-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QrWnrcZWKdYPC9QHV/oDrGyXmFVtc8HmRjQT5G34UDKr5b2Aw0JEanJOA//7m7af KTeM9X1TxuhzKSIuOXqLpw== 0000077360-98-000006.txt : 19980330 0000077360-98-000006.hdr.sgml : 19980330 ACCESSION NUMBER: 0000077360-98-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENTAIR INC CENTRAL INDEX KEY: 0000077360 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY (NO METALWORKING MACHINERY) [3550] IRS NUMBER: 410907434 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11625 FILM NUMBER: 98575273 BUSINESS ADDRESS: STREET 1: 1500 COUNTY RD - B2 WEST STREET 2: SUITE 400 CITY: ST PAUL STATE: MN ZIP: 55113-3105 BUSINESS PHONE: 6126367920 FORMER COMPANY: FORMER CONFORMED NAME: PENTAIR INDUSTRIES INC DATE OF NAME CHANGE: 19790327 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission File No. 001-11625 PENTAIR, INC. (Exact name of Registrant as specified in its charter) Minnesota 41-0907434 (State of incorporation) (I.R.S. Employer Identification Number) 1500 County Road B2 West, Suite 400, Saint Paul, Minnesota 55113-3105 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 612-636-7920 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, Par Value $.16 2/3 New York Stock Exchange Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of voting stock held by nonaffiliates of the Registrant on February 23, 1998 was $1.4 billion. For purposes of this calculation, all shares held by officers and directors of the Registrant and by the trustees of employee stock ownership plans (ESOPs) and pension plans of the Registrant and subsidiaries were deemed to be shares held by affiliates. The number of shares outstanding of Registrant's only class of common stock on February 23, 1998 was 38,319,608. The exhibit index as required by Item 601(a) of Regulation S-K is included in Item 14 of Part IV of this report. Documents Incorporated by Reference: Portions of the registrant's definitive Proxy Statement for the 1998 Annual Meeting of Shareholders are incorporated by reference in Part III of this Report. PART I ITEM 1. BUSINESS (a) General Development of the Business. The Registrant was incorporated in 1966 under the laws of Minnesota. In the past year, the Registrant has not changed its form of organization or mode of conducting business. The Registrant grows through internal development and acquisitions. As in the past, periodic dispositions of assets or business units are possible when they no longer fit with the long-term strategies of the Registrant. Effective January 1, 1994, the Registrant acquired the net assets and the subsidiaries of Schroff GmbH (Schroff) from Fried. Krupp AG Hoesch-Krupp. Schroff manufactures and sells enclosures, cases, subracks and accessories for commercial electronic and instrumentation applications. In September 1994, Pentair announced that it was exploring strategic alternatives for its paper businesses, including their possible sale. In the second quarter of 1995, all of the Pentair paper businesses were sold. On April 1, 1995 the Company sold its Cross Pointe Paper Corporation subsidiary to Noranda Forest, Inc. On June 30, 1995 the Company sold its Niagara of Wisconsin Paper Corporation, its 50% share of Lake Superior Paper Industries (LSPI) joint venture and its 12% share of Superior Recycled Fiber Industries (SRFI) to Consolidated Papers, Inc. The sale of its paper businesses has permitted Pentair to focus its commitments and resources on its industrial products businesses, building upon the strong growth and leading market positions these businesses have achieved. Effective November 1, 1995, the Company acquired Fleck Controls, Inc., a manufacturer of control valves which are major components in residential water softeners, and commercial and industrial water conditioning systems. Fleck Controls was Pentair's first entry into the water treatment industry. During 1996, the Company completed four strategic acquisitions that strengthened market positions throughout the world. In January, Myers acquired Aplex to broaden its industrial pump line. In June, Porter-Cable acquired FLEX, a German power tool company. In November, the Company acquired Century Manufacturing, a manufacturer which serves service equipment markets, complementing its Lincoln Automotive subsidiary. In December, Fleck Controls purchased SIATA, an Italian manufacturer of water conditioning control equipment. During 1997, the Company completed 3 strategic acquisitions. In January, Schroff France acquired Transrack S.A., a maker of complementary cases and enclosures. In July, Century Manufacturing acquired P & F Technologies , a maker of refrigerant recycling equipment. In August, Pentair acquired the General Signal Pump Group in a significant acquisition designed to create a critical mass in the water and wastewater pump markets. Also in 1997, in another strategic development, the Company divested its Federal Cartridge sporting ammunition business. In the fourth quarter of 1997, the Company realigned its subsidiaries into 3 operating groups to reflect its growing focus in its addressed markets: Professional Tools and Equipment, Water and Fluid Technologies and Electrical and Electronic Enclosures. Delta International, Porter-Cable, Lincoln Automotive and Century Manufacturing make up the Professional Tools and Equipment segment, which markets its products to professional users and sophisticated individual users through similar channels. The Water and Fluid Technologies segment consists of the Pentair pump businesses, Fleck Controls, and Lincoln Industrial, all of which share aspects of manufacturing process, applied technology, and distribution channels. Pentair's Hoffman and Schroff enclosures businesses comprise the Electrical and Electronic Enclosures segment. (b) Financial Information about Industry Segments. Pentair Inc. has three reportable segments: Professional Tools and Equipment (PTE), Water and Fluid Technologies (WFT), and Electrical and Electronic Enclosures (EEE). Other includes corporate expenses, captive insurance company, intermediate financial companies, charges that do not relate to current operations, divested operations (Federal Cartridge), and intercompany eliminations. Other assets include all cash and cash equivalents. In evaluating financial performance, management focuses on operating income as a segment's measure of profit or loss. Operating income is before interest expense, interest income and income taxes. Management uses a variety of balance sheet ratios to measure the business. The primary focus is on maximizing the return from each segment's assets, excluding cash and temporary investments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1 of Notes to the Consolidated Financial Statements included in Item 8). Most intersegment sales are component parts and are sold at cost plus an equitable division of manufacturing and marketing profits. The remaining intercompany sales are finished product and are sold based on current market pricing. Segment Information:
(in thousands) PTE WFT EEE Other Total 1997 Net sales from external customers $737,323 $397,286 $579,209 $125,238 $1,839,056 Intersegment net sales 9,743 6,693 157 (16,593) 0 Depreciation and amortization expense 14,307 16,703 30,265 6,561 67,836 Segment profit (loss) - operating income 84,355 45,987 53,313 (13,853) 169,802 Segment assets 410,037 508,357 473,906 80,562 1,472,862 Capital expenditures 22,947 8,492 43,815 2,207 77,461 1996 Net sales from external customers $572,349 $316,167 $548,695 $129,854 $1,567,065 Intersegment net sales 10,340 6,085 103 (16,528) 0 Depreciation and amortization expense 11,605 12,219 28,297 7,399 59,520 Segment profit (loss) - operating income 60,556 44,445 59,592 (21,674) 142,919 Segment assets 360,766 280,819 464,475 182,954 1,289,014 Capital expenditures 15,270 10,701 40,522 5,153 71,646 1995 Net sales from external customers $483,565 $232,441 $542,452 $144,413 $1,402,871 Intersegment net sales 8,833 5,094 0 (13,927) 0 Depreciation and amortization expense 9,408 5,356 27,247 6,923 48,934 Segment profit (loss) - operating income 49,239 25,111 55,951 (14,054) 116,247 Segment assets 248,251 249,815 440,827 313,600 1,252,493 Capital expenditures 16,592 4,561 32,713 9,972 63,838
(c) Narrative Description of Business. Description of the Professional Tools and Equipment Segment: Products; markets; competition Products include: a full line of homeshop products, contractor tools, general purpose stationary woodworking machinery, and accessories; air-powered nailing products, portable electric tools including saws, routers, sanders, grinders, drills, and cordless tools; and lubricating tools and equipment, battery charging and testing equipment, lifting equipment, portable power supplies, refrigerant and coolant recyclers, arc and MIG welders, plasma cutters, and welding accessories. The products are sold in the United States, Canada, and overseas under the brand names Delta, Biesemeyer, Porter-Cable, FLEX, Lincoln, Blackhawk Automotive, Marquette, Porto-Power, Banner, Winner, Pro-Arc, Century, Solar, Booster Pac, Cobra, and Viper. Products are sold through various channels, including networks of independent industrial and warehouse distributors, home centers and national retailers, hardware stores, and through mail order and catalogues. Certain service equipment is sold under private label programs. The explosive growth in the home center channel in the last few years has resulted in a significant increase in PTE tool sales through this channel. Nationwide, home centers have become the primary channel for all sales of power and bench top tools to end users. While warehouse distributors continue to be the most significant channel for service equipment sales, product entry into retail and home center stores has continued to grow. Tool markets include do-it-yourself(DIY)/homeshop; residential, commercial, and industrial construction; remodeling and cabinet, case good and furniture makers. Service equipment markets include industrial fabrication and maintenance, automotive repair and vehicle maintenance, farm and industrial equipment; and aftermarket and retail channels for professional and do-it-yourself automotive and body repair. Competition in the PTE segment has been intense and growing more so for the past few years, especially as these industries consolidate. The tool markets have become extremely competitive as a few large players remain, having more complete product lines. The Company's tool businesses are no longer perceived as niche players, but have become significant general competitors, even though their addressed market of professional users and higher-end DIY customers does not extend into the larger general consumer tool markets. Each of the businesses in the PTE segment faces a number of competitors, many of whom are larger, have more resources and are more fully integrated. Growth in these markets should come from product development, continued penetration of expanding market channels and acquisitions. Competition at the end-user level focuses primarily on brand names, product performance and features, quality, service and, most importantly, price. The competition for shelf space at home centers and national retailers is particularly intense, demanding continuing product innovation, special inventory and delivery programs, after-sale service capability and competitive pricing. The strategy of the businesses in the PTE segment is to be the price/quality leader in its selected markets. Their success in maintaining their respective positions in the marketplace is largely due to continuing product feature innovations, new products, and outsourcing and other cost-reduction measures. As leaders in their markets, these businesses are able to command access for their products in the most important channels in the face of growing competition. Description of the Water and Fluid Technologies Segment: Products; markets; competition Products include: pumps for wells, sump pumps for residential service, submersible non-clog and grinder pumps and systems for residential, commercial, and municipal service, pumps for water treatment and wastewater solid handling, fire pumps, and reciprocating, turbine, submersible, and centrifugal pumps for commercial and industrial services; a complete line of control valves used in the manufacture of water softeners and filtration, deionization, and desalination systems; and automated and manual lubrication systems and equipment, pumps and pumping stations for thick fluid transfer applications. The products are sold in the United States, Canada, and overseas under the brand names Myers, Aplex, Fairbanks Morse, Aurora, Water Ace, Shur Dri, Hydromatic, Fleck, SIATA, Lincoln, Lincoln Industrial, ORSCO, Air Brake, BearingSaver, Centro-Matic, Cobra, Dispense Pak, Ecolub, Helios, Magna-Ram, Modular Lube, Multi-Luber, PowerMaster, PileDriver, PL2000, Quicklink, Quicklub, System Sentry, and Zerk-lock. Products are sold through various channels including the do-it-yourself market for retail sale through home centers and hardware stores, by specially qualified systems distributors with design, installation and service capability, through industrial supply and specialty distributors and stores, directly by internal sales organizations, and through national catalog distribution. Markets include wholesale and retail distribution to residential users; commercial HVAC, plumbing, and fire pump markets; municipal waste and water treatment facilities and industrial companies; manufacturers who supply residential and commercial markets with standard and custom designed water softener products; and heavy industry (steel mills, cement plants, pulp and paper, power plants), automobile manufacturers, commercial vehicles, agriculture, construction equipment, food and beverage, mining, printing, and general lubrication markets. The water and waste water pump industry has experienced a significant trend toward consolidation, evidenced in part by the acquisitions of Gould's by ITT and of the former General Signal Pump Group by Pentair in 1997. This acquisition by the Company significantly expanded the number, range and targeted markets of Pentair's pump business. The Company is currently in the process of rationalizing the product lines, facilities and manufacturing operations of these businesses to cut costs and increase efficiencies. The water treatment industry is also experiencing rapid consolidation, as evidenced by U.S. Filter's acquisition of Culligan, both current customers of the Company's water conditioning valve business. There are two major independent valve suppliers, including the Company, and a restricted number of small independent suppliers. In addition, there are a number of captive valve manufacturers whose production is used to support their own sales of water conditioning systems. Growth will come largely from niche acquisitions and product development. Competition in the commercial and residential pump markets focuses on brand names, product performance, quality and price. While home center and national retailers are important for residential lines of water and wastewater pumps, they are much less important in commercial pump markets. In municipal pump markets, competition focuses on performance to required specification, service and price. Competition in the water treatment component market focuses on product performance and design, quality, delivery and price. Description of the Electrical and Electronic Enclosures Segment: Products; markets; competition Products include metallic and composite enclosures and cabinets that house electrical and electronic controls, instruments, and components, cabinets, cases, subracks, microcomputer packaging systems as well as a full line of accessories including backplanes, power supplies, and technical workstations. The products are sold in the United States, Canada, and overseas under the brand names Hoffman, Schroff and Transrack. Segment products are sold in three primary markets: electrical enclosures in North America, the channel which is primarily through industrial electrical distribution; electronic enclosures, sold primarily through electronic equipment distributors and to original equipment manufacturers (OEMs); and information and communication technology (ICT) products, marketed primarily to OEMs. Currently, the greater sales for the latter two product groups is in Europe. Industrial markets include manufacturing industries in which electrical and electronic controls require protection from harsh factory floor environments, plant maintenance and repair, commercial construction and electrical equipment manufacturers. Commercial electronic markets include computer, test and measurement, industrial control and factory automation, and medical industries. Finally, ICT products are found in the LAN, data communication and telecommunication industries. Competition in selected product markets can be very intense, especially in European electronic and ICT markets. In addition, the enclosure industry in North America is in the middle of its own consolidation trend, although the impact of this is not foreseeable at this time. Finally, growth in the EEE segment will likely come from geographic expansion, product development and acquisitions. Competition in each of the three product markets focuses on price, product features and innovation, service, quality and delivery. Information Regarding All Segments: Status of new products. The industries in which the segments participate are essentially mature and do not experience the introduction of new products or technologies that materially change the nature of the industry. Nonetheless, new product development or improvement becomes more important for sales growth and channel penetration. The Company emphasizes product development in all its segments, with products introduced within the last five years averaging 25-50% of annual sales, although no new product alone constitutes a material amount of sales. Raw materials. The raw materials used in Pentair's manufacturing processes include steel (bar and sheet), brass, copper, aluminum and various other metals and plastics. Selected motors, castings, plastic parts and components are also purchased. The supply of all raw materials and components is currently adequate. The PTE and WFT segments import selected products and components from Taiwan and China, the supply of which is currently adequate. Patents, trademarks, licenses, franchises and concessions. Pentair's businesses own a number of U.S. and foreign patents and trademarks. They have been acquired over many years and relate to many products and improvements. No single patent or trademark is of material importance to any segment, though patent protection is a significant competitive tool in each of the segments. Seasonal aspects and working capital items. No material portion of Pentair's business is of a highly seasonal nature, since the disposition of Federal Cartridge. The PTE segment, however, has historically experienced strong fourth quarter sales and billings, due in part to holiday retail sales. Reflecting the somewhat seasonal impact of the PTE segment and the growing importance of home center business, there is a buildup of inventory in the third quarter in anticipation of fourth quarter shipments. Dependence on limited number of customers. The Company as a whole is not dependent on a single customer or on a few customers. The loss of a limited number of customers would not have a material adverse impact on the Company's results of operations. Backlog. The segments normally do not experience backlogs for substantial periods of time. The nature of the businesses emphasizes maintaining inventories sufficient to satisfy customer needs on a timely basis. Production and sourcing is geared towards providing adequate inventories in order to minimize customer back orders. Accordingly, backlogs are not material to understanding the sales trends or manufacturing fluctuations of the segments. Government contracts. The Registrant has no significant portion of sales under federal government contracts that may be subject to renegotiation of profits or termination of contracts at the election of the government. Research and Development. Pentair's businesses have not historically undertaken any significant basic or applied research, since the products and processes involved are more traditional and are well-known to all competitors. As discussed above, however, each of the segments, especially PTE, undertakes extensive product development work in order to continue improvements in features and costs. Overall, Pentair's businesses spent over one percent of sales on such development in 1997, up slightly over the prior year. See also Note 1 of Notes to the Consolidated Financial Statements included in Item 8. Environmental Matters See Management's Discussion and Analysis and Note 9 of Notes to the Consolidated Financial Statements included in Item 8. Employees. As of December 31, 1997, the Registrant and its subsidiaries employed approximately 10,433 persons, of which 2,750 were represented by unions having collective bargaining agreements. Labor contracts negotiated in 1997: GMP Local 45 - Ashland, Ohio (extended to 1 April 2000) approximately 70 employees; UAW Local 691 - St. Louis, Missouri (extended to 2 June 2000) approximately 150 employees; GMP Local 19 - Guelph, Ontario, Canada (extended to 30 June 2001) approximately 10 employees; United Steelworkers of America - Kansas City, Kansas (extended to 30 September 2001) approximately 250 employees; IAM Local Lodge 1202 - Aurora, Illinois (extended to 25 June 2002) approximately 275 employees; and UAW Local 1932 - Ashland, Ohio (extended to 30 September 2002) approximately 250 employees. Contracts expiring in 1998: IAM Local 59 - Ashland, Ohio (expires 6 April 1998) approximately 300 employees; IAM Local 9 - St. Louis, Missouri (expires 30 April 1998) approximately 230 employees; United Steelworkers of America Local 8630 - Tupelo, Mississippi (expires 1 May 1998) approximately 260 employees; Teamsters Local 984 - Memphis, Tennessee (expires 31 December 1998) approximately 50 employees. The Registrant considers its employee and labor relations to be good and believes future contracts will be able to be negotiated on terms beneficial to the businesses and their employees. (d) Financial Information about Foreign Operations. The Registrant operates primarily in North America, Europe and Asia. Geographic Information:
Revenues Assets (In millions) 1997 1996 1995 1997 1996 1995 United States $1,275.5 $1,047.1 $921.6 $1,031.0 $761.9 $646.0 Canada 98.3 77.7 70.3 27.9 24.6 21.8 Germany 99.4 115.7 106.4 200.6 240.0 218.7 Other Europe 164.5 136.0 107.9 116.9 65.0 39.2 Pacific Rim 49.5 38.9 36.3 15.9 14.5 13.2 Rest of World 26.6 21.8 16.0 0.0 0.0 0.0 Total $1,713.8 $1,437.2 $1,258.5 $1,392.3 $1,106.0 $938.9
Revenues are attributed to countries based on location of customer. Assets are based on the geographic location of the subsidiary and have been translated into U.S. dollars. EXECUTIVE OFFICERS OF THE REGISTRANT The following are the executive officers of the Registrant. Their term of office extends until the next annual meeting of the Board of Directors, scheduled for April 22, 1998, or until their successors are elected and have qualified. Louis L. Ainsworth 50 Senior Vice President and General Counsel since July, 1997; Shareholder and Officer of Henson & Efron, P.A. November 1985 - June 1997. Winslow H. Buxton 58 Chairman since January, 1993; President and Chief Executive Officer since August 1992. Richard J. Cathcart 53 Executive Vice President since February 1996; Executive Vice President, Corporate Development March 1995 - February 1996; Vice President, Business Development of Honeywell, Inc. 1994 - March 1995; Vice President and General Manager of Honeywell's Worldwide Building Control Division 1992 - 1994. Joseph R. Collins 56 Executive Vice President since March 1995; Acting Chief Financial Officer, June 1993 - March 1994; Senior Vice President - Specialty Products August 1991 - February 1995. George M. Danko 47 Vice President, Corporate Development since October, 1997; General Manager of Sales Operations of General Electric's Electrical Distribution and Control Division September 1994 - October 1997; General Manager Tektronix Test & Measurement Division June 1992 - August 1994; Vice President General Manager Square Co. February 1990 - June 1992. Karen A. Durant 38 Vice President, Controller since September 1997; Controller January 1996 - August, 1997; Assistant Controller September 1994 - December 1995; Director of Financial Planning and Control of Hoffman Enclosures Inc. (subsidiary of Registrant) October 1989 - August 1994. Richard W. Ingman 53 Executive Vice President and Chief Financial Officer since August 1996; President of Hoffman Enclosures Inc. (subsidiary of Registrant) March 1994 - July 1996; Vice President of Corporate Development August 1989 - - February 1994. Gerald C. Kitch 60 Executive Vice President, President International Business Development since February 1996; Executive Vice President March 1995 - February 1996; Senior Vice President - General Industrial Equipment March 1989 - February 1995. Debby S. Knutson 43 Vice President, Human Resources since September 1994; Assistant Vice President, Human Resources , August 1993 - September 1994; Vice President, Human Resources of Hoffman Enclosures Inc. (subsidiary of Registrant) July 1990 - August 1993. Roy T. Rueb 57 Vice President, Treasurer since October 1986 and Secretary since June 1994. James A. White 52 Senior Vice President, Professional Tools Businesses since July 1997; President of Porter-Cable Corporation (subsidiary of Registrant) December 1991 - June 1997. There is no family relationship between any of the executive officers or directors. Item 2. Properties The Corporation and its subsidiaries operate in 50 manufacturing and distribution locations in North America, Europe and Asia. The Corporation owns most of its facilities with the exception of the following major facilities which are leased or leased under special tax increment financing: in the United States - Mt. Sterling, KY; Jackson, TN; Kansas City, KS; Aurora, IL; Ashland, OH (Hydromatic) and in France - Betschdorf, France. The number, type, location and estimated size of the Company's properties are shown on the following charts, by segment. (Professional Tools and Equipment - PTE; Water and Fluid Technologies - WFT; Electrical and Electronic Enclosures - EEE)
Number and Nature of Facilities Mfg. and Distribution Segment HQ & Mfg. Distribution Sales/Service Square Footage (000's) PTE 9 3 29 2,094 WFT 12 9 15 2,132 EEE 13 4 41 2,326 Other: Corporate Office 1 22
Locations of HQ, Manufacturing and Distribution Facilities
North Segment America Europe Asia PTE 11 1 0 WFT 16 5 0 EEE 8 6 3 HQ Offices 1
Management believes that its owned and leased facilities are well maintained and suitable for the operations conducted. Item 3. Legal Proceedings. The Registrant or its subsidiaries have been made parties to actions filed, or have been given notice of potential claims, relating to the conduct of its business, including those pertaining to product liability, environmental, safety and health and employment matters. Major matters which may have an impact on the Registrant are discussed below. The Registrant believes that the outcome of such legal proceedings and claims will not have a material adverse effect on the Registrant's financial position, liquidity, or future results of operations, based on current circumstances known to the Registrant. Environmental Claims. The Registrant and its current subsidiaries have been named as defendants, targets or potentially responsible parties (PRPs) in a small number of environmental cleanups. None of these claims have resulted to date in cleanup costs, fines, penalties or damages in an amount material to Registrant's financial condition or results of operations. The Registrant has disposed of a number of businesses over the past ten years; in certain cases, such as the disposition of Registrant's Cross Pointe uncoated paper business in 1995 and the disposition of its Federal Cartridge ammunition business in 1997, Registrant has retained responsibility for some or all environmental obligations and potential liability. The Registrant has established what it believes to be, based on current circumstances known to it, adequate accruals for potential liabilities arising out of these retained responsibilities, based upon studies of the sites involved. In addition to retained obligations relating to these disposed operations, there are pending environmental issues concerning two sites, in Guelph, Ontario and Jackson, Tennessee, at which Provincial or state environmental agencies have opened investigations. In each case, the Registrant acquired the sites from Rockwell International, whom the Registrant has notified of the issues and from whom it has claimed indemnification. No estimate of the projected response costs can be made based on information currently known to the Registrant. The Registrant believes, however, that these matters are unlikely to result in material liability or material changes in operations at one site still occupied by one of Registrant's subsidiaries. Product Liability Claims. As of March 1, 1998, the Registrant or its subsidiaries are defendants in approximately 167 product liability lawsuits and have been notified of approximately 164 additional claims. The Registrant has had and currently has in place insurance coverage it deems adequate for its needs. A substantial number of these lawsuits and claims are insured and accrued for by Penwald, a regulated insurance company wholly owned by the Registrant. See discussion in Item 7 (MD&A - Insurance Subsidiary) and Item 8 (Note 1 of Notes to the Consolidated Financial Statements). Accounting accruals covering the deductible portion of liability claims not covered by Penwald have been established and are reviewed on a regular basis. The Registrant has not experienced unfavorable trends in either the severity or frequency of product liability claims. Item 4. Submission of Matters to a Vote of Security Holders. During the fourth quarter, no matter was submitted to a vote of security holders. PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters. (a) Market Information Pentair Common Stock is listed on the New York Stock Exchange under the symbol "PNR". The price information below represents closing sale prices reported in the Dow Jones Historical Stock Quote Reporter Service for the calendar year 1997. 1997 High Low Close First Quarter $31 3/4 $28 7/8 $28 7/8 Second Quarter $35 $27 1/2 $32 7/8 Third Quarter $37 1/2 $33 7/8 $36 7/8 Fourth Quarter $39 5/8 $34 1/8 $35 15/16 1996 First Quarter $28 3/4 $23 1/16 $25 1/4 Second Quarter $31 $25 3/8 $30 Third Quarter $30 $24 3/4 $26 1/2 Fourth Quarter $32 1/4 $24 5/8 $32 1/4 (b) Holders of the Corporation's Capital Stock As of December 31, 1997, there were 4,119 holders of record of the Corporation's Common Stock. (c) Dividends In December 1997, the board of directors increased the cash dividend to $.15 per share quarterly for an indicated annual rate of $.60 per share. Pentair has now paid 88 consecutive quarterly dividends, and each year the amount of the dividend payment has increased. See Note 6 of Notes to the Consolidated Financial Statements for certain dividend restrictions. Quarterly dividends per common share for the most recent two years are as follows: 1997 1996 First Quarter $.135 $.125 Second Quarter .135 .125 Third Quarter .135 .125 Fourth Quarter .135 .125 TOTAL $.540 $.500 (d) Annual Meeting of Stockholders The 1998 Annual Meeting of Shareholders of the Corporation is scheduled to be held on April 22, 1998 at 10:00 a.m. at the Northland Inn & Conference Center, Minneapolis, Minnesota. Item 6. Selected Financial Data. SELECTED FINANCIAL DATA Pentair, Inc. and Subsidiaries
(In millions, except per share data) 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 Income Statement Data Net Sales Professional Tools and Equipment . . . . . . . 747.1 582.7 492.4 453.5 408.1 Water and Fluid Technologies. . . . . . . . 404.0 322.3 237.5 210.6 184.4 Electrical and Electronic Enclosures . . . . . 579.4 548.8 542.5 460.5 236.7 Other. . . . . . . 108.6 113.3 130.5 137.1 117.4 Total. . . . . . . 1,839.1 1,567.1 1,402.9 1,261.7 946.6 864.0 802.9 805.2 798.4 445.0 Operating Income Professional Tools and Equipment . . . . . 84.4 60.6 49.2 44.1 37.8 Water and Fluid Technologies. . . . 46.0 44.4 25.1 17.5 10.2 Electrical and Electronic Enclosures. . . . . 53.3 59.6 56.0 44.2 20.7 Other. . . . . . . (13.9) (21.7) (14.1) (0.2) (0.6) Total. . . . . . . 169.8 142.9 116.2 105.6 68.1 61.9 53.1 47.9 52.1 29.1 Earnings before income taxes 158.4 124.6 101.7 83.5 55.1 47.7 38.4 31.6 35.2 21.7 Income From Continuing Operations . . . . . . . 91.6 74.5 60.5 50.1 32.7 27.2 18.8 16.9 19.4 10.7 Net Income (a) . . . . . . . 91.6 74.5 77.2 53.6 46.6 42.8 41.1 33.0 36.4 39.8 Common Share Data EPS - Diluted (a) (b). . . . . 2.11 1.73 1.41 1.17 .76 .64 .47 .42 .50 .32 Cash Dividends . . . . . . . . .54 .50 .40 .36 .34 .32 .30 .29 .26 .22 Stock Dividends. . . . . . . . -- 100 -- -- 50 -- -- -- -- 10 Book Value . . . . . . . 15.12 13.69 12.37 10.71 9.29 8.21 8.79 7.97 7.42 6.67 Stock Price . . . . . . 35 15/16 32 1/4 24 21 16 1/2 13 3/16 13 7/16 8 1/4 9 3/16 10 7/16 Market Capitalization. . . . . 1,548 1,378 1,045 899 692 549 558 342 352 395 Balance Sheet Data Preferred Equity (net) . . . 53.4 47.6 44.6 40.9 33.9 77.4 74.1 68.4 65.9 67.6 Common Equity. . . . . . 577.2 516.2 458.3 391.1 336.9 260.0 275.7 247.8 241.0 214.2 ROE %(a) . . . . . 15.9 14.3 16.9 13.2 13.6 12.8 13.3 11.1 14.1 19.8 Capital Expenditures . . . . 77.5 71.6 63.8 57.8 28.1 28.0 26.5 28.0 28.7 20.2 Total Assets . . . . . . 1,472.9 1,289.0 1,252.5 1,161.1 863.1 769.5 698.4 696.5 708.9 675.2 Long-Term Debt . . . . . . . . 294.5 279.9 219.9 408.5 236.7 209.3 191.2 217.5 243.4 242.9 Debt to Capital %. . . . . . . 32 33 31 49 39 38 35 41 44 46
All Share and Per Share Data adjusted for stock dividends. (a) 1992 - before the cumulative effects of accounting changes. (b) From continuing operations. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's Discussion and Analysis Strategic Direction Pentair grows its businesses through innovative marketing and product design and intensive productivity improvement, coupled with capital investment, and employee training and participation. Pentair has chosen to focus these skills on its three core markets of Professional Tools and Equipment, Water and Fluid Technologies, and Electrical and Electronic Enclosures. Following the divestiture of its paper businesses in 1995, Pentair has made nine acquisitions in these chosen fields. Results of Operations
Professional Water and Electrical and Tools and Fluid Electronic (In thousands) Equipment Technologies Enclosures Other* Total NET SALES 1997 $747,066 $403,979 $579,366 $108,645 $1,839,056 1996 582,689 322,252 548,798 113,326 1,567,065 1995 492,398 237,535 542,452 130,486 1,402,871 OPERATING INCOME 1997 $84,355 $45,987 $53,313 $(13,853) $169,802 1996 60,556 44,445 59,592 (21,674) 142,919 1995 49,239 25,111 55,951 (14,054) 116,247
*Other includes corporate expenses, captive insurance company, intermediate financial companies, charges that do not relate to current operations, divested operations (Federal) and intercompany eliminations. CONSOLIDATED 1997 VERSUS 1996 Consolidated net sales increased to $1,839.1 million in 1997, representing a 17.4% increase over 1996. The double digit growth rate is attributable to additional strategic acquisitions and continued growth in North America. Outside of North America, difficult European markets and weak local currencies limited the growth of sales in dollar terms. Operating income increased to $169.8 million in 1997, up 18.8% over 1996. Operating income as a percent of sales improved slightly from 9.1% to 9.2%. Significant margin gains in most existing businesses were nearly offset by the lower operating margins of our recent acquisitions. Strategic investments were made throughout all the operating segments to position the Company for continued productivity gains, increased capacity and improved customer service and satisfaction. Gross profit margins were maintained, remaining nearly flat at 29.8% in 1997 versus 29.9% in 1996. Research and development expenses increased to 1.2% of net sales versus 1.0% in 1996 due to the increasing stream of new products. Selling, general and administrative expense (SG&A) as a percent of sales was 19.4% in 1997 as compared to 19.8% in 1996. The Company continues to incur costs to support major information system upgrades, which are starting to be offset by the associated cost improvements. Interest expense was higher in 1997 as compared to 1996 due to slightly higher effective interest rates and higher average outstanding debt levels in 1997, influenced by the acquisition of the pump business in August and the sale of Federal in November. Pentair sold its Federal Cartridge Company to Blount International, Inc., in November 1997, realizing a $10.3 million pre-tax gain. This gain was reduced by $9.1 million of taxes, resulting in a net gain of $1.2 million, or $.03 per share. Sales and operating income for Federal through the first 10 months of 1997 improved over the levels of their very difficult 1996. Taxes on the gain from the sale of Federal were greater than the Company's normal tax rate due to non-deductible goodwill created as part of the original structure of the 1988 Federal-Hoffman acquisition. The Company's effective income tax rate of 42.2% includes this incremental tax from the gain on sale. The tax rate excluding the gain on the sale of Federal is 39.0% as compared to 40.2% in 1996. Net income increased 22.9% to $91.6 million versus $74.5 million in 1996. EPS of $2.11 in 1997 represented an increase of 22.0% over 1996 EPS of $1.73. EPS without the gain from the sale of Federal is $2.08, a 20 percent increase over 1996. 1996 VERSUS 1995 Consolidated net sales from continuing operations increased to $1,567.1 million in 1996, representing an 11.7% increase over 1995. The double digit growth rate is attributable to continued strength in North American markets and strategic acquisitions that strengthened our market positions throughout the world. Operating income from continuing operations increased to $142.9 million in 1996, up 22.9% over 1995, and operating income as a percent of sales improved from 8.3% to 9.1%. Gross profit margins improved nearly 1% in 1996 to 29.9% versus 29.0% in 1995. This was primarily due to productivity gains and volume efficiencies. Selling, general and administrative expense (SG&A) as a percent of sales was 19.8% in 1996 as compared to 19.7% in 1995. Extra selling effort was expended during 1996 to support new product introductions and new market expansion activities. In addition, the Company incurred expenses to support major information system upgrades. Interest expense was lower in 1996 as compared to 1995 due to lower interest rates and a slightly lower average debt level. Interest income was lower in 1996 as compared to the prior year. 1995 included interest income received on the note receivable held in relation to the sale of the paper businesses. Income from continuing operations increased 23.2% to $74.5 million versus $60.5 million in 1995. EPS of $1.73 in 1996 represented an increase of 22.7% over 1995 EPS from continuing operations of $1.41. OUTLOOK The Company is targeting to surpass the $2 billion sales level for 1998, before the impact of 1998 acquisitions. While the outlook for each of its segments is very encouraging in 1998, as noted below, Pentair has determined that to achieve financial results comparable to those of top-performing benchmark companies, it must improve its performance on a company-wide basis. To do so, the Company is targeting significant improvements in free cash flow and management of total capital. In addition, the Company has adopted a 2-year target to achieve a $60 million reduction from its planned cost structure. These gains are anticipated to come from improved cooperation and standardization across all operating units in such areas as: transportation, administrative services, outsourcing, and purchasing. This effort will alter historical management patterns, enabling synergies between all businesses. The Company continues to look for synergistic acquisitions in each of its business segments, in line with its pattern over the past three years. Of the past nine acquisitions, most were smaller businesses or product lines which fit with existing operations, offering new products or expanded geographic scope. Two, however, were stand-alone strategic acquisitions of large established businesses, and helped create Pentair's latest business segment, Water and Fluid Technologies. Pentair intends to continue to pursue smaller, bolt-on purchases, but will also carefully review larger targets which have the capability to significantly expand its current segments. Other acquisitions are possible, but only if they present extraordinary opportunities to Pentair. SEGMENT DISCUSSION Pentair has realigned its operating businesses into three segments to reflect its growing focus in its chosen markets: Professional Tools and Equipment (PTE), Water and Fluid Technologies (WFT), and Electrical and Electronic Enclosures (EEE). PROFESSIONAL TOOLS and EQUIPMENT The PTE segment includes Delta International Machinery, Porter-Cable, Lincoln Automotive and Century Manufacturing. Products manufactured include woodworking machinery, portable power tools, battery charging and testing equipment, welding equipment, and lubricating and lifting equipment. 1997 VERSUS 1996 PTE sales increased $164.4 million or 28.2%. The full year effect of 1996 acquisitions contributed to less than half of the growth in sales. Substantial growth was achieved in the tool business due to the introduction of new products, increased brand awareness and continued expansion of the home center channel. Operating income as a percent of sales increased to 11.3% in 1997 from 10.4% in 1996. Profitability improved across the entire segment due to volume efficiencies, cost control activities and continued productivity improvement. 1996 VERSUS 1995 PTE sales increased $90.3 million or 18.3%, propelled by new product introductions, expanded distribution in home center and hardware channels, and the partial year effect of 1996 acquisitions. Operating income as a percent of sales increased to 10.4% in 1996 from 10.0% in 1995 due to favorable product mix, volume efficiencies, and productivity gains. OUTLOOK The Professional Tools and Equipment segment has tremendous momentum going into 1998 and sales growth is expected to continue to be in double digits due to product line expansions and cross marketing through multiple channels of distribution. Margins are anticipated to improve slightly, especially from the full impact of improvements currently being made in recent acquisitions. WATER and FLUID TECHNOLOGIES The WFT segment includes the Pentair pump business, Fleck Controls and Lincoln Industrial. Products manufactured include pumps for wells and water treatment, sump pumps, valves for water softeners, and automated and manual lubrication systems and equipment. 1997 VERSUS 1996 WFT sales increased $81.7 million or 25.4%, primarily due to acquisitions. In particular, 1997 results included 4 months of operations from the pump businesses purchased from General Signal. Otherwise, this segment experienced moderate growth, dampened by the effects of a stronger U.S. dollar on the results of the European operations. Operating income as a percent of sales decreased to 11.4% in 1997 from 13.8% in 1996. Recent acquisitions have lower margins than the overall 1996 percentage for this segment. In addition, one plant experienced temporary production difficulties in meeting customer demand. Investments were made in 1997 across the segment addressing plant and product rationalization, process redesign, and production capacity. Profitability was also impacted by the weak European economy and the effects of a stronger U.S. dollar. 1996 VERSUS 1995 WFT sales increased $84.7 million or 35.7%, including the full year impact of 1995 acquisitions and small 1996 acquisitions. In addition to the contributions from acquisitions, North American operations growth outpaced that of the market and this was slightly offset by the weak economic conditions in Europe in 1996. Operating income as a percent of sales increased to 13.8% in 1996 from 10.6% in 1995 due to favorable business mix, volume efficiencies, and productivity gains in all operations throughout the world. OUTLOOK The Water and Fluid Technologies segment will benefit from full year operations from the recently acquired pump businesses as the overall integration of the Pentair pump business continues, driving down costs and improving productivity via rationalization of products, redesign of processes, and the anticipated divestiture or closure of unprofitable product lines. The automated lubrication and material dispensing business will work to increase its presence in global markets and will expand its product offerings as a result of its January 1998 acquisition of ORSCO, Inc., a manufacturer of automated lubricating equipment. Overall profitability of this segment should improve due to the synergies within the pump business and improvements in operations. ELECTRICAL and ELECTRONIC ENCLOSURES The EEE segment includes Hoffman Enclosures and Schroff. Products manufactured include metallic and composite cases, subracks and cabinets that house and protect electrical and electronic controls, instruments, and components. 1997 VERSUS 1996 EEE sales increased $30.6 million or 5.6% including a 1997 acquisition. In addition, North American sales were the highest in history and outpaced the overall growth in the markets served. The European operations, as measured in local currencies, also experienced year-over-year sales growth despite a continued weak economy in Europe. However, European sales (excluding acquisitions),as measured in a stronger U.S. dollar, were less than 1996. Operating income as a percent of sales decreased to 9.2% in 1997 from 10.9% in 1996. This was due to the impact of the weak European economy, with intense competition affecting pricing and product mix of sales. There were also strategic, one-time costs related to the following: implementation of a new world-wide business system; start-up of the new 300,000-square-foot production facility in Mt. Sterling, Kentucky; integration of the Transrack acquisition including reorganization of the French sales and marketing activities; the cost of employment reductions in Europe; introduction of outdoor enclosures for the telecommunications market; and start up of the North American manufacture of a new flagship product, the ProLine enclosure. 1996 VERSUS 1995 EEE sales increased $6.3 million or 1.2%. European sales (especially as measured in a stronger U.S. dollar) reflected weak economic conditions in Europe in 1996. North American sales growth was strong enough to result in a small total worldwide sales increase over 1995. Operating income as a percent of sales increased to 10.9% in 1996 from 10.3% in 1995 due to cost control measures and strong productivity gains. OUTLOOK The Electrical and Electronic Enclosures segment has a solid leadership position in the global enclosures market. This segment is expected to benefit from the strategic investments made in 1997, economic recovery in Europe, new product introductions and cost savings. Liquidity and Capital Resources The Company's free cash flow (cash from operations less capital expenditures) was $40 million in 1997, up from $30 million in 1996. The Company is targeting continued growth in free cash flow as a percent of sales through improved profitability and working capital ratios. The Company believes that cash flow from operations will continue to exceed its needs for capital programs, smaller acquisitions and dividends in the next year. The Company's financial position was strengthened in 1997, even taking into account the acquisition of the pump businesses from General Signal. As of December 31, 1997, the long-term debt to total capital ratio was 32 percent, compared to 33 percent at the end of 1996. The Company has significant financing capacity to continue its acquisition program and to support its announced stock repurchase program. Capital spending chart here ($ millions) 93 28.1 94 57.8 95 63.8 96 71.6 97 77.5 Pentair invests capital to maintain existing businesses, implement productivity improvements, introduce new products and develop new businesses. In the last five years, approximately $300 million has been invested in Pentair's businesses (excluding acquisitions) as shown above. The Company does not currently have any planned expansions of the magnitude of the Mt. Sterling facility, which should allow Pentair to reduce its 1998 capital expenditures to 1996 spending levels. Contemplated uses include computer systems, cost reduction projects, new product development and reconfiguration of manufacturing facilities. Dividends since 1976 chart here ($ per share, restated for stock dividends) 76 0.03 77 0.04 78 0.06 79 0.09 80 0.11 81 0.13 82 0.14 83 0.15 84 0.16 85 0.18 86 0.20 87 0.21 88 0.22 89 0.26 90 0.29 91 0.30 92 0.32 93 0.34 94 0.36 95 0.40 96 0.50 97 0.54 98 0.60 The Company raised its anticipated 1998 quarterly dividend to 15 cents per share to an indicated annual rate of $.60 per share. This is an 11% increase over 1997. Pentair has increased its dividend payment each year since 1976. Since the first cash dividend in 1976, dividends have increased at an average annualized growth rate of 15%. INFLATION The impact of inflation on the Company's results of operations is not considered material given the current inflationary outlook. INSURANCE SUBSIDIARY The Company's captive insurance subsidiary provides a cost effective means of obtaining insurance coverage for general and product liability, product recall, workers' compensation and auto liability. The insurance subsidiary insures directly and reinsures an admitted carrier. Loss reserves are established based on actuarial projections of ultimate loss. ENVIRONMENTAL MATTERS Under current laws and regulations, Pentair's obligations relating to environmental matters are not expected to have a material impact on the Company's operations, financial condition or operating results. Some subsidiaries face remediation of soil and groundwater as a result of predecessors' or their own previous disposal practices. In addition, Pentair subsidiaries have been named as potentially responsible parties at a small number of Superfund or other sites being studied or remediated. In all cases to date, the affected business has been deemed to be a de minimis defendant or its share of remediation costs has not been material to Pentair. Pentair contractually retained certain obligations pertaining to environmental issues of discontinued paper businesses and the divested sporting ammunition business. Costs and capital expenditures related to environmental obligations were not material to the Company's operations in either 1997 or 1996, and are not anticipated to be material in 1998. Pentair engages environmental professionals to perform periodic audits of its facilities to assist Pentair in complying with the various environmental laws and regulations faced by its businesses. For purposes of maintaining appropriate reserves against liabilities associated with environmental issues, whether involving on- or off-site locations, Pentair management reviews each individual site, taking into consideration the number of parties involved with the site, the joint and several liability imposed by certain environmental laws, the expected level of contributions of the other parties, the nature and quantities of wastes involved, the expected method and extent of remediation, the estimated professional expenses involved and the time period over which any costs would be incurred. Based on this evaluation, reserves are established when loss amounts are probable and reasonably estimable. Insurance recoveries are recorded only when claims for recovery are settled. YEAR 2000 and "Euro" CURRENCY ISSUES The Company has been evaluating its computer, telecommunications, and embedded logic systems since 1995 for compliance with Year 2000 requirements and over the past year for the new "Euro" currency. The Company has determined that expected costs for compliance will not be material to its results of operations, liquidity or capital expenditures. Most of the businesses have installed or are in the process of installing complete new business management systems which go beyond just Year 2000 and "Euro" compliance. Some businesses have chosen to upgrade existing systems to be compliant. Under current plans, the Company does not anticipate significant risks to its operations from internal noncompliance with these issues. In addition, the Company is proactively requiring key suppliers to certify their compliance. NOTIFICATION REGARDING FORWARD-LOOKING INFORMATION Except for historical information contained herein, certain statements are forward-looking statements that involve risks and uncertainties, including, but not limited to, product demand and market acceptance risks, customer mix, the effect of economic conditions, the impact of competitive products and pricing, product development, commercialization and technological difficulties, capacity and supply constraints or difficulties, the results of financing efforts, actual purchases under agreements and the effect of the Company's accounting policies. The actual results that the Company achieves may differ materially from these forward-looking statements due to such risks and uncertainties. The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this Annual Report. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other filings with the Securities and Exchange Commission from time to time that advise interested parties of the risks and uncertainties that may affect the Company's financial condition and results of operations. Item 8. Financial Statements and Supplementary Data. The following consolidated financial statements of the Corporation and its subsidiaries are included herein as indicated below: Consolidated Financial Statements Consolidated Statements of Income for Years Ended December 31, 1997, 1996 and 1995 Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Cash Flows for Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Comprehensive Income for Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Independent Auditors' Report CONSOLIDATED STATEMENTS OF INCOME Pentair, Inc. and Subsidiaries
Years Ended December 31 (In thousands, 1997 1996 1995 except per share amounts) Net sales $1,839,056 $1,567,065 $1,402,871 Operating costs Cost of goods sold 1,290,798 1,098,064 996,576 Selling, general and administrative 357,125 310,606 276,683 Research and development 21,331 15,476 13,365 Total operating costs 1,669,254 1,424,146 1,286,624 Operating income 169,802 142,919 116,247 Gain on sale of business 10,313 -- -- Interest expense (22,261) (19,537) (21,861) Interest income 528 1,220 7,308 Income from continuing operations before income taxes 158,382 124,602 101,694 Provision for income taxes 66,782 50,093 41,194 Income from continuing operations 91,600 74,509 60,500 Discontinued operations: Income from discontinued operations (net of applicable income taxes of $2,740) -- -- 4,566 Gain on sale of discontinued operations (net of applicable income taxes of $7,734) -- -- 12,134 Net income 91,600 74,509 77,200 Preferred dividend requirements 4,867 4,928 5,203 Income available to common shareholders $ 86,733 $ 69,581 $ 71,997 Basic Earnings per Common Share Continuing operations $ 2.28 $ 1.86 $ 1.51 Discontinued operations .00 .00 .45 Net Income $ 2.28 $ 1.86 $ 1.96 Diluted Earnings per Common Share Continuing operations $ 2.11 $ 1.73 $ 1.41 Discontinued operations .00 .00 .40 Net Income $ 2.11 $ 1.73 $ 1.81 Average Common Shares Outstanding 37,989 37,491 36,812 Outstanding Assuming Dilution 43,067 42,752 42,380
See Notes to Consolidated Financial Statements. CONSOLIDATED BALANCE SHEETS Pentair, Inc. and Subsidiaries
(In thousands) December 31 Assets 1997 1996 Current assets Cash and cash equivalents $ 34,340 $ 22,973 Accounts and notes receivable 369,220 299,055 Inventories 266,409 256,715 Deferred income taxes 23,401 23,084 Other current assets 12,000 12,428 Total current assets 705,370 614,255 Property, plant and equipment Land and land improvements 14,278 19,314 Buildings 119,996 110,983 Machinery and equipment 374,967 364,953 Construction in progress 19,113 30,668 Property, plant and equipment - gross 528,354 525,918 Less accumulated depreciation 234,800 227,069 Property, plant and equipment - net 293,554 298,849 Marketable securities - insurance subsidiary 0 40,764 Goodwill 429,279 298,372 Deferred income taxes 12,110 2,381 Other assets 32,549 34,393 Total assets $1,472,862 $1,289,014 Liabilities and Shareholders' Equity Current liabilities Accounts and notes payable $152,592 $ 98,146 Compensation and other benefits accruals 70,758 61,713 Income taxes 15,158 24,919 Accrued product claims and warranties 35,114 25,167 Accrued rebates 21,658 15,172 Accrued expenses and other liabilities 62,194 43,593 Current maturities of long-term debt 34,703 32,928 Total current liabilities 392,177 301,638 Long-term debt 294,549 279,889 Pensions and other retirement compensation 52,470 47,018 Postretirement medical and other benefits 45,135 47,045 Reserves - insurance subsidiary 32,313 32,322 Other liabilities 25,656 17,251 Commitments and Contingencies (Notes 9 and 19) Preferred stock - at liquidation value Outstanding: 1,704,578 shares in 1997 and 1,769,983 shares in 1996 59,696 62,058 Unearned ESOP compensation (6,315) (14,440) Common stock - par value, $.16 Outstanding: 38,184,804 in 1997 and 37,717,022 in 1996 6,365 6,287 Additional paid-in capital 186,486 179,143 Accumulated other comprehensive income (5,085) 8,053 Retained earnings 389,415 322,750 Total shareholders' equity 630,562 563,851 Total liabilities and shareholders' equity $1,472,862 $1,289,014
See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Pentair, Inc. and Subsidiaries
Years Ended December 31 (In thousands) 1997 1996 1995 Preferred Stock Beginning Balance $ 62,058 $ 65,656 $ 68,444 Conversions into common (2,362) (3,598) (2,788) Ending Balance 59,696 62,058 65,656 Unearned ESOP Compensation $ (6,315) $(14,440) $(21,074) Common Stock - Par Beginning Balance $ 6,287 $ 6,172 $ 6,082 Employee stock plans - net 48 69 54 Conversions into common 30 46 36 Ending Balance 6,365 6,287 6,172 Additional Paid in Capital Beginning Balance $179,143 $169,832 $163,273 Employee stock plans - net 5,019 5,770 3,828 Conversions into common 2,324 3,541 2,731 Ending Balance 186,486 179,143 169,832 Foreign Currency Translation Adjustment Beginning Balance $ 7,892 $ 10,964 $ 11,729 Current period change (10,504) (3,072) (765) Ending Balance (2,612) 7,892 10,964 Unrealized Gains on Securities Beginning Balance $ 1,965 $ 1,090 $ (602) Current period change ( 1,965) 875 1,692 Ending Balance 0 1,965 1,090 Minimum Liability Pension Adjustment Beginning Balance $ (1,804) $ (1,034) $ (3,094) Current period change (669) (770) 2,060 Ending Balance (2,473) (1,804) (1,034) Retained Earnings Beginning Balance $322,750 $271,249 $213,670 Net Income 91,600 74,509 77,200 Dividends Common (20,513) (18,735) (14,718) Preferred (4,867) (4,928) (5,203) Payment for redemption of stock rights -- -- (558) Tax Benefit of preferred dividends 445 655 858 Ending Balance 389,415 322,750 271,249 TOTAL SHAREHOLDERS' EQUITY $630,562 $563,851 $502,855
See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF CASH FLOWS Pentair, Inc. and Subsidiaries
Years Ended December 31 (In thousands) 1997 1996 1995 Operating activities Net income $ 91,600 $ 74,509 $ 77,200 Adjustment for Discontinued Operations -- -- (16,700) Adjustments to reconcile to cash flow Depreciation 53,723 47,925 41,570 Amortization of intangible assets 14,113 11,595 7,364 Gain on sale of securities (5,932) -- -- Deferred income taxes (11,268) 484 5,725 Changes in assets/liabilities, net of effects of acquisitions/dispositions Receivables (61,647) (16,791) (34,103) Inventories (22,409) (16,345) (9,257) Other assets (6,946) (13,488) (10,060) Accounts payable 46,673 2,615 10,038 Accrued compensation and benefits 12,157 (9,277) 17,735 Income taxes (14,081) 7,025 9,692 Accrued rebates 6,486 6,365 2,907 Pensions and other retirement compensation 8,578 8,695 12,038 Reserves - insurance subsidiary 2,902 6,211 7,837 Other liabilities 3,945 (7,818) (16,343) Cash from operations - continuing operations 117,894 101,705 105,663 Payments related to discontinued operations -- -- (34,925) Total Cash from Operating Activities 117,894 101,705 70,738 Investing activities Capital expenditures (77,461) (71,646) (63,838) Proceeds from sale of businesses 112,000 100,000 216,086 Payments for acquisition of businesses (210,620) (195,917) (16,517) Construction funds held in escrow 7,055 (9,251) -- Purchase of marketable securities (2,031) (15,966) (13,081) Proceeds from sale of marketable securities 48,727 6,274 6,091 Cash provided by (used for) investing activities (122,330) (186,506) 128,741 Financing activities Long-Term Borrowings 107,353 91,528 30,792 Payments of Long-Term Debt (70,333) (15,425) (210,236) Unearned ESOP compensation decrease 8,124 6,634 6,454 Employee stock plans and other 5,514 6,483 4,161 Dividends (25,380) (23,663) (19,921) Cash provided by (used for) financing activities 25,278 65,557 (188,750) Effects of currency exchange rate changes (9,475) 5,569 (6,758) Increase (decrease) in cash and cash equivalents 11,367 (13,675) 3,971 Cash and cash equivalents - beginning of period 22,973 36,648 32,677 Cash and cash equivalents - end of period $ 34,340 $ 22,973 $ 36,648
Supplemental Cash Flow Information: Cash payments for interest were $18,507,000, $25,591,000, and $22,571,000 for the years ending December 31, 1997, 1996 and 1995, respectively. Cash payments for income taxes were $73,374,000, $38,127,000, and $34,754,000 for the years ending December 31, 1997, 1996 and 1995, respectively. See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Pentair, Inc. and Subsidiaries
Years Ended December 31 (In thousands) 1997 1996 1995 Net Income $91,600 $74,509 $77,200 Other comprehensive income, net of tax: Foreign currency translation adjustments (10,504) (3,072) (765) Unrealized gains on securities: Unrealized holding gains arising during the period 1,891 906 1,581 Less reclassification adjustment for (gains)/losses included in net income (3,856) (31) 111 Minimum pension liability adjustment (669) (770) 2,060 Other comprehensive income(loss) (13,138) (2,967) 2,987 Comprehensive Income $78,462 $71,542 $80,187 Related Tax (Expense)/Benefit of Other Comprehensive Income: Foreign currency translation adjustments $ 6,716 $2,065 $ 521 Unrealized gains on securities: Unrealized holding gains arising during the period (1,018) (488) (851) Less reclassification adj- ustment for (gains)/losses included in net income 2,076 17 (60) Minimum pension liability 427 492 (1,317)
See Notes to Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pentair, Inc. and Subsidiaries 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include Pentair, Inc. and its wholly- owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Property, Plant and Equipment Property, plant and equipment is stated at cost. Depreciation is computed using the straight-line method. Estimated useful lives are: land improvements - 5 to 20 years, buildings - 5 to 50 years, and machinery and equipment - 3 to 15 years. Insurance Subsidiary The Company's wholly-owned insurance subsidiary , Penwald Insurance Company, insures general and product liability, product recall, workers' compensation, and auto liability risks. Reserves for policy claims ($43,305,000 with $32,313,000 noncurrent as of December 31, 1997 and $40,403,000 with $32,322,000 noncurrent as of December 31, 1996) are established based on actuarial projections of ultimate loss. In order to maximize investment earnings from insurance reserves, Penwald now has a long-term receivable from Pentair (established in July, 1997) in lieu of its former marketable securities portfolio. The intercompany receivable is interest-bearing and payable on demand and eliminated in consolidation. Prior to July 1997, the insurance subsidiary invested in marketable securities including debt and equity securities classified as available-for-sale in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Debt and equity securities classified as available-for-sale were carried at fair value on the balance sheet with unrealized gains and losses reported in a component of shareholders' equity. These investments are treated as operating assets of the insurance subsidiary and the related earnings ($2,864,000, $1,824,000, and $1,470,000 in 1997, 1996 and 1995, respectively) are recorded as a reduction of the insurance component of cost of sales. The gain on sale of securities from the liquidation of the portfolio ($5,932,000) is recorded as other income and included as a reduction of selling, general and administrative costs. The cost and market value of debt and equity securities of the insurance subsidiary at December 31, 1996, by contractual maturity, is shown below: In Thousands Cost Market Debt Securities: Due during the next year $ 2,105 $ 2,103 Due after one year through five years 17,381 17,408 Due after five years through ten years 8,020 8,160 27,506 27,671 Equity Securities: 10,262 13,093 Total $37,768 $40,764 Goodwill The excess purchase price paid over the fair value of net assets of businesses acquired is amortized on a straight-line basis over periods ranging from 25 to 40 years. The amortization recorded for 1997, 1996 and 1995 was $14,113,000, $11,160,000, and $7,253,000, respectively. Accumulated amortization was $44,658,000 and $36,685,000 at December 31, 1997 and 1996, respectively. The Company periodically reviews goodwill to assess recoverability. The Company evaluates the recoverability by measuring the unamortized balance of such goodwill against estimated future cash flows. If events or changes in circumstances indicated that the carrying amount of such asset may not be recoverable, the asset would be adjusted to the present value of the estimated future cash flows. Based on evaluations performed, there was no adjustment to the carrying value of goodwill during any of the three years ended December 31, 1997. Long-Lived Assets Pentair evaluates the carrying value of long-lived assets. When the carrying value exceeds the projected undiscounted cash flows from the assets, an impairment is recognized to reduce the carrying value to the fair market value. Losses on long-lived assets to be disposed of are determined in a similar manner, except that the fair market values are reduced for the cost to sell. Based on evaluations performed, there was no adjustment to the carrying value of such assets during any of the three years ended December 31, 1997. Foreign Currency Translation Translation gains or losses resulting from translating foreign currency financial statements are reported as a component of shareholders' equity. Foreign currency transaction gains and losses are included in earnings as incurred. Revenue Recognition Revenue from sales is generally recognized at the time the product is shipped. Product Warranty Costs Provision for estimated warranty costs is recorded at the time of sale and periodically adjusted to reflect actual experience. Research and Development Research and development expenditures are expensed as incurred. Development activities generally relate to creating new products, improving or creating variations of existing products, or modifying existing products to meet new applications. Earnings per Common Share Basic earnings per common share is computed by dividing net income, after deducting preferred stock dividends, by the average common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income, after adjusting the tax benefits on deductible ESOP dividends, by the average common shares outstanding plus the incremental shares that would have been outstanding upon the assumed exercise of dilutive stock options and upon the assumed conversion of each series preferred stock. The tax benefits applicable to preferred dividends paid to ESOPs are recorded in the following ways. For allocated shares, they are credited to income tax expense and included in the earnings per share calculation. For unallocated shares, they are credited to retained earnings and excluded from the earnings per share calculation. See also Note 20. Reclassifications Certain reclassifications have been made to prior years' financial statements to conform to the current year presentation. 2. Adoption of New Accounting Standards In 1997, the Company adopted the following new accounting standards: Statement of Financial Accounting Standard (FAS) No. 128, "Earnings per Share", Statement of Financial Accounting Standard (FAS) No. 130 "Reporting Comprehensive Income", and Statement of Financial Accounting Standard (FAS) No. 131 "Disclosures about Segments of an Enterprise and Related Information". FAS 128 requires the reporting of earnings per share (EPS) in two forms: basic EPS and diluted EPS. Pentair has historically reported its EPS on a fully diluted basis, which reflects the dilution resulting from employee stock options and convertible securities related to employee benefit plans, and is directly comparable to the new diluted EPS reported. See also Note 20. FAS 130 establishes standards for the reporting of comprehensive income and its components. Comprehensive income is defined as the change in equity during the period from transactions and other events and circumstances from non-owner sources. FAS 131 requires the Company to report information about its operating segments based upon how the Company manages its operations. The Company manages its businesses in three distinct operating groups and has realigned its external reportable segments to conform with these internal management structures. The three reportable segments -- Professional Tools and Equipment, Water and Fluid Technologies, and Electrical and Electronic Enclosures - replace the Specialty Products and General Industrial Equipment segments which had been reported since 1991. See also Note 17. Prior year financial statements have been restated accordingly. 3. Acquisitions/Divestitures 1997 In 1997, the Company paid $210,620,000 to acquire 3 new businesses, all accounted for as purchase acquisitions with $180,348,000 of goodwill recorded during 1997 for these acquisitions. The pro forma effect of these acquisitions is not deemed material to the Company. In 1997, the Company sold its Federal Cartridge business for $112,000,000 cash plus receivables approximating $16,000,000 for final closing adjustments. Federal's operating results are included in the Company's results through October 31, 1997. 1996 In 1996, the Company paid $75,185,000 to acquire 4 new businesses, all accounted for as purchase acquisitions with $33,176,000 of goodwill recorded during 1996 for these acquisitions. The pro forma effect of these acquisitions is not deemed material to the Company. 1995 In 1995, the Company paid $16,517,000 in cash and issued promissory notes for $120,732,000 to acquire 2 new businesses, both accounted for as purchase acquisitions with $111,682,000 of goodwill recorded during 1995 for these acquisitions. 4. Discontinued Operations - Paper Businesses On April 1, 1995 the Company sold its Cross Pointe Paper Corporation subsidiary for $203,300,000. On June 30, 1995 the Company sold its Niagara of Wisconsin Paper Corporation, its 50% share of Lake Superior Paper Industries (LSPI) joint venture and its 12% share of Superior Recycled Fiber Industries (SRFI) joint venture for $115,600,000. The gain on the sales was $12,134,000 after income tax expense of $7,734,000. The transaction added 28 cents to diluted earnings per share in 1995. 5. Balance Sheet Information Accounts receivable are stated net of allowances for doubtful accounts of $12,446,000 in 1997 and $7,348,000 in 1996. Inventories are stated at the lower of cost or market. All non-US companies use the first-in, first-out - FIFO and moving average methods. The US companies use the last-in, first-out - LIFO method. (In thousands) 1997 1996 Finished goods $131,847 $159,617 Work in process 58,047 47,689 Raw materials and supplies 76,515 49,409 Total $266,409 $256,715 If all LIFO inventories were valued at FIFO, aggregate inventory would have been $269,653,000 and $261,664,000 at December 31, 1997 and 1996, respectively. 6. Long-Term Debt and Credit Facilities Revolving credit agreements with seven banks provide credit facilities of US $390,000,000 which can be borrowed in US$ or any other G7 currency. G7 currencies include any of Deutschemarks, French Francs, British Pounds Sterling, Japanese Yen, Canadian Dollars, or Italian Lira. The Company must pay a commitment fee rate ranging from .100 to .150 of 1% per annum on the total amount of the credit facility. The rate is assessed pursuant to a sliding scale based on the Company's debt to total capital ratio as calculated quarterly. Borrowings under the revolving credit facility mature on June 30, 2001. Debt is summarized as follows: (In thousands) 1997 1996 Revolving credit facilities, average interest rate of 5.02% $102,119 $168,413 Private placement debt, due 1998 to 2007, average interest rate of 7.09% 197,858 115,000 Other, due periodically to 2005, average interest rate 5.27% 29,275 29,404 Total 329,252 312,817 Current maturities 34,703 32,928 Total long-term debt $294,549 $279,889 At December 31, 1997, outstanding revolving credit facility debt included $50,000,000 in U.S. dollars with an average current interest rate of 6.085% and $52,119,000 in various foreign currencies with an average current local interest rate of 3.99%. The weighted average credit facilities borrowing rates were 4.87% in 1997 and 4.51% in 1996. See also interest rate swap agreements at Note 7. Various debt agreements have restrictions relating to minimum net worth, certain financial ratios, and dividends and certain other restricted payments. Under the most restrictive covenants, $137,000,000 of the December 31, 1997 retained earnings were unrestricted for such purposes. The Company has remained in compliance with these covenants. Total long-term debt maturities, excluding revolving credit facilities, are $34,703,000, $42,896,000, $23,464,000, $18,017,000, and $2,865,000 for the years 1998 to 2002, respectively. 7. Financial Instruments The Company utilizes various derivatives such as interest rate swap agreements, currency swap agreements, and interest rate cap agreements. The Company uses these derivatives in a strategic manner to minimize interest rate and foreign currency risk. The instruments are not purchased as speculative investments. Interest Rate Risk Management The Company has entered into interest rate swap agreements with major financial institutions to exchange variable rate interest payment obligations for fixed rate obligations without the exchange of the underlying principal amounts in order to manage interest rate exposures. Net payments or receipts under the agreements are recorded as adjustments to interest expense and credit risk is considered remote. As of December 31, 1997, the Company has swap agreements outstanding with an aggregate notional amount of $25,000,000 which expire in varying amounts through June 2005. The Company also has in place forward starting swap agreements, which activate during the period from December 1998 through June 1999, with an aggregate notional amount of $49,500,000. The swap agreements have a fixed interest rate of 6.56% and an average maturity of 6 years. Under the interest rate environment existing as of December 31, 1997, the net fair value of the Company's swap agreements was a net liability of $550,000. As of December 31, 1997, the Company has one arrears interest rate cap agreement outstanding. It is a 35,000,000 Deutschemark cap that expires in November 2001 with a capped interest rate of 7.29% DEM-LIBOR. Foreign Exchange Risk Management The Company has entered into currency swap agreements with major financial institutions to hedge net assets in foreign subsidiaries, principally those denominated in Deutschemarks and Italian Lira. The notional amounts set forth in the table below serve solely as a basis for the calculation of interest payments which are exchanged over the life of the swap transaction and are equal to the amount of foreign currency or dollar principal exchanged at maturity. Gains or losses are deferred and are recognized in income as part of the related transaction. Deferred unrealized gains and losses, based on dealer-quoted prices, are presented in the following table: (in thousands) 1997 1996 Notional amounts $138,431 $16,496 Gains 3,433 0 Losses 3,084 146 Fair Value of Financial Instruments The estimated fair value of long-term debt represents the present value of debt service at rates currently available to the Company for issuance of debt with similar terms. The fair value of interest rate swap agreements and currency swap agreements were estimated based on quotes obtained from dealers for those or similar instruments. Except for those listed, all other financial instruments are carried at amounts that approximate estimated fair value. 1997 1996 Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value Long-term debt $329,252 $339,450 $312,817 $318,610 Interest rate swaps 0 (550) 0 (1,309) Currency swaps 0 349 0 (146) Interest rate cap 0 (121) 0 65 8. Lease Commitments Rent expense related to operating leases amounted to $15,737,000, $11,400,000, and $13,117,000 in 1997, 1996 and 1995, respectively. The majority of the lease commitments are for information systems. Future minimum rental payments under all operating leases are $16,530,000, $12,860,000, $9,725,000, $7,756,000, and $6,233,000 for the years 1998 to 2002, respectively. 9. Commitments and Contingencies Various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company relating to the conduct of its businesses, including those pertaining to product liability, environmental, safety and health, and employment matters. The Company records liabilities when loss amounts are determined to be probable and reasonably estimable. Insurance recoveries are recorded only when claims for recovery are settled. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to the Company, management believes, based on facts presently known, that the outcome of such legal proceedings and claims will not have a material adverse effect on the Company's financial position, liquidity, or future results of operations. Under a $382,000,000 leveraged-lease financing for its former joint venture, LSPI, the Company had committed to provide up to $95,000,000 additional cash to LSPI if needed to meet its lease obligations. In connection with the 1995 sale of LSPI, Consolidated Papers, Inc. (the purchaser) had agreed to indemnify the Company for any required payments. In 1997 and January 1998, the midterm purchase options under all of the leases involved were exercised by the purchaser; therefore, the Company has no significant continuing indemnity obligations in connection with this financing. 10. Capital Stock Preferred Stock The two classes of preferred stock (par value - $.10) are: $7.50 Callable Cumulative Convertible Preferred Stock, Series 1988; and 8% Callable Cumulative Voting Convertible Preferred Stock, Series 1990. Both issues are held by ESOPs (see Note 12). The preferred shares are convertible into common stock and are redeemable, in whole or in part, at the option of the Company on or after the dates indicated below, and at redemption prices declining to the original price per share after ten years. Series Series 1988 1990 Shares Authorized 300,000 2,500,000 Issued and outstanding 116,593 1,587,985 Liquidation value $100.00 $30.25 Conversion Price of common $10.66 to $13.34 $13.11 Shares of common 9.375 to 7.5 2.3077 Early redemption date January 1991 March 1994 Upon the retirement or other termination of an ESOP participant, the shares of preferred stock (Series 1988 and 1990) in which he or she is vested are automatically converted into common shares and distributed in that form, with fractional shares paid in cash. Common Stock The authorized stock of the Company also consists of 122,200,000 shares of Common Stock with a par value of $.16 . On January 22, 1996, the board of directors approved a two-for-one stock split in the form of a 100% stock dividend. The dividend was payable February 16, 1996 to shareholders of record at the close of business on February 2, 1996. Changes in outstanding common shares are summarized as follows (in thousands): 1997 1996 1995 Beginning Balance 37,717 37,035 36,496 Employee stock plans - net 288 409 325 Conversion of preferred stock 180 273 214 Ending Balance 38,185 37,717 37,035 On December 29, 1997, the Company announced that the Pentair board had authorized the repurchase within the next 12 months of up to 350,000 shares of Pentair common stock. Any purchases would be made periodically in the open market, by block purchases or private transactions. The share repurchase is intended to offset the dilution caused by stock issuances under employee stock compensation plans. The Company repurchased 25,000 shares on December 30 and 31, 1997, which transactions settled in January 1998. 11. Share Rights Plan On July 21, 1995, the board declared a dividend of one common share purchase right for each outstanding share of common stock. The dividend was effective July 31, 1995 for shareholders of record on that date. Each Right entitles the registered holder to purchase from the Company one common share at a price of $80.00, subject to adjustment. Such rights only become exercisable ten business days after a person or group acquires beneficial ownership of, or commences a tender or exchange offer for, 15 percent or more of the Company's common stock. The Company can redeem the rights for $.01 per right. The Rights will expire on July 31, 2005, unless the Rights are earlier redeemed or exchanged by the Company. 12. Employee Stock Ownership Plan (ESOP) The Company has an Employee Stock Ownership Plan (ESOP) covering non-bargaining and some bargaining U.S. employees. The employees receive Series 1990 Preferred Stock in lieu of cash 401(k) matching contributions and other cash compensation. To finance the plan, the ESOP borrowed $56,500,000 from the Company and exchanged it for 1,867,768 shares of Callable Cumulative Voting Convertible Preferred Stock, Series 1990 at $30.25 per share. The unpaid balance of the twenty-year, 8.75% loan is included in the Company's balance sheet as unearned ESOP compensation. Gross compensation expense (i.e. the value of shares allocated to participants' accounts) was $7,081,000, $5,561,000, and $5,391,000 in 1997, 1996 and 1995, respectively. The stock held by the ESOP is released for allocation to the participants' accounts as principal and interest is paid from dividends on unallocated shares ($1,140,000, $1,679,000, and $2,202,000 in 1997, 1996 and 1995, respectively) and Company contributions. Through December 31, 1997, the loan has been reduced $54,468,000; of this, $50,185,000 (1,659,000 shares) has been allocated to participant accounts as compensation and dividends; and the difference is included in unearned compensation. A separate frozen ESOP holds the Series 1988 Preferred Stock. 13. Stock Incentive Plans Omnibus Stock Incentive Plan In April 1996, shareholders approved amendments to the Omnibus Stock Incentive Plan (the Plan) to authorize the issuance of additional shares of the Company's common stock. The Plan extends to February 14, 2006. At December 31, 1997, there were 2,856,265 shares available for grant under the Plan. The Plan allows for the granting of nonqualified stock options, incentive stock options, restricted stock, rights to restricted stock, incentive compensation units (ICUs), stock appreciation rights, performance shares and performance units. Restricted Shares, Rights to Restricted Stock and ICUs Restrictions on the restricted shares, rights to restricted stock and ICUs generally expire in the third, fourth and fifth years after issuance. Beginning with 1993 grants, ICU restrictions will expire at the end of three years. The value of each ICU is based on the increase in book value of common stock during the restriction period and is payable when the restrictions lift. Compensation expense consists of (a) amortization of the market value of the stock on the date of award over the period in which the restrictions lapse, and (b) the annual increase in ICU value. Compensation expense was $4,991,000 in 1997, $4,909,000 in 1996 and $5,040,000 in 1995. The Company records incremental tax benefits resulting from the program as additional paid-in capital. Options Options are granted to purchase shares at not less than fair market value of shares on date of grant. Options generally expire after five years but may expire up to ten years from date of grant. Outside Directors Nonqualified Stock Option Plan The Outside Directors Nonqualified Stock Option Plan (the Directors Plan) allows for the granting of nonqualified stock options. Options are granted to purchase shares at not less than fair market value of shares on date of grant. Options generally expire after five years but may expire up to ten years from date of grant. The Directors Plan extends to January 2008. At December 31, 1997, there were 407,448 shares available for grant under the Directors Plan. Details of options for both plans are as follows: Number Weighted Average of Shares Exercise Price 1995 Granted 451,718 $21.50 Exercised 427,192 $11.0967 Forfeited 40,392 $20.2416 Outstanding, end of year 1,457,058 $16.8973 Exercisable, end of year 690,738 1996 Granted 398,278 $25.00 Exercised 456,031 $14.0283 Forfeited 51,546 $22.2582 Outstanding, end of year 1,347,759 $19.9397 Exercisable, end of year 602,412 1997 Granted 372,314 $31.0791 Exercised 342,077 $15.7225 Forfeited 18,174 $29.3324 Outstanding, end of year 1,359,822 $23.9256 Exercisable, end of year 660,542 Options Outstanding and Exercisable by Price Range as of December 31, 1997:
Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price $13.50 - $17.75 297,775 0.89 $17.03 297,775 $17.03 $21.375 - $21.50 348,569 2.05 $21.50 227,730 $21.50 $25.00 361,706 3.06 $25.00 125,912 $25.00 $29.125 - $33.9375 351,772 4.07 $31.375 9,125 $31.00 $13.50 - $33.9375 1,359,822 2.59 $23.93 660,542 $20.30
In accordance with generally accepted accounting principles, the Company has chosen to continue accounting for its plans using the "intrinsic method" in accordance with Accounting Principles Board Opinion No. 25 which requires no compensation expense to be recorded for the issuance of stock options when exercise prices are equal to market value on the date of grant. Had compensation cost for the plans been determined using the "fair value" method as defined in Statement of Financial Accounting Standards (FAS) No. 123, "Accounting for Stock-Based Compensation", compensation expense would have been accrued and the effect on the Company's income from continuing operations and earnings per share would have been as follows: (In thousands) 1997 1996 1995 Income from continuing operations As reported $91,600 $74,509 $60,500 Pro forma 89,900 73,120 59,021 Basic EPS - continuing operations As reported $2.28 $1.86 $1.51 Pro forma 2.24 1.82 1.46 Diluted EPS - continuing operations As reported $2.11 $1.73 $1.41 Pro forma 2.07 1.69 1.37 The weighted average fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and represents the difference between the fair market value on the date of grant and the estimated market value on the exercise date. The model uses the following weighted-average assumptions: 1997 1996 1995 Volatility 26% 25% 25% Risk-free interest rate 5.5% 5.2% 7.75% Expected life (years) Plan 2.0 2.0 2.0 Directors Plan 2.5 2.5 2.5 Dividend yield 1.7% 2.0% 2.0% 14. Provision for Income Taxes The components of earnings before income taxes were as follows: (In thousands) 1997 1996 1995 U.S. $139,006 $ 89,833 $ 76,294 International 19,376 34,769 25,400 $158,382 $124,602 $101,694 The provisions for income taxes, excluding tax benefits credited directly to shareholders' equity, were as follows: (In thousands) 1997 1996 1995 Current U.S.(less foreign tax credits) $ 60,640 $ 33,897 $ 23,751 State 9,573 6,760 4,127 International 7,837 8,962 7,591 Current provision 78,050 49,609 35,469 Deferred U.S. (11,592) (4,687) 2,421 International 324 5,171 3,304 Deferred provision (11,268) 484 5,725 Total provision $ 66,782 $ 50,093 $ 41,194 A reconciliation of the statutory federal tax rate to the effective rate follows: 1997 1996 1995 Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of U.S. income tax benefit 3.6 3.3 3.1 Incremental international tax rate 0.6 1.6 2.0 Non-deductible amortization of goodwill 1.6 2.0 1.2 ESOP dividend benefit (0.8) (0.9) (1.1) Other (1.0) (0.8) 0.3 39.0 40.2 40.5 Incremental Tax - gain on sale of business 3.2 0.0 0.0 Effective Rate 42.2% 40.2% 40.5% The tax effect of the primary temporary differences giving rise to the Company's deferred tax assets and liabilities at December 31 are as follows: (In thousands) 1997 1996 Deferred Tax Assets: Accounts receivable allowances $ 4,737 $ 4,026 Retiree medical liability 17,480 19,376 Warranty/product liability accruals 19,991 15,632 Employee benefit accruals 20,098 17,173 Other 10,829 14,232 Gross deferred tax assets 73,135 70,439 Deferred Tax Liabilities: Inventory allowances (5,878) (5,376) Accelerated depreciation (16,886) (22,300) Other (14,860) (17,298) Gross deferred tax liabilities (37,624) (44,974) Net Deferred Tax Assets $35,511 $25,465 15. Retirement Plans The Company has several non-contributory defined benefit employee pension plans covering substantially all employees of its U.S. and certain non-U.S. subsidiaries. Employees covered under the bargaining plans are eligible to participate at the time of employment and the benefits are based on a fixed amount for each year of service. Employees covered under the non-bargaining pension plans are eligible to participate upon the attainment of age 21 and the completion of one year of service; and benefits are based upon final average salary and years of service. All employees are fully vested in the plans after 5-7 years of service. The Company's funding policy is to make quarterly contributions as required by applicable regulations. Assumptions used to develop pension data were: 1997 1996 1995 Expense: Discount rate 7.5% 7.0% 8.5% Long-term rate of return on assets 8.5% 8.5% 8.5% Rate of increase in compensation 5.0% 5.0% 6.0% PBO discount rate year-end 7.0% 7.5% 7.0% The components of pension cost are as follows: (In thousands) 1997 1996 1995 Service cost $11,058 $11,128 $9,020 Interest cost on projected benefit obligation 18,900 18,023 16,772 Actual return on assets (46,655) (41,358) (43,012) Net amortization and deferral 23,245 22,778 28,165 Net periodic pension cost $ 6,548 $10,571 $10,945 The funded status and accrued pension cost at December 31 are as follows: Plans Whose Plans Whose Assets Exceed Accumulated Benefits Accumulated Benefits Exceed Assets (In thousands) 1997 1996 1997 1996 Plan assets at fair value $307,537 $272,135 $187 $146 Accumulated benefit obligation (ABO): Vested benefits $208,942 $177,743 $16,967 $17,523 Nonvested benefits 3,370 2,885 16,118 13,175 Total ABO 212,312 180,628 33,085 30,698 Provision for salary increases 47,782 44,687 5,810 5,645 Projected benefit obligation (PBO) $260,094 $225,315 $38,895 $36,343 Plan assets (in excess of) less than PBO $(47,443) $(46,820) $38,708 $36,197 Net transition (liability) asset 491 671 (172) (233) Unrecognized prior service cost (3,057) (2,669) (301) (454) Unrecognized net gains (losses) 50,550 48,032 (7,965) (6,890) Minimum liability adjustment - - 4,383 3,517 Accrued pension liability $ 541 $ (786) $34,653 $32,137 Approximately $21,000,000 of the $38,708,000 underfunding shown above (Plan assets less than PBO) relates to the German pension plans. In German practice, it is uncommon to fund pension plans. At December 31, 1997, approximately 96% of the plan assets are invested in listed stocks and bonds or cash and short-term investments. The rest of the plan assets are invested primarily in fixed-rate guaranteed investment type contracts purchased from insurance companies. The Company's own common stock accounted for 10% of plan assets. 16. Postretirement Medical and Other Benefits The Company provides certain health care and life insurance benefits for retired employees. Employees become eligible for these benefits if they meet minimum age and service requirements and are eligible for retirement benefits. The components of the net periodic cost are as follows: (In thousands) 1997 1996 1995 Service cost $567 $630 $624 Interest cost on projected benefit obligation 2,794 2,921 3,870 Amortization of plan amendment (1,076) (948) (913) Net periodic postretirement cost $2,285 $2,603 $3,581 The accrued postretirement medical and other benefits costs that are not funded were as follows at December 31: (In thousands) 1997 1996 Accumulated postretirement benefit obligation (APBO): Retirees $20,246 $24,864 Fully eligible active plan participants 5,615 7,768 Other active plan participants 9,364 8,311 Total APBO 35,225 40,943 Unrecognized prior service cost 7,652 5,084 Unrecognized net gains (losses) 5,064 2,939 Accrued postretirement medical and other benefits liability $47,941 $48,966 The discount rate used in determining actuarial present value of the benefit obligations was 7.0% in 1997 and 7.5% in 1996. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 8.58 percent in 1997, declining to 5.25 percent by the year 2020. If the health care cost trend rate assumptions were increased by 1 percent, the accumulated postretirement benefit obligation as of December 31, 1997 would be increased by 1.5 percent. The effect of this change on the sum of the service cost and interest cost would be an increase of 2.6 percent. 17. Disclosure about Segments of an Enterprise and Related Information Pentair Inc. has three reportable segments: Professional Tools and Equipment (PTE), Water and Fluid Technologies (WFT), and Electrical and Electronic Enclosures (EEE). The PTE segment includes Delta International Machinery, Porter-Cable, Lincoln Automotive and Century Manufacturing. Products manufactured include woodworking machinery, portable power tools, battery charging and testing equipment, welding equipment, and lubricating and lifting equipment. The WFT segment includes the Pentair pump business, Fleck Controls and Lincoln Industrial. Products manufactured include pumps for wells and water treatment, sump pumps, valves for water softeners, and automated and manual lubrication systems and equipment. The EEE segment includes Hoffman Enclosures and Schroff. Products manufactured include metallic and composite cases, subracks, and cabinets that house and protect electrical and electronic controls, instruments, and components. Other includes corporate expenses, captive insurance company, intermediate financial companies, charges that do not relate to current operations, divested operations (Federal Cartridge), and intercompany eliminations. Other assets include all cash and cash equivalents. In evaluating financial performance, management focuses on operating income as a segment's measure of profit or loss. Operating income is before interest expense, interest income and income taxes. Management uses a variety of balance sheet ratios to measure the business. The primary focus is on maximizing the return from each segment's assets, excluding cash and temporary investments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (Note 1). Most intersegment sales are component parts and are sold at cost plus an equitable division of manufacturing and marketing profits. The remaining intercompany sales are finished product and are sold based on current market pricing.
Segment Information: (in thousands) PTE WFT EEE Other Totals 1997 Net sales from external customers $737,323 $397,286 $579,209 $125,238 $1,839,056 Intersegment net sales 9,743 6,693 157 (16,593) 0 Depreciation and amortization expense 14,307 16,703 30,265 6,561 67,836 Segment profit (loss) - operating income 84,355 45,987 53,313 (13,853) 169,802 Segment assets 410,037 508,357 473,906 80,562 1,472,862 Capital expenditures 22,947 8,492 43,815 2,207 77,461 1996 Net sales from external customers $572,349 $316,167 $548,695 $129,854 $1,567,065 Intersegment net sales 10,340 6,085 103 (16,528) 0 Depreciation and amortization expense 11,605 12,219 28,297 7,399 59,520 Segment profit (loss) - operating income 60,556 44,445 59,592 (21,674) 142,919 Segment assets 360,766 280,819 464,475 182,954 1,289,014 Capital expenditures 15,270 10,701 40,522 5,153 71,646 1995 Net sales from external customers $483,565 $232,441 $542,452 $144,413 $1,402,871 Intersegment net sales 8,833 5,094 0 (13,927) 0 Depreciation and amortization expense 9,408 5,356 27,247 6,923 48,934 Segment profit (loss) - operating income 49,239 25,111 55,951 (14,054) 116,247 Segment assets 248,251 249,815 440,827 313,600 1,252,493 Capital expenditures 16,592 4,561 32,713 9,972 63,838
Segment Geographic Information: Revenues Assets (In millions) 1997 1996 1995 1997 1996 1995 United States $1,275.5 $1,047.1 $921.6 $1,031.0 $761.9 $646.0 Canada 98.3 77.7 70.3 27.9 24.6 21.8 Germany 99.4 115.7 106.4 200.6 240.0 218.7 Other Europe 164.5 136.0 107.9 116.9 65.0 39.2 Pacific Rim 49.5 38.9 36.3 15.9 14.5 13.2 Rest of World 26.6 21.8 16.0 0.0 0.0 0.0 Total $1,713.8 $1,437.2 $1,258.5 $1,392.3 $1,106.0 $938.9 Revenues are attributed to countries based on location of customer. Assets are based on the geographic location of the subsidiary and have been translated into $U.S. dollars. 18. Quarterly Financial Data (unaudited) (In thousands, except per share amounts) 1997 1st 2nd 3rd 4th Total Net sales $411,139 $422,305 $482,089 $523,523 $1,839,056 Gross profit 125,951 128,951 142,290 151,066 548,258 Operating income 37,479 38,568 42,757 50,998 169,802 Net Income 19,417 20,484 22,207 29,492 91,600 Earnings per common share Basic $.48 $.51 $.55 $.74 $2.28 Diluted .45 .47 .51 .68 2.11 1996 1st 2nd 3rd 4th Total Net sales $366,290 $362,900 $410,970 $426,905 $1,567,065 Gross profit 114,736 106,486 115,988 131,791 469,001 Operating income 32,625 32,852 35,623 41,819 142,919 Net Income 16,500 17,109 18,578 22,322 74,509 Earnings per common share Basic $.41 $.42 $.46 $.57 $1.86 Diluted .38 .40 .43 .52 1.73 19. Disclosure of Risks and Uncertainties Pentair, Inc. is engaged principally in the design, engineering, and manufacturing of various industrial products. The diversified businesses manufacture woodworking equipment, power tools, service equipment, pumps, water conditioning control valves, industrial lubrication systems and material dispensing equipment, and enclosures for electrical and electronic equipment. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain obligations of discontinued and divested businesses have been retained by the Company. Based on evaluations by management and environmental professionals, amounts for currently estimable and probable risks or obligations have been accrued. Although the individual subsidiaries deal with major customers throughout North America and Europe, Pentair as a whole has mitigated any significant impact or potential risk of concentration of customers or products, or in certain markets or geographic areas. This is due to the diversified nature of the Company and its product lines. 20. Earnings Per Share Effective December 15, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). Earnings per share amounts presented for 1996 and 1995 have been restated for the adoption of SFAS No. 128. The following table reflects the calculation of basic and diluted earnings per share. (In thousands) 1997 1996 1995 Earnings per share Income from continuing operations $91,600 $74,509 $60,500 Preferred dividend requirements 4,867 4,928 5,203 Income available to common shareholders 86,733 69,581 55,297 Weighted average shares outstanding 37,989 37,491 36,812 Basic Earnings per Common Share - continuing operations $2.28 $1.86 $1.51 Earnings per share - assuming dilution Income available to common shareholders 86,733 69,581 55,297 Addback preferred dividend requirements due to conversion into common shares 4,867 4,928 5,203 Elimination of tax benefit on preferred ESOP dividend due to conversion into common shares (1,420) (1,333) (1,243) Addition of tax benefit on ESOP dividend assuming conversion to common shares - at common dividend rate 740 644 481 Income available to common shareholders assuming dilution 90,920 73,820 59,738 Weighted average shares outstanding 37,989 37,491 36,812 Dilutive impact of stock options outstanding 456 458 488 Assumed conversion of preferred stock 4,622 4,803 5,080 Weighted average shares and potentially dilutive shares outstanding 43,067 42,752 42,380 Diluted Earnings per Common Share - continuing operations $2.11 $1.73 $1.41 Management's Responsibility for Financial Reporting The consolidated financial statements of Pentair, Inc. have been prepared by Company management who are responsible for their integrity and objectivity. These statements have been prepared in accordance with generally accepted accounting principles and, where appropriate, reflect estimates based on judgments of management. Pentair maintains a system of internal controls. Our systems provide reasonable assurance that assets are protected, transactions are appropriately reported, and established procedures are followed. The financial statements have been audited by Deloitte & Touche LLP, independent auditors, whose report appears on this page. The Audit Committee of the Board of Directors, comprised of outside directors, meets periodically with the independent auditors, the Company's internal auditors, and management to monitor activities and to ensure that each is properly discharging its responsibilities. The independent auditors have free access to the Audit Committee, without management present, to discuss the results of their audit, the adequacy of internal accounting controls, and the quality of financial reports. Winslow H. Buxton Chairman of the Board, President and Chief Executive Officer Richard W. Ingman Executive Vice President and Chief Financial Officer Independent Auditors' Report To the Board of Directors and Shareholders of Pentair, Inc.: We have audited the accompanying consolidated balance sheets of Pentair, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, cash flows and comprehensive income for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Pentair, Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. Deloitte & Touche LLP Minneapolis, Minnesota February 9, 1998 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. Information regarding nominees and directors appearing under "Election of Directors" in the Pentair, Inc. Notice of Annual Meeting of Shareholders and Proxy Statement for the April 1998 annual shareholders' meeting (the "1998 Proxy Statement") is hereby incorporated by reference. Information regarding executive officers is set forth in Item 1 of Part I of this report. Item 11. Executive Compensation. Information appearing under "Election of Directors" and "Executive Compensation" in the 1998 Proxy Statement is hereby incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information appearing under "Security Ownership of Management and Beneficial Ownership" in the 1998 Proxy Statement is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions. No relationships or transactions existed that require disclosure under Item 13. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Financial Statements and Exhibits. 1. List of Financial Statements The following consolidated financial statements of Pentair, Inc. and subsidiaries are included in Item 8 or Part II: Consolidated Statements of Income for Years Ended December 31, 1997, 1996 and 1995 Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Cash Flows for Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Comprehensive Income for Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Independent Auditors' Report 2. List of Financial Statement Schedules The following financial statement schedules of Pentair, Inc. and subsidiaries are included herein. Schedule II- Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or inapplicable and, therefore, have been omitted. 3. List of Exhibits The following exhibits are either included in this report or incorporated by reference as indicated below: Exhibit Number Description (3.1) Restated Articles of Incorporation as amended through April 19, 1995. (Incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q for the quarter ended June 30, 1995). (3.2) Resolution Establishing and Designating $7.50 Callable Cumulative Convertible Preferred Stock, Series 1988, as a series of Preferred Stock of Pentair, Inc. (Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Company's Current Report on Form 8-K filed December 30, 1988). (3.3) Resolution Establishing and Designating 8% Callable Cumulative Voting Convertible Preferred Stock, Series 1990, as a series of Preferred Stock of Pentair, Inc. (Incorporated by reference to Exhibit 4 to the Company's Current Report on Form 8-K filed March 21, 1990). (3.4) Second Amended and Superseding By-Laws as amended through July 21, 1995. (Incorporated by reference to Exhibit 3.2 to the Company's Form 10-Q for the quarter ended June 30, 1995). (4.1) Rights Agreement as of July 21, 1995 between Norwest Bank N.A. and Pentair, Inc. (Incorporated by reference to Exhibit 4.1 to the Company's Form 10-Q for the quarter ended June 30, 1995). The Corporation agrees to furnish a copy of any other documents with respect to long-term debt instruments of the Corporation and its subsidiaries upon request. (10.1) * Company's Supplemental Employee Retirement Plan effective June 16, 1988. (Incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989). (10.2) * Company's Omnibus Stock Incentive Plan as Amended and Restated. (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended March 31, 1996). (10.3) * Company's Management Incentive Plan as amended to January 12, 1990. (Incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989). (10.4) * Employee Stock Purchase and Bonus Plan as amended and restated effective January 1, 1992. (Incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991). (10.5) * Company's Flexible Perquisite Program as amended to January 1, 1989. (Incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989). (10.6) * Form of 1986 Management Assurance Agreement (Revised 1990) between the Company and certain key employees. (Incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989). (10.7) * Fourth Amended and Restated Compensation Plan for Non-Employee Directors. (Incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). (10.8) * Pentair, Inc. Outside Directors Nonqualified Stock Option Plan dated January 15, 1998. (10.9) * Pentair, Inc. Deferred Compensation Plan effective January 1, 1993. (Incorporated by reference to Exhibit 10.21 to the Company's Form 10-K for the year ended December 31, 1992). (10.10) * Pentair, Inc. Non-Qualified Deferred Compensation Plan effective January 1, 1996. (Incorporated by reference to Exhibit 10.17 to the Company's Form 10-K for the year ended December 31, 1995). (10.11) * Trust Agreement for Pentair, Inc. Non-Qualified Deferred Compensation Plan between Pentair, Inc. And State Street Bank and Trust Company. (Incorporated by reference to Exhibit 10.18 to the Company's Form 10-K for the year ended December 31, 1995). (10.12) Loan and Stock Purchase Agreement dated March 7, 1990 between the Company and the Pentair, Inc. Employee Stock Ownership Plan Trust, acting through State Street Bank and Trust Company, as Trustee. (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed March 21, 1990). (10.13) $56,499,982 Promissory Note dated March 7, 1990 of the Pentair, Inc. Employee Stock Ownership Plan Trust, acting through State Street Bank and Trust Company, as Trustee, to the Company. (Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed March 21, 1990). (10.14) * Executive Officer Performance Plan (21) Subsidiaries of Registrant. (23) Consent of Deloitte & Touche LLP. (27) Financial Data Schedules. * Management contract or compensatory plan. EXHIBIT INDEX Exhibit Number Description (10.8) Pentair, Inc. Outside Directors Nonqualified Stock Option Plan dated January 15, 1998. (10.14) Company's Executive Officer Performance Plan (21) Subsidiaries of Registrant. (23) Consent of Deloitte & Touche LLP. (27.1) Financial Data Schedule for year 1997. (27.2) Restated Financial Data Schedule for quarters 1997. (27.3) Restated Financial Data Schedule for year 1996. (27.4) Restated Financial Data Schedule for quarters 1996. (27.5) Restated Financial Data Schedule for year 1995. (b) Reports on Form 8-K. A report on Form 8-K was filed on November 13, 1997 regarding the sale of Federal Cartridge to Blount International, Inc. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PENTAIR, INC. By /s/ Richard W. Ingman Richard W. Ingman Executive Vice President and Chief Financial Officer Dated: March 27, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has also been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By /s/ Winslow H. Buxton Dated: March 27, 1998 Winslow H. Buxton, Chairman, President and Chief Executive Officer, Director By /s/ George N. Butzow Dated: March 27, 1998 George N. Butzow, Director By /s/ William J. Cadogan Dated: March 27, 1998 William J. Cadogan, Director By /s/ Barbara B. Grogan Dated: March 27, 1998 Barbara B. Grogan, Director By /s/ Charles A. Haggerty Dated: March 27, 1998 Charles A. Haggerty, Director By /s/ Harold V. Haverty Dated: March 27, 1998 Harold V. Haverty, Director By /s/ Quentin J. Hietpas Dated: March 27, 1998 Quentin J. Hietpas, Director By /s/ Walter Kissling Dated: March 27, 1998 Walter Kissling, Director By /s/ Richard M. Schulze Dated: March 27, 1998 Richard M. Schulze, Director By /s/ Karen E. Welke Dated: March 27, 1998 Karen E. Welke, Director SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES PENTAIR, INC. AND SUBSIDIARIES (Thousands of Dollars)
Balance (A) At Charged Changes Balance Beginning to Costs Add At End Description of Period and Expenses Deductions (Deduct) of Period Allowance for doubtful accounts Year Ended December 31 1997 $7,348 $2,406 $1,687 $4,379 $12,446 1996 7,840 498 1,546 556 7,348 1995 7,189 782 303 172 7,840
(A) Primarily assumed or established in connection with acquisitions. EX-10.8 2 EXHIBIT 10.8 PENTAIR, INC. OUTSIDE DIRECTORS NONQUALIFIED STOCK OPTION PLAN (as amended and restated effective January 15, 1998) 1. Purpose. The purposes of this Plan are to (i) encourage stock ownership by Outside Directors of the Company through the granting of nonqualified stock options to purchase shares of Pentair, Inc. Common Stock, (ii) provide an incentive to the directors to continue to serve the Company and (iii) aid the Company in continuing to attract qualified director candidates. Options granted under the Plan will not meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The exercise of options is necessarily speculative, and the Company gives no assurance as to the future value of Stock. 2. Definitions. a. "Company" means Pentair, Inc. and any first-tier or second-tier subsidiary, including a joint venture partially owned by a subsidiary. b. "Board" means the Board of Directors of Pentair, Inc. c. "Plan" means the Outside Directors Nonqualified Stock Option Plan. d. "Optionee" means an Outside Director who has entered into an option agreement. e. "Outside Director" means any member of the Board who is not also an employee of the Company. f. "Stock" means Pentair, Inc, Common Stock. 3. Administration. The Plan shall be administered by the Board. 4. Selection of Optionees. The Board shall select the Outside Directors to be granted options to acquire Stock, the number of shares to be covered by the option and the terms of the option. As soon as practicable after selection by the Board, each Outside Director so selected will be notified and be given an opportunity to accept an option agreement. 5. Grant of Option. a. Number of Shares. Subject to the provisions of Article 12, the maximum number of shares as to which options may be granted under the Plan shall be 175,000 shares of Stock. b. Determination of Grant. The number of shares for which options may be granted to any one Outside Director in any year pursuant to the Plan shall be determined according to the following formula: Each Outside Director's Annual Director Compensation (i.e., the sum of all annual retainer and meeting fees calculated to be earned over the ensuing calendar year) shall be multiplied by 40%, the result of which shall be divided by the product of (i) the fifteen (15) day average trading price of Stock for the period ending on the December 31 preceding the date of any grant made under the Plan, and (ii) the Black-Scholes ratio for Stock as of the same period end, as determined by a nationally recognized independent compensation consultant retained by the Company; provided, however, that the number of shares for which options may be granted to any one director shall not be less than 1,000 shares. The formula is stated arithmetically as follows: 40% x Annual Director Compensation //(12/31 15-day average trading price)X (Black-Scholes Ratio) = ANNUAL GRANT Each option granted shall be exercisable only within ten (10) years from the date of grant and shall be first exercisable for one-third of the number of shares for which options were granted following the first anniversary of the date of grant, an additional one-third following the second anniversary and the final one-third following the third anniversary. c. Reload Options. Options granted under the Plan with ten (10) year terms which are exercised by a stock swap not later than the fifth anniversary of the date of grant may be eligible for grant of a reload option, at the discretion of the Board. Any such reload option shall be for a term equal to the remainder of the original term to which the reload option relates and shall have an exercise price of no less than the fair market value of Stock, determined as of the date of the stock swap. The grant of reload options pursuant to the provisions of this Article 5(c) shall be determined annually by the Board and each eligible Optionee will be notified and given an opportunity to accept an option agreement. Grants of reload options shall be subject to the maximum number of shares authorized and available under the Plan as described in Article 5(a). d. Exercise Price. The price to be paid upon the exercise of each option granted under the Plan shall be no less than the fair market value of Stock, determined as of the date the option is granted. e. Fair Market Value. For purposes of this Article 5, the fair market value of Stock shall mean the closing price of a share of Stock on the relevant date as reported by the New York Stock Exchange, or as otherwise determined using procedures established by the Board. f. Amendments to Article 5. The provisions of this Article 5 may not be amended more than once every six (6) months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules and regulations promulgated under either of them. 6. Effective Date and Period of Plan. The Plan is effective for a period of ten (10) years from January 15, 1998. 7. Period of Option. The term of any option issued pursuant to the Plan shall not exceed ten (10) years from the date granted (or in the case of an option granted pursuant to Article 12, ten (10) years from the date the substituted option was granted by the predecessor corporation), but may extend beyond the termination of this Plan. Each option shall become exercisable at such time or times and in the manner determined by the Board when granting it, as may be modified by the Board at any time thereafter, providing such modification does not postpone exercise of the option. 8. Termination. a. Death or Permanent Disability of Optionee. In the event of death or permanent disability of an Optionee while a member of the Board, and prior to the time an option has been fully exercised, any option which has not then expired by its terms shall be exercisable only within the six (6) months immediately succeeding the date of death or disability and then only (i) by the person or persons to whom the Optionee's rights under the option shall pass by will or the laws of descent and distribution, and (ii) to the extent the Optionee was entitled to exercise the option at the date of death or disability. Permanent disability shall be as defined in Code section 105. b. Termination for Reasons Other than Death or Permanent Disability. Upon removal of an Optionee from the Board for reasons other than death or permanent disability, all options hereunder will terminate within thirty (30) days of the date of the Optionee's removal from the Board unless the Board in its discretion prescribes a later date. 9. Transferability. a. Options Not Transferable. Each option granted under this Plan shall be nontransferable other than on the death of the Optionee by will or by operation of the laws of descent and distribution of the state in which the Optionee is domiciled on the date of death. Options shall be exercisable during the Optionee's lifetime only by the Optionee. b. Transfer Restrictions. Each share of Stock acquired by exercise of an option under this Plan shall be subject to such restriction on transfer as the Board shall determine is necessary to comply with the Securities Act of 1933, as amended. Stock certificates evidencing such shares shall bear an appropriate restrictive legend. No Stock may be sold, transferred, hypothecated or otherwise disposed of in violation of such restriction. 10. Payment. a. General. Full payment for all Stock to be acquired pursuant to the exercise of an option shall be made at the time such option, or any part thereof, is exercised, except that the Board may permit deferred payment if at least the minimum interest rate required under Code section 483 is charged. Payment shall be made in cash or in one of the alternative forms specified below. b. Payment with Options. In lieu of paying cash for the exercise price, the Optionee may pay such exercise price by transferring to the Company a sufficient number of outstanding options. The cash derived from the transfer of options for payment of such exercise price will be equal to the appreciated value of the options, measured by the excess of the current market value of the Stock over the exercise price of the option. c. Payment in Stock. Shares of Stock also may be exchanged in payment for the exercise price due upon exercise of an option. For this purpose, the value of the Stock will be the fair market value as of the date of exercise. Any such transfer of Stock must be in whole shares; the Optionee may not transfer fractional shares of Stock. 11. Form of Option. The form of option granted pursuant to the Plan and the contents of the option agreement shall be determined by the Board subject to the provisions of the Plan. 12. Anti-dilution. If the number of outstanding shares of Stock shall be changed in number or class by reason of split-ups, combinations, mergers, consolidations recapitalizations or the declaration of a Stock dividend, the number and class of shares as to which options may thereafter be granted, and the number and class of shares then subject to outstanding options, shall be adjusted proportionately to the nearest whole share. In addition, the price per share payable upon exercise of each outstanding option also shall be adjusted proportionately to reflect any such adjustment in the number of shares then subject to outstanding options. Any adjustment made pursuant to this Article 12 shall be determined in the sole discretion of the Board, provided, however, that no adjustment shall be made in the number of shares subject to outstanding options for Stock dividends in any calendar year which, in the aggregate, do not exceed three percent (3%) of the total number of shares of such Stock outstanding on the record date used to determine the stockholders entitled to receive the latest such dividend in such calendar year. 13. Modification and Termination. The Board may, at any time, terminate, modify or suspend the Plan. 14. Interpretation of Plan. Full power and authority to construe, interpret and administer the Plan and all option contracts issued thereunder shall be vested in the Board. Decisions of the Board shall be final, conclusive and binding upon all parties, including the Company, the stockholders and Optionees. 15. Expenses of Administration. The expenses of administering this Plan shall be borne by the Company. 16. Removal from Board. The fact that an Outside Director has been granted an option under this Plan shall not affect or qualify the right of the Board or the shareholders of the Company to remove such individual from the Board consistent with the provisions of the Company's Articles of Incorporation or By-Laws, or under applicable provisions of Minnesota law. IN WITNESS WHEREOF, this Plan, as amended and restated effective January 15, 1998, has been executed this _____ day of __________, 1998. PENTAIR, INC. By ________________________________________ Its: Chief Executive Officer By ________________________________________ Its: Secretary EX-10.14 3 EXHIBIT 10.14 EXECUTIVE OFFICER PERFORMANCE PLAN Pentair, Inc. Purpose A primary objective of Pentair, Inc. ("Pentair" or "Corporate") is to be a top-performing company by consistently achieving profit performance that is higher than the performance of comparable companies. Pentair has also identified growth as a key strategy for the long term success of the business. The return on our investments, whether to support internal growth and improvements or make acquisitions, is also a key determinant of our business success and the return to our shareholders. Pentair expects to compensate executive officers for their performance against key financial measurements in accordance with the terms of the Executive Officer Performance Plan (EOPP). Participation Key employees in executive positions will be considered for participation. Participation is determined by the magnitude and scope of the employee's position and is subject to Pentair, Inc. Compensation Committee nomination. An employee who participates in this program is not eligible for the Pentair Management Incentive Plan. Qualifying Positions and BOC Percentages Bonus Opportunity Category (BOC) percentages are assigned to each qualifying position by the Compensation Committee based on competitive market data. The current designed Qualifying Position and BOC percentage is: Qualifying Position BOC Percentage Chairman, CEO 71.5% The BOC% for other positions that may qualify for future participation at the discretion of the Compensation Committee are: President, Chief Operating Officer 58.5% Executive VP 52.0% Other Sr. Officers 45.5% Establishment of Goals and Factors Corporate Performance Goals and Factors EOPP Goals are established for Corporate for the following three financial performance measurements: Earnings Per Share (EPS) Growth, Return on Invested Capital (ROIC) and Return on Sales (ROS). EOPP Goals are a function of the overall financial goals for Pentair and are based on the comparative market data and the historical and expected performance of the company and its subsidiaries. Financial performance that meets the EOPP Goals will result in a corporate performance factor of 1.00. Financial performance results that are below or above the EOPP Goals are indexed with factors ranging from a low of .50 to a high of 1.80. Any result falling between the stated goals and factors will be interpolated. The EOPP Goals and factors established for the fiscal year are measured against Pentair's fiscal year performance for that year. They are determined early in the fiscal year by the Compensation Committee of the Board of Directors. They have been established to be used over multiple fiscal years, although they will be determined annually by the Compensation Committee. Incentive Awards Incentive Awards under the EOPP are determined according to the following formula: Incentive Award = Base Salary x BOC% x C.P.F. Base Salary = Actual base salary earning during the year BOC% = Bonus Opportunities Category Percentage C.P.F. = Corporate Performance Factor Cash Pay-out Limit The cash incentive award for the fiscal year will be limited to one times the participant's annual base salary. The portion in excess of one times the participant's annual base salary will be awarded as performance shares. The performance shares will be subject to the terms and provisions of the Omnibus Stock Incentive Plan. Maximum Award No participant will receive an Incentive Award (cash plus stock) greater than $1.5 million or 200% of annual base salary. Timing of Pay-out Incentive Awards for a fiscal year, shall be paid as soon as administratively possible after the annual audit is complete and the Compensation Committee has reviewed and approved the payment. Corporate Performance Factor The Corporate Performance Factor is based on actual fiscal year financial performance achieved as measured against the following goals, which when achieved will create shareholder value and move Pentair toward its top performance objectives. The goals to be measured are multiplicative to emphasize a balanced approach to financial performance. Earnings Per Share (EPS) Growth Return on Invested Capital (ROIC) Return on Sales (ROS) Economic Value Added (EVA) is the concept used to measure shareholder value creation. (EVA is the "residual income" left over from operating profits after the cost of capital has been subtracted.) The three measures chosen encircle EVA. The strength of these measures is that they reflect shareholder value. Pentair will have one primary measure and two secondary measures with factors based on the current and historical performance. Earnings Per Share Growth (EPS) will be primary and the secondary factors are ROIC and ROS. If Corporate attains the goal on each of the three measures the plan participants will receive a Corporate Performance factor of 1.00. There will be a range of performance factors for each measure that when multiplied together give the total Corporate Performance Factor. Primary Factor x Second Factor #1 x Secondary Factor #2 = Corporate Performance Factor Performance Multiplier Grid Performance Factor Grid Minimum Below Goal On Goal Above Goal Maximum E.P.S. Growth .50 .75 1.00 1.20 1.40 1.60 1.80 R.O.I.C. .80 .90 1.00 1.10 1.20 R.O.S. .80 .90 1.00 1.10 1.20 1.30 Corporate Performance Factor* .32 1.00 2.81 *Performance falling between stated factors will be interpolated. Minimum Operating Income Requirement If Pentair's operating income (after corporate charges) is zero or less, there will be no bonus payouts. Consideration for Acquisitions/Divestitures In the case of an acquisition, no special adjustment will be necessary. The additional sales, earnings, and invested capital will flow into the calculations and impact the results and payouts. Divestitures will be excluded from the calculations. In the event of a divestiture, EOPP will be calculated based on results from continuing operations. Any financial gain/loss from the divestiture will be excluded from the EOPP calculation. Approval of Final Awards The Compensation Committee will review and approve all goals and final Incentive Awards granted under this plan. The Compensation Committee has the flexibility to reduce or eliminate the award based on its business judgment. The Compensation Committee does not have the authority or discretion to award more than the incentive award generated by the formula, subject to the stated limits. General Provisions 1. Nothing contained herein shall be construed to limit or affect in any manner or degree the normal and usual powers of management, including the right to terminate the employment of any participant or remove him/her from participating in the EOPP at any time. 2. The judgment of the Compensation Committee in administering the EOPP will be final, conclusive and binding upon all officers and employees of Pentair and its subsidiaries, whether or not selected as participants hereunder, and their heirs, executors, personal representatives and assigns. 3. The Compensation Committee has the authority and duties to: a. Determine the rights and benefits under the EOPP of participants and other persons, b. Interpret the terms of the EOPP and apply them to different situations; c. Approve, process and direct the payment of EOPP benefits, and d. Adopt rules, procedures and forms which are appropriate for the smooth and proper operation of the EOPP. 4. In the event of death, a participant's designated beneficiary will be entitled to the participant's Plan benefits. If a participant does not designate a beneficiary, the participant's beneficiary(ies) will be determined according to the participant's will. If there is no will, the beneficiary(ies) shall be determined by the laws of descent and distribution of the state in which the participant is resident on the date of death. 5. A participant does not have the right to assign, transfer, encumber or dispose of any award under the Plan unit it is distributed to the participant. Also, no award is liable to the claims of any creditor of the participant until it is distributed to him or her. 6. The Compensation Committee subject to approval by the Pentair, Inc. Board of Directors, has the right to terminate the Plan at any time. 7. Calculations will exclude the impact of periodic change in accounting methods used by Pentair or required by the Financial Accounting Standards Board. EX-21 4 EXHIBIT 21 LIST OF SUBSIDIARIES OF THE REGISTRANT Listed below are the subsidiares of Pentair, Inc.,all of which are either directly or indirectly 100% owned as of December 31, 1997, except as otherwise noted. Aplex Industries, Inc. United States APNO, S.A. de C.V. Mexico Biesemeyer Manufacturing Corporation United States Century Manufacturing Co. United States Delta International Machinery Corp. United States EuroPentair, GmbH Germany Fleck Controls, Inc. United States Fleck Europe, SAS France Flex Elektrowerkzeuge GmbH Germany Hoffman Enclosures Inc. United States Hoffman Engineering, S.A. de C.V. de SrL Mexico Hoffman Engineering Co Limited United Kingdom Hoffman-Schroff PTE Ltd. Singapore HS Systems. Inc. United States Lincoln Czech Republic Czech Republic Lincoln GmbH Germany Lincoln U.K. Ltd. United Kingdom McNeil (Ohio) Corporation United States ORSCO Acquisition Corp United States Pentair, Inc. United States Pentair FSC Corporation Virgin Islands (U.S.) Pentair Asia, PTE Ltd. Singapore Pentair Canada, Inc. Canada Pentair Financial Services Ireland Ireland Pentair Halifax, Inc. Canada Pentair Nova Scotia Co. Canada Pentair Pump Group United States Pentair U.K. Ltd. United Kingdom Penwald Insurance Company United States Porter-Cable Corporation United States Schroff Scandinavia AB Sweden Schroff S.r.L. Italy Schroff Inc. United States Schroff SAS France Schroff Co. Ltd. Taiwan Schroff K.K. Japan Schroff U.K. Ltd. United Kingdom Schroff, GmbH Germany SIATA S.p.A. Italy Telestack Company United States Transrack S.A. France EX-23 5 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-36256, No. 33-38534, No. 33-42268, No. 33-45012, and No. 333-12561 of our report dated February 9, 1998 appearing in this Annual Report on Form 10-K for the year ended December 31, 1997. DELOITTE & TOUCHE LLP Minneapolis, Minnesota March 23, 1998 EX-27.1 6 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 YEAR DEC-31-1997 DEC-31-1997 34340000 0 369220000 12446000 266409000 705370000 528354000 234800000 1472862000 392177000 0 577181000 0 53381000 0 1472862000 1839056000 1839056000 1290798000 1669254000 378456000 0 22261000 158382000 66782000 91600000 0 0 0 91600000 0.00 2.28 2.11
EX-27.2 7 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 3-MOS 3-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997 0.55 0.51 0.48 0.51 0.47 0.45
EX-27.3 8 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 YEAR DEC-31-1996 DEC-31-1996 1.86 1.73
EX-27.4 9 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 3-MOS 3-MOS 3-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996 0.46 0.42 0.41 0.43 0.40 0.38
EX-27.5 10 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 YEAR DEC-31-1995 DEC-31-1995 1.51 1.41
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