spending
outpaced sales growth. We experienced higher spending in 2000 in our Tools
segment for:
- - advertising and selling expenses; and
- - one-time costs of $22 million for the establishment of additional accounts
receivable reserves, of which, $16 million was to cover the deteriorating
credit quality of one customer.
These increases in 2000 were offset by lower SG&A and R&D costs as a percent of
sales in our Water and Enclosures segments as sales growth outpaced spending.
RESTRUCTURING CHARGE
1999 RESTRUCTURING CHARGE
To reduce costs and improve productivity, we initiated a restructuring program
in the first quarter of 1999 to consolidate manufacturing facilities, reduce
overhead, and outsource certain product lines. Related to this, we recorded a
restructuring charge of $23.0 million in our Tools and Enclosures segments. In
the first quarter of 2000 we reevaluated the status and progress of projects
implemented in 1999 and recorded a change in estimate that reduced the
restructuring charge by $8.5 million. In addition, new projects related to the
original restructuring charge were identified and we recorded an additional $6.0
million charge. In the fourth quarter of 2000, we recorded a final change in
estimate of $0.5 million that increased the restructuring charge. As of the end
of 2000, this restructuring program was complete.
The additional charge in the first quarter of 2000 of $6.0 million related to
our Enclosures segment and consisted of:
- - the closure of a North American facility; and
- - the non-cash write-off of impaired goodwill of $3.0 million.
2000 RESTRUCTURING CHARGE
To reduce costs and improve productivity and accountability, we initiated a
fourth quarter 2000 restructuring program to decentralize corporate service
functions and reorganize our Tools segment infrastructure. As a result, we
recorded a restructuring charge of $26.8 million.
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The major components of the 1999 and 2000 restructuring charges and remaining
restructuring liability follows:
EMPLOYEE NON-CASH
TERMINATION ASSET EXIT
IN THOUSANDS BENEFITS DISPOSALS COSTS TOTAL
- --------------------------------------------------------------------------------------------------
1999 RESTRUCTURING CHARGE (FIRST QUARTER) $21,288 $ 1,100 $ 660 $ 23,048
Utilization (8,678) -- (167) (8,845)
- --------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 LIABILITY 12,610 1,100 493 14,203
First quarter 2000 change in estimate (9,110) -- 602 (8,508)
First quarter 2000 restructuring charge 800 3,900 1,340 6,040
Fourth quarter 2000 change in estimate 747 42 (332) 457
Utilization (5,047) (5,042) (2,103) (12,192)
- --------------------------------------------------------------------------------------------------
LIABILITY BEFORE 2000 RESTRUCTURING CHARGE -- -- -- --
2000 RESTRUCTURING CHARGE (FOURTH QUARTER) 7,888 10,518 8,394 26,800
Utilization -- (10,518) (87) (10,605)
- --------------------------------------------------------------------------------------------------
DECEMBER 31, 2000 LIABILITY $ 7,888 $ -- $ 8,307 $ 16,195
==================================================================================================
Included in other current liabilities on the consolidated balance sheets is the
unused portion of the restructuring charge of $16.2 million, which will be used
or paid in 2001.
As a result of our 1999 restructuring charge, our workforce was reduced by
approximately 800 employees. Workforce reductions related to the 2000
restructuring charge are for about 260 employees. Employee termination benefits
consist primarily of severance and outplacement counseling fees.
Non-cash asset disposals related to the 1999 restructuring charge consisted of
equipment write-downs due to abandonment and the write-off of impaired goodwill.
Non-cash asset disposals related to the 2000 restructuring charge consisted of
the abandonment of leasehold improvements and the abandonment of internal use
software under development.
Exit costs are primarily related to contract and lease termination costs.
OPERATING INCOME
Operating income by segment and the change from the prior year were as follows:
00/99 99/98
IN THOUSANDS 2000 1999 1998 % CHANGE % CHANGE
- ------------------------------------------------------------------------------------------------
Tools(1) $ 23,751 $100,680 $ 80,383 (76.4%) 25.3%
Water 120,732 73,362 56,264 64.6% 30.4%
Enclosures(2) 96,268 46,346 46,026 107.7% 0.7%
Other(3) (38,721) (18,662) (18,431) 107.5% 1.3%
- ------------------------------------------------------------------------------------------------
Total $202,030 $201,726 $164,242 0.2% 22.8%
================================================================================================
(1) Includes restructuring charge expense of $5.4 million in 2000 and $6.3
million in 1999.
(2) Includes restructuring charge (income) of $(1.6) million in 2000 and $16.7
million expense in 1999.
(3) Includes restructuring charge expense of $21.0 million in 2000.
TOOLS
The decrease in Tools segment operating income in 2000 was primarily due to:
- - one-time working capital charges of $30 million for inventory and accounts
receivable impairment;
- - lower sales volume for generators and a change in product mix in our
Porter-Cable/Delta business; and
- - lower selling prices due to price discounting to recover market share.
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The increase in Tools segment operating income in 1999 was primarily due to:
- - the acquisition of DeVilbiss Air Power Company; and
- - higher volume in our Porter-Cable/Delta business.
These 1999 increases were somewhat offset by:
- - restructuring charge expense of $6.3 million in 1999.
WATER
The increase in Water segment operating income in 2000 and 1999 was primarily
due to:
- - the acquisition of the pressure vessel and pool and spa equipment businesses
of Essef Corporation;
- - increased volume for pumps and valves; and
- - material cost savings as a result of supply management initiatives in 1999.
These increases were somewhat offset by:
- - unfavorable impacts of foreign currency translation in 2000.
ENCLOSURES
The increase in Enclosures segment operating income in 2000 was primarily due
to:
- - higher volume due to strong demand for our products; and
- - restructuring charge expense of $16.7 million in 1999 favorably impacting
European operating margins.
These increases were somewhat offset by:
- - unfavorable impacts of foreign currency translation in 2000.
The increase in Enclosures segment operating income in 1999 was primarily due
to:
- - higher volume due to strong demand for our products; and
- - material cost savings as a result of supply management initiatives in 1999.
These increases were offset by:
- - restructuring charge expense of $16.7 million in 1999.
NET INTEREST EXPENSE
Net interest expense was $74.9 million in 2000, compared with $43.6 in 1999 and
$19.9 million in 1998. The year-over-year increases reflect higher borrowings as
a result of the 1999 and 1998 acquisitions and higher average interest rates in
2000 and 1999.
PROVISION FOR INCOME TAXES
Our effective tax rate on continuing operations was 35.6 percent in 2000,
compared with 38 percent in 1999 and 37.2 percent in 1998. The decrease in 2000
from 1999 of 2.4 points was primarily the result of the implementation of
additional tax-planning strategies, somewhat offset by an increase in
non-deductible amortization of goodwill resulting from the 1999 acquisitions.
The increase in 1999 from 1998 of 0.8 points was primarily the result of the
increase in non-deductible amortization of goodwill resulting from the 1999
acquisitions, somewhat offset by the implementation of tax planning strategies.
We expect our effective tax rate on continuing operations to be 37 percent in
2001.
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DISCONTINUED OPERATIONS
After evaluating our strategic plans for the future, we elected to discontinue
our Equipment segment (Century/Lincoln and Lincoln Industrial businesses) in the
fourth quarter of 2000. Discussions with potential purchasers are currently
being held and we expect to dispose of these businesses in mid-2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operating activities, borrowings under credit agreements,
and access to public equity and public and private debt markets have been our
principal sources of liquidity over the past three years. These funds covered
our share repurchases, dividend payments, and investments in property, plant and
equipment and acquisitions of businesses.
OPERATING ACTIVITIES
Operating activities generated $184.9 million in 2000, compared with $144.3
million in 1999 and $120.9 million in 1998. The $40.6 million increase in 2000
over 1999 was primarily due to lower receivables and extending payment terms
with vendors. The $23.4 million increase in 1999 over 1998 primarily reflected a
change in the timing of payments for accounts payable and higher earnings from
continuing operations and depreciation and amortization driven by our 1999
acquisitions. These increases were partially offset by unfavorable changes in
other working capital accounts.
INVESTING ACTIVITIES
Capital expenditures in 2000, 1999, and 1998 were $68.0 million, $53.7 million,
and $43.3 million, respectively. The $14.3 million increase in 2000 over 1999
and the $10.4 million increase in 1999 over 1998, reflect increased investments
as a result of acquisitions. Capital expenditures as a percent of sales were 2.5
percent in both 2000 and 1999 and 2.6 percent in 1998. We anticipate capital
expenditures in 2001 to be between $85 and $90 million. The anticipated increase
in 2001 investments over 2000 is expected to be in the areas of tooling for new
product development, factory expansion, and additional machinery and equipment
for cost reductions and capacity expansion.
In 1999, we acquired DeVilbiss Air Power Company, the pressure vessel and pool
and spa equipment businesses of Essef Corporation, and WEB Tool & Manufacturing,
Inc. for $953.1 million. In 1998, we paid $50.3 million for the acquisition of
Walker Dickson Group Limited and an additional $7.4 million for final payments
related to 1997 acquisitions. The 1999 acquisitions were financed through an
equity offering and the issuance of additional debt.
FINANCING ACTIVITIES
As of the end of 2000, our capital structure comprised of $108.1 million in
short-term borrowings, $805.8 million in long-term debt, and $1,010.6 million in
shareholders equity. The ratio of debt-to-total capital was 47.5 percent,
compared with 51.1 percent as of the end of 1999. Our targeted debt-to-total
capital ratio range is 30 to 40 percent. We will exceed this target from
time-to-time as needed for operational purposes and/or acquisitions.
We have committed revolving credit facilities totaling $725 million (the
Facilities), consisting of a $335 million 364-day facility that expires on
August 30, 2001, and $390 million of multi-currency facilities that expire on
September 2, 2004.
We are authorized to sell $725 million of short-term commercial paper notes with
the Facilities used as back-up liquidity to support 100 percent of commercial
paper outstanding. As of the end of 2000, we had $423.3 million of aggregate
commercial paper outstanding that matures within 60 days, of which, $315.2
million was classified as long-term and $108.1 million was classified as
short-term borrowings in the consolidated balance sheets. The $315.2 million has
been classified as long-term as we intend and have the ability to refinance such
obligations on a long-term basis. Short-term borrowings as of the end of 1999
consisted of $150.6 million in bank borrowings under the 364-day facility.
Interest rates and fees on the Facilities vary based on our debt ratings by
credit rating agencies. Aggregate borrowings on the Facilities had a
weighted-average interest rate of 6.71 percent in 2000 and 6.10 percent in 1999.
In addition to the
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Facilities, we have $56.4 million of uncommitted credit facilities. As of the
end of 2000, we had no borrowings under this agreement.
Due to poor operating results in our Tools and discontinued Equipment segments,
as well as restructuring charges taken in the fourth quarter, we determined that
we could potentially be in violation of certain covenants under our Facilities.
In December 2000, we received a waiver modifying our interest coverage and
leverage ratio covenants from our bank lenders. Subsequent to year-end, we
amended our Facility agreements to modify these ratios through September 30,
2001. We will be required to meet our original interest coverage and leverage
ratios as of the end of 2001.
Our debt agreements contain certain financial covenants that restrict the amount
paid for dividends and certain other payments, and require us to maintain
certain financial ratios and a minimum net worth. Under the most restrictive
covenants, $149.7 million of retained earnings were restricted as of the end of
2000. We were in compliance with all covenants, as modified.
In December 2000, the credit rating agencies announced they were reviewing our
ratings for possible downgrade. Since that announcement, we have been unable to
access the commercial paper markets and have been refinancing maturing
commercial paper with borrowings under the revolving credit facilities. If we
continue to be unable to access the commercial paper markets or our credit
ratings are lowered, our borrowing costs will increase. We have sufficient
liquidity under the Facilities to refinance all outstanding commercial paper.
Dividends paid in 2000 were $32.0 million, compared with $28.2 million in 1999
and $27.3 million in 1998. The year-over-year increases reflect higher
outstanding shares as a result of our 1999 secondary stock offering and an
increase in our quarterly dividend rate to $0.17 per share in the third quarter
of 2000 from $0.16 per share.
In addition to measuring our cash flow generation or usage based upon operating,
investing, and financing classifications included in the consolidated statements
of cash flows, we also measure our free cash flow. We define free cash flow as
cash flow from operating activities less capital expenditures, including both
continuing and discontinued operations. We generated free cash flow of $116.9
million in 2000, compared with $90.6 million in 1999 and $77.5 million in 1998.
We intend to increase our free cash flow by reducing inventories, improving
collection of receivables, and working with suppliers to increase payment terms.
We also have changed our management incentive targets to include more emphasis
on improving free cash flow.
We believe cash generated from operating activities, together with credit
available under committed and uncommitted facilities and our current cash
position will provide adequate short-term and long-term liquidity.
COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL
Under current laws and regulations, our obligations relating to environmental
matters are not expected to have a material impact on our 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, our subsidiaries have been named as potentially
responsible parties at a small number of Superfund or other sites being studied
or remediated. Generally, the affected business has been deemed to be a de
minimis defendant or its share of remediation costs has not been material. We
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 our operations in the recent past and are not anticipated to be
material in 2001.
We engage environmental professionals to perform periodic audits of our
facilities and to assist us in complying with the various environmental laws and
regulations faced by our businesses. For purposes of maintaining appropriate
reserves against liabilities associated with environmental issues, whether
involving on- or off-site locations, we review each individual site, taking into
consideration the number of parties
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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.
NEW ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which
among other guidance, clarified the Staff's views on various revenue recognition
and reporting matters. As a result, we changed our method of accounting for
certain sales transactions. Historically, we recognized revenue upon shipment of
products to the customer because, even though some products were shipped FOB
destination, we used a common carrier and thus we gave up substantially all the
risks of ownership. Under the new accounting method adopted retroactive to
January 1, 2000, we now recognize revenue upon delivery of products to the
customer, which is when title passes. The cumulative effect of the change on
prior years resulted in a minor non-cash charge to income of $1.2 million (net
of income taxes of $0.7 million) for the year ended December 31, 2000. The net
effect of the change on the year ended December 31, 2000, was to increase income
before the cumulative effect of the accounting change by $0.8 million ($0.02 per
share). The pro forma amounts presented in the consolidated statements of income
were calculated assuming the accounting change was made retroactively to prior
periods.
For the three months ended March 31, 2000, we recognized $7.4 million in revenue
that was included in the cumulative effect adjustment as of January 1, 2000. The
effect of the revenue in the first quarter was to increase income by $1.2
million (after reduction for income taxes of $0.7 million).
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), is effective for all fiscal years
beginning after June 15, 2000. SFAS 133, as amended and interpreted, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
All derivatives, whether designated in hedging relationships or not, will be
required to be recorded on the balance sheet at fair value. If the derivative is
designated as a fair-value hedge, the changes in the fair value of the
derivative and the hedged item will be recognized in earnings. If the derivative
is designated in a cash-flow hedge, changes in the fair value of the derivative
will be recorded in other comprehensive incomes (OCI) and will be recognized in
the consolidated statements of income when the hedged item affects earnings.
SFAS 133 defines new requirements for designation and documentation of hedging
relationships as well as ongoing effectiveness assessments in order to use hedge
accounting. For a derivative that is not designated as or does not qualify as a
hedge, changes in fair value will be recognized in earnings.
On January 1, 2001, we adopted SFAS 133 and recorded a transition adjustment
that increased OCI by $6.7 million and will be reported as a cumulative effect
of accounting change in comprehensive income. The transition adjustment relates
to our hedging activities through December 31, 2000. Prior to the application of
SFAS 133, financial instruments designated as cash-flow hedges were not recorded
in the financial statements, but cash flows from such contracts were recorded as
adjustments to earnings as the hedged items effected earnings.
EURO CONVERSION
A new currency, the Euro, was introduced in Europe on January 1, 1999. Of the
fifteen member countries of the European Union, eleven adopted the Euro as their
legal currency on that date. Fixed conversion rates between the national
currencies of these eleven countries and the Euro were established on that date.
The national currencies are scheduled to remain legal tender as denominations of
the Euro during the transition period ending December 31, 2001. During this
transition period, parties may settle transactions using either the Euro or a
participating country's national currency. At the current time, we do not
believe that the conversion to the Euro will have a material impact on our
business or financial condition.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
We are exposed to various market risks, including changes in interest rates,
foreign currency rates and prices of raw materials and sourced components.
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as interest rates and foreign currency exchange rates. We use
derivative financial instruments to manage and reduce the impact of some of
these risks. We do not hold or issue derivative financial instruments for
trading purposes.
INTEREST RATE RISK
We are exposed to changes in interest rates primarily as a result of our
borrowing activities used to fund operations. We utilize committed floating rate
credit facilities to fund a portion of our operations. Interest rates on $74.5
million of floating rate debt is swapped to fixed rates through agreements with
financial institutions. The table below summarizes our floating and fixed rate
debt obligations and interest rate swap agreements as of December 31, 2000 along
with interest rates for the swapped portion and fair value of the swap
agreement. Weighted-average variable rates are based on implied forward rates in
the yield curve at December 31, 2000, plus our borrowing spread.
Expected year of maturity
-----------------------------------------------------------------------------
DOLLARS IN THOUSANDS 2001 2002 2003 2004 2005 THEREAFTER TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, INCLUDING CURRENT PORTION
Variable rate $ -- $ -- $ -- $390,000 $ -- $ -- $ 390,000
Average interest rate -- -- -- 7.08% -- -- 7.08%
Fixed rate $23,999 $ 7,512 $53,230 $ 43,179 $ 357 $287,556 $ 415,833
Average interest rate 7.25% 6.95% 6.69% 6.72% 7.00% 7.74% 7.45%
PORTION SUBJECT TO INTEREST RATE SWAPS
Variable to fixed $ -- $19,500 $15,000 $ 20,000 $ 20,000 $ -- $ 74,500
Average rate to be received -- 5.50% 5.80% 6.00% 6.00% -- 5.83%
Average rate to be paid -- 6.31% 6.31% 6.31% 6.31% -- 6.31%
FOREIGN CURRENCY RISK
We hedge our net investment in certain of our foreign subsidiaries by borrowing
in those subsidiaries' functional currencies. We have entered into foreign
currency swap agreements with major financial institutions to hedge firm foreign
currency commitments. As of December 31, 2000, the following table presents
principal cash flows of our open currency swap agreements:
Expected year of maturity
------------------------------------------------------------------------ FAIR
IN THOUSANDS 2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE
- --------------------------------------------------------------------------------------------------------------------------
FORWARD EXCHANGE AGREEMENTS(1)
Receive U.S. dollars $ -- $ -- $50,000 $ -- $ -- $ -- $ 50,000 $ 4,120
Pay Canadian dollars -- -- 69,385 -- -- -- 69,385
Receive Canadian dollars $ -- $ -- $69,385 $ -- $ -- $ -- $ 69,385 $ 3,386
Pay Deutschemark -- -- 88,625 -- -- -- 88,625
---------
Total exchange gain $ 7,506
=========
(1) Foreign exchange information is presented in local currency by maturity,
however, the fair value is presented in U.S. dollars
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
We are responsible for the integrity and objectivity of the financial
information presented in this report. The financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States and include certain amounts based on our best estimates and
judgment.
We are also responsible for establishing and maintaining our accounting systems
and related internal controls, which are designed to provide reasonable
assurance that assets are safeguarded and transactions are properly recorded.
These systems and controls are reviewed by the internal auditors. In addition,
our code of conduct states that our affairs are to be conducted under the
highest ethical standards.
The independent auditors provide an independent review of the financial
statements and the fairness of the information presented therein. The Audit and
Finance Committee of the Board of Directors, composed solely of outside
directors, meets regularly with us, our internal auditors and our independent
auditors to review audit activities, internal controls, and other accounting,
reporting, and financial matters. Both the independent auditors and internal
auditors have unrestricted access to the Audit and Finance Committee.
/s/ Randall J. Hogan /s/ David D. Harrison
Randall J. Hogan David D. Harrison
President and Chief Executive Officer Executive Vice President and Chief Financial Officer
St. Paul, Minnesota
February 16, 2001
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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 (the Company) as of December 31, 2000 and 1999, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14. These
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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 the Company at December 31, 2000
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Deloitte & Touche LLP
/s/DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 16, 2001
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PENTAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
------------------------------------
IN THOUSANDS, EXCEPT PER-SHARE DATA 2000 1999 1998
- -----------------------------------------------------------------------------------------------
Net sales $2,748,013 $2,116,070 $1,689,641
Cost of goods sold 2,051,515 1,529,419 1,227,427
- -----------------------------------------------------------------------------------------------
Gross profit 696,498 586,651 462,214
Selling, general and administrative 438,488 339,707 281,078
Research and development 31,191 22,170 16,894
Restructuring charge 24,789 23,048 --
- -----------------------------------------------------------------------------------------------
Operating income 202,030 201,726 164,242
Interest income 1,488 1,472 1,414
Interest expense 76,387 45,054 21,269
- -----------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 127,131 158,144 144,387
Provision for income taxes 45,263 60,056 53,667
- -----------------------------------------------------------------------------------------------
Income from continuing operations 81,868 98,088 90,720
Income (loss) from discontinued operations, net of tax (24,759) 5,221 16,120
Cumulative effect of accounting change, net of tax (1,222) -- --
- -----------------------------------------------------------------------------------------------
Net income 55,887 103,309 106,840
Preferred dividends -- -- (4,267)
- -----------------------------------------------------------------------------------------------
Income available to common shareholders $ 55,887 $ 103,309 $ 102,573
===============================================================================================
EARNINGS PER COMMON SHARE
BASIC
Continuing operations $ 1.68 $ 2.24 $ 2.25
Income (loss) from discontinued operations (0.51) 0.12 0.42
Cumulative effect of accounting change (0.02) -- --
- -----------------------------------------------------------------------------------------------
Basic earnings per common share $ 1.15 $ 2.36 $ 2.67
===============================================================================================
DILUTED
Continuing operations $ 1.68 $ 2.21 $ 2.09
Income (loss) from discontinued operations (0.51) 0.12 0.37
Cumulative effect of accounting change (0.02) -- --
- -----------------------------------------------------------------------------------------------
Diluted earnings per common share $ 1.15 $ 2.33 $ 2.46
===============================================================================================
PRO FORMA AMOUNTS ASSUMING THE ACCOUNTING CHANGE IS APPLIED
RETROACTIVELY
Net income from continuing operations $ 81,868 $ 97,514 $ 90,631
Net income (loss) from discontinued operations (24,759) 5,221 16,120
Preferred dividend requirements -- -- (4,267)
- -----------------------------------------------------------------------------------------------
Income available to common shareholders $ 57,109 $ 102,735 $ 102,484
===============================================================================================
NET INCOME PER COMMON SHARE
BASIC
Continuing operations $ 1.68 $ 2.23 $ 2.25
Income (loss) from discontinued operations (0.51) 0.12 0.42
- -----------------------------------------------------------------------------------------------
Basic earnings per common share $ 1.17 $ 2.35 $ 2.67
===============================================================================================
DILUTED
Continuing operations $ 1.68 $ 2.20 $ 2.09
Income (loss) from discontinued operations (0.51) 0.12 0.37
- -----------------------------------------------------------------------------------------------
Diluted earnings per common share $ 1.17 $ 2.32 $ 2.46
===============================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 48,544 43,803 38,444
Diluted 48,645 44,287 43,149
See accompanying notes to consolidated financial statements.
22
23
PENTAIR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-----------------------
IN THOUSANDS, EXCEPT PER-SHARE DATA 2000 1999
- -------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 34,944 $ 63,015
Accounts and notes receivable, net of allowance of $18,636
and $14,242, respectively 468,081 502,235
Inventories 392,495 352,830
Deferred income taxes 72,577 51,356
Prepaid expenses and other current assets 22,442 13,229
Net assets of discontinued operations 101,263 143,839
- -------------------------------------------------------------------------------------
Total current assets 1,091,802 1,126,504
PROPERTY, PLANT AND EQUIPMENT, NET 352,984 367,783
OTHER ASSETS
Goodwill, net 1,141,102 1,164,056
Other 58,137 48,173
- -------------------------------------------------------------------------------------
Total other assets 1,199,239 1,212,229
- -------------------------------------------------------------------------------------
$2,644,025 $2,706,516
=====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 108,141 $ 150,612
Current maturities of long-term debt 23,999 27,176
Accounts and notes payable 250,088 220,944
Employee compensation and benefits 84,197 96,082
Accrued product claims and warranties 42,189 46,467
Income taxes 5,487 16,182
Other current liabilities 134,691 130,393
- -------------------------------------------------------------------------------------
Total current liabilities 648,792 687,856
Long-term debt 781,834 857,296
Pension and other retirement compensation 59,313 59,042
Postretirement medical and other benefits 34,213 31,471
Deferred income taxes 37,133 6,632
Other noncurrent liabilities 72,149 73,448
- -------------------------------------------------------------------------------------
Total liabilities 1,633,434 1,715,745
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred shares -- --
Common shares par value $0.16 2/3;
48,711,955 and 48,317,068 shares issued and outstanding,
respectively 8,119 8,053
Additional paid-in capital 468,425 456,516
Retained earnings 568,084 544,235
Unearned restricted stock compensation (7,285) (2,434)
Accumulated other comprehensive loss (26,752) (15,599)
- -------------------------------------------------------------------------------------
Total shareholders' equity 1,010,591 990,771
- -------------------------------------------------------------------------------------
$2,644,025 $2,706,516
=====================================================================================
See accompanying notes to consolidated financial statements.
23
24
PENTAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
----------------------------------
IN THOUSANDS 2000 1999 1998
- ----------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 55,887 $ 103,309 $106,840
Depreciation 59,897 56,081 46,571
Amortization 39,131 25,987 15,483
Deferred income taxes 13,118 (5,299) 4,069
Restructuring charge 24,789 23,048 --
Cumulative effect of accounting change 1,222 -- --
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS OF
BUSINESS ACQUISITIONS AND DISPOSITIONS
Accounts and notes receivable 17,719 (31,053) (16,366)
Inventories (45,186) (26,740) 6,253
Prepaid expenses and other current assets (8,635) 7,447 2,077
Accounts payable 32,536 26,478 (9,017)
Employee compensation and benefits (10,309) 20,122 (3,677)
Accrued product claims and warranties (6,318) 21,400 (5,461)
Income taxes (11,850) (4,458) (5,543)
Other current liabilities (19,401) (43,289) (11,326)
Pension and post-retirement benefits 3,148 4,213 2,020
Other assets and liabilities (4,940) (20,676) 9,997
- ----------------------------------------------------------------------------------------------
Net cash provided by continuing operations 140,808 156,570 141,920
Net cash provided by (used for) discontinued
operations 44,139 (12,274) (21,048)
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 184,947 144,296 120,872
INVESTING ACTIVITIES
Capital expenditures (68,041) (53,671) (43,335)
Proceeds from sale of businesses -- -- 13,001
Acquisitions, net of cash acquired -- (953,124) (57,699)
Other (32) 1,664 611
- ----------------------------------------------------------------------------------------------
Net cash used for investing activities (68,073) (1,005,131) (87,422)
FINANCING ACTIVITIES
Net short-term borrowings (repayments) (42,471) 150,612 --
Proceeds from long-term debt 6,967 351,297 72,967
Repayment of long-term debt (76,987) (59,814) (64,805)
Proceeds from long-term bonds -- 250,000 --
Debt issuance costs -- (2,430) --
Proceeds from bridge loans -- 450,000 --
Repayment of bridge loans -- (450,000) --
Unearned ESOP compensation decrease -- -- 6,315
Stock options and restricted stock 3,100 4,454 1,715
Proceeds from issuance of common stock, net 774 214,480 --
Repurchases of common stock (410) (4,030) (12,373)
Dividends paid (32,038) (28,201) (27,330)
- ----------------------------------------------------------------------------------------------
Net cash provided by (used for) financing
activities (141,065) 876,368 (23,511)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (3,880) 18,344 (7,676)
- ----------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS (28,071) 33,877 2,263
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 63,015 29,138 26,875
- ----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 34,944 $ 63,015 $ 29,138
==============================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest $ 81,401 $ 46,359 $ 24,990
Income taxes $ 42,449 $ 68,108 $ 64,956
See accompanying notes to consolidated financial statements.
24
25
PENTAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
UNEARNED
PREFERRED SHARES COMMON SHARES ADDITIONAL RESTRICTED
--------------------- ------------------- PAID-IN RETAINED STOCK
IN THOUSANDS, EXCEPT PER-SHARE DATA NUMBER AMOUNT NUMBER AMOUNT CAPITAL EARNINGS COMPENSATION
- -----------------------------------------------------------------------------------------------------------------------
BALANCE -- DECEMBER 31, 1997 1,704,578 $ 59,696 38,184,804 $6,365 $186,486 $389,415 $(2,909)
Net income 106,840
Change in cumulative translation
adjustment
Adjustment in minimum pension
liability, net of $62 tax expense
Comprehensive income
Tax benefit of stock options 1,912
Cash dividends -- $0.60 per common
share (23,063)
Cash dividends -- preferred (4,267)
Share repurchases (350,000) (58) (12,315)
Exercise of stock options 185,299 30 1,685
Issuance of restricted shares, net
of cancellations 22,567 3 396 (399)
Amortization of restricted shares 1,571
Conversion into common stock (169,659) (6,058) 460,917 77 5,981
Tax benefit of preferred dividends 202
Earned ESOP compensation
- -----------------------------------------------------------------------------------------------------------------------
BALANCE -- DECEMBER 31, 1998 1,534,919 53,638 38,503,587 6,417 184,145 469,127 (1,737)
Net income 103,309
Change in cumulative translation
adjustment
Adjustment in minimum pension
liability, net of $889 tax expense
Comprehensive income
Tax benefit of stock options 3,190
Cash dividends -- $0.64 per common
share (28,201)
Issuance of common shares from
secondary offering 5,500,000 917 213,563
Share repurchases (117,000) (19) (4,011)
Exercise of stock options 321,278 53 4,401
Issuance of restricted shares, net
of cancellations 30,616 5 2,270 (2,275)
Amortization of restricted shares 1,578
Conversion into common stock (1,534,919) (53,638) 4,078,587 680 52,958
- -----------------------------------------------------------------------------------------------------------------------
BALANCE -- DECEMBER 31, 1999 -- -- 48,317,068 8,053 456,516 544,235 (2,434)
Net income 55,887
Change in cumulative translation
adjustment
Adjustment in minimum pension
liability, net of $926 tax benefit
Comprehensive income
Tax benefit of stock options 985
Cash dividends -- $0.66 per common
share (32,038)
Adjustment for 1999 secondary
offering 774
Share repurchases (13,700) (2) (408)
Exercise of stock options 151,529 25 3,075
Issuance of restricted shares, net
of cancellations 257,058 43 7,483 (7,526)
Amortization of restricted shares 2,675
- -----------------------------------------------------------------------------------------------------------------------
BALANCE -- DECEMBER 31, 2000 -- $ -- 48,711,955 $8,119 $468,425 $568,084 $(7,285)
=======================================================================================================================
UNEARNED ACCUMULATED
COMPENSATION OTHER
RELATING TO COMPREHENSIVE COMPREHENSIVE
IN THOUSANDS, EXCEPT PER-SHARE DATA THE ESOP LOSS TOTAL INCOME
- ----------------------------------- ---------------------------------------------------------
BALANCE -- DECEMBER 31, 1997 $(6,315) $ (5,085) $ 627,653
Net income 106,840 $106,840
Change in cumulative translation
adjustment 1,025 1,025 1,025
Adjustment in minimum pension
liability, net of $62 tax expense 98 98 98
--------
Comprehensive income $107,963
========
Tax benefit of stock options 1,912
Cash dividends -- $0.60 per common
share (23,063)
Cash dividends -- preferred (4,267)
Share repurchases (12,373)
Exercise of stock options 1,715
Issuance of restricted shares, net
of cancellations --
Amortization of restricted shares 1,571
Conversion into common stock --
Tax benefit of preferred dividends 202
Earned ESOP compensation 6,315 6,315
- -----------------------------------
BALANCE -- DECEMBER 31, 1998 -- (3,962) 707,628
Net income 103,309 $103,309
Change in cumulative translation
adjustment (13,027) (13,027) (13,027)
Adjustment in minimum pension
liability, net of $889 tax expense 1,390 1,390 1,390
--------
Comprehensive income $ 91,672
========
Tax benefit of stock options 3,190
Cash dividends -- $0.64 per common
share (28,201)
Issuance of common shares from
secondary offering 214,480
Share repurchases (4,030)
Exercise of stock options 4,454
Issuance of restricted shares, net
of cancellations --
Amortization of restricted shares 1,578
Conversion into common stock --
- -----------------------------------
BALANCE -- DECEMBER 31, 1999 -- (15,599) 990,771
Net income 55,887 $ 55,887
Change in cumulative translation
adjustment (9,705) (9,705) (9,705)
Adjustment in minimum pension
liability, net of $926 tax benefit (1,448) (1,448) (1,448)
--------
Comprehensive income $ 44,734
========
Tax benefit of stock options 985
Cash dividends -- $0.66 per common
share (32,038)
Adjustment for 1999 secondary
offering 774
Share repurchases (410)
Exercise of stock options 3,100
Issuance of restricted shares, net
of cancellations --
Amortization of restricted shares 2,675
- -----------------------------------
BALANCE -- DECEMBER 31, 2000 $ -- $(26,752) $1,010,591
===================================
See accompanying notes to consolidated financial statements.
25
26
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
Our fiscal year ends on December 31. Additionally, we report our interim
quarterly periods on a 13-week basis ending on a Saturday.
PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements include the accounts of the parent company
and all significant subsidiaries. Significant intercompany accounts and
transactions have been eliminated. Certain balances have been reclassified to
conform to the 2000 presentation.
USE OF ESTIMATES
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and assumptions that affect the amounts reported in our
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
CASH EQUIVALENTS
We consider highly liquid investments with original maturities of three months
or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Inventories of domestic
subsidiaries are generally determined by the last-in, first-out (LIFO) method.
Inventories of foreign subsidiaries are determined by the first-in, first-out
(FIFO) and moving average methods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and amortization
is computed for financial reporting purposes principally using the straight-line
method over the following estimated useful lives:
YEARS
-------
Land improvements 5 to 20
Buildings 5 to 50
Machinery and equipment 3 to 15
GOODWILL
Goodwill represents the difference between the purchase price of acquired
businesses and the fair value of their net assets when accounted for by the
purchase method. We amortize goodwill evenly over periods ranging from 25 to 40
years. Accumulated amortization as of the end of 2000 and 1999 was $114.4
million and $80.2 million, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
We review long-lived assets for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If impairment indicators are present and the estimated future
undiscounted cash flows are less than the carrying value of the assets and any
related goodwill, the carrying value is reduced to the estimated fair value as
measured by the discounted cash flows. Losses on long-lived assets to be
disposed of are based upon estimated selling prices and reduced for the cost to
sell.
INCOME TAXES
Deferred taxes are recognized for the estimated taxes ultimately payable or
recoverable based on enacted tax law. Changes in enacted tax rates are reflected
in the tax provision as they occur.
26
27
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION, SALES RETURNS AND WARRANTY COSTS
We recognize revenue when the earnings process is complete, evidenced by an
agreement between Pentair and the customer, there has been delivery and
acceptance, collectibility is probable, and pricing is fixed and determinable.
If significant obligations remain after delivery, revenue is deferred until such
obligations are fulfilled. Provisions for sales returns and warranty costs are
recorded at the time of sale based on historical information and current trends.
FREIGHT EXPENSE
Distribution and freight expenses for products shipped to customers are included
in cost of goods sold, in accordance with Emerging Issues Task Force No. 00-10,
Accounting for Shipping and Handling Fees and Costs (EITF 00-10). Distribution
expense was previously reported in selling, general and administrative, while
outbound freight expense was previously reported as a reduction of gross sales.
Prior period expenses have also been reclassified to cost of goods sold, which
had no effect on previously reported net income.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currency are translated at the
current exchange rate as of the balance sheet date, and income statement amounts
are translated at the average monthly exchange rate. Translation adjustments
resulting from fluctuations in exchange rates are recorded in comprehensive
income.
FINANCIAL INSTRUMENTS
We use derivative financial instruments for the purpose of hedging interest rate
and currency exposures, which exist as part of ongoing business operations. All
hedging instruments are designated and effective as hedges, in accordance with
generally accepted accounting principles. Instruments that do not qualify for
hedge accounting are marked-to-market with changes recognized in current
earnings. We do not hold or issue derivative financial instruments for trading
purposes.
INTEREST RATE SWAP AND CAP AGREEMENTS
We use interest rate swap and cap agreements to reduce interest rate
exposure. Interest rate contracts designated and effective as a hedge of
underlying debt obligations were not marked-to-market. Amounts paid or
received on agreements are recognized as adjustments to interest expense
over the life of the underlying debt agreement. Gains and losses realized
upon the settlement of such contracts are deferred and amortized to
interest expense over the remaining life of the debt instrument or are
recognized immediately if the underlying instrument is settled. Open
interest rate contracts are reviewed regularly to ensure they remain
effective as hedges of interest rate exposure.
FOREIGN CURRENCY SWAP AGREEMENTS
We enter into foreign currency swap agreements to hedge transactions
denominated in foreign currencies in order to reduce the currency risk
associated with fluctuating exchange rates. Realized and unrealized gains
and losses from instruments qualifying as hedges were recognized as part of
the cost basis of the underlying transaction.
We hedge our net investment in certain of our foreign subsidiaries by
borrowing in those subsidiaries' functional currencies. Gains and losses on
contracts designated as hedges of net investments in foreign subsidiaries
are recognized in accumulated other comprehensive loss.
STOCK-BASED COMPENSATION
In accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123), we elected to account for
our stock-based compensation using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25).
The exercise price of stock options equals the market price on the date of
grant. In general, there is no recorded compensation expense related to stock
options.
27
28
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INSURANCE SUBSIDIARY
We insure general and product liability, product recall, workers' compensation,
and automobile liability risks through our wholly owned insurance subsidiary.
Reserves for policy claims are established based on actuarial projections of
ultimate losses. As of the end of 2000 and 1999, reserves for policy claims were
$26.2 million ($10.0 million included in accrued product claims and warranties
and $16.2 million included in other noncurrent liabilities) and $28.9 million
($6.0 million included in accrued product claims and warranties and $22.9
million included in other noncurrent liabilities).
EARNINGS PER COMMON SHARE
Basic earnings per share are computed by dividing net income, after deducting
preferred stock dividends, by the weighted-average number of common shares
outstanding. Diluted earnings per share are computed by dividing net income,
after adjusting for the tax benefits on deductible ESOP dividends, by the
weighted average number of common shares outstanding, including the dilutive
effects of options, restricted stock and assumed conversion of preferred stock.
Unless otherwise noted, references are to diluted earnings per share.
Basic and diluted earnings per share were calculated using the following:
IN THOUSANDS, EXCEPT PER-SHARE DATA 2000 1999 1998
- --------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE -- BASIC
Income from continuing operations $ 81,868 $ 98,088 $ 90,720
Subtract preferred dividends -- -- (4,267)
- --------------------------------------------------------------------------------------------
Income from continuing operations -- basic 81,868 98,088 86,453
- --------------------------------------------------------------------------------------------
Income (loss) from discontinued operations -- basic (24,759) 5,221 16,120
Cumulative effect of accounting change -- basic (1,222) -- --
- --------------------------------------------------------------------------------------------
Income available to common shareholders -- basic $ 55,887 $103,309 $102,573
============================================================================================
Continuing operations $ 1.68 $ 2.24 $ 2.25
Income (loss) from discontinued operations (0.51) 0.12 0.42
Cumulative effect of accounting change (0.02) -- --
- --------------------------------------------------------------------------------------------
Earnings per common share -- basic $ 1.15 $ 2.36 $ 2.67
============================================================================================
EARNINGS PER COMMON SHARE -- DILUTED
Income from continuing operations $ 81,868 $ 98,088 $ 90,720
Adjustment for tax benefits due to assumed ESOP conversion -- -- (606)
- --------------------------------------------------------------------------------------------
Income from continuing operations -- diluted 81,868 98,088 90,114
- --------------------------------------------------------------------------------------------
Income (loss) from discontinued operations -- diluted (24,759) 5,221 16,120
Cumulative effect of accounting change -- diluted (1,222) -- --
- --------------------------------------------------------------------------------------------
Income available to common shareholders -- diluted $ 55,887 $103,309 $106,234
============================================================================================
Continuing operations $ 1.68 $ 2.21 $ 2.09
Income (loss) from discontinued operations (0.51) 0.12 0.37
Cumulative effect of accounting change (0.02) -- --
- --------------------------------------------------------------------------------------------
Earnings per common share -- diluted $ 1.15 $ 2.33 $ 2.46
============================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -- BASIC 48,544 43,803 38,444
Dilutive impact of stock options and restricted stock 101 346 435
Assumed conversion of preferred stock -- 138 4,270
- --------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -- DILUTED 48,645 44,287 43,149
============================================================================================
28
29
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which
among other guidance, clarified the Staff's views on various revenue recognition
and reporting matters. As a result, we changed our method of accounting for
certain sales transactions. Historically, we recognized revenue upon shipment of
products to the customer because, even though some products were shipped FOB
destination, we used a common carrier and thus we gave up substantially all the
risks of ownership. Under the new accounting method adopted retroactive to
January 1, 2000, we now recognize revenue upon delivery of products to the
customer, which is when title passes. The cumulative effect of the change on
prior years resulted in a minor non-cash charge to income of $1.2 million (net
of income taxes of $0.7 million) for the year ended December 31, 2000. The net
effect of the change on the year ended December 31, 2000, was to increase income
before the cumulative effect of the accounting change by $0.8 million ($0.02 per
share). The pro forma amounts presented in the consolidated statements of income
were calculated assuming the accounting change was made retroactively to prior
periods.
For the three months ended March 31, 2000, we recognized $7.4 million in revenue
that was included in the cumulative effect adjustment as of January 1, 2000. The
effect of the revenue in the first quarter was to increase income by $1.2
million (after reduction for income taxes of $0.7 million).
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, (SFAS 133) is effective for all fiscal years
beginning after June 15, 2000. SFAS 133, as amended and interpreted, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
All derivatives, whether designated in hedging relationships or not, will be
required to be recorded on the balance sheet at fair value. If the derivative is
designated as a fair-value hedge, the changes in the fair value of the
derivative and the hedged item will be recognized in earnings. If the derivative
is designated in a cash-flow hedge, changes in the fair value of the derivative
will be recorded in other comprehensive incomes (OCI) and will be recognized in
the consolidated statements of income when the hedged item affects earnings.
SFAS 133 defines new requirements for designation and documentation of hedging
relationships as well as ongoing effectiveness assessments in order to use hedge
accounting. For a derivative that is not designated as or does not qualify as a
hedge, changes in fair value will be recognized in earnings.
On January 1, 2001, we adopted SFAS 133 and recorded a transition adjustment
that increased OCI by $6.7 million and will be reported as a cumulative effect
of accounting change in comprehensive income. The transition adjustment relates
to our hedging activities through December 31, 2000. Prior to the application of
SFAS 133, financial instruments designated as cash-flow hedges were not recorded
in the financial statements, but cash flows from such contracts were recorded as
adjustments to earnings as the hedged items effected earnings.
2. RESTRUCTURING CHARGE
1999 RESTRUCTURING CHARGE
To reduce costs and improve productivity, we initiated a restructuring program
in the first quarter of 1999 to consolidate manufacturing facilities, reduce
overhead and outsource certain product lines. Related to this, we recorded a
restructuring charge of $23.0 million in our Tools and Enclosures segments. In
the first quarter of 2000 we reevaluated the status and progress of projects
implemented in 1999 and recorded a change in estimate that reduced the
restructuring charge by $8.5 million. In addition, new projects related to the
original restructuring charge were identified and we recorded an additional $6.0
million charge. In the fourth quarter of 2000, we recorded a final change in
estimate of $0.5 million that increased the restructuring charge. As of the end
of 2000, this restructuring program was complete.
29
30
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The additional charge in the first quarter of 2000 of $6.0 million related to
our Enclosures segment and consisted of:
- - the closure of a North American facility; and
- - the non-cash write-off of impaired goodwill of $3.0 million.
2000 RESTRUCTURING CHARGE
To reduce costs, improve productivity and accountability, we initiated a fourth
quarter 2000 restructuring program to decentralize corporate service functions
and reorganize our Tools segment infrastructure. As a result, we recorded a
restructuring charge of $26.8 million.
The major components of the 1999 and 2000 restructuring charges and remaining
restructuring liability follows:
EMPLOYEE NON-CASH
TERMINATION ASSET EXIT
IN THOUSANDS BENEFITS DISPOSALS COSTS TOTAL
- -------------------------------------------------------------------------------------------------
1999 RESTRUCTURING CHARGE (FIRST QUARTER) $21,288 $ 1,100 $ 660 $ 23,048
Utilization (8,678) -- (167) (8,845)
- -------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 LIABILITY 12,610 1,100 493 14,203
First quarter 2000 change in estimate (9,110) -- 602 (8,508)
First quarter 2000 restructuring charge 800 3,900 1,340 6,040
Fourth quarter 2000 change in estimate 747 42 (332) 457
Utilization (5,047) (5,042) (2,103) (12,192)
- -------------------------------------------------------------------------------------------------
LIABILITY BEFORE 2000 RESTRUCTURING CHARGE -- -- -- --
2000 RESTRUCTURING CHARGE (FOURTH QUARTER) 7,888 10,518 8,394 26,800
Utilization -- (10,518) (87) (10,605)
- -------------------------------------------------------------------------------------------------
DECEMBER 31, 2000 LIABILITY $ 7,888 $ -- $ 8,307 $ 16,195
=================================================================================================
Included in other current liabilities on the consolidated balance sheets is the
unused portion of the restructuring charge of $16.2 million, which will be used
or paid in 2001.
As a result of our 1999 restructuring charge, our workforce was reduced by
approximately 800 employees. Workforce reductions related to the 2000
restructuring charge are for about 260 employees. Employee termination benefits
consist primarily of severance and outplacement counseling fees.
Non-cash asset disposals related to the 1999 restructuring charge consisted of
equipment write-downs due to abandonment and the write-off of impaired goodwill.
Non-cash asset disposals related to the 2000 restructuring charge consisted of
the abandonment of leasehold improvements and the abandonment of internal use
software under development.
Exit costs are primarily related to contract and lease termination costs.
3. DISCONTINUED OPERATIONS
After evaluating our strategic plans for the future, we elected to discontinue
our Equipment segment (Century/Lincoln and Lincoln Industrial businesses) in the
fourth quarter of 2000. Discussions with potential purchasers are currently
being held and we expect to dispose of these businesses in mid-2001.
Our financial statements have been restated to reflect the Equipment segment as
a discontinued operation for all periods presented. Operating results of the
discontinued Equipment segment are summarized below. The amounts exclude general
corporate overhead previously allocated to the Equipment segment. The amounts
include an allocation of interest based on a ratio of the net assets of the
discontinued operations
30
31
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to the total net assets of Pentair. The results for 2000 reflect activity
through December 2000 (the measurement date); results for 1999 and 1998 reflect
activity for each entire year.
IN THOUSANDS 2000 1999 1998
- --------------------------------------------------------------------------------------------
Net sales $255,256 $318,334 $306,689
- --------------------------------------------------------------------------------------------
Pre-tax income (loss) $(37,809) $ 8,385 $ 26,558
Provision for income taxes (13,050) 3,164 10,438
- --------------------------------------------------------------------------------------------
Income (loss) from discontinued operations, net of tax $(24,759) $ 5,221 $ 16,120
============================================================================================
Net assets of the discontinued Equipment segment consisted of the following:
IN THOUSANDS 2000 1999
- ---------------------------------------------------------------------------------
Net current assets $ 59,708 $ 92,288
Property, plant and equipment, net 28,339 36,023
Net other noncurrent assets and liabilities 13,216 15,528
- ---------------------------------------------------------------------------------
Net asset of discontinued operations $101,263 $143,839
=================================================================================
Included within the net assets of the discontinued Equipment segment at December
31, 1999, was a restructuring liability of $11.0 million. During 2000, an
additional $0.8 million was incurred due to a change in estimate and $11.8
million was utilized in 2000, with no liability remaining at December 31, 2000.
The $11.8 million utilization consisted of $6.6 million in cash and $5.2 million
non-cash.
4. ACQUISITIONS
All of the following acquisitions were accounted for as purchases and,
accordingly, the respective purchase prices were allocated to the respective
assets and liabilities based upon their estimated fair values as of the
acquisition date. Operating results of businesses acquired have been included in
the consolidated statements of income from the respective acquisition dates
forward.
A summary of our purchase transactions for the past three years is included in
the following table (In thousands):
ENTITY NAME AND BUSINESS DATE
DESCRIPTION OF BUSINESS ACQUIRED SEGMENT ACQUIRED CONSIDERATION INTANGIBLES FORM OF CONSIDERATION
- -------------------------------------------------------------------------------------------------------------------------------
1999 ACQUISITIONS
DeVilbiss Air Power Company Tools 9/99 $466,579 $360,445 $466,579 Cash
Manufacturer of air compressors,
generators, and pressure washers
Essef Corporation (Structural
Fibers and Pac-Fab) Water 8/99 424,633 349,608 304,633 Cash
Manufacturer of pressure vessels
and 120,000 Debt assumed
pool and spa equipment
WEB Tool & Manufacturing, Inc. Enclosures 4/99 61,912 45,342 61,912 Cash
Designer, manufacturer and
marketer of custom server
subracks for the datacom and
telecom markets
1998 ACQUISITIONS
Walker Dickson Group Limited Enclosures 10/98 50,333 27,200 50,333 Cash
Designer, manufacturer and
marketer of custom and standard
enclosures, subracks and systems
ORSCO, Inc. Equipment 1/98 1,248 894 1,248 Note
Manufacturer of oil lubrication
systems (discontinued in 12/00)
T-Tech Industries Equipment 4/98 7,729 6,419 6,419 Cash
Manufacturer of automatic
transmission fluid exchangers (discontinued in 12/00)
31
32
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCUMULATED OTHER COMPREHENSIVE LOSS
Components of accumulated other comprehensive loss consist of the following:
IN THOUSANDS 2000 1999 1998
- -------------------------------------------------------------------------------------------
Minimum pension liability adjustments, net of tax $ (2,433) $ (985) $(2,375)
Foreign currency translation adjustments (24,319) (14,614) (1,587)
- -------------------------------------------------------------------------------------------
Accumulated other comprehensive loss $(26,752) $(15,599) $(3,962)
===========================================================================================
6. INVENTORIES
Inventories were comprised of:
IN THOUSANDS 2000 1999
- ---------------------------------------------------------------------------------
Raw materials and supplies $110,935 $104,840
Work-in-process 48,392 46,947
Finished goods 233,168 201,043
- ---------------------------------------------------------------------------------
Total inventories $392,495 $352,830
=================================================================================
If all inventories were valued at FIFO as of the end of 2000 and 1999,
inventories would have been $396.9 million and $357.5 million, respectively.
7. PROPERTY, PLANT AND EQUIPMENT
The major categories of property, plant and equipment follow:
IN THOUSANDS 2000 1999
- ---------------------------------------------------------------------------------
Land and land improvements $ 17,238 $ 20,319
Buildings 149,620 146,042
Machinery and equipment 496,175 455,084
Construction in progress 25,682 35,771
- ---------------------------------------------------------------------------------
Total property and equipment 688,715 657,216
Less accumulated depreciation and amortization 335,731 289,433
- ---------------------------------------------------------------------------------
Property, plant and equipment, net $352,984 $367,783
=================================================================================
8. DEBT
CREDIT FACILITIES
We have committed revolving credit facilities totaling $725 million (the
Facilities), consisting of a $335 million 364-day facility that expires on
August 30, 2001, and $390 million of multi-currency facilities that expire on
September 2, 2004.
We are authorized to sell $725 million of short-term commercial paper notes with
the Facilities used as back-up liquidity to support 100 percent of commercial
paper outstanding. As of the end of 2000, we had $423.3 million of aggregate
commercial paper outstanding that matures within 60 days, of which, $315.2
million was classified as long-term and $108.1 million was classified as
short-term borrowings in the consolidated balance sheets. The $315.2 million has
been classified as long-term as we intend and have the ability to refinance such
obligations on a long-term basis. Short-term borrowings as of the end of 1999
consisted of $150.6 million in bank borrowings under the 364-day facility.
Interest rates and fees on the Facilities vary based on our debt ratings by
credit rating agencies. Aggregate borrowings on the Facilities had a
weighted-average interest rate of 6.71 percent in 2000 and 6.10 percent in 1999.
In addition to the Facilities, we have $56.4 million of uncommitted credit
facilities. As of the end of 2000, we had no borrowings under this agreement.
32
33
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Due to poor operating results in our Tools and discontinued Equipment segments
as well as restructuring charges taken in the fourth quarter, we determined that
we could potentially be in violation of certain covenants under our Facilities.
In December 2000, we received a waiver modifying our interest coverage and
leverage ratio covenants from our bank lenders. Subsequent to year-end, we
amended our Facility agreements to modify these ratios through September 30,
2001. We will be required to meet our original interest coverage and leverage
ratios as of the end of 2001.
Our debt agreements contain certain financial covenants that restrict the amount
paid for dividends and certain other payments, and require us to maintain
certain financial ratios and a minimum net worth. Under the most restrictive
covenants, $149.7 million of retained earnings were restricted as of the end of
2000. We were in compliance with all covenants, as modified.
In December 2000, the credit rating agencies announced they were reviewing our
ratings for possible downgrade. Since that announcement, we have been unable to
access the commercial paper markets and have been refinancing maturing
commercial paper with borrowings under the revolving credit facilities. If we
continue to be unable to access the commercial paper markets or our credit
ratings are lowered, our borrowing costs will increase. We have sufficient
liquidity under the Facilities to refinance all outstanding commercial paper.
In October 1999, we issued $250 million of 7.85 percent Senior notes due October
2009. The proceeds were used to repay other outstanding debt.
Long-term debt and the average interest rate on debt outstanding as of December
31, is summarized as follows:
Average Maturity
In thousands interest rate (Year) 2000 1999
- --------------------------------------------------------------------------------------------------
Commercial paper, maturing within 60 days 7.04% 2004 $315,172 $ --
Revolving credit facilities 7.22% 2004 74,828 440,000
Private placement 6.80% 2001-2007 149,814 174,694
Senior notes 7.85% 2009 250,000 250,000
Other Various 2001-2006 16,019 19,778
- --------------------------------------------------------------------------------------------------
Long-term debt, including current portion 805,833 884,472
Less current maturities of long-term debt (23,999) (27,176)
- --------------------------------------------------------------------------------------------------
Long-term debt $781,834 $857,296
==================================================================================================
Long-term debt outstanding at December 31, 2000 matures as follows:
IN THOUSANDS 2001 2002 2003 2004 2005 THEREAFTER TOTAL
- -------------------------------------------------------------------------------------
Maturities $23,999 $7,512 $53,230 $433,179 $357 $287,556 $805,833
=====================================================================================
9. FINANCIAL INSTRUMENTS
INTEREST RATE SWAP AND CAP AGREEMENTS
We have 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 the end of 2000, we had swap agreements outstanding with an aggregate
notional amount of $74.5 million that expire in various amounts through June
2005. The swap agreements have a fixed interest rate of 6.31 percent and an
average remaining maturity of 3 years. The net fair value of our swap agreements
as of the end of 2000 was a net liability of $0.8 million.
33
34
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of the end of 2000, we had a 35 million Deutschemark interest rate cap
agreement outstanding that expires in November 2001, with a capped interest rate
of 7.29 percent DEM-LIBOR.
FOREIGN CURRENCY SWAP AGREEMENTS
We have entered into foreign currency swap agreements with major financial
institutions to hedge firm foreign currency commitments. The original term of
the currency swap agreements ranged from 3 to 6 years and mature on October 1,
2003. The notional amounts 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 recognized in income as
part of the underlying transaction. Deferred unrealized gains, based on
dealer-quoted prices, are as follows:
IN THOUSANDS 2000 1999
- ---------------------------------------------------------------------------------
Notional amounts $100,000 $128,431
Gains 7,506 5,322
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts and estimated fair values of financial instruments,
including derivative financial instruments were as follows:
2000 1999
-----------------------------------------
RECORDED FAIR RECORDED FAIR
IN THOUSANDS AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------
Long-term debt, including current portion $805,833 $789,087 $884,472 $899,726
Derivative financial instruments:
Interest rate swap asset (liability) -- (826) -- 1,518
Interest rate cap asset (liability) -- 59 -- (120)
Currency swap asset (liability) -- 7,506 -- 5,322
The following methods were used to estimate the fair values of each class of
financial instrument:
- - short-term financial instruments (cash and cash equivalents, accounts and
notes receivable, accounts and notes payable, and short-term
borrowings) -- recorded amount approximates fair value because of the short
maturity period;
- - long-term debt, including current maturities -- fair value is based on market
quotes available for issuance of debt with similar terms;
- - interest rate swap and cap agreements -- fair value is based on market or
dealer quotes; and
- - currency swap -- fair value is based on market or dealer quotes.
10. INCOME TAXES
Income from continuing operations before income taxes consisted of the
following:
IN THOUSANDS 2000 1999 1998
- --------------------------------------------------------------------------------------------
United States $ 89,111 $146,420 $133,187
International 38,020 11,724 11,200
- --------------------------------------------------------------------------------------------
Income from continuing operations before taxes $127,131 $158,144 $144,387
============================================================================================
34
35
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes from continuing operations consisted of the
following:
IN THOUSANDS 2000 1999 1998
- -----------------------------------------------------------------------------------------
Currently payable:
Federal $18,869 $48,122 $38,895
State 2,132 8,220 8,620
International 16,708 8,869 2,581
- -----------------------------------------------------------------------------------------
Total current taxes 37,709 65,211 50,096
Deferred:
Federal 11,317 11 2,280
International (3,763) (5,166) 1,291
- -----------------------------------------------------------------------------------------
Total deferred taxes 7,554 (5,155) 3,571
- -----------------------------------------------------------------------------------------
Total provision for income taxes $45,263 $60,056 $53,667
=========================================================================================
Reconciliation of the U.S. statutory income tax rate to our effective tax rate
for continuing operations follows:
2000 1999 1998
- --------------------------------------------------------------------------------
U.S. statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit 2.1% 3.6% 4.2%
Tax effect of foreign operations (5.6%) (2.8%) (3.0%)
Non-deductible amortization of goodwill 7.0% 3.3% 1.6%
ESOP dividend benefit (0.6%) (0.6%) (0.9%)
Tax credits (2.4%) (0.7%) 0.0%
All other, net 0.1% 0.2% 0.3%
- --------------------------------------------------------------------------------
Effective tax rate on continuing operations 35.6% 38.0% 37.2%
================================================================================
Deferred taxes arise because of different treatment between financial statement
accounting and tax accounting, known as "temporary differences." We record the
tax effect of these temporary differences as "deferred tax assets" (generally
items that can be used as a tax deduction or credit in future periods) and
"deferred tax liabilities" (generally items that we received a tax deduction
for, but not yet been recorded in the consolidated statements of income).
The tax effects of the major items recorded as deferred tax assets and
liabilities are:
2000 1999
DEFERRED TAX DEFERRED TAX
-------------------------------------------------------
IN THOUSANDS ASSETS LIABILITIES ASSETS LIABILITIES
- -----------------------------------------------------------------------------------------------------------
Accounts receivable allowances $ 8,185 $ -- $ 6,402 $ --
Inventory allowances 10,194 -- 3,702 --
Accelerated depreciation/amortization -- 23,166 -- 24,386
Accrued product claims and warranties 31,791 -- 25,739 --
Employee benefit accruals 39,113 -- 40,994 --
Other, net -- 30,673 -- 7,727
- -----------------------------------------------------------------------------------------------------------
Subtotal 89,283 53,839 76,837 32,113
Valuation allowance -- -- -- --
- -----------------------------------------------------------------------------------------------------------
Total deferred taxes $89,283 $53,839 $76,837 $32,113
===========================================================================================================
Net deferred tax asset $35,444 $44,724
===========================================================================================================
35
36
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. BENEFIT PLANS
PENSION AND POSTRETIREMENT BENEFITS
We have various non-contributory defined-benefit pension plans that cover nearly
all U.S. employees and many employees outside the United States. Pension
benefits are based principally on an employee's years of service and/or
compensation levels near retirement. Our pension funding policy is to deposit
with independent trustees amounts as required by applicable law. In addition, we
also provide certain postretirement health care and life insurance benefits for
nearly all retirees. Generally, the postretirement health care and life
insurance plans require contributions from retirees.
The weighted-average assumptions used for these plans consisted of:
PENSION BENEFITS POSTRETIREMENT
---------------------------------------
2000 1999 1998 2000 1999 1998
- -----------------------------------------------------------------------------------------------
Discount rate 7.75% 7.75% 6.75% 7.75% 7.75% 6.75%
Expected return on plan assets 8.50% 8.50% 8.50% -- -- --
Rate of compensation increase 5.00% 5.00% 5.00% -- -- --
Components of the net periodic benefit cost are as follows:
PENSION BENEFITS POSTRETIREMENT
---------------------------------------------------------
IN THOUSANDS 2000 1999 1998 2000 1999 1998
- ----------------------------------------------------------------------------------------------------
Service cost $ 11,922 $ 12,796 $ 12,146 $ 376 $ 466 $ 407
Interest cost 20,744 18,651 17,702 2,145 1,744 1,622
Expected return on plan assets (27,439) (25,476) (23,858) -- --
Amortization of transition (asset) (134) (176) (181) -- -- --
Amortization of prior year service cost
(benefit) 535 689 1,608 (591) (591) (451)
Recognized net actuarial (gain) (4,777) (3,114) (703) (59) (51) (91)
Special termination benefits 2,191 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 3,042 $ 3,370 $ 6,714 $1,871 $1,568 $1,487
====================================================================================================
36
37
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables present reconciliations of the benefit obligation of the
plans, the plan assets of the pension plans, and the funded status of the plans:
PENSION BENEFITS POSTRETIREMENT
-----------------------------------------
IN THOUSANDS 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation beginning of year $278,629 $282,065 $ 28,783 $ 25,539
Service cost 11,922 12,796 376 466
Interest cost 20,744 18,651 2,145 1,744
Plan amendments 347 834 (91) --
Actuarial (gain) loss 7,673 (30,642) (2,835) 129
Special termination benefits 2,191 -- -- --
Acquisition -- 10,317 -- 3,009
Translation (gain) loss (1,341) (3,392) -- --
Benefits paid (18,304) (12,000) (1,130) (2,104)
- ----------------------------------------------------------------------------------------------
Benefit obligation end of year $301,861 $278,629 $ 27,248 $ 28,783
==============================================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets beginning of year $332,530 $297,335 $ -- $ --
Actual return on plan assets (13,937) 36,331 -- --
Acquisition -- 9,888 -- --
Company contributions 1,400 1,155 1,130 2,104
Translation (gain) loss (356) (179) -- --
Benefits paid (18,304) (12,000) (1,130) (2,104)
- ----------------------------------------------------------------------------------------------
Fair value of plan assets end of year $301,333 $332,530 $ -- $ --
==============================================================================================
FUNDED STATUS
Plan assets in excess of/(less than) benefit
obligation $ (528) $ 53,901 $(27,248) $(28,783)
Unrecognized cost:
Net transition (asset) obligation -- (134) -- --
Net actuarial (gains) (40,877) (96,590) (12,672) (6,849)
Prior service cost (benefit) 3,260 3,448 (1,864) (2,365)
- ----------------------------------------------------------------------------------------------
Net amount recognized $(38,145) $(39,375) $(41,784) $(37,997)
==============================================================================================
The components in the consolidated balance sheets consist of:
PENSION BENEFITS POSTRETIREMENT
-----------------------------------------
IN THOUSANDS 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------
Prepaid benefit cost $ 7,222 $ 6,199 $ -- $ --
Accrued benefit liability (50,888) (48,617) (41,784) (37,997)
Intangible asset 1,532 1,429 -- --
Accumulated other comprehensive income -- pre-tax 3,989 1,614 -- --
- ----------------------------------------------------------------------------------------------
Net amount recognized $(38,145) $(39,375) $(41,784) $(37,997)
==============================================================================================
Plan assets consist primarily of listed stocks and bonds as well as cash and
short-term investments. Our common stock accounted for approximately 7 percent
and 10 percent of plan assets as of the end of 2000 and 1999, respectively.
37
38
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pension plans with obligations in excess of plan assets were as follows:
IN THOUSANDS 2000 1999
- -------------------------------------------------------------------------------
Pension plans with an accumulated benefit obligation in
excess of plan assets:
Fair value of plan assets $ 827 $ --
Accumulated benefit obligation 51,330 39,757
Pension plans with a benefit obligation in excess of plan
assets:
Fair value of plan assets $ 827 $ 227
Benefit obligation 55,362 45,187
A one-percentage point change in the assumed health care cost trend rate would
have the following effects:
IN THOUSANDS INCREASE DECREASE
- ---------------------------------------------------------------------------------
Effect on total of service and interest cost $ 81 $ (69)
Effect on postretirement benefit obligation 766 (663)
Health care cost trend rate was 9.62 percent in 2000 and assumed
to gradually decline to 6 percent in 2019.
SAVINGS PLAN
We have a 401(k) plan (the plan) with an employee stock ownership (ESOP) bonus
component, which covers certain union and nearly all-nonunion U.S. employees who
meet certain age requirements. Under the plan, eligible U.S. employees may
voluntarily contribute a percentage of their eligible compensation. Matching
contributions are made to employees who meet certain eligibility and service
requirements. Our matching contribution is based on our financial performance
and ranges from 30 percent to 90 percent of eligible employee contributions,
limited to 4 percent of compensation contributed by employees. Beginning in
1999, our annual matching contribution was in the form of cash. Prior to 1999,
matching contributions were made in the form of Pentair 8% Callable Cumulative
Voting Convertible Preferred Stock, Series 1990, and were allocated to eligible
employees based on a fixed acquisition price of $30.25 per share.
In addition to the matching contribution, all employees who meet certain service
requirements receive a discretionary ESOP contribution. In 2000 and 1999, the
discretionary contribution was equal to 1.5 percent of annual eligible
compensation and was 1 percent in 1998.
Our combined contributions to the 401(k) and ESOP were $11.9 million, $9.2
million, and $7.1 million in 2000, 1999, and 1998, respectively.
12. SHAREHOLDERS' EQUITY
AUTHORIZED SHARES
We may issue up to 250 million shares of common stock. Our Board of Directors
may designate up to 15 million of those shares as preferred stock.
COMMON SHARE PURCHASE RIGHTS
We have a ten-year Share Rights Agreement dated July 31, 1995. Under this
agreement, each outstanding share of our common stock has one common share
purchase right attached to it and entitle the holder to purchase one share of
our common stock, at the current price of $80 per share, subject to adjustment.
However, these rights are not exercisable unless certain change-in-control
events transpire, such as a person acquiring or obtaining the right to acquire
beneficial ownership of 15 percent or more of our outstanding common stock.
The rights are redeemable by us for $0.01 per right until ten business days
after certain defined change-in-control events transpire, or at any time prior
to the expiration of the rights.
38
39
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SHARE REPURCHASES
In December 1999, the Board of Directors authorized the repurchase of up to
400,000 shares of our common stock in open market or negotiated transactions.
13. STOCK PLANS
OMNIBUS STOCK INCENTIVE PLAN
In April 1996, the Omnibus Stock Incentive Plan (the Plan) was approved. The
Plan authorizes the issuance of additional shares of our common stock and
extends through February 2006. 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.
The Plan is administered by our Compensation and Human Resources Committee (the
Committee), which is made up of members of our Board of Directors. Employees
eligible to receive awards under the Plan are managerial, administrative, or
other key employees who are in a position to make a material contribution to the
continued profitable growth and long-term success of Pentair. The Committee has
the authority to select the recipients of awards, determine the type and size of
awards, establish certain terms and conditions of award grants, and take certain
other actions as permitted under the Plan. The Plan provides that no more than
20 percent of the total shares available for issuance under the Plan may be used
to make awards other than stock options and limits the Committee's authority to
reprice awards or to cancel and reissue awards at lower prices.
INCENTIVE STOCK OPTIONS
We may grant stock options to any eligible employee with an exercise
price equal to 100 percent of the market value of the shares on the dates
the options were granted. Options are generally exercisable after five
years or less, subject to continuous employment and certain other
conditions and have expiration dates of five to ten years after the grant
date.
RESTRICTED STOCK, RIGHTS TO RESTRICTED STOCK AND ICUS
Under the Plan, eligible employees are awarded restricted shares or
rights to restricted shares (awards) of our common stock and ICUs.
Restrictions on awards and ICUs generally expire from three to five years
after issuance, subject to continuous employment and certain other
conditions. Restricted stock awards are recorded at market value on the
date of the grant as unearned compensation. Unearned compensation is
shown as a reduction of shareholders' equity in our consolidated
financial statements and is being amortized to expense over the
restriction period. The value of ICUs is based on a matrix, which takes
into account growth in operating income and return on invested capital.
Annual compensation expense for the value of restricted stock and ICUs
was $0.1 million in 2000, $7.3 million in 1999 and $6.1 million in 1998.
OUTSIDE DIRECTORS NONQUALIFIED STOCK OPTION PLAN
Nonqualified stock options are granted to outside directors under the Outside
Directors Nonqualified Stock Option Plan (the Directors Plan) with an exercise
price equal to 100 percent of the market value of the shares on the dates the
options were granted. Options generally expire after five years, but may expire
up to ten years from the date of grant. The Directors Plan extends to January
2008.
39
40
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS
The following table summarizes stock option activity under all plans:
OPTIONS OUTSTANDING
2000 1999 1988
------------------------------------------------------------------
Exercise Exercise Exercise
Shares price(1) Shares price(1) Shares price(1)
- -----------------------------------------------------------------------------------------------------
BALANCE JANUARY 1 1,522,518 $33.21 1,483,472 $28.41 1,359,822 $23.93
Granted 693,321 34.88 431,972 39.55 424,100 35.75
Exercised (301,664) 24.82 (384,486) 21.44 (280,344) 18.44
Canceled (87,819) 36.44 (8,440) 34.33 (20,106) 29.70
- -----------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31 1,826,356 $35.07 1,522,518 $33.21 1,483,472 $28.41
=====================================================================================================
OPTIONS EXERCISABLE -- DECEMBER
31 788,999 $33.65 710,468 $28.67 739,385 $23.77
SHARES AVAILABLE FOR GRANT -- DECEMBER 31
Omnibus Plan 1,108,787 1,970,055 2,419,774
Directors Plan 372,798 384,498 395,973
- -----------------------------------------------------------------------------------------------------
TOTAL 1,481,585 2,354,553 2,815,747
=====================================================================================================
(1) Weighted average
The following table summarizes information concerning stock options outstanding
as of the end of 2000 under all plans:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------
Remaining
Range of life(1) Exercise Exercise
exercise prices Shares (in years) price(1) Shares price(1)
- -----------------------------------------------------------------------------------
$21.00-$25.00 136,512 4.6 $23.15 73,512 $25.00
25.01- 30.00 960 7.1 26.85 300 29.13
30.01- 35.00 668,876 3.7 33.16 547,556 32.77
35.01- 40.00 973,100 8.0 37.67 138,508 39.58
40.01- 45.00 21,599 6.9 41.48 12,248 41.74
45.01- 50.00 25,309 7.3 45.14 16,875 45.15
- -----------------------------------------------------------------------------------
1,826,356 6.2 $35.07 788,999 $33.65
===================================================================================
(1) Weighted average
We apply APB 25 and related interpretations in accounting for employee stock
options. Accordingly, no compensation expense has been recognized related to
stock options. The following table summarizes results as if we had recorded
compensation expense for our stock option plans under SFAS 123.
IN THOUSANDS, EXCEPT PER-SHARE DATA 2000 1999 1998
- -------------------------------------------------------------------------------------------
INCOME AVAILABLE TO COMMON SHAREHOLDERS
As reported $55,887 $103,309 $102,573
Pro forma $52,307 $100,519 $100,608
EARNINGS PER COMMON SHARE -- BASIC
As reported $ 1.15 $ 2.36 $ 2.67
Pro forma $ 1.08 $ 2.29 $ 2.62
EARNINGS PER COMMON SHARE -- DILUTED
As reported $ 1.15 $ 2.33 $ 2.46
Pro forma $ 1.08 $ 2.27 $ 2.42
40
41
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted-average fair value of options granted in 2000, 1999 and 1998 was
$10.93, $12.20 and $9.44 per option, respectively. We estimated the fair values
using the Black-Scholes option-pricing model, modified for dividends and using
the following assumptions:
2000 1999 1998
- --------------------------------------------------------------------------------
Risk-free rate 4.5% 6.5% 4.6%
Dividend yield 2.0% 1.7% 1.7%
Expected stock price volatility 40% 34% 31%
Expected term until exercise (years):
Omnibus Plan 2.07 1.91 1.91
Directors Plan 2.24 2.13 2.17
The expected life was determined separately for each plan due to varying
exercise patterns. The fair value of options is amortized to expense over a
three-year option-vesting period in determining the pro forma impact.
14. BUSINESS SEGMENTS
We classify our continuing operations into the following business segments:
- - TOOLS -- which manufactures and markets tool products positioned at the
high-end of the market and targets professionals and upscale hobbyists. Tools
segment products include woodworking machinery, portable power tools,
compressors, generators, and pressure washers.
- - WATER -- which manufactures and markets essential products for the transport
and treatment of water, wastewater and fluids. Water segment products include
water and wastewater pumps, control valves, pumps and pumping stations for
thick fluid transfer applications, storage tanks, filtration systems, and pool
and spa accessories.
- - ENCLOSURES -- which designs, manufactures, and markets customized and standard
metal and composite enclosures that house and protect sensitive controls and
components for markets that include data communications, networking,
telecommunications, automotive, and general electronics. Products include
metallic and composite enclosures, cabinets, cases, subracks, thermal
management backplanes and power supplies.
- - OTHER -- is primarily composed of corporate expenses, our insurance
subsidiary, intermediate finance companies, divested operations, discontinued
operations, and intercompany eliminations.
The accounting policies of our operating segments are the same as those
described in the summary of significant accounting policies. We evaluate
performance based on the operating income of the segment and use a variety of
ratios to measure performance.
41
42
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial information by reportable business segment is included in the
following summary:
IN THOUSANDS 2000 1999 1998 2000 1999 1998
- -----------------------------------------------------------------------------------------------------
NET SALES TO EXTERNAL CUSTOMERS OPERATING INCOME (LOSS)
------------------------------------ ------------------------------
Tools $1,066,616 $ 875,643 $ 661,782 $ 23,751 $100,680 $ 80,383
Water 903,672 582,927 441,030 120,732 73,362 56,264
Enclosures 777,725 657,500 586,829 96,268 46,346 46,026
Other -- -- -- (38,721) (18,662) (18,431)
- -----------------------------------------------------------------------------------------------------
CONSOLIDATED $2,748,013 $2,116,070 $1,689,641 $202,030 $201,726 $164,242
=====================================================================================================
IDENTIFIABLE ASSETS(1) DEPRECIATION AND AMORTIZATION
- -----------------------------------------------------------------------------------------------------
Tools $ 864,051 $ 936,096 $ 338,466 $26,692 $16,898 $11,082
Water 990,730 953,736 442,048 37,232 28,167 16,956
Enclosures 558,160 547,705 535,811 29,797 35,259 32,285
Other(1) 231,084 268,979 167,882 5,307 1,744 1,731
- -----------------------------------------------------------------------------------------------------
CONSOLIDATED $2,644,025 $2,706,516 $1,484,207 $99,028 $82,068 $62,054
=====================================================================================================
CAPITAL EXPENDITURES
- --------------------------------------------------------------------
Tools $23,154 $23,019 $14,237 (1) Segment assets include all
Water 11,966 12,413 10,112 assets except cash and cash
Enclosures 20,254 14,395 17,320 equivalents. These assets
Other 12,667 3,844 1,666 are included in Other, which
- -------------------------------------------------------------------- also includes the net assets
CONSOLIDATED $68,041 $53,671 $43,335 of discontinued operations.
====================================================================
OPERATING INCOME
Tools segment operating income includes:
- - restructuring charge expense of $5.4 million in 2000 and $6.3 million expense
in 1999; and
- - one-time working capital charges of $30 million in 2000 to establish
additional accounts receivable ($22 million) and inventory valuation ($8
million) reserves.
Enclosures segment operating income includes:
- - restructuring charge income of $(1.6) million in 2000 and $16.7 million
expense in 1999.
Other segment operating income includes:
- - restructuring charge expense of $21.0 million in 2000.
The following table presents certain geographic information:
IN THOUSANDS 2000 1999 1998 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
NET SALES TO EXTERNAL CUSTOMERS LONG-LIVED ASSETS
------------------------------------ ----------------------------------
United States $2,339,478 $1,754,961 $1,368,954 $1,308,169 $1,324,577 $488,058
Canada 59,976 58,077 54,785 752 557 387
Germany 129,884 136,131 141,244 84,594 92,389 115,100
All other 218,675 166,901 124,658 100,571 114,316 116,737
- ---------------------------------------------------------------------------------------------------------
CONSOLIDATED $2,748,013 $2,116,070 $1,689,641 $1,494,086 $1,531,839 $720,282
=========================================================================================================
Net sales are based on the location in which the sale originated. Long-lived
assets include property, plant and equipment, and goodwill, net of related
depreciation and amortization.
42
43
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We sell our products through various distribution channels including home
centers and retail chains. In 2000, sales to The Home Depot, a major customer of
our Tools segment, accounted for approximately 10.5 percent of total net sales.
In addition, three customers accounted for about 58 percent of our Tools segment
net sales, which if lost, would have a material adverse effect on the segment.
15. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Rental expense under operating leases was $35.4 million, $25.0 million and $20.7
million in 2000, 1999 and 1998, respectively. The minimum lease commitments
under non-cancelable operating leases is as follows:
IN THOUSANDS 2001 2002 2003 2004 2005 THEREAFTER TOTAL
- --------------------------------------------------------------------------------------------------
Lease commitments $29,976 $25,294 $16,716 $11,800 $9,484 $11,664 $104,934
==================================================================================================
Environmental
Under current laws and regulations, our obligations relating to environmental
matters are not expected to have a material impact on our 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, our subsidiaries have been named as potentially
responsible parties at a small number of Superfund or other sites being studied
or remediated. Generally, the affected business has been deemed to be a de
minimis defendant or its share of remediation costs has not been material. We
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 our operations in the recent past and are not anticipated to be
material in 2001.
We engage environmental professionals to perform periodic audits of our
facilities and to assist us in complying with the various environmental laws and
regulations faced by our businesses. For purposes of maintaining appropriate
reserves against liabilities associated with environmental issues, whether
involving on- or off-site locations, we review 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.
LITIGATION
We are occasionally a party to litigation arising in the normal course of
business. We regularly analyze current information and, as necessary, provide
accruals for probable liabilities on the eventual disposition of these matters.
We believe the effect on our consolidated results of operations and financial
position, if any, for the disposition of all currently pending matters will not
be material.
43
44
PENTAIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST(1) SECOND(2) THIRD
--------------------- --------------------- ---------------------
AS AS AS
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
2000 (IN THOUSANDS, EXCEPT PER-SHARE DATA) REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED FOURTH(1)(2)
- --------------------------------------------------------------------------------------------------------------------------------
Net sales $659,010 $647,691 $730,410 $733,761 $683,518 $691,784 $674,777
Gross profit 182,511 179,902 191,730 192,147 170,350 172,859 151,590
Operating income 74,678 72,752 78,495 79,437 59,840 61,350 (11,509)
Income (loss) from continuing operations 34,874 33,641 38,070 38,673 27,055 28,021 (18,467)
Income (loss) from discontinued
operations, net of tax (975) (975) (1,440) (1,440) (14,382) (14,382) (7,962)
Cumulative effect of accounting change,
net of tax -- (1,222) -- -- -- -- --
Net income 33,899 31,444 36,630 37,233 12,673 13,639 (26,429)
EARNINGS PER COMMON SHARE(4)
BASIC
Continuing operations $ 0.72 $ 0.69 $ 0.78 $ 0.80 $ 0.56 $ 0.58 $ (0.38)
Income (loss) from discontinued operations (0.02) (0.02) (0.03) (0.03) (0.30) (0.30) (0.16)
Cumulative effect of accounting change -- (0.02) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 0.70 $ 0.65 $ 0.75 $ 0.77 $ 0.26 $ 0.28 $ (0.54)
================================================================================================================================
DILUTED
Continuing operations $ 0.72 $ 0.69 $ 0.78 $ 0.79 $ 0.56 $ 0.58 $ (0.38)
Income (loss) from discontinued operations (0.02) (0.02) (0.03) (0.03) (0.30) (0.30) (0.16)
Cumulative effect of accounting change -- (0.02) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 0.70 $ 0.65 $ 0.75 $ 0.76 $ 0.26 $ 0.28 $ (0.54)
================================================================================================================================
2000 (IN THOUSANDS, EXCEPT PER-SHARE DATA) YEAR(1)(2)
- ------------------------------------------ ----------
Net sales $2,748,013
Gross profit 696,498
Operating income 202,030
Income (loss) from continuing operations 81,868
Income (loss) from discontinued
operations, net of tax (24,759)
Cumulative effect of accounting change,
net of tax (1,222)
Net income 55,887
EARNINGS PER COMMON SHARE(4)
BASIC
Continuing operations $ 1.68
Income (loss) from discontinued operations (0.51)
Cumulative effect of accounting change (0.02)
- ------------------------------------------
Basic earnings per common share $ 1.15
==========================================
DILUTED
Continuing operations $ 1.68
Income (loss) from discontinued operations (0.51)
Cumulative effect of accounting change (0.02)
- ------------------------------------------
Diluted earnings per common share $ 1.15
==========================================
FIRST(3) SECOND THIRD FOURTH
---------------------- ---------------------- ---------------------- ----------
AS AS AS AS
PREVIOUSLY PREVIOUSLY PREVIOUSLY PREVIOUSLY
1999 (IN THOUSANDS, EXCEPT PER-SHARE DATA) REPORTED PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA REPORTED
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales $408,240 $409,262 $439,188 $438,799 $546,586 $542,396 $722,056
Gross profit 115,163 115,465 122,869 122,887 150,422 149,093 198,197
Operating income 17,551 17,706 43,287 43,306 56,170 55,223 84,718
Income (loss) from continuing operations 8,299 8,395 23,613 23,625 26,549 25,962 39,627
Income (loss) from discontinued
operations, net of tax (6,059) (6,059) 4,672 4,672 3,260 3,260 3,348
Net income 2,240 2,336 28,285 28,297 29,809 29,222 42,975
EARNINGS PER COMMON SHARE(4)
BASIC
Continuing operations $ 0.19 $ 0.19 $ 0.55 $ 0.55 $ 0.62 $ 0.61 $ 0.83
Income (loss) from discontinued operations (0.14) (0.14) 0.11 0.11 0.08 0.08 0.07
- ---------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 0.05 $ 0.05 $ 0.66 $ 0.66 $ 0.70 $ 0.69 $ 0.90
=================================================================================================================================
DILUTED
Continuing operations $ 0.19 $ 0.19 $ 0.55 $ 0.55 $ 0.61 $ 0.59 $ 0.83
Income (loss) from discontinued operations (0.14) (0.14) 0.11 0.11 0.08 0.08 0.07
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 0.05 $ 0.05 $ 0.66 $ 0.66 $ 0.69 $ 0.67 $ 0.90
=================================================================================================================================
FOURTH YEAR(3)
--------- -----------------------
AS
PREVIOUSLY
1999 (IN THOUSANDS, EXCEPT PER-SHARE DATA) PRO FORMA REPORTED PRO FORMA
- ------------------------------------------ -----------------------------------
Net sales $722,777 $2,116,070 $2,113,234
Gross profit 198,430 586,651 585,875
Operating income 84,626 201,726 200,861
Income (loss) from continuing operations 39,532 98,088 97,514
Income (loss) from discontinued
operations, net of tax 3,348 5,221 5,221
Net income 42,880 103,309 102,735
EARNINGS PER COMMON SHARE(4)
BASIC
Continuing operations $ 0.83 $ 2.24 $ 2.23
Income (loss) from discontinued operations 0.07 0.12 0.12
- ------------------------------------------
Basic earnings per common share $ 0.90 $ 2.36 $ 2.35
==========================================
DILUTED
Continuing operations $ 0.83 $ 2.21 $ 2.20
Income (loss) from discontinued operations 0.07 0.12 0.12
- ------------------------------------------
Diluted earnings per common share $ 0.90 $ 2.33 $ 2.32
==========================================
The above quarterly financial information does not agree to previously filed
quarterly reports on Form 10-Q as:
- - all financial information reflects our Equipment segment (Century/Lincoln and
Lincoln Industrial businesses) as discontinued operations; and
- - we have restated all financial information for the adoption of EITF 00-10.
In addition, as restated and pro forma quarterly financial information reflects
the impact of the adoption of SAB 101 on January 1.
(1) First quarter 2000 net income reflects pre-tax restructuring charge (income)
of $(2.5) million, or $(0.03) per share, and fourth quarter net income
reflects pre-tax restructuring charge expense of $27.3, or $0.36 per share.
(2) Second quarter 2000 net income reflects a one-time pre-tax cost to establish
an additional $5.0 million in accounts receivable reserves. Fourth quarter
2000 net income reflects one-time pre-tax costs to establish an additional
$25.0 million for accounts receivable ($17.0 million) and inventory
valuation ($8.0 million) reserves.
(3) First quarter 1999 net income reflects pre-tax restructuring charge expense
of $23.0 million, or $0.34 per share.
(4) Amounts may not total to the annual earnings per share because each quarter
and the year are calculated separately based on basic and diluted weighted
average common shares outstanding during that period.
44
45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Information required under this item with respect to Directors is contained in
our Notice of Annual Meeting of Shareholders and Proxy Statement under the
captions "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is contained in our Notice of Annual
Meeting of Shareholders and Proxy Statement under the captions "Election of
Directors" and "Executive Compensation" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is contained in our Notice of Annual
Meeting of Shareholders and Proxy Statement under the caption "Security
Ownership of Management and Beneficial Ownership" and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE.
45
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS
Consolidated Statements of Income for the Years Ended
December 31, 2000, 1999 and 1998
Consolidated Balance Sheets as of December 31, 2000 and
December 31, 1999
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission have been omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
(3) EXHIBITS
3.1 Second Restated Articles of Incorporation as amended through
June 14, 1999 (Incorporated by reference to Exhibit 3.1
contained in Pentair's Amendment 1 to Registration
Statement on Form S-3 dated July 16, 1999).
3.2 Third Amended and Restated By-Laws as amended effective
August 23, 2000 (Incorporated by reference to Exhibit 3.2
contained in Pentair's Current Report on Form 8-K filed
September 21, 2000).
4.1 Rights Agreement as of July 21, 1995 between Norwest Bank
N.A. and Pentair, Inc. (Incorporated by reference to Exhibit
4.1 contained in Pentair's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1995).
4.2 Form of Indenture, dated June 1, 1999, between Pentair, Inc.
and U.S. Bank National Association, as Trustee.
10.1 Pentair's Supplemental Employee Retirement Plan as Amended
and Restated effective August 23, 2000 (Incorporated by
reference to Exhibit 10.1 contained in Pentair's Current
Report on Form 8-K filed September 21, 2000).
10.2 Pentair's 1999 Supplemental Executive Retirement Plan as
Amended and Restated effective August 23, 2000 (Incorporated
by reference to Exhibit 10.2 contained in Pentair's
Current Report on Form 8-K filed September 21, 2000).
10.3 Pentair's Restoration Plan as Amended and Restated effective
August 23, 2000 (Incorporated by reference to Exhibit 10.3
contained in Pentair's Current Report on Form 8-K filed
September 21, 2000).
10.4 Pentair's Omnibus Stock Incentive Plan as Amended and
Restated (Incorporated by reference to Exhibit 10.1
contained in Pentair's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1996).
10.5 Pentair's First Amendment effective August 23, 2000 to
Omnibus Stock Incentive Plan as Amended and Restated
effective February 14, 1996 (Incorporated by reference to
Exhibit 10.4 contained in Pentair's Current Report on Form
8-K filed September 21, 2000).
46
47
10.6 Fourth Amended and Restated Compensation Plan for
Non-Employee Directors (Incorporated by reference to Exhibit
10.12 contained in Pentair's Annual Report on Form 10-K
for the year ended December 31, 1996).
10.7 Amendment effective August 23, 2000 to Pentair's Fourth
Amended and Restated Compensation Plan for Non-Employee
Directors (Incorporated by reference to Exhibit 10.5
contained in Pentair's Current Report on Form 8-K filed
September 21, 2000).
10.8 Pentair, Inc. Outside Directors Nonqualified Stock Option
Plan dated January 15, 1998 (Incorporated by reference to
Exhibit 10.8 contained in Pentair's Annual Report on Form
10-K for the year ended December 31, 1997).
10.9 Amendment effective August 23, 2000 to Pentair's Outside
Directors Non-Qualified Stock Option Plan (Incorporated by
reference to Exhibit 10.6 contained in Pentair's Current
Report on Form 8-K filed September 21, 2000).
10.10 Pentair, Inc. Deferred Compensation Plan effective January
1, 1993 (Incorporated by reference to Exhibit 10.21
contained in Pentair's Annual Report on Form 10-K for the
year ended December 31, 1992).
10.11 Amendment effective August 23, 2000 to Pentair's Deferred
Compensation Plan effective January 1, 1993 (Incorporated by
reference to Exhibit 10.7 contained in Pentair's Current
Report on Form 8-K filed September 21, 2000).
10.12 Pentair, Inc. Non-Qualified Deferred Compensation Plan
effective January 1, 1996 (Incorporated by reference to
Exhibit 10.17 contained in Pentair's Annual Report on Form
10-K for the year ended December 31, 1995).
10.13 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 contained in Pentair's Annual Report on Form
10-K for the year ended December 31, 1995).
10.14 Amendment effective August 23, 2000 to Pentair's
Non-Qualified Deferred Compensation Plan effective January
1, 1996 (Incorporated by reference to Exhibit 10.8
contained in Pentair's Current Report on Form 8-K filed
September 21, 2000).
10.15 Executive Officer Performance Plan (Incorporated by
reference to Exhibit 10.14 contained in Pentair's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.16 Amendment effective August 23, 2000 to Pentair's Executive
Officer Performance Plan (Incorporated by reference to
Exhibit 10.9 contained in Pentair's Current Report on Form
8-K filed September 21, 2000).
10.17 Pentair's Management Incentive Plan as amended to January
12, 1990 (Incorporated by reference to Exhibit 10.17
contained in Pentair's Annual Report on Form 10-K for the
year ended December 31, 1989).
10.18 Employee Stock Purchase and Bonus Plan as amended and
restated effective January 1, 1992. (Incorporated by
reference to Exhibit 10.16 contained in Pentair's Annual
Report on Form 10-K for the year ended December 31, 1991).
10.19 Pentair's Flexible Perquisite Program as amended to January
1, 1989. (Incorporated by reference to Exhibit 10.20
contained in Pentair's Annual Report on Form 10-K for the
year ended December 31, 1989).
10.20 Form of Key Executive Employment and Severance Agreement
effective August 23, 2000 for Winslow H. Buxton
(Incorporated by reference to Exhibit 10.10 contained in
Pentair's Current Report on Form 8-K filed September 21,
2000).
47
48
10.21 Form of Key Executive Employment and Severance Agreement
effective August 23, 2000 for Randall J. Hogan (Incorporated
by reference to Exhibit 10.11 contained in Pentair's
Current Report on Form 8-K filed September 21, 2000).
10.22 Form of Key Executive Employment and Severance Agreement
effective August 23, 2000 for Roy T. Rueb (Incorporated by
reference to Exhibit 10.12 contained in Pentair's Current
Report on Form 8-K filed September 21, 2000).
10.23 Form of Key Executive Employment and Severance Agreement
effective August 23, 2000 for Louis Ainsworth, Richard J.
Cathcart, George M. Danko, Karen A. Durant, David D.
Harrison, Deb S. Knutson, Frank J. Feraco and others
(Incorporated by reference to Exhibit 10.13 contained in
Pentair's Current Report on Form 8-K filed September 21,
2000).
10.24 Long-Term Credit Agreement, dated as of September 2, 1999,
between Pentair and subsidiaries and various financial
institutions and Bank of America, N.A., as Administrative
Agent (Incorporated by reference to Exhibit 4.1 contained
in Pentair's Current Report on Form 8-K filed September 3,
1999).
10.25 First Amendment, dated as of February 16, 2001, to the
Long-Term Credit Agreement, dated as of September 2, 1999,
between Pentair and subsidiaries and various financial
institutions and Bank of America, N.A., as Administrative
Agent.
10.26 364-Day Credit Agreement, dated as of September 2, 1999,
between Pentair and subsidiaries and various financial
institutions and Bank of America, N.A., as Administrative
Agent (Incorporated by reference to Exhibit 10.1 contained
in Pentair's Current Report on Form 8-K filed September 3,
1999).
10.27 Second Amendment, dated as of February 16, 2001, to the
364-Day Credit Agreement dated as of September 2, 1999,
between Pentair and various financial institutions and
Bank of America, N.A., as Administrative Agent.
10.28 Separation Agreement dated May 31, 2000 between Pentair,
Inc. and Richard Ingman.
10.29 Separation Agreement dated November 27, 2000 between
Pentair, Inc. and James White.
10.30 Proposed form of Pentair, Inc. Omnibus Stock Incentive Plan
as Amended and Restated, dated February 14, 2001 (Submitted
for shareholder approval on April 25, 2001).
21 List of Pentair subsidiaries.
23 Consent of Independent Auditors -- Deloitte & Touche LLP
24 Power of Attorney (See signature page)
(B) REPORTS ON FORM 8-K
None.
48
49
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, on March 19, 2001.
PENTAIR, INC.
By /s/ David D. Harrison
-------------------------------------
David D. Harrison
Executive Vice President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned directors of Pentair, Inc.,
a Minnesota corporation, hereby constitute and appoint Louis L. Ainsworth
his/her attorney-in-fact and agent, with full power of substitution, for the
purpose of signing on his/her behalf as a director of Pentair, Inc. the Annual
Report on Form 10-K, to be filed with the Securities and Exchange Commission
within the next sixty days, and to file the same, with all exhibits thereto and
other supporting documents, with the Commission, granting unto such
attorney-in-fact, full power and authority to do and perform any and all acts
necessary or incidental to the performance and execution of the powers herein
expressly granted.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on March 19, 2001 in the
capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ Randall J. Hogan President and Chief
- --------------------------- Executive Officer
Randall J. Hogan
/s/ William J. Cadogan Director
- ---------------------------
William J. Cadogan
/s/ Joseph R. Collins Director
- ---------------------------
Joseph R. Collins
/s/ Barbara B. Grogan Director
- ---------------------------
Barbara B. Grogan
/s/ Charles A. Haggerty Director
- ---------------------------
Charles A. Haggerty
/s/ Harold V. Haverty Director
- ---------------------------
Harold V. Haverty
SIGNATURE TITLE
--------- -----
/s/ Winslow H. Buxton Chairman of the Board
- ---------------------------
Winslow H. Buxton
/s/ Quentin J. Hietpas Director
- ---------------------------
Quentin J. Hietpas
/s/ Stuart Maitland Director
- ---------------------------
Stuart Maitland
/s/ Augusto Meozzi Director
- ---------------------------
Augusto Meozzi
/s/ Richard M. Schulze Director
- ---------------------------
Richard M. Schulze
/s/ Karen E. Welke Director
- ---------------------------
Karen E. Welke
49
50
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Pentair, Inc. and subsidiaries
ADDITIONS OTHER
BALANCE CHARGED TO CHANGES BALANCE
BEGINNING COSTS AND DEDUCTIONS -- ADD (DEDUCT) END OF
IN THOUSANDS OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- --------------------------------------------------------------------------------------------------------
ALLOWANCES FOR DOUBTFUL ACCOUNTS
Year ended December 31, 2000 $14,242 $28,055 $23,661(1) $ --(2) $18,636
Year ended December 31, 1999 $ 9,373 $ 3,008 $ 2,397(1) $4,258(2) $14,242
Year ended December 31, 1998 $ 9,910 $ 1,115 $ 1,784(1) $ 132(2) $ 9,373
(1) Uncollectible accounts written off, net of recoveries.
(2) Result of acquisitions.
50