Prepared by R.R. Donnelley Financial -- Form 10-Q
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 30, 2002
 
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 organization)
 
(I.R.S. Employer Identification number)
1500 County Road B2 West,
Suite 400, St. Paul, Minnesota

 
55113

(Address of principal executive offices)
 
(Zip code)
Registrant’s telephone number, including area code: (651) 636-7920
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes  x     No  ¨
 
On April 26, 2002, 49,231,674 shares of the Registrant’s common stock were outstanding.
 


Table of Contents
 
Pentair, Inc. and Subsidiaries
 
         
Page

    
Item 1.    
       
       
3
       
4
       
5
       
6
Item 2.
     
9
Item 3.
     
14
    
Item 1.
     
15
Item 4.
     
15
Item 6.
     
15
  
16

2


Table of Contents
 
PART I     FINANCIAL INFORMATION
 
ITEM 1.     FINANCIAL STATEMENTS
 
Pentair, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
 
    
Three months ended

    
March 30
  
March 31
In thousands, except per-share data

  
2002

  
2001

Net sales
  
$
613,435
  
$
671,383
Cost of goods sold
  
 
466,052
  
 
507,396
    

  

Gross profit
  
 
147,383
  
 
163,987
Selling, general and administrative
  
 
93,292
  
 
103,392
Research and development
  
 
8,364
  
 
7,739
    

  

Operating income
  
 
45,727
  
 
52,856
Net interest expense
  
 
13,730
  
 
17,716
Other expense, write-off of investment
  
 
  
 
2,500
    

  

Income before income taxes
  
 
31,997
  
 
32,640
Provision for income taxes
  
 
10,559
  
 
12,077
    

  

Net income
  
$
21,438
  
$
20,563
    

  

Earnings per common share
             
Basic
  
$
0.44
  
$
0.42
Diluted
  
$
0.43
  
$
0.42
Weighted average common shares outstanding
             
Basic
  
 
49,173
  
 
49,006
Diluted
  
 
49,584
  
 
49,127
Cash dividends declared per common share
  
$
0.18
  
$
0.17
 
See accompanying notes to condensed consolidated financial statements.

3


Table of Contents
 
Pentair, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
In thousands, except share and per-share data

  
March 30
2002 (Unaudited)

    
December 31
2001

    
March 31 2001
(Unaudited)

 
Assets
                          
Current assets
                          
Cash and cash equivalents
  
$
20,946
 
  
$
39,844
 
  
$
33,003
 
Accounts and notes receivable, net
  
 
447,483
 
  
 
398,579
 
  
 
508,344
 
Inventories
  
 
295,391
 
  
 
300,923
 
  
 
383,194
 
Deferred income taxes
  
 
67,871
 
  
 
69,953
 
  
 
73,252
 
Prepaid expenses and other current assets
  
 
19,340
 
  
 
20,979
 
  
 
21,295
 
Net assets of discontinued operations
  
 
3,613
 
  
 
5,325
 
  
 
106,633
 
    


  


  


Total current assets
  
 
854,644
 
  
 
835,603
 
  
 
1,125,721
 
Property, plant and equipment, net
  
 
318,758
 
  
 
329,500
 
  
 
346,820
 
Other assets
                          
Goodwill, net
  
 
1,085,463
 
  
 
1,088,206
 
  
 
1,132,070
 
Other assets
  
 
116,833
 
  
 
118,889
 
  
 
66,373
 
    


  


  


Total assets
  
$
2,375,698
 
  
$
2,372,198
 
  
$
2,670,984
 
    


  


  


Liabilities and Shareholders’ Equity
                          
Current liabilities
                          
Short-term borrowings
  
$
 
  
$
 
  
$
170,111
 
Current maturities of long-term debt
  
 
5,972
 
  
 
8,729
 
  
 
24,569
 
Accounts and notes payable
  
 
197,407
 
  
 
179,149
 
  
 
224,293
 
Employee compensation and benefits
  
 
59,930
 
  
 
74,888
 
  
 
66,330
 
Accrued product claims and warranties
  
 
37,825
 
  
 
37,590
 
  
 
41,483
 
Income taxes
  
 
15,501
 
  
 
6,252
 
  
 
11,888
 
Other current liabilities
  
 
127,511
 
  
 
121,825
 
  
 
124,281
 
    


  


  


Total current liabilities
  
 
444,146
 
  
 
428,433
 
  
 
662,955
 
Long-term debt
  
 
689,136
 
  
 
714,977
 
  
 
782,173
 
Pension and other retirement compensation
  
 
75,858
 
  
 
74,263
 
  
 
61,141
 
Post-retirement medical and other benefits
  
 
43,367
 
  
 
43,583
 
  
 
34,103
 
Deferred income taxes
  
 
34,040
 
  
 
34,128
 
  
 
36,702
 
Other noncurrent liabilities
  
 
61,664
 
  
 
61,812
 
  
 
70,475
 
    


  


  


Total liabilities
  
 
1,348,211
 
  
 
1,357,196
 
  
 
1,647,549
 
Shareholders’ equity
                          
Common shares par value $0.16 2/3; 49,211,099, 49,110,859,
                          
and 49,020,742 shares issued and outstanding, respectively
  
 
8,201
 
  
 
8,193
 
  
 
8,170
 
Additional paid-in capital
  
 
481,690
 
  
 
478,541
 
  
 
475,520
 
Retained earnings
  
 
579,213
 
  
 
566,626
 
  
 
580,318
 
Unearned restricted stock compensation
  
 
(10,244
)
  
 
(9,440
)
  
 
(13,310
)
Accumulated other comprehensive loss
  
 
(31,373
)
  
 
(28,918
)
  
 
(27,263
)
    


  


  


Total shareholders’ equity
  
 
1,027,487
 
  
 
1,015,002
 
  
 
1,023,435
 
    


  


  


Total liabilities and shareholders’ equity
  
$
2,375,698
 
  
$
2,372,198
 
  
$
2,670,984
 
    


  


  


 
See accompanying notes to condensed consolidated financial statements.

4


Table of Contents
Pentair, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
    
Three months ended

 
In thousands

  
March 30
2002

    
March 31
2001

 
Operating activities
                 
Net income
  
$
21,438
 
  
$
20,563
 
Depreciation
  
 
15,035
 
  
 
16,854
 
Amortization of intangibles and unearned compensation
  
 
864
 
  
 
9,884
 
Deferred income taxes
  
 
2,089
 
  
 
(880
)
Other expense, write-off of investment
  
 
 
  
 
2,500
 
Changes in assets and liabilities, net of effects of business acquisitions
                 
Accounts and notes receivable
  
 
(48,583
)
  
 
(45,438
)
Inventories
  
 
3,255
 
  
 
6,615
 
Prepaid expenses and other current assets
  
 
1,146
 
  
 
(3,969
)
Accounts payable
  
 
21,318
 
  
 
(22,866
)
Employee compensation and benefits
  
 
(13,768
)
  
 
(16,832
)
Accrued product claims and warranties
  
 
287
 
  
 
(552
)
Income taxes
  
 
9,295
 
  
 
6,791
 
Other current liabilities
  
 
8,051
 
  
 
(3,425
)
Pension and post-retirement benefits
  
 
2,506
 
  
 
2,930
 
Other assets and liabilities
  
 
(2,879
)
  
 
(2,378
)
    


  


Net cash provided by (used for) continuing operations
  
 
20,054
 
  
 
(30,203
)
Net cash provided by (used for) discontinued operations
  
 
1,712
 
  
 
(9,894
)
    


  


Net cash provided by (used for) operating activities
  
 
21,766
 
  
 
(40,097
)
Investing activities
                 
Capital expenditures
  
 
(6,980
)
  
 
(12,859
)
Proceeds from sale of businesses
  
 
1,138
 
  
 
 
Acquisitions, net of cash acquired
  
 
 
  
 
(6,937
)
Equity investments
  
 
(2,081
)
  
 
 
Other
  
 
(165
)
  
 
 
    


  


Net cash used for investing activities
  
 
(8,088
)
  
 
(19,796
)
Financing activities
                 
Net short-term borrowings
  
 
 
  
 
62,016
 
Proceeds from long-term debt
  
 
45
 
  
 
2,413
 
Repayment of long-term debt
  
 
(27,736
)
  
 
(1,189
)
Proceeds from exercise of stock options
  
 
1,490
 
  
 
251
 
Dividends paid
  
 
(8,851
)
  
 
(8,331
)
    


  


Net cash provided by (used for) financing activities
  
 
(35,052
)
  
 
55,160
 
Effect of exchange rate changes on cash
  
 
2,476
 
  
 
2,792
 
    


  


Change in cash and cash equivalents
  
 
(18,898
)
  
 
(1,941
)
Cash and cash equivalents, beginning of period
  
 
39,844
 
  
 
34,944
 
    


  


Cash and cash equivalents, end of period
  
$
20,946
 
  
$
33,003
 
    


  


 
See accompanying notes to condensed consolidated financial statements.
 

5


Table of Contents
Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
 
1.
 
Basis of Presentation and Responsibility for Interim Financial Statements
 
We prepared the unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States can be condensed or omitted. We made certain reclassifications to the 2001 condensed consolidated financial statements to conform to the 2002 presentation.
 
We are responsible for the unaudited financial statements included in this document. The financial statements include all normal recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. As these are condensed financial statements, one should also read our consolidated financial statements and notes thereto which are included in our 2001 Annual Report on Form 10-K.
 
Revenues, expenses, cash flows, assets and liabilities can and do vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.
 
2.
 
New Accounting Standards
 
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. This statement requires that goodwill and intangible assets deemed to have an indefinite life not be amortized. Instead of amortizing goodwill and intangible assets deemed to have an indefinite life, the statement requires a test for impairment to be performed annually, or immediately if conditions indicate that such an impairment could exist. We adopted the provisions of SFAS 142 effective January 1, 2002, and as a result, will no longer record goodwill amortization (2001 goodwill amortization was $36.1 million, or $32.0 million after tax or $0.65 per diluted share). We are currently in the process of completing the first step of the initial goodwill impairment test required by SFAS 142 and will complete this assessment in the second quarter of 2002.
 
The following table provides the comparable effects of the adoption of SFAS No. 142 for the quarters ended March 30, 2002 and March 31, 2001.
 
    
Three months ended

In thousands, except per-share data

  
March 30 2002

  
March 31 2001

Reported net income
  
$
21,438
  
$
20,563
Add back goodwill amortization, net of tax
  
 
  
 
8,000
    

  

Adjusted net income
  
$
21,438
  
$
28,563
    

  

Reported earnings per share—basic
  
$
0.44
  
$
0.42
Goodwill amortization
  
 
  
 
0.16
    

  

Adjusted net earnings per share—basic
  
$
0.44
  
$
0.58
    

  

Reported earnings per share—diluted
  
$
0.43
  
$
0.42
Goodwill amortization
  
 
  
 
0.16
    

  

Adjusted net earnings per share—diluted
  
$
0.43
  
$
0.58
    

  

 
The changes in the carrying amount of goodwill for the quarter ended March 30, 2002 by operating segment is as follows:
 
In thousands

  
Tools

    
Water

    
Enclosures

    
Consolidated

 
Balance December 31, 2001
  
$
344,707
 
  
$
576,757
 
  
$
166,742
 
  
$
1,088,206
 
Foreign currency translation
  
 
(79
)
  
 
(1,262
)
  
 
(1,402
)
  
 
(2,743
)
    


  


  


  


Balance March 30, 2002
  
$
344,628
 
  
$
575,495
 
  
$
165,340
 
  
$
1,085,463
 
    


  


  


  


 
In August 2001, the FASB issued SFAS No. 143 (SFAS 143), Accounting for Asset Retirement Obligations, which is effective January 1, 2003. SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. We are currently in the process of evaluating the effect the adoption of this standard will have on our consolidated results of operations, financial position and cash flows.
 
In September 2001, the FASB issued SFAS No. 144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, it retains many of the fundamental provisions of that statement. The adoption of this standard on January 1, 2002 did not have an effect on our historical consolidated results of operations, financial position and cash flows.
 

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Table of Contents
 
Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
 
3.
 
Earnings Per Common Share
 
Basic and diluted earnings per share were calculated using the following:
 
    
Three months ended

In thousands, except per-share data

  
March 30
2002

  
March 31
2001

Net income
  
$
21,438
  
$
20,563
Weighted average common shares outstanding—basic
  
 
49,173
  
 
49,006
Dilutive impact of stock options and restricted stock
  
 
411
  
 
121
    

  

Weighted average common shares outstanding—diluted
  
 
49,584
  
 
49,127
    

  

Earnings per common share—basic
  
$
0.44
  
$
0.42
Earnings per common share—diluted
  
$
0.43
  
$
0.42
 
There were 1.1 million and 1.7 million stock options excluded from the computation of diluted earnings per share in the first quarter of 2002 and 2001, respectively, due to their anti-dilutive effect.
 
4.
 
Inventories
 
Inventories were comprised of:
 
In thousands

  
March 30
2002
(Unaudited)

  
December 31
2001

  
March 31
2001
(Unaudited)

Raw materials and supplies
  
$
91,847
  
$
94,404
  
$
114,545
Work-in-process
  
 
36,973
  
 
38,760
  
 
47,485
Finished goods
  
 
166,571
  
 
167,759
  
 
221,164
    

  

  

Total inventories
  
$
295,391
  
$
300,923
  
$
383,194
    

  

  

 
5.
 
Comprehensive Income
 
Comprehensive income and its components, net of tax, are as follows:
 
    
Three months ended

 
In thousands

  
March 30
2002

    
March 31
2001

 
Net income
  
$
21,438
 
  
$
20,563
 
Changes in cumulative translation adjustment
  
 
(4,318
)
  
 
(7,519
)
Changes in market value of derivative financial instruments classified as cash flow hedges
  
 
1,863
 
  
 
717
 
Unrealized loss from marketable securities classified as available for sale
  
 
 
  
 
(449
)
Cumulative effect of accounting change—SFAS 133
  
 
 
  
 
6,739
 
    


  


Comprehensive income (loss)
  
$
18,983
 
  
$
20,051
 
    


  


 
6.
 
Restructuring Charge
 
In the fourth quarter of 2001, we initiated a restructuring program designed to consolidate manufacturing operations and eliminate non-critical support facilities in our Enclosures segment. We also wrote off internal-use software development costs at corporate for the abandonment of a company-wide human resource system. Consequently, we recorded a restructuring charge of $42.8 million. Cash outlays associated with the charge were $2.0 million in the first quarter of 2002.
 
The components of the restructuring charge and utilization are as follows:
 
         
Utilization

      
In thousands

  
2001
restructuring
charge (fourth quarter)

  
Year
2001

    
Three months
2002

    
Balance March 30
2002

Employee termination benefits
  
$
16,696
  
$
(2,464
)
  
$
(1,522
)
  
$
12,710
Non-cash asset disposals
  
 
11,050
  
 
(11,050
)
  
 
 
  
 
Impaired goodwill
  
 
7,362
  
 
(7,362
)
           
 
Exit costs
  
 
7,649
  
 
(769
)
  
 
(501
)
  
 
6,379
    

  


  


  

Total
  
 
42,757
  
 
(21,645
)
  
 
(2,023
)
  
 
19,089
    

  


  


  

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Table of Contents
 
Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
 
Included in other current liabilities on the March 30, 2002 condensed consolidated balance sheet is the unused portion of the restructuring charge liability of $19.1 million. We expect to complete the remaining restructuring activities in second half of 2002.
 
Workforce reductions related to the 2001 restructuring charge is for approximately 720 employees, of whom 586 were terminated as of the end of the first quarter of 2002. Employee termination benefits consist primarily of severance and outplacement counseling fees. Exit costs relate to the shutdown of six Enclosures segment facilities, of which two are owned and currently held for resale and four are leased.
 
7.
 
Equity Method Investments
 
We have invested approximately $24.9 million to take a 40 percent interest in certain joint venture operations of an Asian supplier for bench and portable tools, of which $22.5 million has been paid ($2.1 million was paid in the first quarter of 2002) and $2.4 million is included in other current liabilities. We hold an option to increase our ownership interest in these joint ventures to as much as 100 percent. Our portion of the earnings of these joint ventures is included in costof goods sold, however, it was not material.
 
8.
 
Business Segments
 
Financial information by reportable business segment is included in the following summary:
 
    
Three months ended

 
In thousands

  
March 30
2002

    
March 31
2001

 
Net sales to external customers
                 
Tools
  
$
261,069
 
  
$
240,392
 
Water
  
 
212,806
 
  
 
220,852
 
Enclosures
  
 
139,560
 
  
 
210,139
 
    


  


Consolidated
  
$
613,435
 
  
$
671,383
 
    


  


Operating income (loss) as reported
                 
Tools
  
$
16,686
 
  
$
7,863
 
Water
  
 
29,747
 
  
 
28,193
 
Enclosures
  
 
4,608
 
  
 
21,237
 
Other
  
 
(5,314
)
  
 
(4,437
)
    


  


Consolidated
  
$
45,727
 
  
$
52,856
 
    


  


Goodwill amortization
                 
Tools
  
$
 
  
$
2,319
 
Water
  
 
 
  
 
4,549
 
Enclosures
  
 
 
  
 
2,146
 
    


  


Total goodwill amortization
  
 
 
  
 
9,014
 
Amortization of unearned compensation
  
 
864
 
  
 
870
 
    


  


Total amortization
  
$
864
 
  
$
9,884
 
    


  


Operating income (loss) excluding goodwill amortization
                 
Tools
  
$
16,686
 
  
$
10,182
 
Water
  
 
29,747
 
  
 
32,742
 
Enclosures
  
 
4,608
 
  
 
23,383
 
Other
  
 
(5,314
)
  
 
(4,437
)
    


  


Consolidated
  
$
45,727
 
  
$
61,870
 
    


  


 
Other operating income (loss) is primarily composed of corporate expenses, our insurance subsidiary, intermediate finance companies, divested operations, discontinued operations, and intercompany eliminations.
 

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Table of Contents
 
ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                    AND RESULTS OF OPERATIONS
 
FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this report may contain some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expected,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” or the negative thereof or similar words. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results. They can be affected by assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all-potential risks and uncertainties.
 
Any change in the following factors may impact the achievement of results:
 
 
·
 
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, including acquisition, divestiture, and restructuring activities;
 
·
 
governmental and regulatory policies;
 
·
 
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;
 
·
 
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 claims.
 
The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business.
 
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in our 2001 Annual Report on Form 10-K. The accounting policies used in preparing our interim 2002 condensed consolidated financial statements are the same as those described in our annual report, except as described in Note 2 of this report “New Accounting Standards.”
 
In preparing the financial statements, we follow accounting principles generally accepted in the United States of America, which in many cases require us to make assumptions, estimates and judgments that affect the amounts reported. Many of these policies are relatively straightforward. There are, however, a few policies that are critical because they are important in determining the financial condition and results of operations and they can be difficult to apply. Our critical accounting policies include those related to:
 
 
·
 
the collectibility of accounts receivable;
 
·
 
the valuation of inventories and reserves to adjust inventory to the lower of cost or market;
 
·
 
estimating sales returns and warranty costs;
 
·
 
self-insurance reserves for product liability, workers’ compensation, and employee medical liabilities;
 
·
 
assumptions used in the valuation of environmental remediation costs and pending litigation;
 
·
 
the resolution of matters related to open tax years;
 
·
 
the evaluation of long-lived assets, including goodwill, for impairment; and
 
·
 
accounting for pensions and other post-retirement benefits, because of the importance of management judgment in making the estimates necessary to apply these policies.

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Table of Contents
 
RESULTS OF OPERATIONS
 
Net sales
The components of the net sales decrease was as follows:
 
      
% change from 2001
 
Percentages

    
First quarter

 
Volume
    
(8.3
)
Price
    
0.2
 
Currency
    
(0.5
)
      

Total
    
(8.6
)
      

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

  
Three months ended

           
  
March 30 2002

  
March 31 2001

  
$ change

    
% change

Tools
  
$
261,069
  
$
240,392
  
$
20,677
 
  
8.6%
Water
  
 
212,806
  
 
220,852
  
 
(8,046
)
  
(3.6%)
Enclosures
  
 
139,560
  
 
210,139
  
 
(70,579
)
  
(33.6%)
    

  

  


  
Total
  
$
613,435
  
$
671,383
  
$
(57,948
)
  
(8.6%)
    

  

  


  
 
Tools
The 8.6 percent increase in Tools segment sales in the first quarter of 2002 from 2001 was primarily driven by:
 
·
 
higher sales volume in our DeVilbiss Air Power Company (DAPC) business, particularly for pressure washers and incremental sales of generators due to a January 2002 ice storm in the Midwest.
 
Water
The 3.6 percent decline in Water segment sales in the first quarter of 2002 from 2001 was primarily due to:
 
·
 
lower sales of pool and spa equipment products due to timing of orders;
·
 
lower sales of pressure vessels for large water treatment systems; and
·
 
unfavorable impacts of foreign currency translation.
 
These declines were partially offset by:
 
·
 
higher sales volume for our municipal and residential pumps; and
·
 
slight increases in average selling prices.
 
While we experienced lower Water segment sales volume in the first quarter of 2002 compared with 2001, backlog was up about 6 percent from prior year levels going into the second quarter, primarily driven by strong orders in our pool and spa equipment business.
 
Enclosures
The 33.6 percent decline in Enclosures segment sales in the first quarter of 2002 from 2001 was primarily due to:
 
·
 
lower sales volume due to significant industry-wide sales declines, reflecting severely reduced capital spending in the industrial market and over-capacity and lack of demand in the datacom and telecom markets; and
·     unfavorable impacts of foreign currency translation.
 
Although we experienced significantly lower Enclosures sales volume from first quarter 2001 levels, sales in the North American industrial market increased about 5 percent from the fourth quarter of 2001. In addition, we have also experienced an increase in automotive quote activity over the fourth quarter of 2001 and there may be early signs of recovery in the North American base electronics market as well. The worldwide datacom and telecom markets, however, continue to suffer from over-capacity and a lack of demand.
 
We are pursuing several strategies aimed at improving our Enclosures segment performance by continuing to expand our distribution network, principally in the commercial market. In the first quarter of 2002, we added 99 new distributors and we expect to add another 300 distribution locations in the near future.

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

In thousands, except per-share data

  
As
reported

  
Goodwill
amortization

    
As
adjusted

SG&A
  
$
103,392
  
$
(9,014
)
  
$
94,378
Operating income
  
 
52,856
  
 
9,014
 
  
 
61,870
Provision for income taxes
  
 
12,077
  
 
1,014
 
  
 
13,091
Net income
  
 
20,563
  
 
8,000
 
  
 
28,563
Earnings per share—diluted
  
$
0.42
  
$
0.16
 
  
$
0.58
 
 
Supplemental Condensed Consolidated Statements of Income
  
Three months ended

        
In thousands

  
March 30
2002

    
March 31
2001
As adjusted (1)

    
Percentage
point change

 
Net sales
  
$
613,435
 
  
$
671,383
 
      
Cost of goods sold
  
 
466,052
 
  
 
507,396
 
      
Gross profit
  
 
147,383
 
  
 
163,987
 
      
        % of net sales
  
 
24.0%
 
  
 
24.4%
 
  
(0.4) pts
 
Selling, general and administrative (SG&A) (1)
  
 
93,292
 
  
 
94,378
 
      
        % of net sales
  
 
15.2%
 
  
 
14.1%
 
  
1.1 pts
 
Research and development (R&D)
  
 
8,364
 
  
 
7,739
 
      
        % of net sales
  
 
1.4%
 
  
 
1.2%
 
  
0.2 pts
 
    


  


  

Operating income
  
 
45,727
 
  
 
61,870
 
      
        % of net sales
  
 
7.5%
 
  
 
9.2%
 
  
(1.7) pts
 
Net interest expense
  
 
13,730
 
  
 
17,716
 
      
        % of net sales
  
 
2.2%
 
  
 
2.6%
 
  
(0.4) pts
 
Other expense, write-off of investment
  
 
 
  
 
2,500
 
      
        % of net sales
  
 
n/a
 
  
 
0.4%
 
      
    


  


  

Income before income taxes
  
 
31,997
 
  
 
41,654
 
      
        % of net sales
  
 
5.2%
 
  
 
6.2%
 
  
(1.0) pts
 
Provision for income taxes (1)
  
 
10,559
 
  
 
13,091
 
      
Effective tax rate
  
 
33.0%
 
  
 
31.4%
 
  
1.6 pts
 
    


  


  

Net income
  
$
21,438
 
  
$
28,563
 
      
    


  


  

% of net sales
  
 
3.5
%
  
 
4.3
%
  
(0.8
) pts
 
Percentages may reflect rounding adjustments.
n/a—not applicable.
(1)
 
First quarter 2001 numbers have been adjusted to exclude goodwill amortization as noted above.
 
Gross profit
Gross profit margin was 24.0 percent of net sales in the first quarter of 2002, compared with 24.4 percent of net sales for the same period last year.
 
The 0.4 percentage point decline in the first quarter of 2002 from 2001 was primarily the result of:
 
·     lower sales volume, primarily in our Enclosures segment resulting in unabsorbed overhead, partially offset by savings resulting from our supply chain management and lean enterprise initiatives.
 
SG&A and R&D
SG&A expense in the first quarter of 2002 was $93.3 million, compared with $94.4 million (excluding goodwill amortization of $9.0 million) in the first quarter of 2001, or 15.2 and 14.1 percent of sales, respectively. The 1.1 percentage point increase is largely the result of Enclosures segment sales declining at a much faster rate than the decline in SG&A spending, and higher spending on selling expense in our Tools segment, primarily for advertising.

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Table of Contents
 
R&D expense was $8.4 million in the first quarter of 2002, compared with $7.7 million in the first quarter of 2001, or 1.4 and 1.2 percent of sales, respectively. The year-over-year increase is primarily the result of additional investments related to new product development initiatives in our Tools segment.
 
Operating income
Tools
The following table provides a comparison of Tools segment operating income as reported, and those results as if we had accounted for goodwill under SFAS 142 for all prior periods presented:
 
    
Three months ended

In thousands

  
March 30 2002

      
March 31 2001

Tools
                 
Operating income as reported
  
$
16,686
 
    
$
7,863
Add back goodwill amortization
  
 
 
    
 
2,319
    


    

Adjusted operating income
  
$
16,686
 
    
$
10,182
    


    

% of net sales
  
 
6.4%
 
    
 
4.2%
Percentage point change
  
 
2.2
pts
        
 
The 2.2 percentage point increase in first quarter 2002 operating income margin excluding 2001 goodwill amortization for our Tools segment was primarily the result of:
 
·
 
cost savings as a result of our supply management and lean enterprise initiatives; and
·
 
higher sales volume, particularly for pressure washers.
 
These increases were partially offset by:
 
·
 
higher selling expense, primarily for advertising; and
·
 
higher R&D expense related to new product development initiatives.
 
Water
The following table provides a comparison of Water segment operating income as reported, and those results as if we had accounted for goodwill under SFAS 142 for all prior periods presented:
 
    
Three months ended

In thousands

  
March 31 2001

      
March 31 2001

Water
                 
Operating income as reported
  
$
29,747
 
    
$
28,193
Add back goodwill amortization
  
 
 
    
 
4,549
    


    

Adjusted operating income
  
$
29,747
 
    
$
32,742
    


    

% of net sales
  
 
14.0%
 
    
 
14.8%
Percentage point change
  
 
(0.8
) pts
        
 
The 0.8 percentage point decline in first quarter 2002 operating income margin excluding 2001 goodwill amortization for our Water segment was primarily the result of:
 
·
 
lower sales of pool and spa equipment products due to timing of orders;
·
 
temporary declines in productivity at our pool business associated with production line rationalization between our factories in California and North Carolina; and
·
 
lower sales of pressure vessels for large water treatment systems.
 
These decreases were partially offset by:
 
·
 
cost improvements as a result of our lean enterprise initiatives; and
·
 
slight increases in average selling prices.

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

In thousands

  
March 30 2002

      
March 31 2001

Enclosures
                 
Operating income as reported
  
$
4,608
 
    
$
21,237
Add back goodwill amortization
  
 
 
    
 
2,146
    


    

Adjusted operating income
  
$
4,608
 
    
$
23,383
    


    

% of net sales
  
 
3.3%
 
    
 
11.1%
Percentage point change
  
 
(7.8
) pts
        
 
The 7.8 percentage point decline in first quarter 2002 operating income margin excluding 2001 goodwill amortization for our Enclosures segment was primarily the result of:
 
·
 
lower sales volume due to significant industry-wide sales declines, resulting in unabsorbed overhead despite reductions in overall cost structure; and
·
 
higher SG&A expense as a percent of sales, as the decline in sales was at a much faster rate than the reduction in costs.
 
These decreases were partially offset by:
 
·
 
savings realized as a part of our restructuring program, net of one-time nonrecurring costs; and
·
 
material cost savings and other cost reductions as a result of our lean enterprise initiatives.
 
Net interest expense
Net interest expense was $13.7 million and $17.7 million in the first quarter of 2002 and 2001, respectively. Included in the $13.7 million, is a write-off of $1.8 million of financing costs related to excess capacity on certain credit facilities that we do not expect to utilize. Excluding the $1.8 million write-off, net interest expense declined $5.8 million reflecting lower average borrowings driven by our strong cash flow performance and lower interest rates on our variable debt. Net interest expense in the fourth quarter of 2001 was $13.1 million.
 
Provision for income taxes
Our effective tax rate was 33.0 percent in the first quarter of 2002, compared with 31.4 percent, as if we had accounted for goodwill under SFAS 142 (37.0 percent as reported), for the comparable period in 2001. The 1.6 percentage point increase reflects a change in U.S. versus foreign earnings mix in 2002 compared to 2001. We expect our effective tax rate to be around 33.0 percent for 2002.
 
Other expense
In the first quarter of 2001, we incurred a non-cash charge of $2.5 million for the write-off of our business-to-business e-commerce equity investment that we made in early 2000.
 
LIQUIDITY AND CAPITAL RESOURCES
To fund capital expenditures, acquisitions, repurchase shares, and pay dividends, committed revolving credit facilities are used to complement operating cash flows. Because of the seasonality of some of our businesses, particularly the pool and spa equipment business and the tools business, we generally experience negative cash flows from operations in the first half of any given year. However, due to our emphasis on working capital management, we generated $21.8 million of cash from operating activities in the first quarter of 2002, which (net of $7.0 million of capital expenditures) resulted in a positive free cash flow of $14.8 million.
 
The following table presents selected measures of our liquidity calculated from our monthly operating results based on a 13-month moving average:
 
Days

    
March 30 2002

    
March 31 2001

Days of sales in accounts receivable
    
64
    
69
Days inventory on hand
    
72
    
80
Days in accounts payable
    
58
    
60
Cash conversion cycle
    
78
    
89
 
Operating activities
Operating activities provided $21.8 million in the first quarter of 2002, compared with a use of $40.1 million for the same period in 2001 for a year-over-year improvement of $61.9 million. The increase was primarily the result of higher accounts payable balances at the end of the first quarter of 2002 compared with the end of 2001, driven by increased material purchases, higher inventory turnover, and improved sell through of products in our Tools segment. In addition, the disposition of our Equipment segment businesses at the end of 2001 provided a year-over-year improvement of $11.6 million.

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Table of Contents
 
Investing activities
Capital expenditures in the first quarter of 2002 and 2001 were $7.0 million and $12.9 million, respectively. We anticipate capital expenditures in 2002 to be approximately $50 million. Anticipated expenditures in 2002 are expected to be in the areas of tooling for new product development and general maintenance capital.
 
Financing activities
As of the end of the first quarter of 2002, our capital structure was comprised of $695.1 million in long-term debt (including current maturities), and $1,027.5 million in shareholders’ equity. The ratio of debt-to-total capital as of the end of the first quarter of 2002 was 40.4 percent, compared with 41.6 percent as of the end of 2001 and 48.8 percent as of the end of the first quarter of 2001. The 1.2 percentage point decline from the end of 2001 reflects a decrease in our total debt and an increase in our equity resulting from our strong cash flow performance. Our targeted debt-to-total capital ratio is around 40 percent. As of March 30, 2002, we had $705.0 million in committed revolving credit facilities with various banks, of which $403.4 million was unused.
 
In March 2002, we entered into an interest rate swap agreement for senior notes having a notional principal amount of $100 million and maturing in 2009. Under the terms of the interest rate swap agreement, we will pay interest semi-annually at the six month LIBOR rate plus 2.49 percent and we will receive interest semi-annually at the annual rate of 7.85 percent. This swap agreement has been accounted for as a fair value hedge in accordance with SFAS No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, as amended. Since this swap qualifies as an “effective” hedge under SFAS 133, there is no impact on net income or shareholders’ equity.
 
Dividends paid in the first quarter of 2002 were $8.9 million or $0.18 per common share, compared with $8.3 million or $0.17 per common share for the same period in 2001.
 
In addition to measuring our cash flow generation or usage based upon operating, investing, and financing classifications included in the condensed consolidated statements of cash flows, we also measure our free cash flow. We define free cash flow as cash flow from operating activities less capital expenditures, including both continuing and discontinued operations. We had positive free cash flow of $14.8 million in the first quarter of 2002, compared with a negative $53.0 million for the same period in 2001. Our free cash flow goal for 2002 is $200 million, compared with $178.7 million realized in 2001. We intend to achieve this goal through higher earnings and further reductions in working capital. Our management incentive plans include a component that emphasizes free cash flow.
 
We believe cash generated from operating activities, together with credit available under committed and uncommitted facilities and our current cash position, will provide adequate short-term and long-term liquidity.
 
NEW ACCOUNTING STANDARDS — SEE NOTE 2 OF ITEM 1
 
ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
There have been no material changes in our market risk during the quarter ended March 30, 2002. For additional information, refer to Item 7A on page 24 of our 2001 Annual Report on Form 10-K.

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Table of Contents
 
PART II    OTHER INFORMATION
 
ITEM 1.     Legal Proceedings
 
Environmental, Product Liability Claims, and Horizon Litigation
There have been no further material developments regarding the above from that contained in our 2001 Annual Report on Form 10-K.
 
Other
We are occasionally a party to litigation arising in the normal course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities based on the expected eventual disposition of these matters. We believe the effect on our consolidated results
 
ITEM 4.      Submission of Matters to a Vote of Security Holders
 
At Pentair’s Annual Meeting of Shareholders held on May 1, 2002, the shareholders voted on the following items:
 
Proposal 1. — Election of Directors
 
Nominees

    
Votes For

    
Votes Withheld

Barbara B. Grogan
    
42,320,765
    
1,313,964
Stuart Maitland
    
42,019,456
    
1,615,273
Augusto Meozzi
    
41,976,660
    
1,658,069
William H. Hernandez
    
41,748,445
    
1,886,284
Proposal 2. — Approval of amendments to the Articles of Incorporation and By-Laws to fix the number of the directors at ten.
Votes For

    
Votes Against

    
Votes Abstain

43,087,817
    
392,347
    
154,565
Proposal 3. — Approval of the Omnibus Stock Incentive Plan for Section 162(m) purposes.
Votes For

    
Votes Against

    
Votes Abstain

40,463,447
    
2,898,214
    
273,068
Proposal 4. — Approval of an amendment to the Executive Officer Performance Plan.
Votes For

    
Votes Against

    
Votes Abstain

39,850,853
    
3,472,260
    
311,616
Proposal 5. — Proposal to ratify the selection of Deloitte & Touche LLP as independent auditors of Pentair for 2002.
Votes For

    
Votes Against

    
Votes Abstain

41,470,882
    
2,010,788
    
153,059
 
ITEM 6.      Exhibits and Reports on Form 8-K
 
 
(a)
 
  Exhibits
 
3.1
  
Second Restated Articles of Incorporation of Pentair, Inc. as amended through May 1, 2002 (Filed herewith).
3.2
  
Third Amended and Superseding By-Laws of Pentair, Inc. adopted on August 23, 2000 as amended May 1, 2002 (Filed herewith).
10.15
  
Pentair, Inc. Executive Officer Performance Plan as amended and restated, dated February 27, 2002 and approved by shareholders on May 1, 2002 (Incorporated by reference to Exhibit 10.15 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 2001).
 
 
(b)
 
  Reports on Form 8-K
 
None.

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Table of Contents
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 9, 2002.
 
    
PENTAIR, INC.
    
Registrant
    
By:
 
/s/    DAVID D. HARRISON

        
David D. Harrison
        
Executive Vice President and Chief Financial Officer
        
(Chief Accounting Officer)

16