10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
|
|
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
|
|
For the Fiscal Year Ended
December 31, 2008
|
|
|
OR
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
Commission file number 000-04689
Pentair, Inc.
(Exact name of Registrant as
specified in its charter)
|
|
|
Minnesota
|
|
41-0907434
|
(State
or other jurisdiction of
incorporation or organization)
|
|
(I.R.S.
Employer
Identification number)
|
|
|
|
5500 Wayzata Boulevard,
Suite 800, Golden Valley, Minnesota
|
|
55416-1259
(Zip
code)
|
(Address of principal executive
offices)
|
|
|
Registrants telephone number, including area code:
(763) 545-1730
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
|
|
Title of each class
|
|
Name of each exchange on which registered
|
|
Common Shares,
$0.162/3
par value
|
|
|
New York Stock Exchange
|
|
Preferred Share Purchase Rights
|
|
|
New York Stock Exchange
|
|
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
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 registrants 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
|
|
|
|
Large
accelerated
filer þ
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting
company o
|
(Do
not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
Aggregate market value of voting and non-voting common equity
held by non-affiliates of the Registrant, based on the closing
price of $33.87 per share as reported on the New York Stock
Exchange on June 27, 2008 (the last business day of
Registrants most recently completed second quarter):
$3,177,008,897
The number of shares outstanding of Registrants only class
of common stock on December 31, 2008 was 98,276,919
DOCUMENTS
INCORPORATED BY REFERENCE
Parts of the Registrants definitive proxy statement for
its annual meeting to be held on April 30, 2009, are
incorporated by reference in this
Form 10-K
in response to Part III, ITEM 10, 11, 12, 13 and 14.
Pentair,
Inc.
Annual
Report on
Form 10-K
For the
Year Ended December 31, 2008
2
PART I
GENERAL
Pentair, Inc. is a focused diversified industrial manufacturing
company comprised of two operating segments: Water and Technical
Products. Our Water Group is a global leader in providing
innovative products and systems used worldwide in the movement,
storage, treatment, and enjoyment of water. Our Technical
Products Group is a leader in the global enclosures and thermal
management markets, designing and manufacturing standard,
modified and custom enclosures that house and protect sensitive
electronics and electrical components; thermal management
products; and accessories.
Pentair
Strategy
Our strategy is to achieve benchmark Return on Invested Capital
(ROIC) performance for diversified industrial
manufacturing companies by:
|
|
|
building operational excellence through the Pentair Integrated
Management System (PIMS) consisting of strategy
deployment, lean enterprise, and IGNITE, which is our process to
drive organic growth;
|
|
|
driving long-term growth in sales, income and cash flows,
through internal growth initiatives and acquisitions;
|
|
|
developing new products and enhancing existing products;
|
|
|
penetrating attractive growth markets, particularly
international;
|
|
|
expanding multi-channel distribution; and
|
|
|
proactively managing our business portfolio, including
consideration of new business platforms.
|
Pentair
Financial Objectives
Our long-term financial objectives are to:
|
|
|
Achieve 5%+ annual organic sales growth, plus acquisitions
|
|
|
Achieve benchmark financial performance:
|
|
|
|
Earnings Before Interest and Taxes
(EBIT) Margin
|
|
14%
|
ROIC (after-tax)
|
|
15%
|
Free Cash Flow (FCF)
|
|
100% conversion of net income
|
Earnings Per Share (EPS) Growth
|
|
10%+ (sales growth plus margin expansion)
|
|
|
|
Achieve 5% annual productivity improvement on core business cost
|
Unless the context otherwise indicates, references herein to
Pentair, the Company, and such words as
we, us, and our include
Pentair, Inc. and its subsidiaries. Pentair is a Minnesota
corporation that was incorporated in 1966.
BUSINESS
AND PRODUCTS
Business segment and geographical financial information is
contained in ITEM 8, Note 15 of the Notes to
Consolidated Financial Statements, included in this
Form 10-K.
WATER
GROUP
Our Water Group is a global leader in providing innovative
products and systems used worldwide in the movement, storage,
treatment, and enjoyment of water. Our Water Group offers a
broad array of products and systems to multiple markets and
customers. The core competencies of our Water Group center
around flow and filtration. We have identified a target market
totaling $60 billion, with our current primary focus on
three
3
markets: Flow Technologies (approximately 40% of group sales),
Filtration (approximately 30% of group sales), and Pool
(approximately 30% of group sales).
Flow
Technologies Market
Our Flow Technologies business is a global leader in
residential, commercial and municipal water pump markets. Our
primary markets are those serving residential well water
installers and residential and commercial end-users; waste water
dealers and distributors; commercial and industrial operations;
and municipal water treatment facilities. We address these
markets with products ranging from light duty diaphragm pumps to
high-flow turbine pumps and solid handling pumps designed for
water and wastewater applications, and agricultural spraying, as
well as pressure tanks for residential applications.
Applications for our broad range of products include pumps for
residential and municipal wells, water treatment, wastewater
solids handling, pressure boosting, engine cooling, fluid
delivery, circulation, and transfer.
Brand names for the Flow Technologies market include
STA-RITE®,
Myers®,
Aurora®,
Hydromatic®,
Fairbanks
Morsetm,
Flotec®,
Hypro®,
Water
Ace®,
Berkeley®,
Aermotortm,
Simer®,
Verti-line®,
Diamond®,
FoamPro®,
Ongatm,
Nocchitm,
SHURflo®,
Edwards®,
JUNG
PUMPEN®,
oxynaut®,
and
JUNG®.
Filtration
Market
Our Filtration business competes in residential and commercial
water softening and filtration markets globally; in selected
industrial markets for both water and other fluid filtration,
largely in the United States; and for desalination and reverse
osmosis projects globally. We address these markets with control
valves, tanks, filter systems, filter cartridges, pressure
vessels, and specialty dispensing pumps providing flow solutions
for specific end-user market applications including residential,
commercial, foodservice, industrial, recreation vehicles,
marine, and aviation.
Filtration products are used in the manufacture of water
softeners; filtration, deionization, and desalination systems;
industrial, commercial and residential water filtration
applications; and filtration and separation technologies for
hydrocarbon, medical and hydraulic applications.
Brand names for the Filtration market include
Everpure®,
SHURflo®,
Fleck®,
CodeLine®,
Structuraltm,
Pentek®,
SIATAtm,
WellMatetm,
American
Plumber®,
Armor®,
OMNIFILTER®,
Fibredynetm,
and Porous
Mediatm.
Pool
Market
We address the Pool equipment market with a complete line of
commercial and residential pool equipment and accessories
including pumps, filters, heaters, lights, automatic controls,
automatic pool cleaners, commercial deck equipment, maintenance
equipment, and Pool accessories. Applications for our pool
products include commercial and residential pool construction,
maintenance, repair, and service.
Brand names for the Pool market include Pentair Pool
Products®,
Pentair Water Pool and
Spatm,
STA-RITE®,
Paragon
Aquatics®,
Kreepy
Krauly®,
Compool®,
WhisperFlo®,
PoolShark®,
Legendtm,
Rainbowtm,
FIBERworks®,
IntelliTouchtm,
IntelliFlow®,
IntelliChlor®,
and
Acu-Trol®.
Customers
Our Water Group distributes its products through wholesale
distributors, retail distributors, original equipment
manufacturers, home centers and home and pool builders.
Information regarding significant customers in our Water Group
is contained in ITEM 8, Note 15 of the Notes to
Consolidated Financial Statements, included in this
Form 10-K.
Seasonality
We experience seasonal demand in a number of markets within our
Water Group. End-user demand for pool equipment follows warm
weather trends and is at seasonal highs from April to August.
The magnitude of the sales spike is partially mitigated by
employing some advance sale early buy programs
(generally including
4
extended payment terms
and/or
additional discounts). Demand for residential and agricultural
water systems is also impacted by weather patterns, particularly
by heavy flooding and droughts.
Competition
Our Water Group faces numerous domestic and international
competitors, some of which have substantially greater resources
directed to the markets in which we compete. Consolidation,
globalization, and outsourcing are continuing trends in the
water industry. Competition in commercial and residential flow
technologies 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 not important for commercial pumps.
For municipal pumps, competition focuses on performance to meet
required specifications, service, and price. Competition in
water treatment and filtration components focuses on product
performance and design, quality, delivery, and price. For pool
equipment, competition focuses on brand names, product
performance, quality, and price. We compete by offering a wide
variety of innovative and high-quality products, which are
competitively priced. We believe our distribution channels and
reputation for quality also contribute to our continuing market
penetration.
TECHNICAL
PRODUCTS GROUP
Our Technical Products Group is a leader in the global
enclosures and thermal management markets, designing and
manufacturing standard, modified, and custom enclosures that
house and protect sensitive electronics and electrical
components; thermal management products; and accessories. We
have identified a target market of $30 billion. Our
Technical Products Group focuses its business portfolio on four
primary industries: Commercial and Industrial (55% of group
sales), Telecom and Datacom (20% of group sales), Electronics
(20% of group sales), and Networking (5% of group sales). The
primary brand names for the Technical Products Group are:
Hoffman®,
Schroff®,
Pentair Electronic
Packagingtm,
Taunustm,
McLean®,
Electronic
Solutionstm,
Birtcher®,
Calmark®
and Aspen
Motiontm.
Products and related accessories of the Technical Products Group
include metallic and composite enclosures, cabinets, cases,
subracks, backplanes, heat exchangers, and blowers. Applications
served include industrial machinery, data communications,
networking, telecommunications, test and measurement,
automotive, medical, security, defense, and general electronics.
Customers
Our Technical Products Group distributes its products through
electrical and data contractors, electrical and electronic
components distributors, and original equipment manufacturers.
Information regarding significant customers in our Technical
Products Group is contained in ITEM 8, Note 15 of the
Notes to Consolidated Financial Statements, included in this
Form 10-K.
Seasonality
Our Technical Products Group is not significantly impacted by
seasonal demand fluctuations.
Competition
Competition in the technical products markets can be intense,
particularly in telecom and datacom markets, where product
design, prototyping, global supply, price competition, and
customer service are significant factors. Our Technical Products
Group has continued to focus on cost control and improving
profitability. Recent growth in the Technical Products Group is
a result of new products development, overall market growth,
continued channel penetration, growth in targeted market
segments, geographic expansion, price increases and
acquisitions. Consolidation, globalization, and outsourcing are
visible trends in the technical products marketplace and
typically play to the strengths of a large and globally
positioned supplier. We believe our Technical Products Group has
the broadest array of enclosures products available for
commercial and industrial uses.
RECENT
DEVELOPMENTS
Growth
of our business
We continually look at each of our businesses to determine
whether they fit with our strategic vision. Our primary focus is
on businesses with strong fundamentals and growth opportunities,
including international
5
markets. We seek growth through product and service innovation,
market expansion, and acquisitions. Acquisitions have played an
important part in the growth of our business, and while we
expect acquisitions to be an important part of our future
growth, until economic and credit market conditions improve, we
are not currently planning any significant acquisitions.
Acquisitions
On June 28, 2008, we entered into a transaction with GE
Water & Process Technologies (a unit of General
Electric Company) (GE) that was accounted for as an
acquisition of an 80.1 percent ownership interest in
GEs global water softener and residential water filtration
business in exchange for a 19.9 percent interest in our
global water softener and residential water filtration business.
The acquisition was effected through the formation of two new
entities, (collectively, Pentair Residential
Filtration or PRF) a U.S. entity and an
international entity, into which we and GE contributed certain
assets, properties, liabilities and operations representing our
respective global water softener and residential water
filtration businesses. We are an 80.1 percent owner of the new
entities and GE is a 19.9 percent owner.
With the formation of this business, we believe PRF will be
better positioned to serve residential customers with
industry-leading technical applications in the areas of water
conditioning, whole-house filtration, point of use water
management and water sustainability and expect to accelerate
revenue growth by selling GEs existing residential
conditioning products through our sales channels.
On May 7, 2007, we acquired as part of our Technical
Products Group the assets of Calmark Corporation
(Calmark), a privately held business. Calmarks
product portfolio includes enclosures, guides, card locks,
retainers, extractors, card pullers and other products for the
aerospace, medical, telecommunications and military market
segments, among others.
On April 30, 2007, we acquired as part of our Water Group
all of the capital interests in Porous Media Corporation and
Porous Media, Ltd. (together, Porous Media), two
privately held filtration and separation technologies
businesses. Porous Media brings strong technical ability to our
Water Group, including engineering, material science, media
development and application capabilities. Porous Medias
product portfolio includes high-performance filter media,
membranes and related filtration products and purification
systems for liquids, gases and solids for the general
industrial, petrochemical, refining and healthcare market
segments, among others.
On February 2, 2007, we acquired as part of our Water Group
all the outstanding shares of capital stock of Jung Pumpen GmbH
(Jung Pump). Jung Pump is a leading German
manufacturer of wastewater products for municipal and
residential markets. Jung Pump brings us its strong application
engineering expertise and a complementary product offering,
including a new line of water re-use products, submersible
wastewater and drainage pumps, wastewater disposal units and
tanks. Jung Pump also brings to Pentair its well-established
European presence, a
state-of-the-art
training facility in Germany and sales offices in Germany,
Austria, France, Hungary, Poland and Slovakia.
Also refer to ITEM 7, Managements Discussion and
Analysis, and ITEM 8, Note 2 of the Notes to
Consolidated Financial Statements, included in this
Form 10-K.
Discontinued
operations/divestitures
On December 15, 2008, we sold our Spa and Bath
(Spa/Bath) business to Balboa Water Group in a cash
transaction.
On February 28, 2008, we sold our National Pool Tile
(NPT) business unit to Pool Corporation in a cash
transaction. National Pool Tile is the leading wholesale
distributor of pool tile and composite pool finishes serving
professional contractors in the swimming pool refurbish and
construction markets.
The results of Spa/Bath and NPT have been reported as
discontinued operations for all periods presented. The assets
and liabilities of Spa/Bath and NPT have been reclassified as
discontinued operations for all periods presented.
6
Also refer to ITEM 7, Managements Discussion and
Analysis, and ITEM 8, Note 3 of the Notes to
Consolidated Financial Statements, included in this
Form 10-K.
INFORMATION
REGARDING ALL BUSINESS SEGMENTS
Backlog
Our backlog of orders as of December 31 by segment was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
$ change
|
|
|
% change
|
|
|
|
|
Water
|
|
$
|
324,748
|
|
|
$
|
303,625
|
|
|
$
|
21,123
|
|
|
|
7.0
|
%
|
Technical Products
|
|
|
111,678
|
|
|
|
124,919
|
|
|
|
(13,241
|
)
|
|
|
(10.6
|
%)
|
|
|
Total
|
|
$
|
436,426
|
|
|
$
|
428,544
|
|
|
$
|
7,882
|
|
|
|
1.8
|
%
|
|
|
The $21.1 million increase in Water Group backlog was
primarily due to increased backlog for pumps used in industrial
and municipal market applications and growth in Asian markets,
partially offset by declining market conditions in residential
pool and pump markets. The $13.2 million decrease in
Technical Products Group backlog reflected declining market
conditions in both our electrical and electronic markets. Due to
the relatively short manufacturing cycle and general industry
practice for the majority of our businesses, backlog, which
typically represents less than 60 days of shipments, is not
deemed to be a significant item. A substantial portion of our
revenues result from orders received and product sold in the
same month. We expect that most of our backlog at
December 31, 2008 will be filled in 2009.
Research
and development
We conduct research and development activities in our own
facilities, which consist primarily of the development of new
products, product applications, and manufacturing processes.
Research and development expenditures during 2008, 2007, and
2006 were $62.5 million, $56.8 million, and
$56.5 million, respectively.
Environmental
Environmental matters are discussed in ITEM 3, ITEM 7,
and in ITEM 8, Note 16 of the Notes to Consolidated
Financial Statements, included in this
Form 10-K.
Raw
materials
The principal materials used in the manufacturing of our
products are electric motors, mild steel, stainless steel,
electronic components, plastics (resins, fiberglass, epoxies),
and paint (powder and liquid). In addition to the purchase of
raw materials, we purchase some finished goods for distribution
through our sales channels.
The materials used in the various manufacturing processes are
purchased on the open market, and the majority are available
through multiple sources and are in adequate supply. We have not
experienced any significant work stoppages to-date due to
shortages of materials. We have certain long-term commitments,
principally price commitments, for the purchase of various
component parts and raw materials and believe that it is
unlikely that any of these agreements would be terminated
prematurely. Alternate sources of supply at competitive prices
are available for most materials for which long-term commitments
exist, and we believe that the termination of any of these
commitments would not have a material adverse effect on
operations.
Certain commodities, such as metals and resin, are subject to
market and duty-driven price fluctuations. We manage these
fluctuations through several mechanisms, including long-term
agreements with escalator / de-escalator clauses. Prices for raw
materials, such as metals and resins, may trend higher in the
future.
Intellectual
property
Patents, non-compete agreements, proprietary technologies,
customer relationships, trade marks, trade names, and brand
names are important to our business. However, we do not regard
our business as being materially dependent upon any single
patent, non-compete agreement, proprietary technology, customer
relationship, trade mark, trade name, or brand name.
7
Patents, patent applications, and license agreements will expire
or terminate over time by operation of law, in accordance with
their terms or otherwise. We do not expect the termination of
patents, patent applications, and license agreements to have a
material adverse effect on our financial position, results of
operations or cash flows.
Employees
As of December 31, 2008, we employed approximately 14,700
people worldwide. Total employees in the United States were
approximately 8,000, of whom approximately 850 are represented
by five different trade unions having collective bargaining
agreements. Generally, labor relations have been satisfactory.
Captive
Insurance Subsidiary
We insure certain general and product liability, property,
workers compensation, and automobile liability risks
through our regulated wholly-owned captive insurance subsidiary,
Penwald Insurance Company (Penwald). Reserves for
policy claims are established based on actuarial projections of
ultimate losses. Accruals with respect to liabilities insured by
third parties, such as liabilities arising from acquired
businesses, pre-Penwald liabilities and those of certain foreign
operations are established without regard to the availability of
insurance.
Matters pertaining to Penwald are discussed in ITEM 3 and
ITEM 8, Note 1 of the Notes to Consolidated Financial
Statements, included in this
Form 10-K.
Available
information
We make available free of charge (other than an investors
own Internet access charges) through our Internet website
(http://www.pentair.com)
our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and if applicable, amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission. Reports
of beneficial ownership filed by our directors and executive
officers pursuant to Section 16(a) of the Securities
Exchange Act of 1934 are also available on our website. We are
not including the information contained on our website as part
of, or incorporating it by reference into, this Annual Report on
Form 10-K.
You should carefully consider the following risk factors and
warnings before making an investment decision. You are cautioned
not to place undue reliance on any forward-looking statements.
You should also understand that it is not possible to predict or
identify all such factors and should not consider the following
list to be a complete statement of all potential risks and
uncertainties. If any of the risks described below actually
occur, our business, financial condition, results of operations
or prospects could be materially adversely affected. In that
case, the price of our securities could decline and you could
lose all or part of your investment. You should also refer to
other information set forth in this document.
General
economic conditions, including difficult credit and residential
construction markets, affect demand for our
products.
We compete around the world in various geographic regions and
product markets. Among these, the most significant are global
industrial and commercial markets (for both the Water and
Technical Products Groups) and residential markets (for the
Water Group). The global credit crisis and recession have
adversely affected the robustness of our markets as exemplified
in the fourth quarter of 2008. Important factors for our
businesses include the overall strength of the economy and our
customers confidence in the economy; industrial and
governmental capital spending; the strength of the residential
and commercial real estate markets; unemployment rates;
availability of consumer and commercial financing for our
customers and end-users; and interest rates. New construction
for residential housing and home improvement activity fell
dramatically in both 2007 and 2008, which reduced revenue growth
in each of the businesses within our Water Group. We believe
that weakness in this market and the recent dramatic slowdown in
our industrial and commercial markets will
8
likely continue to affect our revenues and margins throughout
2009. Any continuing weakness in these markets beyond 2009 will
negatively affect our sales and financial performance in future
periods.
Our
inability to sustain consistent organic growth or limit revenue
decreases could adversely affect our financial
performance.
Over the past three years, our organic growth was generated in
part from expanding international sales, entering new
distribution channels, price increases and introducing new
products. To grow more rapidly than our end markets, we would
have to continue to expand our geographic reach, further
diversify our distribution channels, continue to introduce new
products, and increase sales of existing products to our
customer base. Difficult economic and competitive factors
adversely affected our ability to sustain consistent organic
growth in 2008, as revenues contracted in the fourth quarter. As
a result of these economic conditions, that adversely impacted
our anticipated financial performance, we did not meet our
stated revenue growth targets in the fourth quarter and for the
year 2008. We believe that our revenues will continue to decline
as our markets weaken. Rather than focus our efforts primarily
on broad-based revenue growth, we have chosen to limit our
growth initiatives to specific end markets and geographies. We
cannot assure you that these growth initiatives will be
sufficient to offset revenue declines in other markets.
Our
businesses operate in highly competitive markets, so we may be
forced to cut prices or to incur additional costs.
Our businesses generally face substantial competition in each of
their respective markets. Competition may force us to cut prices
or to incur additional costs to remain competitive. We compete
on the basis of product design, quality, availability,
performance, customer service and price. Present or future
competitors may have greater financial, technical or other
resources which could put us at a disadvantage in the affected
business or businesses. We cannot assure you that these and
other factors will not have a material adverse effect on our
future results of operations.
Material
cost and other inflation have adversely affected and could
continue to affect our results of operations.
Over the past few years, we have experienced material cost and
other inflation in a number of our businesses. We are striving
for greater productivity improvements and implementing selective
increases in selling prices to help mitigate cost increases in
raw materials (especially metals and resins), energy and other
costs such as pension, health care and insurance. While these
inflationary pressures have begun to abate in late 2008 and
early 2009 as a result of general economic conditions, we may
not be able to recognize the full benefit from this moderating
or reversal of material cost and other inflation. In addition,
the recent reversal of material cost inflation may not be
sustainable once the economy begins to strengthen. We also are
continuing to implement our excellence in operations initiatives
in order to continuously reduce our costs. We cannot assure you,
however, that these actions will be successful in managing our
costs or increasing our productivity. Continued cost inflation
or failure of our initiatives to generate cost savings or
improve productivity would likely negatively impact our results
of operations.
Seasonality
of sales and weather conditions may adversely affect our
financial results.
We experience seasonal demand in a number of markets within our
Water Group. End-user demand for pool equipment in our primary
markets follows warm weather trends and is at seasonal highs
from April to August. The magnitude of the sales spike is
partially mitigated by employing some advance sale or
early buy programs (generally including extended
payment terms
and/or
additional discounts). Demand for residential and agricultural
water systems is also impacted by weather patterns, particularly
by heavy flooding and droughts. We cannot assure you that
seasonality and weather conditions will not have a material
adverse effect on our results of operations.
9
Intellectual
property challenges may hinder product development and
marketing.
Patents, non-compete agreements, proprietary technologies,
customer relationships, trade marks, trade names, and brand
names are important to our business. Intellectual property
protection, however, may not preclude competitors from
developing products similar to ours or from challenging our
names or products. Over the past few years, we have noticed an
increasing tendency for participants in our markets to use
conflicts over and challenges to intellectual property as a
means to compete. Patent and trademark challenges increase our
costs to develop, engineer and market our products.
Our
results of operations may be negatively impacted by
litigation.
Our business exposes us to potential litigation, such as product
liability claims relating to the design, manufacture, and sale
of our products. While we currently maintain what we believe to
be suitable product liability insurance, we cannot assure you
that we will be able to maintain this insurance on acceptable
terms or that this insurance will provide adequate protection
against potential liabilities. In addition, we self-insure a
portion of product liability claims. A series of successful
claims against us for significant amounts could materially and
adversely affect our product reputation, financial condition,
results of operations, and cash flows.
Reductions
in our acquisition activity will likely slow our revenue growth
or otherwise adversely affect our financial
performance.
Over the past four years, much of our growth has resulted from
acquisitions of businesses within our current business segments.
While we intend to continue to evaluate acquisitions in these
segments, given the current financial and economic environment,
we currently do not expect to make significant acquisitions
until credit markets and business conditions stabilize. We
cannot assure you that we would be able to continue to grow or
to limit revenue declines without making acquisitions.
Acquisitions we may undertake could have a material adverse
effect on our operating results, particularly in the fiscal
quarters immediately following the acquisitions, while we
attempt to integrate operations of the acquired businesses into
our operations. Once integrated, acquired operations may not
achieve the levels of profitability originally anticipated.
The
availability and cost of capital could have a negative impact on
our financial performance.
Our plans to vigorously compete in our chosen markets will
require additional capital for future acquisitions, capital
expenditures, growth of working capital, and continued
international and regional expansion. In the past, we have
financed growth of our businesses primarily through cash from
operations and debt financing. While we refinanced our primary
credit agreements in the second quarter of 2007 on what we
believe to be favorable terms, future acquisitions or other uses
of funds may require us to expand our debt financing resources
or to issue equity securities. Our financial results may be
adversely affected if new financing is not available on
favorable terms or if interest costs under our debt financings
are higher than the income generated by acquisitions or other
internal growth. In addition, future acquisitions could be
dilutive to your equity investment if we issue additional stock
as consideration. We cannot assure you that we will be able to
issue equity securities or obtain future debt financing at
favorable terms. Without sufficient financing, we will not be
able to pursue our targeted growth strategy, and our acquisition
program, which will limit our revenue growth and future
financial performance.
We are
exposed to political, economic and other risks that arise from
operating a multinational business.
Sales outside of the United States, including export sales from
our domestic businesses, accounted for approximately 35% of our
gross sales in 2008, up from 32% in 2007. Further, most of our
businesses obtain some products, components and raw materials
from foreign suppliers. Accordingly, our business is subject to
the political, economic and other risks that are inherent in
operating in numerous countries. These risks include:
|
|
|
changes in general economic and political conditions in
countries where we operate, particularly in emerging markets;
|
10
|
|
|
relatively more severe economic conditions in some international
markets than in the United States;
|
|
|
the difficulty of enforcing agreements and collecting
receivables through foreign legal systems;
|
|
|
trade protection measures and import or export licensing
requirements;
|
|
|
tax rates in certain foreign countries that exceed those in the
U.S. and the imposition of withholding requirements on foreign
earnings;
|
|
|
the possibility of terrorist action against us or our operations;
|
|
|
the imposition of tariffs, exchange controls or other trade
restrictions;
|
|
|
difficulty in staffing and managing widespread operations in
non-U.S.
labor markets;
|
|
|
the difficulty of protecting intellectual property in foreign
countries; and
|
|
|
required compliance with a variety of foreign laws and
regulations.
|
Our business success depends in part on our ability to
anticipate and effectively manage these and other risks. We
cannot assure you that these and other factors will not have a
material adverse effect on our international operations or on
our business as a whole.
Our
international operations are subject to foreign market and
currency fluctuation risks.
We expect the percentage of our sales outside of North America
to increase in the future. Over the past few years, the
economies of some of the foreign countries in which we do
business have had slower growth than the U.S. economy. The
European Union currently accounts for the majority of our
foreign sales and income, in which our most significant European
market is Germany; each market area is currently experiencing
similar economic difficulties to those in the United States, and
sales in those markets slowed significantly by the end of 2008.
In addition, we have a significant and growing business in the
Asia-Pacific area, but the economic conditions in countries in
this region are subject to different growth expectations, market
weaknesses and business practices. We cannot predict how
changing market conditions in these regions will impact our
financial results.
We are also exposed to the risk of fluctuation of foreign
currency exchange rates which may affect our financial results.
In 2008, the weakness of the US dollar slightly benefited our
financial results in foreign jurisdictions. We do not anticipate
continuing US dollar weakness in foreign exchange markets in
2009 of a similar magnitude, which may hurt our financial
results on a comparative basis. In addition, we source certain
products, components and raw materials throughout the world, the
import of which into the United States has raised the cost of
these goods in US dollars and has impacted the results of our
domestic businesses as well.
We
have significant goodwill and intangible assets, and future
impairment of our goodwill and intangible assets could have a
material negative impact on our financial results.
We test goodwill and indefinite-lived intangible assets for
impairment on an annual basis as required by Statement of
Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142), by comparing
the estimated fair value of each of our reporting units to their
respective carrying values on our balance sheet. At
December 31, 2008 our goodwill and intangible assets were
approximately $2,617.4 million, and represented
approximately 64.6% of our total assets. While our annual
assessment in 2008 did not indicate an impairment of goodwill at
that time, long-term declines in projected future cash flows
could result in future goodwill and intangible asset
impairments. Because of the significance of our goodwill and
intangible assets, any future impairment of these assets could
have a material adverse effect on our financial results.
We are
exposed to potential environmental and other laws, liabilities
and litigation.
We are subject to federal, state, local and foreign laws and
regulations governing our environmental practices, public and
worker health and safety and the indoor and outdoor environment.
Compliance with these environmental, health and safety
regulations could require us to satisfy environmental
liabilities, increase the
11
cost of manufacturing our products or otherwise adversely affect
our business, financial condition and results of operations. Any
violations of these laws by us could cause us to incur
unanticipated liabilities that could harm our operating results
and cause our business to suffer. We are also required to comply
with various environmental laws and maintain permits, some of
which are subject to discretionary renewal from time to time,
for many of our businesses, and we could suffer if we are unable
to renew existing permits or to obtain any additional permits
that we may require.
We have been named as defendants, targets, or potentially
responsible parties (PRP) in a number of
environmental
clean-ups
relating to our current or former business units. We have
disposed of a number of businesses in recent years and, in
certain cases, we have retained responsibility and potential
liability for certain environmental obligations. We have
received claims for indemnification from certain purchasers. We
may be named as a PRP at other sites in the future for existing
business units, as well as both divested and acquired
businesses. We have also made claims against third parties for
indemnification against potential liabilities for environmental
remediations or other obligations. We cannot assure you that we
will be successful in obtaining indemnity or reimbursement for
such costs.
We cannot ensure you that environmental requirements will not
change or become more stringent over time or that our eventual
environmental
clean-up
costs and liabilities will not exceed the amount of our current
reserves.
Provisions
of our Restated Articles of Incorporation, Bylaws and Minnesota
law could deter takeover attempts.
Anti-takeover provisions in our charter documents, under
Minnesota law, and in our shareholder rights plan could prevent
or delay transactions that our shareholders may favor.
Our Restated Articles of Incorporation and Bylaws include
provisions relating to the election, appointment and removal of
directors, as well as shareholder notice and shareholder voting
requirements which could delay, prevent or make more difficult a
merger, tender offer, proxy contest or other change of control.
In addition, our common share purchase rights could cause
substantial dilution to a person or group that attempts to
acquire us, which could deter some acquirers from making
takeover proposals or tender offers. Also, the Minnesota
Business Corporations Act contains control share acquisition and
business combination provisions which could delay, prevent or
make more difficult a merger, tender offer, proxy contest or
other change of control. Our shareholders might view any such
transaction as being in their best interests since the
transaction could result in a higher stock price than the
current market price for our common stock.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
Our principal executive office is in leased premises located in
Golden Valley, Minnesota. We carry out our Water Group
manufacturing operations at 23 plants located throughout
the United States and at 18 plants located in 10 other
countries. In addition, our Water Group has 33 distribution
facilities and 36 sales offices located in numerous
countries throughout the world. We carry out our Technical
Products Group manufacturing operations at 8 plants located
throughout the United States and 10 plants located in 8 other
countries. In addition, our Technical Products Group has 7
distribution facilities and 30 sales offices located in numerous
countries throughout the world.
We believe that our production facilities are suitable for their
purpose and are adequate to support our businesses.
12
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
We have been made parties to a number of actions filed or have
been given notice of potential claims relating to the conduct of
our business, including those pertaining to commercial disputes,
product liability, environmental, safety and health, patent
infringement, and employment matters.
We comply with the requirements of Statement of Financial
Accounting Standards (SFAS) No. 5,
Accounting for Contingencies, and related guidance, and
record liabilities for an estimated loss from a loss contingency
where the outcome of the matter is probable and can be
reasonably estimated. Factors that are considered when
determining whether the conditions for accrual have been met
include the (a) nature of the litigation, claim, or
assessment, (b) progress of the case, including progress
after the date of the financial statements but before the
issuance date of the financial statements, (c) opinions of
legal counsel, and (d) managements intended response
to the litigation, claim, or assessment. Where the reasonable
estimate of the probable loss is a range, we record the most
likely estimate of the loss. When no amount within the range is
a better estimate than any other amount, however, the minimum
amount in the range is accrued. Gain contingencies are not
recorded until realized.
While we believe that a material adverse impact on our
consolidated financial position, results of operations, or cash
flows from any such future charges is unlikely, given the
inherent uncertainty of litigation, a remote possibility exists
that a future adverse ruling or unfavorable development could
result in future charges that could have a material adverse
impact. We do and will continue to periodically reexamine our
estimates of probable liabilities and any associated expenses
and receivables and make appropriate adjustments to such
estimates based on experience and developments in litigation. As
a result, the current estimates of the potential impact on our
consolidated financial position, results of operations, and cash
flows for the proceedings and claims described in Legal
Proceedings could change in the future.
Environmental
We have been named as defendants, targets, or PRP in a small
number of environmental
clean-ups,
in which our current or former business units have generally
been given de minimis status. To date, none of these
claims have resulted in
clean-up
costs, fines, penalties, or damages in an amount material to our
financial position or results of operations. We have disposed of
a number of businesses in recent years and in certain cases,
such as the disposition of the Cross Pointe Paper Corporation
uncoated paper business in 1995, the disposition of the Federal
Cartridge Company ammunition business in 1997, the disposition
of Lincoln Industrial in 2001, and the disposition of the Tools
Group in 2004, we have retained responsibility and potential
liability for certain environmental obligations. We have
received claims for indemnification from purchasers of these
businesses and have established what we believe to be adequate
accruals for potential liabilities arising out of retained
responsibilities. We settled some of the claims in prior years;
to date our recorded accruals have been adequate.
In addition, there are ongoing environmental issues at a limited
number of sites, including one site acquired in the acquisition
of Essef Corporation in 1999, which relate to operations no
longer carried out at the sites. We have established what we
believe to be adequate accruals for remediation costs at these
sites. We do not believe that projected response costs will
result in a material liability.
We may be named as a PRP at other sites in the future, for both
divested and acquired businesses. When the outcome of the matter
is probable and it is possible to provide reasonable estimates
of our liability with respect to environmental sites, provisions
have been made in accordance with generally accepted accounting
principles in the United States. As of December 31, 2008
and 2007, our undiscounted reserves for such environmental
liabilities were approximately $3.1 million and
$3.5 million, respectively. We cannot ensure that
environmental requirements will not change or become more
stringent over time or that our eventual environmental
clean-up
costs and liabilities will not exceed the amount of our current
reserves.
Product
liability claims
We are subject to various product liability lawsuits and
personal injury claims. A substantial number of these lawsuits
and claims are insured and accrued for by Penwald, our captive
insurance subsidiary. See discussion
13
in ITEM 1 and ITEM 8, Note 1 of the Notes to
Consolidated Financial Statements Insurance
subsidiary. Penwald records a liability for these claims based
on actuarial projections of ultimate losses. For all other
claims, accruals covering the claims are recorded, on an
undiscounted basis, when it is probable that a liability has
been incurred and the amount of the liability can be reasonably
estimated based on existing information. The accruals are
adjusted periodically as additional information becomes
available. We have not experienced significant unfavorable
trends in either the severity or frequency of product liability
lawsuits or personal injury claims.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None.
14
EXECUTIVE
OFFICERS OF THE REGISTRANT
Current
executive officers of Pentair, their ages, current position, and
their business experience during at least the past five years
are as follows:
|
|
|
|
|
Name
|
|
Age
|
|
Current Position and Business Experience
|
|
Randall J. Hogan
|
|
53
|
|
Chief Executive Officer since January 2001 and Chairman of the
Board effective May 1, 2002; President and Chief Operating
Officer, December 1999 December 2000; Executive Vice
President and President of Pentairs Electrical and
Electronic Enclosures Group, March 1998 December
1999; United Technologies Carrier Transicold President
1995 1997; Pratt & Whitney Industrial
Turbines Vice President and General Manager 1994
1995; General Electric various executive positions
1988 1994; McKinsey & Company consultant
1981 1987.
|
Michael V. Schrock
|
|
56
|
|
President and Chief Operating Officer since September 2006;
President and Chief Operating Officer of Filtration and
Technical Products, October 2005 September 2006;
President and Chief Operating Officer of Enclosures October
2001 September 2005; President, Pentair Water
Technologies Americas, January 2001
October 2001; President, Pentair Pump and Pool Group, August
2000 January 2001; President, Pentair Pump Group,
January 1999 August 2000; Vice President and General
Manager, Aurora, Fairbanks Morse and Pentair Pump Group
International, March 1998 December 1998; Divisional
Vice President and General Manager, Honeywell Inc.,
1994 1998.
|
John L. Stauch
|
|
44
|
|
Executive Vice President and Chief Financial Officer since
February 2007; Chief Financial Officer of the Automation and
Control Systems unit of Honeywell International Inc., July
2005 February 2007; Vice President, Finance and
Chief Financial Officer of the Sensing and Controls unit of
Honeywell International Inc., January 2004 July
2005; Vice President, Finance and Chief Financial Officer of the
Automation & Control Products unit of Honeywell
International Inc., July 2002 January 2004; Chief
Financial Officer and IT Director of PerkinElmer
Optoelectronics, a unit of PerkinElmer, Inc., April
2000 April 2002; Various executive, investor
relations and managerial finance positions with Honeywell
International Inc. and its predecessor AlliedSignal Inc.,
1994 2000.
|
Louis L. Ainsworth
|
|
61
|
|
Senior Vice President and General Counsel since July 1997 and
Secretary since January 2002; Shareholder and Officer of the law
firm of Henson & Efron, P.A., November
1985 June 1997.
|
Frederick S. Koury
|
|
48
|
|
Senior Vice President, Human Resources, since August 2003; Vice
President of Human Resources of the Victorias Secret unit
of Limited Brands, September 2000 August 2003;
PepsiCo, Inc., various executive positions, June
1985 September 2000.
|
Michael G. Meyer
|
|
50
|
|
Vice President of Treasury and Tax since April 2004; Treasurer,
January 2002 March 2004; Assistant Treasurer,
September 1994 December 2001; Various executive
positions with Federal-Hoffman, Inc. (former subsidiary of
Pentair), August 1985 August 1994.
|
Mark C. Borin
|
|
41
|
|
Corporate Controller and Chief Accounting Officer since March
2008; Partner in the audit practice of the public accounting
firm KPMG LLP, June 2000 March 2008; Various
positions in the audit practice of KPMG LLP, September
1989 June 2000.
|
15
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON STOCK, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock is listed for trading on the New York Stock
Exchange and trades under the symbol PNR. As of
December 31, 2008, there were 3,835 shareholders of record.
The high, low, and closing sales price for our common stock and
the dividends declared for each of the quarterly periods for
2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
High
|
|
$
|
34.98
|
|
|
$
|
38.76
|
|
|
$
|
41.00
|
|
|
$
|
38.50
|
|
|
$
|
33.22
|
|
|
$
|
39.37
|
|
|
$
|
39.67
|
|
|
$
|
36.59
|
|
Low
|
|
$
|
26.02
|
|
|
$
|
31.14
|
|
|
$
|
31.72
|
|
|
$
|
18.42
|
|
|
$
|
29.35
|
|
|
$
|
30.09
|
|
|
$
|
31.47
|
|
|
$
|
32.03
|
|
Close
|
|
$
|
31.48
|
|
|
$
|
33.87
|
|
|
$
|
38.52
|
|
|
$
|
23.67
|
|
|
$
|
31.16
|
|
|
$
|
38.57
|
|
|
$
|
33.18
|
|
|
$
|
34.81
|
|
Dividends declared
|
|
$
|
0.17
|
|
|
$
|
0.17
|
|
|
$
|
0.17
|
|
|
$
|
0.17
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Pentair has paid 132 consecutive quarterly dividends and has
increased dividends each year for 32 consecutive years.
16
Stock
Performance Graph
The following information under the caption Stock
Performance Graph in this ITEM 5 of this Annual
Report on
Form 10-K
is not deemed to be soliciting material or to be
filed with the SEC or subject to Regulation 14A
or 14C under the Securities Exchange Act of 1934 or to the
liabilities of Section 18 of the Securities Exchange Act of
1934, and will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934, except to the extent we
specifically incorporate it by reference into such a filing.
The following graph sets forth the cumulative total shareholder
return on our common stock for the last five years, assuming the
investment of $100 on December 31, 2003 and the
reinvestment of all dividends since that date to
December 31, 2008. The graph also contains for comparison
purposes the S&P 500 Index and the S&P MidCap 400
Index, assuming the same investment level and reinvestment of
dividends.
By virtue of our market capitalization, we are a component of
the S&P MidCap 400 Index. On the basis of our size and
diversity of businesses, we have not found a readily
identifiable peer group. We believe the S&P MidCap 400
Index is an appropriate comparison. We have evaluated other
published indices, but have determined that the results are
skewed by significantly larger companies included in the
indices. We believe such a comparison would not be meaningful.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Period
|
|
INDEXED RETURNS
|
|
|
December
|
|
Years Ending December 31:
|
Company / Index
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
PENTAIR INC
|
|
|
100
|
|
|
|
193.43
|
|
|
|
155.37
|
|
|
|
143.66
|
|
|
|
162.12
|
|
|
|
112.58
|
|
S&P 500 INDEX
|
|
|
100
|
|
|
|
110.88
|
|
|
|
116.33
|
|
|
|
134.70
|
|
|
|
142.10
|
|
|
|
89.53
|
|
S&P MIDCAP 400 INDEX
|
|
|
100
|
|
|
|
116.48
|
|
|
|
131.11
|
|
|
|
144.64
|
|
|
|
156.18
|
|
|
|
99.59
|
|
17
Purchases
of Equity Securities
The following table provides information with respect to
purchases made by Pentair of common stock during the fourth
quarter of 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Dollar Value of
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Shares that
|
|
|
|
Total Number
|
|
|
|
|
|
as Part of Publicly
|
|
|
May Yet Be
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
Announced Plans
|
|
|
Purchased Under the
|
|
Period
|
|
Purchased
|
|
|
Paid per Share
|
|
|
or Programs
|
|
|
Plans or Programs
|
|
|
|
|
September 28 October 25, 2008
|
|
|
168,549
|
|
|
$
|
29.77
|
|
|
|
168,058
|
|
|
$
|
6,908,012
|
|
October 26 November 22, 2008
|
|
|
204,996
|
|
|
$
|
24.53
|
|
|
|
203,787
|
|
|
$
|
1,908,261
|
|
November 23 December 31, 2008
|
|
|
97,807
|
|
|
$
|
23.03
|
|
|
|
83,989
|
|
|
$
|
0
|
|
|
|
Total
|
|
|
471,352
|
|
|
|
|
|
|
|
455,834
|
|
|
|
|
|
|
|
|
(a) |
|
The purchases in this column
include shares repurchased as part of our publicly announced
programs and, in addition, 491 shares for the period
September 28 October 25, 2008,
1,209 shares for the period October 26
November 22, 2008, and 13,818 shares for the period
November 23 December 31, 2008 deemed
surrendered to us by participants in our Omnibus Stock Incentive
Plan and the Outside Directors Nonqualified Stock Option Plan
(the Plans) to satisfy the exercise price or
withholding of tax obligations related to the exercise of stock
options and non-vested shares.
|
|
(b) |
|
The average price paid in this
column includes shares repurchased as part of our publicly
announced programs and shares deemed surrendered to us by
participants in the Plans to satisfy the exercise price or
withholding of tax obligations related to the exercise price of
stock options and non-vested shares.
|
|
(c) |
|
The number of shares in this column
represents the number of shares repurchased as part of a
publicly announced program to repurchase up to $50 million
of our common stock during 2008.
|
|
(d) |
|
In December 2007, the Board of
Directors authorized the repurchase of shares of our common
stock during 2008 up to a maximum dollar limit of
$50 million. As of December 31, 2008, we had purchased
1,549,893 shares for $50.0 million pursuant to this
authorization. This authorization expired on December 31,
2008. There is currently no repurchase authorization for 2009.
|
18
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following table sets forth our selected historical financial
data from continuing operations for the five years ended
December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2008(1)
|
|
|
2007(1)
|
|
|
2006(1)
|
|
|
2005(1)
|
|
|
2004
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,351,976
|
|
|
$
|
3,280,903
|
|
|
$
|
3,022,602
|
|
|
$
|
2,801,715
|
|
|
$
|
2,221,909
|
|
Operating income
|
|
|
324,685
|
|
|
|
379,049
|
|
|
|
312,943
|
|
|
|
313,320
|
|
|
|
239,834
|
|
Income from continuing operations
|
|
|
256,363
|
|
|
|
212,118
|
|
|
|
186,251
|
|
|
|
179,183
|
|
|
|
133,233
|
|
Per Share
Data:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS from continuing operations
|
|
$
|
2.62
|
|
|
$
|
2.15
|
|
|
$
|
1.87
|
|
|
$
|
1.78
|
|
|
$
|
1.34
|
|
Weighted average shares
|
|
|
97,887
|
|
|
|
98,762
|
|
|
|
99,784
|
|
|
|
100,665
|
|
|
|
99,316
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS from continuing operations
|
|
$
|
2.59
|
|
|
$
|
2.12
|
|
|
$
|
1.84
|
|
|
$
|
1.75
|
|
|
$
|
1.31
|
|
Weighted average shares
|
|
|
99,068
|
|
|
|
100,205
|
|
|
|
101,371
|
|
|
|
102,618
|
|
|
|
101,706
|
|
Cash dividends declared per common share
|
|
$
|
0.68
|
|
|
$
|
0.60
|
|
|
$
|
0.56
|
|
|
$
|
0.52
|
|
|
$
|
0.43
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,053,213
|
|
|
$
|
4,000,614
|
|
|
$
|
3,364,979
|
|
|
$
|
3,253,755
|
|
|
$
|
3,120,575
|
|
Total debt
|
|
|
954,092
|
|
|
|
1,060,586
|
|
|
|
743,552
|
|
|
|
752,614
|
|
|
|
736,105
|
|
Total shareholders equity
|
|
|
1,898,681
|
|
|
|
1,910,871
|
|
|
|
1,669,999
|
|
|
|
1,555,610
|
|
|
|
1,447,794
|
|
|
|
|
|
|
(1) |
|
In 2005 we early adopted
SFAS 123R retroactively to January 1, 2005. The
incrementatl impact of the adoption of SFAS 123R to the
results of operations for 2008, 2007, 2006 and 2005 include
after tax expense of $7.5 million, $9.2 million,
$9.9 million and $12.0 million, respectively, or
($0.08), ($0.09), ($0.10) and ($0.12) diluted EPS, respectively.
|
|
(2) |
|
All share and per share information
presented in this Annual Report on
Form 10-K
has been retroactively restated to reflect the effect of a 100%
stock dividend in 2004.
|
|
|
|
In July 2004, we acquired as part
of our Water Group all of the capital stock of WICOR, Inc. In
December 2005, we acquired as part of our Technical Products
Group the McLean Thermal Management, Aspen Motion Technologies
and Electonic Solutions businesses. In February and April 2007,
we acquired the outstanding shares of capital stock of Jung Pump
and all of the capital interests of Porous Media, respectively,
as part of our Water Group. In May 2007, we acquired as part of
our Technical Products Group the assets of Calmark. In June
2008, we entered into a transaction with GE that was accounted
for as an acquisition of an 80.1 percent ownership interest
in GEs global water softener and residential water
filtration business in exchange for a 19.9 percent interest in
our global water softener and residential water filtration
business.
|
19
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This report contains statements that we believe to be
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.
Forward-looking statements give our current expectations or
forecasts of future events. Forward-looking statements generally
can be identified by the use of forward-looking terminology such
as may, will, expect,
intend, estimate,
anticipate, believe,
project, or continue, or similar words
or the negative thereof . From time to time, we also may provide
oral or written forward-looking statements in other materials we
release to the public. Any or all of our forward-looking
statements in this report and in any public statements we make
could be materially different from actual results. They can be
affected by assumptions we might make or by known or unknown
risks or uncertainties. Consequently, we cannot guarantee any
forward-looking statements. Investors are cautioned not to place
undue reliance on any forward-looking statements. Investors
should also understand that it is not possible to predict or
identify all such factors and should not consider the following
list to be a complete statement of all potential risks and
uncertainties.
The following factors and those discussed in ITEM 1A, Risk
Factors, of this
Form 10-K
may impact the achievement of forward-looking statements:
|
|
|
general economic and political conditions, such as political
instability, credit market uncertainty, the rate of economic
growth or decline in our principal geographic or product markets
or fluctuations in exchange rates;
|
|
|
changes in general economic and industry conditions in markets
in which we participate, such as:
|
|
|
|
|
|
continued deterioration in the global economy;
|
|
|
|
continued deterioration in or stabilization of the North America
housing market;
|
|
|
|
the strength of product demand and the markets we serve;
|
|
|
|
the intensity of competition, including that from foreign
competitors;
|
|
|
|
pricing pressures;
|
|
|
|
the financial condition of our customers;
|
|
|
|
market acceptance of new product introductions and enhancements;
|
|
|
|
the introduction of new products and enhancements by competitors;
|
|
|
|
our ability to maintain and expand relationships with large
customers;
|
|
|
|
our ability to source raw material commodities from our
suppliers without interruption and at reasonable prices; and
|
|
|
|
our ability to source components from third parties, in
particular from foreign manufacturers, without interruption and
at reasonable prices;
|
|
|
|
our ability to access capital markets and obtain anticipated
financing under favorable terms;
|
|
|
our ability to identify, complete and integrate acquisitions
successfully and to realize expected synergies on our
anticipated timetable;
|
|
|
changes in our business strategies, including acquisition,
divestiture and restructuring activities;
|
|
|
any impairment of goodwill and indefinite-lived intangible
assets as a result of deterioration in our markets;
|
|
|
domestic and foreign governmental and regulatory policies;
|
|
|
changes in operating factors, such as continued improvement in
manufacturing activities and the achievement of related
efficiencies, cost reductions and inventory risks due to shifts
in market demand and costs associated with moving production
overseas;
|
20
|
|
|
our ability to generate savings from our excellence in
operations initiatives consisting of lean enterprise, supply
management and cash flow practices;
|
|
|
our ability to generate savings from our restructuring actions;
|
|
|
unanticipated developments that could occur with respect to
contingencies such as litigation, intellectual property matters,
product liability exposures and environmental matters; and
|
|
|
our ability to accurately evaluate the effects of contingent
liabilities such as tax, product liability, environmental and
other claims.
|
The foregoing factors are not exhaustive, and new factors may
emerge or changes to the foregoing factors may occur that would
impact our business. We assume no obligation, and disclaim any
duty, to update the forward-looking statements in this report.
Overview
We are a focused diversified industrial manufacturing company
comprised of two operating segments: Water and Technical
Products. Our Water Group is a global leader in providing
innovative products and systems used worldwide in the movement,
storage, treatment and enjoyment of water. Our Technical
Products Group is a leader in the global enclosures and thermal
management markets, designing and manufacturing standard,
modified and custom enclosures that house and protect sensitive
electronics and electrical components; thermal management
products; and accessories. In 2009, we expect our Water Group
and Technical Products Group to generate approximately 2/3 and
1/3 of total revenues, respectively.
Our Water Group has progressively become a more important part
of our business portfolio with sales increasing from
approximately $125 million in 1995 to approximately
$2.2 billion in 2008. We believe the water industry is
structurally attractive as a result of a growing demand for
clean water and the large global market size (of which we have
identified a target market totaling $60 billion). Our
vision is to be a leading global provider of innovative products
and systems used in the movement, storage, treatment and
enjoyment of water.
On February 28, 2008, we sold our National Pool Tile
(NPT) business to Pool Corporation in a cash
transaction. The results of NPT have been reported as
discontinued operations for all periods presented. The assets
and liabilities of NPT have been reclassified as discontinued
operations for all periods presented.
On June 28, 2008, we entered into a transaction with GE
Water & Process Technologies (a unit of General
Electric Company) (GE) that was accounted for as an
acquisition of an 80.1 percent ownership interest in
GEs global water softener and residential water filtration
business in exchange for a 19.9 percent interest in our
global water softener and residential water filtration business.
The acquisition was effected through the formation of two new
entities, (collectively, Pentair Residential
Filtration or PRF) a U.S. entity and an
international entity, into which we and GE contributed certain
assets, properties, liabilities and operations representing our
respective global water softener and residential water
filtration businesses. We are an 80.1 percent owner of the new
entities and GE is a 19.9 percent owner.
With the formation of Pentair Residential Filtration, we believe
we will be better positioned to serve residential customers with
industry-leading technical applications in the areas of water
conditioning, whole house filtration, point of use water
management and water sustainability and expect to accelerate
revenue growth by selling GEs existing residential
conditioning products through our sales channels.
On December 15, 2008, we sold our Spa and Bath
(Spa/Bath) business to Balboa Water Group in a cash
transaction. The results of Spa/Bath have been reported as
discontinued operations for all periods presented. The assets
and liabilities of Spa/Bath have been reclassified as
discontinued operations for all periods presented.
Our Technical Products Group operates in a large global market
with significant potential for growth in industry segments such
as defense, security, medical and networking. We believe we have
the largest industrial and commercial distribution network in
North America for enclosures and the highest brand recognition
in the industry in North America. From mid-2001 through 2003,
the Technical Products Group experienced
21
significantly lower sales volumes as a result of severely
reduced capital spending in the industrial and commercial
markets and over-capacity and weak demand in the data
communication and telecommunication markets. From 2004 through
2008, sales volumes increased due to the addition of new
distributors, new products, price increases and higher demand in
targeted markets.
Key
Trends and Uncertainties
The following trends and uncertainties affected our financial
performance in 2008 and will likely impact our results in 2009
and beyond:
|
|
|
Many markets we serve have slowed dramatically as a result of
the tumultuous credit markets and the resulting recession. We
have identified specific product and geographic markets we serve
that we believe will stagnate, contract or continue contracting
in 2009, as noted below. We have begun and expect to continue to
restructure our operations serving those markets to close
facilities in order to reduce or relocate capacity, to reduce
labor and material costs, to optimize our manufacturing
footprint and to simplify our business structure. We have also
identified specific markets in which we participate that we
believe will continue to grow over this period and are
selectively reinforcing our businesses in these markets. Because
our businesses are significantly affected by general economic
trends, further deterioration in our most important markets
addressed below would likely have an adverse impact on our
results of operation for 2009 and beyond.
|
|
|
New home building and new pool starts have contracted for each
of the past three years in the United States and have started to
slow significantly in Europe as well. We believe that
construction of new homes and new pool starts in North America
affect approximately 10% - 15% of sales of our water businesses,
while repair, replacement and refurbishment accounts for
approximately 15% - 20% of sales in these businesses. We expect
the current recession to continue to adversely impact our sales
for all or a significant portion of 2009. As sales of products
into domestic residential end-markets in our Water Group
business continued to slow appreciably, we have reduced our
investments in businesses in those markets, and further
restructured our operations by closing or downsizing facilities,
reducing headcount and taking other market-related actions.
|
|
|
Industrial, communications and commercial markets for all of our
businesses, including commercial and industrial construction,
have also slowed significantly during the fourth quarter of
2008, especially in December, and this weakness has continued
throughout the early part of the first quarter of 2009. We have
a high level of uncertainty over the course of the economy and
hence the strength of many of our significant markets both in
the United States and around the world for the balance of the
year and beyond. We have reduced our investments in businesses
in these markets, and further restructured our operations by
closing or downsizing facilities, reducing headcount and taking
other market-related actions.
|
|
|
We experienced material cost and other inflation in a number of
our businesses during 2008. To offset this inflation, we
implemented productivity improvements and selective increases in
selling prices to help mitigate inflationary cost increases we
experienced in base materials such as carbon steel, copper and
resins and other costs such as health care and other employee
benefit costs. We expect the current economic environment will
result in price volatility for many of our raw materials;
material costs have declined in the fourth quarter of 2008 and
the first quarter of 2009, and we believe they will continue to
decline so long as general economic conditions remain weak. We
believe that these cost decreases we are experiencing will not
begin to be fully realized in our results of operations until
the second quarter of 2009.
|
|
|
As a result of the dramatic fall in securities and other
investment markets over 2008, our unfunded pension liability
increased from fiscal year end 2007 to fiscal year end 2008 from
$147 million to $257 million, or an increase of
$110 million primarily reflecting our reduced investment
return and significantly lower asset values in our US defined
benefit plans during 2008. We believe that this will increase
our pension expense in 2009 over year-earlier levels, and more
significantly, require an increase in our 2009 contributions to
the plans to approximately $40-$45 million, an increase of
over $30 million in the year.
|
22
|
|
|
We have a long-term goal to consistently generate free cash flow
that equals or exceeds 100% conversion of our net income. We
define free cash flow as cash flow from continuing operating
activities less capital expenditures plus proceeds from sale of
property and equipment. Free cash flow for the full year 2008
was approximately $164 million, or 72% of our net income.
Our target for free cash flow in 2009 remains at 100% of net
income, and we have instituted several measures internally to
maintain our strong collection experience and to decrease our
working capital. See our discussion of Other financial
measures under the caption Liquidity and Capital
Resources in this report.
|
|
|
We experience seasonal demand in a number of markets within our
Water Group. End-user demand for pool equipment follows warm
weather trends and is normally at seasonal highs from April to
August. The magnitude of the sales spike is partially mitigated
by employing some advance sale early buy programs
(generally including extended payment terms
and/or
additional discounts). Demand for residential and agricultural
water systems is also impacted by economic conditions and
weather patterns, particularly by heavy flooding and droughts.
While we believe that this seasonality will continue in the
second and third quarters of 2009, due to the unknown impact of
the current economic situation, we are uncertain of the size and
impact of the seasonal spike for the year, and contemplate that
any seasonal impact will likely be less than in prior years.
|
|
|
We experienced year over year favorable foreign currency effects
on net sales and operating results in 2007 and the first nine
months of 2008, due to the weakening of the U.S. dollar in
relation to other foreign currencies. Our currency effect is
primarily for the U.S. dollar against the euro, which may or may
not trend favorably in the future.
|
|
|
On June 28, 2008, we formed Pentair Residential Filtration
in order to expand our product lines, accelerate opportunities
to provide our customers complete water filtration systems,
increase revenue growth and exploit cost synergy opportunities.
The one-time gain on the transaction increased diluted earnings
per share, on an after tax basis, by 86 cents in the second
quarter of 2008. Integration and inventory
step-up
costs arising out of the formation of the PRF business amounted
to approximately $7 million in 2008. We believe we will
continue to incur integration costs as we combine facilities in
this business throughout most of 2009.
|
|
|
The effective income tax rate for 2008 was 29.5%. We estimate
our effective tax rate for the full year 2009 to be between 32%
and 33%. We continue to actively pursue initiatives to reduce
our effective tax rate. The tax rate in any quarter can be
affected positively or negatively by adjustments that are
required to be reported in the specific quarter of resolution.
|
Outlook
In 2009, our operating objectives include the following:
|
|
|
Restructuring our operations in challenging markets while
investing in more favorable markets and geographies;
|
|
|
Increasing our vertical market focus within each of our Global
Business Units to grow in those markets in which we have
competitive advantages;
|
|
|
Driving operating excellence through lean enterprise
initiatives, with special focus on sourcing and supply
management, cash flow management, and lean operations;
|
|
|
Stressing proactive talent development, particularly in
international management and other key functional areas; and
|
|
|
Completing integration of the newly formed PRF business and
prior acquisitions, and realizing identified synergistic
opportunities.
|
On February 3, 2009, we announced our results of operations
for fiscal year 2008 and modified our earnings guidance for the
first quarter of 2009 to a range of $0.20 to $0.30 per share on
a diluted basis. Our prior guidance for the first quarter of
2009, given in December 2008, was a range of $0.30 to $0.35 per
share. Our
23
revised outlook for the quarter is based on what we believe will
be a continuation of the order rates and level of economic
activity realized in December and January lasting throughout the
first quarter.
In December 2008, we also initiated earnings guidance for the
year 2009 that anticipated our earnings to be approximately
$1.70 to $2.00 per share on a diluted basis. This guidance has
not been withdrawn or modified because we do not have sufficient
certainty at this time to support any revision. We do caution,
however, that we are uncertain of the economic performance
trajectory, both in the United States and globally, for the
calendar year. As noted above, significant deterioration in
general economic conditions in our primary markets and
geographies beyond what we have seen to date in the first
quarter would adversely impact our revenues and financial
performance.
This outlook is based on several variables. First, our guidance
anticipates revenue declines in our businesses throughout 2009
of approximately 10% as a result of overall market conditions,
bringing our total revenue to approximately $3.0 billion
for the full year. Second, we expect to get the benefit in the
second, third and fourth quarters of 2009 of restructuring and
other market-related expense reduction efforts taken during 2008
and early in 2009. Third, we anticipate that our manufacturing
productivity initiatives, in particular our materials sourcing
programs, will improve through our lean enterprise initiatives
and commodity deflation.
We have heightened our focus on increasing the conversion of our
net income into free cash flow from that achieved in 2008. In
addition, in response to continuing turbulence in the credit
markets, we are taking actions we believe will help maintain our
liquidity and increase our capital resources by allowing us to
repay indebtedness at a faster rate than would otherwise be the
case. We do not intend to implement our stock buyback program
for 2009, as we have in the past, nor do we currently intend to
make any significant cash acquisitions until credit markets and
business conditions stabilize.
If economic conditions worsen in North America and Europe, then
we expect that our sales, manufacturing productivity and cash
flow may deteriorate from the current forecast. In that event,
we would further reduce discretionary capital spending and
selling, marketing and R&D costs as well as accelerate our
restructuring actions in order to minimize the impact of these
declines on our earnings per share. Conversely, if economic
conditions hold up and improve over the year we would then have
the flexibility to increase expenditures in our selling,
marketing and R&D efforts to maximize organic sales growth
in favorable markets in 2009 and to anticipate growth in 2010.
Our guidance assumes an absence of significant acquisitions or
divestitures in 2009. In 2009, we may seek to expand our
geographic reach internationally, expand our presence in our
various channels to market and acquire technologies and products
to broaden our businesses capabilities to serve additional
markets. We may also consider the divestiture or closure of
discrete business units to further focus our businesses on their
most attractive markets.
The ability to achieve our operating objectives and 2009
guidance will depend, to a certain extent, on factors outside
our control. See Risk Factors under Part I of
this report.
RESULTS
OF OPERATIONS
Net
sales
The
components of the net sales change were:
|
|
|
|
|
|
|
|
|
Percentages
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
|
Volume
|
|
|
(1.6
|
)
|
|
|
4.3
|
|
Price
|
|
|
2.3
|
|
|
|
2.6
|
|
Currency
|
|
|
1.5
|
|
|
|
1.6
|
|
|
|
Total
|
|
|
2.2
|
|
|
|
8.5
|
|
|
|
The
2.2 percent increase in consolidated net sales in 2008 from
2007 was primarily the result of:
|
|
|
selective increases in selling prices to mitigate inflationary
cost increases;
|
24
|
|
|
an increase in sales volume due to the formation of PRF and our
2007 acquisitions of Jung Pumpen GmbH (Jung Pump)
Porous Media Corporation and Porous Media, Ltd. (together
Porous Media);
|
|
|
favorable foreign currency effects; and
|
|
|
higher Technical Products Group sales.
|
These
increases were partially offset by:
|
|
|
lower sales of certain pump, pool and filtration products
primarily related to the downturn in the North American
residential housing market throughout 2008 and other global
markets in the fourth quarter.
|
The
8.5 percent increase in consolidated net sales in 2007 from
2006 was primarily the result of:
|
|
|
an increase in sales volume due to our February 2, 2007
acquisition of Jung Pump and our April 30, 2007 acquisition
of Porous Media;
|
|
|
organic sales growth of approximately 2 percent for the
full year 2007 (excluding acquisitions and foreign currency
exchange), which included selective increases in selling prices
to mitigate inflationary cost increases due to:
|
|
|
|
|
|
growth in the Europe and Asia-Pacific markets;
|
|
|
|
higher Technical Product sales into electrical markets;
|
|
|
|
higher second quarter sales of municipal pumps related to a
large flood control project; and
|
|
|
|
growth in commercial and industrial water markets.
|
These
increases were partially offset by:
|
|
|
lower Technical Products sales into North American electronics
markets driven by contraction and consolidation in the
telecommunication equipment industry which have delayed buying
activity and by datacommunication projects reaching
end-of-life;
|
|
|
lower sales of certain pump, pool and filtration products
related to the downturn in the North American residential
housing market and softness in residential pool construction
markets; and
|
|
|
favorable foreign currency effects.
|
Sales by
segment and the
year-over-year
changes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
$ change
|
|
|
% change
|
|
|
$ change
|
|
|
% change
|
|
|
|
|
Water
|
|
$
|
2,206,142
|
|
|
$
|
2,230,770
|
|
|
$
|
2,023,358
|
|
|
$
|
(24,628
|
)
|
|
|
(1.1
|
%)
|
|
$
|
207,412
|
|
|
|
10.3
|
%
|
Technical Products
|
|
|
1,145,834
|
|
|
|
1,050,133
|
|
|
|
999,244
|
|
|
|
95,701
|
|
|
|
9.1
|
%
|
|
|
50,889
|
|
|
|
5.1
|
%
|
|
|
Total
|
|
$
|
3,351,976
|
|
|
$
|
3,280,903
|
|
|
$
|
3,022,602
|
|
|
$
|
71,073
|
|
|
|
2.2
|
%
|
|
$
|
258,301
|
|
|
|
8.5
|
%
|
|
|
Water
The
1.1 percent decrease in Water segment sales in 2008 from
2007 was primarily the result of:
|
|
|
organic sales decline (excluding acquisitions and foreign
currency exchange) of 5.1 percent for the full year 2008,
which included:
|
|
|
|
|
|
lower sales of certain pump, pool and filtration products into
North American and Western European residential housing markets;
and
|
|
|
|
second quarter 2007 sales of municipal pumps related to a large
flood control project that did not recur in 2008.
|
25
These
decreases were partially offset by:
|
|
|
|
|
selective increases in selling prices to mitigate inflationary
cost increases; and
|
|
|
|
continued growth in China and in other markets in Asia-Pacific
as well as continued success in penetrating markets in Europe
and the Middle East.
|
These
decreases were further offset by:
|
|
|
an increase in sales volume driven by the formation of PRF and
our 2007 acquisitions of Jung Pump and Porous Media; and
|
|
|
favorable foreign currency effects.
|
The
10.3 percent increase in Water segment sales in 2007 from
2006 was primarily the result of:
|
|
|
an increase in sales volume driven by our February 2, 2007
acquisition of Jung Pump and our April 30, 2007 acquisition
of Porous Media;
|
|
|
organic sales growth of 2 percent for the full year 2007
(excluding acquisitions and foreign currency exchange), which
included selective increases in selling prices to mitigate
inflationary cost increases:
|
|
|
|
|
|
continued growth in China and in other markets in Asia-Pacific
as well as continued success in penetrating markets in Europe
and the Middle East;
|
|
|
|
higher second quarter sales of municipal pumps related to a
large flood control project; and
|
|
|
|
growth in commercial and industrial water markets.
|
These
increases were partially offset by:
|
|
|
|
|
a decline in sales of certain pump, pool and filtration products
into North American residential markets and softness in
residential pool construction markets; and
|
|
|
|
favorable foreign currency effects.
|
Technical
Products
The
9.1 percent increase in Technical Products segment sales in
2008 from 2007 was primarily the result of:
|
|
|
an increase in sales into electrical markets, which includes new
products and selective increases in selling prices to mitigate
inflationary cost increases;
|
|
|
an increase in sales into electronics markets as sales to our
datacommunication and telecommunications customers rebounded and
we expanded into other vertical markets;
|
|
|
strong sales performance in Asia and Europe; and
|
|
|
favorable foreign currency effects.
|
These
increases were partially offset by:
|
|
|
an organic sales decline in our North American electronics
markets.
|
The
5.1 percent increase in Technical Products segment sales in
2007 from 2006 was primarily the result of:
|
|
|
organic sales (excluding acquisitions and foreign currency
exchange) which were up approximately 2 percent for the
full year 2007 ,which included selective increases in selling
prices to mitigate inflationary cost increases;
|
|
|
strong sales performance in Asia; and
|
|
|
increased sales into electrical markets.
|
26
These
increases were partially offset by:
|
|
|
lower sales into North American electronics markets driven by
contraction and consolidation in the telecommunication equipment
industry which have delayed buying activity and by
datacommunication projects reaching
end-of-life;
and
|
|
|
favorable foreign currency effects.
|
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
% of sales
|
|
2007
|
|
|
% of sales
|
|
2006
|
|
|
% of sales
|
|
|
|
|
Gross profit
|
|
$
|
1,014,550
|
|
|
30.3%
|
|
$
|
1,012,698
|
|
|
30.9%
|
|
$
|
896,056
|
|
|
|
29.6
|
%
|
|
|
Percentage point change
|
|
|
|
|
|
(0.6) pts
|
|
|
|
|
|
1.3 pts
|
|
|
|
|
|
|
|
|
The
0.6 percentage point decrease in gross profit as a percent
of sales in 2008 from 2007 was primarily the result
of:
|
|
|
inflationary increases related to raw materials and labor costs;
|
|
|
lower sales of certain pump, pool and filtration products
primarily related to the downturn in the North American
residential housing market and the slowing of residential
markets in Western Europe;
|
|
|
higher cost of goods sold in 2008 as a result of a fair market
value inventory
step-up
related to the formation of PRF; and
|
|
|
operating inefficiencies related to product moves and plant
consolidations.
|
These
decreases were partially offset by:
|
|
|
selective increases in selling prices in our Water and Technical
Products Groups to mitigate inflationary cost increases;
|
|
|
the gross margin impact from increased sales volume in our
Technical Products Group and the resulting improved fixed cost
leverage;
|
|
|
savings generated from our PIMS initiatives including lean and
supply management practices; and
|
|
|
lower comparative cost in 2008 for our Jung Pump and Porous
Media businesses due to the absence of a fair market value
inventory
step-up that
was recorded in connection with those acquisitions.
|
The
1.3 percentage point increase in gross profit as a percent
of sales in 2007 from 2006 was primarily the result
of:
|
|
|
savings generated from our PIMS initiatives including lean and
supply management practices;
|
|
|
selective increases in selling prices in our Water and Technical
Products Groups to mitigate inflationary cost increases; and
|
|
|
a decrease in costs related to capacity rationalization and
market-related actions in 2007 compared to 2006.
|
These increases were partially offset by:
|
|
|
inflationary increases related to raw materials and labor; and
|
|
|
higher cost as a result of a fair market value inventory
step-up
related to the Jung Pump and Porous Media acquisitions.
|
27
Selling,
general and administrative (SG&A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
% of sales
|
|
2007
|
|
|
% of sales
|
|
2006
|
|
|
% of sales
|
|
|
|
|
*SG&A
|
|
$
|
627,415
|
|
|
18.7%
|
|
$
|
576,828
|
|
|
17.6%
|
|
$
|
526,568
|
|
|
|
17.4
|
%
|
|
|
Percentage point change
|
|
|
|
|
|
1.1 pts
|
|
|
|
|
|
0.2 pts
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes Legal settlement, which is
presented on a separate line in the Consolidated Statements of
Income
|
The
1.1 percentage point increase in SG&A expense as a
percent of sales in 2008 from 2007 was primarily the result
of:
|
|
|
restructuring actions in both our Water and Technical Products
Groups during the second half of 2008;
|
|
|
higher selling and general expense to fund investments in future
growth with emphasis on growth in the international markets,
including personnel and business infrastructure investments; and
|
|
|
expenses related to the settlement of the Horizon litigation.
|
These
increases were partially offset by:
|
|
|
reduced costs related to productivity actions taken in the
second half of 2007 and throughout 2008; and
|
|
|
reduced costs related to the completion of the European SAP
implementation in 2007.
|
The
0.2 percentage point increase in SG&A expense as a
percent of sales in 2007 from 2006 was primarily the result
of:
|
|
|
higher selling and general expense to fund investments in future
growth with emphasis on growth in the international markets,
including personnel and business infrastructure investments;
|
|
|
proportionately higher SG&A expenses in the acquired Jung
Pump and Porous Media businesses caused in part by amortization
expense related to the intangible assets from those
acquisitions; and
|
|
|
exit costs incurred in 2007 related to a previously announced
2001 French facility closure.
|
These
increases were partially offset by:
|
|
|
a decrease in costs related to capacity rationalization and
market-related actions in 2007 compared to 2006.
|
Research
and development (R&D)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
% of sales
|
|
2007
|
|
|
% of sales
|
|
2006
|
|
|
% of sales
|
|
|
|
|
R&D
|
|
$
|
62,450
|
|
|
1.9%
|
|
$
|
56,821
|
|
|
1.7%
|
|
$
|
56,545
|
|
|
|
1.9
|
%
|
|
|
Percentage point change
|
|
|
|
|
|
0.2 pts
|
|
|
|
|
|
(0.2) pts
|
|
|
|
|
|
|
|
|
The
0.2 percentage point increase in R&D expense as a
percent of sales in 2008 from 2007 was primarily the result
of:
|
|
|
increased R&D spending with emphasis on new product
development and value engineering.
|
The
0.2 percentage point decrease in R&D expense as a
percent of sales in 2007 from 2006 was primarily the result
of:
|
|
|
relatively flat R&D expense spending on higher volume.
|
28
Operating
income
Water
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
% of sales
|
|
2007
|
|
|
% of sales
|
|
2006
|
|
|
% of sales
|
|
|
|
|
Operating income
|
|
$
|
206,357
|
|
|
9.4%
|
|
$
|
273,677
|
|
|
12.3%
|
|
$
|
219,611
|
|
|
|
10.9
|
%
|
|
|
Percentage point change
|
|
|
|
|
|
(2.9) pts
|
|
|
|
|
|
1.4 pts
|
|
|
|
|
|
|
|
|
The
2.9 percentage point decrease in Water segment operating
income as a percent of net sales in 2008 from 2007 was primarily
the result of:
|
|
|
inflationary increases related to raw materials and labor;
|
|
|
a decline in sales of certain pump, pool and filtration products
resulting from the downturn in North American and Western
European markets;
|
|
|
restructuring actions taken throughout 2008;
|
|
|
expenses related to the settlement of the Horizon litigation;
|
|
|
second quarter 2007 sales of municipal pumps related to a large
flood control project, which did not recur in 2008; and
|
|
|
higher cost in 2008 as a result of a fair market value inventory
step-up and
intangible amortization related to the June 2008 formation of
PRF.
|
These
increases were partially offset by:
|
|
|
selective increases in selling prices to mitigate inflationary
cost increases;
|
|
|
savings generated from our PIMS initiatives including lean and
supply management practices;
|
|
|
an increase in sales volume driven by our February 2, 2007
acquisition of Jung Pump, our April 30, 2007 acquisition of
Porous Media, and the June 2008 formation of PRF;
|
|
|
curtailment of long-term defined benefit pension and retiree
medical plans in 2007; and
|
|
|
lower comparative cost in 2008 for our Jung Pump and Porous
Media businesses due to the absence of a fair market value
inventory
step-up that
was recorded in connection with those acquisitions.
|
The
1.4 percentage point increase in Water segment operating
income as a percent of net sales in 2007 from 2006 was primarily
the result of:
|
|
|
selective increases in selling prices to mitigate inflationary
cost increases;
|
|
|
savings generated from our PIMS initiatives including lean and
supply management practices;
|
|
|
income generated by our February 2, 2007 acquisition of
Jung Pump and our April 30, 2007 acquisition of Porous
Media;
|
|
|
curtailment of long-term defined benefit pension and retiree
medical plans; and
|
|
|
a decrease in costs related to capacity rationalization and
market-related actions in 2007 compared to 2006.
|
These
increases were partially offset by:
|
|
|
inflationary increases related to raw materials and labor;
|
|
|
a decline in sales of certain pump, pool and filtration products
into North American residential markets;
|
|
|
amortization expense related to the intangible assets from the
Jung Pump and Porous Media acquisitions; and
|
29
|
|
|
higher cost as a result of fair market value market
step-up
related to the Jung Pump and Porous Media acquisitions.
|
Technical
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
% of sales
|
|
2007
|
|
|
% of sales
|
|
2006
|
|
|
% of sales
|
|
|
|
|
Operating income
|
|
$
|
169,315
|
|
|
14.8%
|
|
$
|
153,586
|
|
|
14.6%
|
|
$
|
148,905
|
|
|
|
14.9
|
%
|
|
|
Percentage point change
|
|
|
|
|
|
0.2 pts
|
|
|
|
|
|
(0.3) pts
|
|
|
|
|
|
|
|
|
The
0.2 percentage point increase in Technical Products segment
operating income as a percent of net sales in 2008 from 2007 was
primarily the result of:
|
|
|
an increase in sales to electrical and electronics markets,
which includes selective increases in selling prices to mitigate
inflationary cost increases;
|
|
|
savings realized from the continued success of PIMS, including
lean and supply management activities.
|
These
increases were partially offset by:
|
|
|
inflationary increases related to raw materials such as carbon
steel and labor costs; and
|
|
|
expenses associated with restructuring actions taken during the
second half of 2008.
|
The
0.3 percentage point decrease in Technical Products segment
operating income as a percent of net sales in 2007 from 2006 was
primarily the result of:
|
|
|
inflationary increases related to raw materials such as
stainless steel and labor costs;
|
|
|
lower sales into North American electronics markets driven by
contraction and consolidation in the telecommunication equipment
industry which have delayed buying activity and by
datacommunication projects reaching
end-of-life;
and
|
|
|
exit costs incurred in 2007 related to a previously announced
2001 French facility closure.
|
These
decreases were partially offset by:
|
|
|
selective increases in selling prices to mitigate inflationary
cost increases;
|
|
|
savings realized from the continued success of PIMS, including
lean and supply management activities; and
|
|
|
increased sales in our electrical markets.
|
Net
interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
Difference
|
|
|
% change
|
|
|
2007
|
|
|
2006
|
|
|
Difference
|
|
|
% change
|
|
|
|
|
Net interest expense
|
|
$
|
59,435
|
|
|
$
|
68,393
|
|
|
$
|
(8,958
|
)
|
|
|
(13.1
|
%)
|
|
$
|
68,393
|
|
|
$
|
50,300
|
|
|
$
|
18,093
|
|
|
|
36.0
|
%
|
|
|
The
13.1 percent decrease in interest expense from continuing
operations in 2008 from 2007 was primarily the result
of:
|
|
|
a decrease in outstanding debt; and
|
|
|
favorable impact of lower interest rates.
|
The
36.0 percent increase in interest expense from continuing
operations in 2007 from 2006 was primarily the result
of:
|
|
|
an increase in outstanding debt primarily related to the Jung
Pump and Porous Media acquisitions.
|
30
Loss
on early extinguishment of debt
On July 8, 2008, we commenced a cash tender offer for all
of our outstanding $250 million aggregate principal 7.85%
Senior Notes due 2009 (the Notes). Upon expiration
of the tender offer on August 4, 2008, we purchased
$116.1 million aggregate principal amount of the Notes. As
a result of this transaction, we recognized a loss of
$4.6 million on early extinguishment of debt. The loss
included the write off of $0.1 million in unamortized
deferred financing fees in addition to recognition of
$0.6 million in previously unrecognized swap gains and cash
paid of $5.1 million related to the tender premium and
other costs associated with the purchase.
Provision
for income taxes from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Income from continuing operations before income taxes and
minority interest
|
|
$
|
367,140
|
|
|
$
|
306,561
|
|
|
$
|
259,675
|
|
Provision for income taxes
|
|
|
108,344
|
|
|
|
94,443
|
|
|
|
73,424
|
|
Effective tax rate
|
|
|
29.5
|
%
|
|
|
30.8
|
%
|
|
|
28.3
|
%
|
The
1.3 percentage point decrease in the tax rate in 2008 from
2007 was primarily the result of:
|
|
|
higher earnings in lower-tax rate jurisdictions during 2008; and
|
|
|
a portion of the gain on the formation of PRF taxed at a rate of
0%.
|
These
decreases were partially offset by:
|
|
|
the impact in 2007 of a favorable adjustment related to the
measurement of deferred tax assets and liabilities to account
for changes in German tax law enacted on August 17, 2007.
|
The
2.5 percentage point increase in the tax rate in 2007 from
2006 was primarily the result of:
|
|
|
higher utilization of foreign tax credits in 2006; and
|
|
|
the favorable settlement in 2006 of prior years federal
tax returns.
|
These
increases were partially offset by:
|
|
|
a favorable adjustment in 2007 related to the measurement of
deferred tax assets and liabilities to account for changes in
German tax law enacted on August 17, 2007.
|
We expect our full year effective tax rate in 2009 to be between
32% and 33%. We will continue to pursue tax rate reduction
opportunities.
LIQUIDITY
AND CAPITAL RESOURCES
We generally fund cash requirements for working capital, capital
expenditures, equity investments, acquisitions, debt repayments,
dividend payments and share repurchases from cash generated from
operations, availability under existing committed revolving
credit facilities, and in certain instances, public and private
debt and equity offerings. We have grown our businesses in
significant part over the past few years through acquisitions,
such as Jung Pump and Porous Media in 2007, financed by credit
provided under our revolving credit facilities and, from time to
time, by private or public debt issuance. Our primary revolving
credit facilities have generally been adequate for these
purposes, although we have negotiated additional credit
facilities as needed to allow us to complete acquisitions; these
are temporary loans that have in the past been repaid within
less than a year.
In light of the current global economic situation and the state
of credit markets generally, we have instituted a more
conservative financial policy. We do not currently plan to make
any significant acquisitions in 2009, and we do not plan to
continue in 2009 the annual share repurchase programs that we
have undertaken over the
31
past few years. We are focusing on increasing our cash flow and
maximizing debt repayment for the foreseeable future. Our intent
is to maintain investment grade ratings and a solid liquidity
position.
We previously had a targeted
debt-to-total-capital
ratio of 40%, which could and had been exceeded from time to
time as needed for operational purposes and, especially,
acquisitions. Our capital structure as of December 31, 2008
consisted of $954.1 million in total indebtedness and
$1,898.7 million in shareholders equity. The ratio of
debt-to-total
capital was 33.4 percent, compared with 35.7 percent
at year-end 2007 and 30.8 percent in 2006. In line with our
new financial policy, we no longer target a particular
debt-to-total-capital
ratio, but we will strive to maintain our investment grade
ratings.
Our current $800 million multi-currency revolving credit
facility (the Credit Facility) was entered into in
the second quarter of 2007 and does not expire until
June 4, 2012. The agent banks under the Credit Facility are
J. P. Morgan, Bank of America, Wells Fargo, U. S. Bank and Bank
of Tokyo-Mitsubishi. We have borrowing capacity of over
$580 million at December 31, 2008, and the only
significant required debt repayment before 2012 is for the
retirement in October 2009 of the remaining 7.85% Senior Notes
originally issued in 1999, of which approximately
$134 million are currently outstanding.
We experience seasonal cash flows primarily due to seasonal
demand in a number of markets within our Water Group. We
generally borrow in the first quarter of our fiscal year for
operational purposes, which usage reverses in the second quarter
as the seasonality of our businesses peaks. End-user demand for
pool equipment follows warm weather trends and is at seasonal
highs from April to August. The magnitude of the sales spike is
partially mitigated by employing some advance sale early
buy programs (generally including extended payment terms
and/or
additional discounts). Demand for residential and agricultural
water systems is also impacted by weather patterns, particularly
by heavy flooding and droughts.
Operating
activities
Cash provided by operating activities was $204.2 million in
2008, or $137.1 million lower compared with the same period
in 2007. The decrease in cash provided by operating activities
was due primarily to an increase in working capital, higher
prepaid expenses (particularly prepaid taxes) and lower income
from continuing operations, excluding the gain from the
formation of PRF.
Cash provided by operating activities was $341.3 million in
2007, or $109.8 million higher compared with the same
period in 2006. The increase in cash provided by operating
activities was due primarily to working capital reductions
during 2007 versus 2006 and higher net income.
In December 2008 and 2007, we sold approximately
$44 million and $50 million, respectively, of a
customers account receivable to a third-party financial
institution to mitigate accounts receivable concentration risk.
In compliance with Statement of Financial Accounting Standards
(SFAS) No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, sales of accounts receivable are reflected as a
reduction of accounts receivable in our Consolidated Balance
Sheets and the proceeds are included in the cash flows from
operating activities in our Consolidated Statements of Cash
Flows. In 2008 and 2007, a loss in the amount of
$0.5 million and $1.2 million related to the sale of
accounts receivable is included in the line
item Other in our Consolidated Statements of Income.
Investing
activities
Capital expenditures in 2008, 2007, and 2006 were
$53.1 million, $61.5 million and $50.9 million,
respectively. We anticipate capital expenditures for fiscal 2009
to be approximately $45 to $50 million, primarily for
capacity expansions in our low cost country manufacturing
facilities, new product development, and general maintenance
capital.
On May 7, 2007, we acquired as part of our Technical
Products Group the assets of Calmark Corporation
(Calmark), a privately held business, for
$28.4 million, including a cash payment of
$29.2 million and transaction costs of $0.2 million,
less cash acquired of $1.0 million.
32
On April 30, 2007, we acquired as part of our Water Group
all of the capital interests in Porous Media, two privately held
filtration and separation technologies businesses, for
$224.9 million, including a cash payment of
$225.0 million and transaction costs of $0.4 million,
less cash acquired of $0.5 million.
On February 2, 2007, we acquired as part of our Water Group
all the outstanding shares of capital stock of Jung Pump for
$229.5 million, including a cash payment of
$239.6 million and transaction costs of $1.3 million,
less cash acquired of $11.4 million.
On December 15, 2008, we sold our Spa/Bath business to
Balboa Water Group in a cash transaction for approximately
$8.3 million subject to certain price adjustments based on
working capital at closing. The results of Spa/Bath have been
reported as discontinued operations for all periods presented.
The assets and liabilities of Spa/Bath have been reclassified as
discontinued operations for all periods presented.
On February 28, 2008, we sold our NPT business to Pool
Corporation in a cash transaction for approximately
$30.0 million subject to certain price adjustments. The
results of NPT have been reported as discontinued operations for
all periods presented. The assets and liabilities of NPT have
been reclassified as discontinued operations for all periods
presented.
Cash proceeds from the sale of property and equipment of
$4.7 million in 2008 was primarily related to the sale of a
facility in our Water Group. Cash proceeds from the sale of
property and equipment of $5.2 million in 2007 was
primarily related to the sale of a facility used by our
Technical Products Group.
Financing
activities
Net cash used for financing activities was $217.2 million
in 2008 versus net cash provided by financing activities of
$222.7 in 2007. The difference in cash usage between the two
years is primarily attributable to the three acquisitions in
2007. Other financing activities included draw downs and
repayments on our revolving credit facilities to fund our
operations in the normal course of business, payments of
dividends, cash used to repurchase Company stock, cash received
from stock option exercises, and tax benefits related to
stock-based compensation.
The Credit Facility creates an unsecured, committed revolving
credit facility of up to $800 million, with multi-currency
sub facilities to support investments outside the U.S. The
Credit Facility expires on June 4, 2012. Borrowings under
the Credit Facility bear interest at the rate of LIBOR plus
0.50%. Interest rates and fees on the Credit Facility vary based
on our credit ratings. We believe that internally generated
funds and funds available under our Credit Facility will be
sufficient to support our normal operations, dividend payments,
stock repurchases (if authorized) and debt maturities over the
life of the Credit Facility.
We are authorized to sell short-term commercial paper notes to
the extent availability exists under the Credit Facility. We use
the Credit Facility as
back-up
liquidity to support 100% of commercial paper outstanding. Our
use of commercial paper as a funding vehicle depends upon the
relative interest rates for our commercial paper compared to the
cost of borrowing under our Credit Facility. As of
December 31, 2008, we had $0.2 million of commercial
paper outstanding that matures within 41 days. All of the
commercial paper was classified as long-term as we have the
intent and the ability to refinance such obligations on a
long-term basis under the Credit Facility.
In May 2007, we entered into a Note Purchase Agreement with
various institutional investors (the Agreement) for
the sale of $300 million aggregate principal amount of our
5.87% Senior Notes (Fixed Notes) and
$105 million aggregate principal amount of our Floating
Rate Senior Notes (Floating Notes and with the Fixed
Notes, the Notes). The Fixed Notes are due in May
2017. The Floating Notes are due in May 2012 and bear interest
equal to the 3 month LIBOR plus 0.50%. The Agreement
contains customary events of default.
We used $250 million of the proceeds from the sale of the
Notes to retire a $250 million
364-day Term
Loan Agreement that we entered into in April 2007, which we used
in part to pay the cash purchase price of our Porous Media
acquisition which closed in April 2007.
33
Our debt agreements contain certain financial covenants, the
most restrictive of which is a leverage ratio (total
consolidated indebtedness, as defined, over consolidated EBITDA,
as defined) that may not exceed 3.5 to 1.0. We were in
compliance with all covenants under our debt agreements as of
December 31, 2008.
In addition to the Credit Facility, we have $25.0 million
of uncommitted credit facilities, under which we had no
borrowings as of December 31, 2008.
Our current credit ratings are as follows:
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
|
Current Rating
|
|
Rating Agency
|
|
Rating
|
|
|
Outlook
|
|
|
Standard & Poors
|
|
|
BBB
|
|
|
|
Negative
|
|
Moodys
|
|
|
Baa3
|
|
|
|
Stable
|
|
Our long-term debt rating is an investment grade rating.
Investment grade is a credit rating of BBB- or higher by
Standard & Poors or Baa3 or higher by
Moodys.
On March 7, 2007, Standard & Poors Ratings
Services revised its current rating outlook on us from stable to
negative. At the same time, Standard & Poors
affirmed its long-term debt rating of BBB.
Standard & Poors stated that the outlook
revision reflects the additional leverage and stress on credit
metrics that would result from the acquisition of Porous Media.
The negative outlook indicates the rating could be lowered if
financial policies become more aggressive or if operating
results are weaker than expected.
We believe the potential impact of a downgrade in our financial
outlook is currently not material to our liquidity exposure or
cost of debt. A credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific
financial obligation, a specific class of financial obligations,
or a specific financial program. The credit rating takes into
consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation and takes
into account the currency in which the obligation is
denominated. The ratings outlook also highlights the potential
direction of a short or long-term rating. It focuses on
identifiable events and short-term trends that cause ratings to
be placed under observation by the respective rating agencies. A
change in rating outlook does not mean a rating change is
inevitable. Prior changes in our ratings outlook have had no
immediate impact on our liquidity exposure or on our cost of
debt.
We issue short-term commercial paper notes that are currently
not rated by Standard & Poors or Moodys.
Even though our short-term commercial paper is unrated, we
believe a downgrade in our long-term debt rating could have a
negative impact on our ability to continue to issue unrated
commercial paper.
We do not expect that a one rating downgrade of our long-term
debt by either Standard & Poors or Moodys
would substantially affect our ability to access the long-term
debt capital markets. However, depending upon market conditions,
the amount, timing and pricing of new borrowings could be
adversely affected. If both of our long-term debt ratings were
downgraded to below BBB-/Baa3, our flexibility to access the
term debt capital markets would be reduced.
We expect to continue to have cash requirements to support
working capital needs and capital expenditures, to pay interest
and service debt, and to pay dividends to shareholders. In order
to meet these cash requirements, we intend to use available cash
and internally generated funds, and to borrow under our
committed and uncommitted credit facilities.
We paid dividends in 2008 of $67.3 million, compared with
$59.9 million in 2007 and $56.6 million in 2006. We
recently announced an increase in our dividend rate for 2009
from $0.68 per share in 2008 to $0.72 per share in 2009, which
is the
33rd
consecutive year in which we have increased our dividend.
In December 2007, the Board of Directors authorized the
repurchase of shares of our common stock during 2008 up to a
maximum dollar limit of $50 million. As of
December 31, 2008, we had purchased 1,549,893 shares
for $50 million pursuant to this authorization. This
authorization expired on December 31, 2008. No
authorization for the repurchase of shares of our common stock
has been granted for 2009.
34
The
following summarizes our significant contractual obligations
that impact our liquidity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
In thousands
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
5 Years
|
|
|
Total
|
|
|
|
|
Long-term debt obligations
|
|
$
|
134,773
|
|
|
$
|
78
|
|
|
$
|
6
|
|
|
$
|
319,206
|
|
|
$
|
200,007
|
|
|
$
|
300,022
|
|
|
$
|
954,092
|
|
Interest obligations on fixed-rate debt
|
|
|
41,811
|
|
|
|
33,524
|
|
|
|
33,524
|
|
|
|
29,990
|
|
|
|
24,095
|
|
|
|
59,264
|
|
|
|
222,208
|
|
Operating lease obligations, net of sublease rentals
|
|
|
25,952
|
|
|
|
19,790
|
|
|
|
17,773
|
|
|
|
13,310
|
|
|
|
9,121
|
|
|
|
11,952
|
|
|
|
97,898
|
|
Pension and post-retirement plan contributions
|
|
|
50,200
|
|
|
|
35,200
|
|
|
|
30,200
|
|
|
|
30,100
|
|
|
|
30,100
|
|
|
|
78,000
|
|
|
|
253,800
|
|
Other long-term liabilities
|
|
|
948
|
|
|
|
546
|
|
|
|
229
|
|
|
|
229
|
|
|
|
114
|
|
|
|
|
|
|
|
2,066
|
|
|
|
Total contractual cash obligations, net
|
|
$
|
253,684
|
|
|
$
|
89,138
|
|
|
$
|
81,732
|
|
|
$
|
392,835
|
|
|
$
|
263,437
|
|
|
$
|
449,238
|
|
|
$
|
1,530,064
|
|
|
|
Our long-term debt obligations that are due in 2009 include
$134.1 million that has been classified as long-term in our
Consolidated Balance Sheets as we have the intent and the
ability to refinance such obligations on a long-term basis under
the Credit Facility.
In addition to the summary of significant contractual
obligations, we will incur annual interest expense on
outstanding variable rate debt. As of December 31, 2008,
variable interest rate debt, including the effects of derivative
financial instruments, was $214.4 million at a weighted
average interest rate of 1.21%.
Pension and post-retirement plan contributions are based on an
assumed discount rate of 6.5% for all periods and an expected
rate of return on plan assets ranging from 6.5% to 8.5%.
As of December 31, 2008, the gross liability for uncertain
tax positions under FIN 48 is $28.1 million. We do not
expect a significant payment related to these obligations to be
made within the next twelve months. We are not able to provide a
reasonably reliable estimate of the timing of future payments
relating to the non-current FIN 48 obligations.
Other
financial measures
In addition to measuring our cash flow generation or usage based
upon operating, investing, and financing classifications
included in the Consolidated Statements of Cash Flows, we also
measure our free cash flow and our conversion of net income. We
have a long-term goal to consistently generate free cash flow
that equals or exceeds 100% conversion of net income. Free cash
flow and conversion of net income are non-GAAP financial
measures that we use to assess our cash flow performance. We
believe free cash flow and conversion of net income are
important measures of operating performance because they provide
us and our investors a measurement of cash generated from
operations that is available to pay dividends and repay debt. In
addition, free cash flow and conversion of net income are used
as a criterion to measure and pay compensation-based incentives.
Our measure of free cash flow and conversion of net income may
not be comparable to similarly titled measures reported by other
companies. The following table is a reconciliation of free cash
flow and a calculation of the conversion of net income with cash
flows from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Cash flow provided by (used for) continuing operations
|
|
$
|
212,612
|
|
|
$
|
336,990
|
|
|
$
|
229,399
|
|
Capital expenditures
|
|
|
(53,089
|
)
|
|
|
(61,516
|
)
|
|
|
(50,894
|
)
|
Proceeds from sale of property and equipment
|
|
|
4,741
|
|
|
|
5,198
|
|
|
|
654
|
|
|
|
Free cash flow
|
|
|
164,264
|
|
|
|
280,672
|
|
|
|
179,159
|
|
Net income
|
|
|
228,734
|
|
|
|
210,927
|
|
|
|
183,731
|
|
|
|
Conversion of net income
|
|
|
72
|
%
|
|
|
133
|
%
|
|
|
98
|
%
|
|
|
35
In 2009, our objective is to generate free cash flow that equals
or exceeds 100% of net income.
Off-balance
sheet arrangements
At December 31, 2008, we had no off-balance sheet financing
arrangements.
COMMITMENTS
AND CONTINGENCIES
Environmental
We have been named as defendants, targets, or PRP in a small
number of environmental
clean-ups,
in which our current or former business units have generally
been given de minimis status. To date, none of these
claims have resulted in
clean-up
costs, fines, penalties, or damages in an amount material to our
financial position or results of operations. We have disposed of
a number of businesses in recent years and in certain cases,
such as the disposition of the Cross Pointe Paper Corporation
uncoated paper business in 1995, the disposition of the Federal
Cartridge Company ammunition business in 1997, the disposition
of Lincoln Industrial in 2001, and the disposition of the Tools
Group in 2004, we have retained responsibility and potential
liability for certain environmental obligations. We have
received claims for indemnification from purchasers of these
businesses and have established what we believe to be adequate
accruals for potential liabilities arising out of retained
responsibilities. We settled some of the claims in prior years;
to date our recorded accruals have been adequate.
In addition, there are ongoing environmental issues at a limited
number of sites, including one site acquired in the acquisition
of Essef Corporation in 1999, which relate to operations no
longer carried out at the sites. We have established what we
believe to be adequate accruals for remediation costs at these
sites. We do not believe that projected response costs will
result in a material liability.
We may be named as a PRP at other sites in the future, for both
divested and acquired businesses. When the outcome of the matter
is probable and it is possible to provide reasonable estimates
of our liability with respect to environmental sites, provisions
have been made in accordance with GAAP in the United States. As
of December 31, 2008 and 2007, our undiscounted reserves
for such environmental liabilities were approximately
$3.1 million and $3.5 million, respectively. We cannot
ensure that environmental requirements will not change or become
more stringent over time or that our eventual environmental
clean-up
costs and liabilities will not exceed the amount of our current
reserves.
Stand-by
letters of credit
In the ordinary course of business, we are required to commit to
bonds that require payments to our customers for any
non-performance. The outstanding face value of the bonds
fluctuates with the value of our projects in process and in our
backlog. In addition, we issue financial stand-by letters of
credit primarily to secure our performance to third parties
under self-insurance programs and certain legal matters. As of
December 31, 2008 and 2007, the outstanding value of these
instruments totaled $64.5 million and $58.5 million,
respectively.
NEW
ACCOUNTING STANDARDS
See ITEM 8, Note 1 of the Notes to Consolidated
Financial Statements for information pertaining to recently
adopted accounting standards or accounting standards to be
adopted in the future.
CRITICAL
ACCOUNTING POLICIES
We have adopted various accounting policies to prepare the
consolidated financial statements in accordance with accounting
principles generally accepted in the United States. Our
significant accounting policies are more fully described in
ITEM 8, Note 1 of the Notes to Consolidated Financial
Statements. Certain of our accounting policies require the
application of significant judgment by management in selecting
the appropriate assumptions for calculating financial estimates.
By their nature, these judgments are subject to an inherent
degree of uncertainty. These judgments are based on our
historical experience, terms of existing contracts, our
36
observance of trends in the industry, and information available
from other outside sources, as appropriate. We consider an
accounting estimate to be critical if:
|
|
|
it requires us to make assumptions about matters that were
uncertain at the time we were making the estimate; and
|
|
|
changes in the estimate or different estimates that we could
have selected would have had a material impact on our financial
condition or results of operations.
|
Our critical accounting estimates include the following:
Impairment
of Goodwill
Goodwill represents the excess of the cost of acquired
businesses over the fair value of identifiable tangible net
assets and identifiable intangible assets purchased.
Goodwill is tested at least annually for impairment, and is
tested for impairment more frequently if events or changes in
circumstances indicate that the asset might be impaired. The
impairment test is performed using a two-step process. In the
first step, the fair value of each reporting unit is compared
with the carrying amount of the reporting unit, including
goodwill. If the estimated fair value is less than the carrying
amount of the reporting unit, an indication that goodwill
impairment exists and a second step must be completed in order
to determine the amount of the goodwill impairment, if any, that
should be recorded. In the second step, an impairment loss is
recognized for any excess of the carrying amount of the
reporting units goodwill over the implied fair value of
that goodwill. The implied fair value of goodwill is determined
by allocating the fair value of the reporting unit in a manner
similar to a purchase price allocation. The fair value of each
reporting unit is determined using a discounted cash flow
analysis. Projecting discounted future cash flows requires is to
make significant estimates regarding future revenues and
expenses, projected capital expenditures, changes in working
capital and the appropriate discount rate. The projections also
take into account several factors including current and
estimated economic trends and outlook, costs of raw materials,
consideration of our market capitalization in comparison to the
estimated fair values of our reporting units determined using
discounted cash flow analyses and other factors which are beyond
our control.
At December 31, 2008 our goodwill and intangible assets
were approximately $2,617.4 million, and represented
approximately 64.6% of our total assets. Declines in projected
future cash flows could result in future goodwill and intangible
impairments. Because of the significance of our goodwill and
intangible assets, any future impairment of these assets could
have a material adverse effect on our financial statements.
We completed step one of our annual goodwill impairment
evaluation during the fourth quarter with each reporting
units fair value exceeding its carrying value.
Accordingly, step two of the impairment analysis was not
required.
Our primary identifiable intangible assets include trade marks
and trade names, brand names, patents, non-compete agreements,
proprietary technology, and customer relationships. Under the
provisions of SFAS No. 142, Goodwill and Other
Intangible Assets, identifiable intangibles with finite
lives are amortized and those identifiable intangibles with
indefinite lives are not amortized. Identifiable intangible
assets that are subject to amortization are evaluated for
impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Identifiable
intangible assets not subject to amortization are tested for
impairment annually or more frequently if events warrant. The
impairment test consists of a comparison of the fair value of
the intangible asset with its carrying amount. During the fourth
quarter of 2008, we completed our annual impairment test for
those identifiable assets not subject to amortization and
recorded an impairment charge of $1.0 million. The charge
was recorded in Selling, general and administrative in
our Consolidated Statements of Income.
Impairment
of Long-lived Assets
We review the recoverability of long-lived assets to be held and
used, such as property, plant and equipment, when events or
changes in circumstances occur that indicate the carrying value
of the asset or asset group may not be recoverable. The
assessment of possible impairment is based on our ability to
recover the carrying
37
value of the asset or asset group from the expected future
pre-tax cash flows (undiscounted and without interest charges)
of the related operations. If these cash flows are less than the
carrying value of such asset, an impairment loss is recognized
for the difference between estimated fair value and carrying
value. Impairment losses on long-lived assets held for sale are
determined in a similar manner, except that fair values are
reduced for the cost to dispose of the assets. The measurement
of impairment requires us to estimate future cash flows and the
fair value of long-lived assets.
Pension
We sponsor domestic and foreign defined-benefit pension and
other post-retirement plans. The amounts recognized in our
consolidated financial statements related to our defined-benefit
pension and other post-retirement plans are determined from
actuarial valuations. Inherent in these valuations are
assumptions including expected return on plan assets, discount
rates, rate of increase in future compensation levels, and
health care cost trend rates. These assumptions are updated
annually and are disclosed in ITEM 8, Note 12 to the
Notes to Consolidated Financial Statements. Changes to these
assumptions will affect pension expense, pension contributions
and the funded status of our pension plans.
In December 2006, we adopted SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106, and 132(R)
(SFAS 158). SFAS 158 requires that we
recognize the overfunded or underfunded status of our defined
benefit and retiree medical plans as an asset or liability in
our 2006 year-end balance sheet, with changes in the funded
status recognized through comprehensive income in the year in
which they occur.
Discount
rate
The discount rate reflects the current rate at which the pension
liabilities could be effectively settled at the end of the year
based on our December 31 measurement date. The discount rate was
determined by matching our expected benefit payments to payments
from a stream of AA or higher bonds available in the
marketplace, adjusted to eliminate the effects of call
provisions. This produced a discount rate for our U.S. plans of
6.50% in 2008 and 2007 and 6.00% in 2006. The discount rates on
our foreign plans ranged from 2.00% to 6.25% in 2008, 2.00% to
5.25% in 2007 and 2.00% to 5.15% in 2006. There are no other
known or anticipated changes in our discount rate assumption
that will impact our pension expense in 2009.
Expected
rate of return
Our expected rate of return on plan assets in 2008 equaled 8.5%,
which remained unchanged from 2007 and 2006. The expected rate
of return is designed to be a long-term assumption that may be
subject to considerable
year-to-year
variance from actual returns. In developing the expected
long-term rate of return, we considered our historical returns,
with consideration given to forecasted economic conditions, our
asset allocations, input from external consultants and broader
longer-term market indices.
We base our determination of pension expense or income on a
market-related valuation of assets which reduces
year-to-year
volatility. This market-related valuation recognizes investment
gains or losses over a five-year period from the year in which
they occur. Investment gains or losses for this purpose are the
difference between the expected return calculated using the
market-related value of assets and the actual return based on
the market-related value of assets. Since the market-related
value of assets recognizes gains or losses over a
five-year-period,
the future value of assets will be impacted as previously
deferred gains or losses are recorded.
See ITEM 8, Note 12 of the Notes to Consolidated
Financial Statements for further information regarding pension
plans.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market
risk
Market risk is the potential economic loss that may result from
adverse changes in the fair value of financial instruments. We
are exposed to various market risks, including changes in
interest rates and foreign currency rates. We use derivative
financial instruments to manage or reduce the impact of some of
these risks.
38
Counterparties to all derivative contracts are major financial
institutions. All instruments are entered into for other than
trading purposes. The major accounting policies and utilization
of these instruments is described more fully in ITEM 8,
Note 1 of the Notes to Consolidated Financial Statements.
Our derivatives and other financial instruments consist of
long-term debt (including current portion), short-term borrowing
and interest rate swaps. The net market value of these financial
instruments combined is referred to below as the net financial
instrument position. As of December 31, 2008 and
December 31, 2007, the net financial instrument position
was a liability of $923.9 million and
$1,076.5 million, respectively.
Failure of one or more of our swap counterparties would result
in the loss of any benefit to us of the swap agreement. In this
case, we would continue to be obligated to pay the variable
interest payments per the underlying debt agreements which are
at variable interest rates of 3 month LIBOR plus .50% for
$105 million of debt and 3 month LIBOR plus .60% for
$100 million of debt. Additionally, failure of one or all
of our swap counterparties would not eliminate our obligation to
continue to make payments under our existing swap agreements if
we continue to be in a net pay position.
Interest
rate risk
Our debt portfolio, including swap agreements, as of
December 31, 2008 was comprised of debt predominantly
denominated in U.S. dollars. This debt portfolio is comprised of
56% fixed-rate debt and 44% variable-rate debt, not considering
the effects of our interest rate swaps. Taking into account the
variable to fixed rate swap agreement we entered with an
effective date of April 2006 and August 2007, our debt portfolio
is comprised of 78% fixed-rate debt and 22% variable-rate debt.
Changes in interest rates have different impacts on the fixed
and variable-rate portions of our debt portfolio. A change in
interest rates on the fixed portion of the debt portfolio
impacts the net financial instrument position but has no impact
on interest incurred or cash flows. A change in interest rates
on the variable portion of the debt portfolio impacts the
interest incurred and cash flows but does not impact the net
financial instrument position.
Based on the variable-rate debt included in our debt portfolio,
including the interest rate swap agreements, as of
December 31, 2008, a 100 basis point increase or decrease
in interest rates would result in a $2.1 million increase
or decrease in interest incurred.
Foreign
currency risk
We conduct business in various locations throughout the world
and are subject to market risk due to changes in the value of
foreign currencies in relation to our reporting currency, the
U.S. dollar. We generally do not use derivative financial
instruments to manage these risks. The functional currencies of
our foreign operating locations are the local currency in the
country of domicile. We manage these operating activities at the
local level and revenues, costs, assets, and liabilities are
generally denominated in local currencies, thereby mitigating
the risk associated with changes in foreign exchange. However,
our results of operations and assets and liabilities are
reported in U.S. dollars and thus will fluctuate with changes in
exchange rates between such local currencies and the U.S. dollar.
39
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Pentair, Inc. and its subsidiaries (the
Company) is responsible for establishing and
maintaining adequate internal control over financial reporting,
as such term is defined in
Rules 13a-15(f)
and 15d-15(f) of the Securities Exchange Act of 1934. The
Companys internal control over financial reporting is
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. The Companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to maintenance of
records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
Company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of the financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of the effectiveness of
internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2008. In making this assessment, management
used the criteria for effective internal control over financial
reporting described in Internal Control-Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of December 31,
2008, the Companys internal control over financial
reporting was effective based on those criteria.
Our independent registered public accounting firm,
Deloitte & Touche LLP, has issued an attestation
report on the Companys internal control over financial
reporting as of year ended December 31, 2008. That
attestation report is set forth immediately following this
management report.
|
|
|
Randall J. Hogan
Chairman and Chief Executive Officer
|
|
John L. Stauch
Executive Vice President and Chief Financial Officer
|
40
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Pentair, Inc.:
We have audited the internal control over financial reporting of
Pentair, Inc. and subsidiaries (the Company) as of
December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2008, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule listed in the Index at ITEM 15 as of and for the
year ended December 31, 2008, of the Company, and our
report dated February 23, 2009, expressed an unqualified
opinion on those consolidated financial statements and financial
statement schedule.
Minneapolis, Minnesota
February 23, 2009
41
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Pentair, Inc.:
We have audited the accompanying consolidated balance sheets of
Pentair, Inc. and subsidiaries (the Company) as of
December 31, 2008 and 2007, and the related consolidated
statements of income, stockholders equity, and cash flows
for each of the three years in the period ended
December 31, 2008. Our audits also included the financial
statement schedule listed in the Index at Item 15. These
financial statements and financial statement schedule are the
responsibility of the Companys 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 the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company at December 31, 2008 and 2007, and the results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2008, in conformity
with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.
As discussed in Notes 1 and 11 to the consolidated
financial statements, the Company changed its method of
accounting for uncertain tax benefits in 2007 and as discussed
in Notes 1 and 12 to the consolidated financial statements,
the Company changed its method of accounting for defined benefit
pension and postretirement benefit plans in 2006.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2008, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 23, 2009,
expressed an unqualified opinion on the Companys internal
control over financial reporting.
Minneapolis, Minnesota
February 23, 2009
42
Pentair,
Inc. and Subsidiaries
Consolidated
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
In thousands, except per-share data
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Net sales
|
|
$
|
3,351,976
|
|
|
$
|
3,280,903
|
|
|
$
|
3,022,602
|
|
Cost of goods sold
|
|
|
2,337,426
|
|
|
|
2,268,205
|
|
|
|
2,126,546
|
|
|
|
Gross profit
|
|
|
1,014,550
|
|
|
|
1,012,698
|
|
|
|
896,056
|
|
Selling, general and administrative
|
|
|
606,980
|
|
|
|
576,828
|
|
|
|
526,568
|
|
Research and development
|
|
|
62,450
|
|
|
|
56,821
|
|
|
|
56,545
|
|
Legal settlement
|
|
|
20,435
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
324,685
|
|
|
|
379,049
|
|
|
|
312,943
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of interest in subsidiaries
|
|
|
(109,648
|
)
|
|
|
|
|
|
|
|
|
Equity losses of unconsolidated subsidiary
|
|
|
3,041
|
|
|
|
2,865
|
|
|
|
3,332
|
|
Loss on early extinquishment of debt
|
|
|
4,611
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(2,029
|
)
|
|
|
(1,510
|
)
|
|
|
(744
|
)
|
Interest expense
|
|
|
61,464
|
|
|
|
69,903
|
|
|
|
51,044
|
|
Other
|
|
|
106
|
|
|
|
1,230
|
|
|
|
(364
|
)
|
|
|
Income from continuing operations before income taxes and
minority interest
|
|
|
367,140
|
|
|
|
306,561
|
|
|
|
259,675
|
|
Provision for income taxes
|
|
|
108,344
|
|
|
|
94,443
|
|
|
|
73,424
|
|
Minority interest
|
|
|
2,433
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
256,363
|
|
|
|
212,118
|
|
|
|
186,251
|
|
Loss from discontinued operations, net of tax
|
|
|
(5,783
|
)
|
|
|
(1,629
|
)
|
|
|
(2,484
|
)
|
Gain (loss) on disposal of discontinued operations, net of tax
|
|
|
(21,846
|
)
|
|
|
438
|
|
|
|
(36
|
)
|
|
|
Net income
|
|
$
|
228,734
|
|
|
$
|
210,927
|
|
|
$
|
183,731
|
|
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
2.62
|
|
|
$
|
2.15
|
|
|
$
|
1.87
|
|
Discontinued operations
|
|
|
(0.28
|
)
|
|
|
(0.01
|
)
|
|
|
(0.03
|
)
|
|
|
Basic earnings per common share
|
|
$
|
2.34
|
|
|
$
|
2.14
|
|
|
$
|
1.84
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
2.59
|
|
|
$
|
2.12
|
|
|
$
|
1.84
|
|
Discontinued operations
|
|
|
(0.28
|
)
|
|
|
(0.01
|
)
|
|
|
(0.03
|
)
|
|
|
Diluted earnings per common share
|
|
$
|
2.31
|
|
|
$
|
2.11
|
|
|
$
|
1.81
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
97,887
|
|
|
|
98,762
|
|
|
|
99,784
|
|
Diluted
|
|
|
99,068
|
|
|
|
100,205
|
|
|
|
101,371
|
|
See accompanying notes to consolidated financial statements.
43
Pentair,
Inc. and Subsidiaries
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
In thousands, except share and per-share data
|
|
2008
|
|
|
2007
|
|
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
39,344
|
|
|
$
|
70,795
|
|
Accounts and notes receivable, net of allowances of $25,156 and
$27,471, respectively
|
|
|
461,081
|
|
|
|
461,408
|
|
Inventories
|
|
|
417,287
|
|
|
|
379,018
|
|
Deferred tax assets
|
|
|
51,354
|
|
|
|
50,511
|
|
Prepaid expenses and other current assets
|
|
|
63,113
|
|
|
|
35,799
|
|
Current assets of discontinued operations
|
|
|
|
|
|
|
40,490
|
|
|
|
Total current assets
|
|
|
1,032,179
|
|
|
|
1,038,021
|
|
Property, plant and equipment, net
|
|
|
343,881
|
|
|
|
361,690
|
|
Other assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,101,851
|
|
|
|
1,999,119
|
|
Intangibles, net
|
|
|
515,508
|
|
|
|
487,028
|
|
Other
|
|
|
59,794
|
|
|
|
82,238
|
|
Non-current assets of discontinued operations
|
|
|
|
|
|
|
32,518
|
|
|
|
Total other assets
|
|
|
2,677,153
|
|
|
|
2,600,903
|
|
|
|
Total assets
|
|
$
|
4,053,213
|
|
|
$
|
4,000,614
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
|
|
|
$
|
13,586
|
|
Current maturities of long-term debt
|
|
|
624
|
|
|
|
5,075
|
|
Accounts payable
|
|
|
217,898
|
|
|
|
227,786
|
|
Employee compensation and benefits
|
|
|
90,210
|
|
|
|
111,082
|
|
Current pension and post-retirement benefits
|
|
|
8,890
|
|
|
|
8,557
|
|
Accrued product claims and warranties
|
|
|
41,559
|
|
|
|
49,077
|
|
Income taxes
|
|
|
5,451
|
|
|
|
14,999
|
|
Accrued rebates and sales incentives
|
|
|
28,897
|
|
|
|
36,430
|
|
Other current liabilities
|
|
|
104,975
|
|
|
|
90,021
|
|
Current liabilities of discontinued operations
|
|
|
|
|
|
|
3,704
|
|
|
|
Total current liabilities
|
|
|
498,504
|
|
|
|
560,317
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
953,468
|
|
|
|
1,041,925
|
|
Pension and other retirement compensation
|
|
|
270,139
|
|
|
|
161,042
|
|
Post-retirement medical and other benefits
|
|
|
34,723
|
|
|
|
37,147
|
|
Long-term income taxes payable
|
|
|
28,139
|
|
|
|
21,306
|
|
Deferred tax liabilities
|
|
|
146,559
|
|
|
|
166,917
|
|
Other non-current liabilities
|
|
|
101,612
|
|
|
|
97,085
|
|
Non-current liabilities of discontinued operations
|
|
|
|
|
|
|
4,004
|
|
|
|
Total liabilities
|
|
|
2,033,144
|
|
|
|
2,089,743
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
121,388
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Common shares par value
$0.162/3;
98,276,919 and 99,221,831 shares issued and outstanding,
respectively
|
|
|
16,379
|
|
|
|
16,537
|
|
Additional paid-in capital
|
|
|
451,241
|
|
|
|
476,242
|
|
Retained earnings
|
|
|
1,457,676
|
|
|
|
1,296,226
|
|
Accumulated other comprehensive income (loss)
|
|
|
(26,615
|
)
|
|
|
121,866
|
|
|
|
Total shareholders equity
|
|
|
1,898,681
|
|
|
|
1,910,871
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
4,053,213
|
|
|
$
|
4,000,614
|
|
|
|
See accompanying notes to consolidated financial statements.
44
Pentair,
Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
228,734
|
|
|
$
|
210,927
|
|
|
$
|
183,731
|
|
Adjustments to reconcile net income to net cash provided
by
(used for) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
5,783
|
|
|
|
1,629
|
|
|
|
2,484
|
|
(Gain) loss on disposal of discontinued operations
|
|
|
21,846
|
|
|
|
(438
|
)
|
|
|
36
|
|
Equity losses of unconsolidated subsidiary
|
|
|
3,041
|
|
|
|
2,865
|
|
|
|
3,332
|
|
Minority interest
|
|
|
2,433
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
59,673
|
|
|
|
57,603
|
|
|
|
55,682
|
|
Amortization
|
|
|
27,608
|
|
|
|
25,561
|
|
|
|
18,177
|
|
Deferred income taxes
|
|
|
40,754
|
|
|
|
(16,652
|
)
|
|
|
(10,611
|
)
|
Stock compensation
|
|
|
20,572
|
|
|
|
22,913
|
|
|
|
25,377
|
|
Excess tax benefits from stock-based compensation
|
|
|
(1,617
|
)
|
|
|
(4,204
|
)
|
|
|
(3,043
|
)
|
Gain (loss) on sale of assets
|
|
|
510
|
|
|
|
(1,929
|
)
|
|
|
(364
|
)
|
Gain on sale of interest in subsidiaries
|
|
|
(109,648
|
)
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities, net of effects of business
acquisitions and dispositions
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable
|
|
|
(18,247
|
)
|
|
|
(19,068
|
)
|
|
|
15,470
|
|
Inventories
|
|
|
(33,311
|
)
|
|
|
14,714
|
|
|
|
(45,769
|
)
|
Prepaid expenses and other current assets
|
|
|
(27,394
|
)
|
|
|
2,175
|
|
|
|
(5,008
|
)
|
Accounts payable
|
|
|
(1,973
|
)
|
|
|
19,482
|
|
|
|
(18,409
|
)
|
Employee compensation and benefits
|
|
|
(21,919
|
)
|
|
|
3,995
|
|
|
|
(12,688
|
)
|
Accrued product claims and warranties
|
|
|
(7,286
|
)
|
|
|
4,763
|
|
|
|
1,196
|
|
Income taxes
|
|
|
(4,409
|
)
|
|
|
2,849
|
|
|
|
10,353
|
|
Other current liabilities
|
|
|
8,987
|
|
|
|
(3,218
|
)
|
|
|
(13,291
|
)
|
Pension and post-retirement benefits
|
|
|
301
|
|
|
|
6
|
|
|
|
19,397
|
|
Other assets and liabilities
|
|
|
18,174
|
|
|
|
13,017
|
|
|
|
3,347
|
|
|
|
Net cash provided by (used for) continuing operations
|
|
|
212,612
|
|
|
|
336,990
|
|
|
|
229,399
|
|
Net cash provided by (used for) operating activities of
discontinued operations
|
|
|
(8,397
|
)
|
|
|
4,288
|
|
|
|
2,058
|
|
|
|
Net cash provided by (used for) operating activities
|
|
|
204,215
|
|
|
|
341,278
|
|
|
|
231,457
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(53,089
|
)
|
|
|
(61,516
|
)
|
|
|
(50,894
|
)
|
Proceeds from sale of property and equipment
|
|
|
4,741
|
|
|
|
5,198
|
|
|
|
654
|
|
Acquisitions, net of cash acquired
|
|
|
(2,027
|
)
|
|
|
(487,561
|
)
|
|
|
(29,286
|
)
|
Divestitures
|
|
|
37,907
|
|
|
|
|
|
|
|
(24,007
|
)
|
Other
|
|
|
(12
|
)
|
|
|
(5,544
|
)
|
|
|
(6,370
|
)
|
|
|
Net cash provided by (used for) investing activities
|
|
|
(12,480
|
)
|
|
|
(549,423
|
)
|
|
|
(109,903
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net short-term borrowings
|
|
|
(16,994
|
)
|
|
|
(1,830
|
)
|
|
|
13,831
|
|
Proceeds from long-term debt
|
|
|
715,000
|
|
|
|
1,269,428
|
|
|
|
608,975
|
|
Repayment of long-term debt
|
|
|
(805,016
|
)
|
|
|
(954,077
|
)
|
|
|
(631,755
|
)
|
Debt issuance costs
|
|
|
(114
|
)
|
|
|
(1,876
|
)
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
1,617
|
|
|
|
4,204
|
|
|
|
3,043
|
|
Proceeds from exercise of stock options
|
|
|
5,590
|
|
|
|
7,388
|
|
|
|
4,066
|
|
Repurchases of common stock
|
|
|
(50,000
|
)
|
|
|
(40,641
|
)
|
|
|
(59,359
|
)
|
Dividends paid
|
|
|
(67,284
|
)
|
|
|
(59,910
|
)
|
|
|
(56,583
|
)
|
|
|
Net cash provided by (used for) financing activities
|
|
|
(217,201
|
)
|
|
|
222,686
|
|
|
|
(117,782
|
)
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
|
(5,985
|
)
|
|
|
1,434
|
|
|
|
2,548
|
|
|
|
Change in cash and cash equivalents
|
|
|
(31,451
|
)
|
|
|
15,975
|
|
|
|
6,320
|
|
Cash and cash equivalents, beginning of period
|
|
|
70,795
|
|
|
|
54,820
|
|
|
|
48,500
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
39,344
|
|
|
$
|
70,795
|
|
|
$
|
54,820
|
|
|
|
See accompanying notes to consolidated financial statements.
45
Pentair,
Inc. and Subsidiaries
Consolidated
Statements of Changes in Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
|
|
Common shares
|
|
|
paid-in
|
|
|
Retained
|
|
|
comprehensive
|
|
|
|
|
|
Comprehensive
|
|
In thousands, except share and per-share data
|
|
Number
|
|
|
Amount
|
|
|
capital
|
|
|
earnings
|
|
|
income (loss)
|
|
|
Total
|
|
|
income
|
|
|
|
|
Balance December 31, 2005
|
|
|
101,202,237
|
|
|
$
|
16,867
|
|
|
$
|
518,751
|
|
|
$
|
1,020,978
|
|
|
$
|
(986
|
)
|
|
$
|
1,555,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183,731
|
|
|
|
|
|
|
|
183,731
|
|
|
$
|
183,731
|
|
Change in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,471
|
|
|
|
28,471
|
|
|
|
28,471
|
|
Adjustment in minimum pension liability, net of $7,313 tax
benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,513
|
|
|
|
1,513
|
|
|
|
1,513
|
|
Changes in market value of derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
657
|
|
|
|
657
|
|
|
|
657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
214,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply SFAS 158, net of $8,280 tax
benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,951
|
)
|
|
|
(12,951
|
)
|
|
|
|
|
Tax benefit of stock compensation
|
|
|
|
|
|
|
|
|
|
|
3,338
|
|
|
|
|
|
|
|
|
|
|
|
3,338
|
|
|
|
|
|
Cash dividends $0.56 per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,583
|
)
|
|
|
|
|
|
|
(56,583
|
)
|
|
|
|
|
Share repurchases
|
|
|
(1,986,026
|
)
|
|
|
(332
|
)
|
|
|
(59,027
|
)
|
|
|
|
|
|
|
|
|
|
|
( 59,359
|
)
|
|
|
|
|
Exercise of stock options, net of 183,866 shares tendered
for payment
|
|
|
310,963
|
|
|
|
52
|
|
|
|
2,846
|
|
|
|
|
|
|
|
|
|
|
|
2,898
|
|
|
|
|
|
Issuance of restricted shares, net of cancellations
|
|
|
324,219
|
|
|
|
54
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
358
|
|
|
|
|
|
Amortization of restricted shares
|
|
|
|
|
|
|
|
|
|
|
10,677
|
|
|
|
|
|
|
|
|
|
|
|
10,677
|
|
|
|
|
|
Shares surrendered by employees to pay taxes
|
|
|
(74,228
|
)
|
|
|
(12
|
)
|
|
|
(2,589
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,601
|
)
|
|
|
|
|
Stock compensation
|
|
|
|
|
|
|
|
|
|
|
14,240
|
|
|
|
|
|
|
|
|
|
|
|
14,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006
|
|
|
99,777,165
|
|
|
$
|
16,629
|
|
|
$
|
488,540
|
|
|
$
|
1,148,126
|
|
|
$
|
16,704
|
|
|
$
|
1,669,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210,927
|
|
|
|
|
|
|
|
210,927
|
|
|
$
|
210,927
|
|
Change in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,901
|
|
|
|
72,901
|
|
|
|
72,901
|
|
Adjustment in minimum pension liability, net of $23,784 tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,201
|
|
|
|
37,201
|
|
|
|
37,201
|
|
Changes in market value of derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,940
|
)
|
|
|
(4,940
|
)
|
|
|
(4,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
316,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,917
|
)
|
|
|
|
|
|
|
(2,917
|
)
|
|
|
|
|
Tax benefit of stock compensation
|
|
|
|
|
|
|
|
|
|
|
5,654
|
|
|
|
|
|
|
|
|
|
|
|
5,654
|
|
|
|
|
|
Cash dividends $0.60 per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,910
|
)
|
|
|
|
|
|
|
(59,910
|
)
|
|
|
|
|
Share repurchases
|
|
|
(1,209,257
|
)
|
|
|
(202
|
)
|
|
|
(40,439
|
)
|
|
|
|
|
|
|
|
|
|
|
(40,641
|
)
|
|
|
|
|
Exercise of stock options, net of 342,870 shares tendered
for payment
|
|
|
491,618
|
|
|
|
83
|
|
|
|
4,348
|
|
|
|
|
|
|
|
|
|
|
|
4,431
|
|
|
|
|
|
Issuance of restricted shares, net of cancellations
|
|
|
313,160
|
|
|
|
52
|
|
|
|
530
|
|
|
|
|
|
|
|
|
|
|
|
582
|
|
|
|
|
|
Amortization of restricted shares
|
|
|
|
|
|
|
|
|
|
|
9,256
|
|
|
|
|
|
|
|
|
|
|
|
9,256
|
|
|
|
|
|
Shares surrendered by employees to pay taxes
|
|
|
(150,855
|
)
|
|
|
(25
|
)
|
|
|
(4,820
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,845
|
)
|
|
|
|
|
Stock compensation
|
|
|
|
|
|
|
|
|
|
|
13,173
|
|
|
|
|
|
|
|
|
|
|
|
13,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
|
99,221,831
|
|
|
$
|
16,537
|
|
|
$
|
476,242
|
|
|
$
|
1,296,226
|
|
|
$
|
121,866
|
|
|
$
|
1,910,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228,734
|
|
|
|
|
|
|
|
228,734
|
|
|
$
|
228,734
|
|
Change in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(72,117
|
)
|
|
|
(72,117
|
)
|
|
|
(72,117
|
)
|
Adjustment in minimum pension liability, net of $42,793 tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66,933
|
)
|
|
|
(66,933
|
)
|
|
|
(66,933
|
)
|
Changes in market value of derivative financial instruments, net
of $6,284 tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,431
|
)
|
|
|
(9,431
|
)
|
|
|
(9,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
80,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit of stock compensation
|
|
|
|
|
|
|
|
|
|
|
2,247
|
|
|
|
|
|
|
|
|
|
|
|
2,247
|
|
|
|
|
|
Cash dividends $0.68 per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,284
|
)
|
|
|
|
|
|
|
(67,284
|
)
|
|
|
|
|
Share repurchases
|
|
|
(1,549,893
|
)
|
|
|
(258
|
)
|
|
|
(49,742
|
)
|
|
|
|
|
|
|
|
|
|
|
(50,000
|
)
|
|
|
|
|
Exercise of stock options, net of 121,638 shares tendered
for payment
|
|
|
322,574
|
|
|
|
53
|
|
|
|
4,948
|
|
|
|
|
|
|
|
|
|
|
|
5,001
|
|
|
|
|
|
Issuance of restricted shares, net of cancellations
|
|
|
366,005
|
|
|
|
61
|
|
|
|
388
|
|
|
|
|
|
|
|
|
|
|
|
449
|
|
|
|
|
|
Amortization of restricted shares
|
|
|
|
|
|
|
|
|
|
|
9,378
|
|
|
|
|
|
|
|
|
|
|
|
9,378
|
|
|
|
|
|
Shares surrendered by employees to pay taxes
|
|
|
(83,598
|
)
|
|
|
(14
|
)
|
|
|
(2,730
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,744
|
)
|
|
|
|
|
Stock compensation
|
|
|
|
|
|
|
|
|
|
|
10,510
|
|
|
|
|
|
|
|
|
|
|
|
10,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008
|
|
|
98,276,919
|
|
|
$
|
16,379
|
|
|
$
|
451,241
|
|
|
$
|
1,457,676
|
|
|
$
|
(26,615
|
)
|
|
$
|
1,898,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
46
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
|
|
1.
|
Summary
of Significant Accounting Policies
|
Fiscal year
Our fiscal year ends on December 31. We report our interim
quarterly periods on a 13-week basis ending on a Saturday.
Principles
of consolidation
The accompanying consolidated financial statements include the
accounts of Pentair and all subsidiaries, both U.S. and
non-U.S.,
that we control. Intercompany accounts and transactions have
been eliminated. Investments in companies of which we own 20% to
50% of the voting stock or have the ability to exercise
significant influence over operating and financial policies of
the investee are accounted for using the equity method of
accounting and, as a result, our share of the earnings or losses
of such equity affiliates is included in the statement of
income. The cost method of accounting is used for investments in
which Pentair has less than a 20% ownership interest and we do
not have the ability to exercise significant influence. These
investments are carried at cost and are adjusted only for
other-than-temporary
declines in fair value.
Use of
estimates
The preparation of our consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America (GAAP) requires us to make
estimates and assumptions that affect the amounts reported in
these consolidated financial statements and accompanying notes.
Due to the inherent uncertainty involved in making estimates,
actual results reported in future periods may be based upon
amounts that could differ from those estimates. The critical
accounting policies that require our most significant estimates
and judgments include:
|
|
|
the assessment of recoverability of long-lived assets, including
goodwill; and
|
|
|
accounting for pension benefits, because of the importance in
making the estimates necessary to apply these policies.
|
Revenue
recognition
We recognize revenue when it is realized or realizable and has
been earned. Revenue is recognized when persuasive evidence of
an arrangement exists; shipment or delivery has occurred
(depending on the terms of the sale); the sellers price to
the buyer is fixed or determinable; and collectibility is
reasonably assured.
Generally, there is no post-shipment obligation on product sold
other than warranty obligations in the normal, ordinary course
of business. In the event significant post-shipment obligations
were to exist, revenue recognition would be deferred until
substantially all obligations were satisfied.
Sales
returns
The right of return may exist explicitly or implicitly with our
customers. Our return policy allows for customer returns only
upon our authorization. Goods returned must be product we
continue to market and must be in salable condition. Returns of
custom or modified goods are normally not allowed. At the time
of sale, we reduce revenue for the estimated effect of returns.
Estimated sales returns include consideration of historical
sales levels, the timing and magnitude of historical sales
return levels as a percent of sales, type of product, type of
customer, and a projection of this experience into the future.
Pricing
and sales incentives
We record estimated reductions to revenue for customer programs
and incentive offerings including pricing arrangements,
promotions, and other volume-based incentives at the later of
the date revenue is recognized or the incentive is offered.
Sales incentives given to our customers are recorded as a
reduction of revenue unless we (1) receive an identifiable
benefit for the goods or services in exchange for the
consideration and (2) we
47
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
can reasonably estimate the fair value of the benefit received.
The following represents a description of our pricing
arrangements, promotions, and other volume-based incentives:
Pricing
arrangements
Pricing is established up front with our customers, and we
record sales at the agreed upon net selling price. However, one
of our businesses allows customers to apply for a refund of a
percentage of the original purchase price if they can
demonstrate sales to a qualifying OEM customer. At the time of
sale, we estimate the anticipated refund to be paid based on
historical experience and reduce sales for the probable cost of
the discount. The cost of these refunds is recorded as a
reduction in gross sales.
Promotions
Our primary promotional activity is what we refer to as
cooperative advertising. Under our cooperative advertising
programs, we agree to pay the customer a fixed percentage of
sales as an allowance that may be used to advertise and promote
our products. The customer is generally not required to provide
evidence of the advertisement or promotion. We recognize the
cost of this cooperative advertising at the time of sale. The
cost of this program is recorded as a reduction in gross sales.
Volume-based
incentives
These incentives involve rebates that are negotiated up front
with the customer and are redeemable only if the customer
achieves a specified cumulative level of sales or sales
increase. Under these incentive programs, at the time of sale,
we reforecast the anticipated rebate to be paid based on
forecasted sales levels. These forecasts are updated at least
quarterly, for each customer and sales are reduced for the
anticipated cost of the rebate. If the forecasted sales for a
customer changes, the accrual for rebates is adjusted to reflect
the new amount of rebates expected to be earned by the customer.
Shipping
and handling costs
Amounts billed to customers for shipping and handling are
recorded in Net sales in the accompanying Consolidated
Statements of Income. Shipping and handling costs incurred by
Pentair for the delivery of goods to customers are included in
Cost of goods sold in the accompanying Consolidated
Statements of Income.
Cash
equivalents
We consider highly liquid investments with original maturities
of three months or less to be cash equivalents.
Trade
receivables and concentration of credit risk
We record an allowance for doubtful accounts; reducing our
receivables balance to an amount we estimate is collectible from
our customers. Estimates used in determining the allowance for
doubtful accounts are based on historical collection experience,
current trends, aging of accounts receivable, and periodic
credit evaluations of our customers financial condition.
We generally do not require collateral. No customer receivable
balances exceeded 10% of total net receivable balances as of
December 31, 2008 and 2007, respectively.
In December 2008 and 2007, we sold approximately
$44 million and $50 million, respectively, of one
customers accounts receivable to a third-party financial
institution to mitigate accounts receivable concentration risk.
In compliance with Statement of Financial Accounting Standards
(SFAS) No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, sales of accounts receivable are reflected as a
reduction of accounts receivable in our Consolidated Balance
Sheets and the proceeds are included in the cash flows from
operating activities in our Consolidated Statements of Cash
Flows. In 2008 and 2007, a loss in the amount of
$0.5 million and $1.2 million related to the sale of
accounts receivable is included in the line
item Other in our Consolidated Statements of Income.
48
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Inventories
Inventories are stated at the lower of cost or market with
substantially all costed using the
first-in,
first-out (FIFO) method and with an insignificant
amount of inventories located outside the United States costed
using a moving average method which approximates FIFO.
Property,
plant, and equipment
Property, plant, and equipment is stated at historical cost. We
compute depreciation by the straight-line method based on the
following estimated useful lives:
|
|
|
|
|
|
|
Years
|
|
|
Land improvements
|
|
|
5 to 20
|
|
Buildings and leasehold improvements
|
|
|
5 to 50
|
|
Machinery and equipment
|
|
|
3 to 15
|
|
Significant improvements that add to productive capacity or
extend the lives of properties are capitalized. Costs for
repairs and maintenance are charged to expense as incurred. When
property is retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts
and any related gains or losses are included in income.
We review the recoverability of long-lived assets to be held and
used, such as property, plant and equipment, when events or
changes in circumstances occur that indicate the carrying value
of the asset or asset group may not be recoverable. The
assessment of possible impairment is based on our ability to
recover the carrying value of the asset or asset group from the
expected future pre-tax cash flows (undiscounted and without
interest charges) of the related operations. If these cash flows
are less than the carrying value of such asset or asset group,
an impairment loss is recognized for the difference between
estimated fair value and carrying value. Impairment losses on
long-lived assets held for sale are determined in a similar
manner, except that fair values are reduced for the cost to
dispose of the assets. The measurement of impairment requires us
to estimate future cash flows and the fair value of long-lived
assets.
Goodwill
and identifiable intangible assets
Goodwill represents the excess of the cost of acquired
businesses over the fair value of identifiable tangible net
assets and identifiable intangible assets purchased.
Goodwill is tested at least annually for impairment, and is
tested for impairment more frequently if events or changes in
circumstances indicate that the asset might be impaired. The
impairment test is performed using a two-step process. In the
first step, the fair value of each reporting unit is compared
with the carrying amount of the reporting unit, including
goodwill. If the estimated fair value is less than the carrying
amount of the reporting unit, an indication that goodwill
impairment exists and a second step must be completed in order
to determine the amount of the goodwill impairment, if any, that
should be recorded. In the second step, an impairment loss is
recognized for any excess of the carrying amount of the
reporting units goodwill over the implied fair value of
that goodwill. The implied fair value of goodwill is determined
by allocating the fair value of the reporting unit in a manner
similar to a purchase price allocation. The fair value of each
reporting unit is determined using a discounted cash flow
analysis. Projecting discounted future cash flows requires is to
make significant estimates regarding future revenues and
expenses, projected capital expenditures, changes in working
capital and the appropriate discount rate. The projections also
take into account several factors including current and
estimated economic trends and outlook, costs of raw materials,
consideration of our market capitalization in comparison to the
estimated fair values of our reporting units determined using
discounted cash flow analyses and other factors which are beyond
our control.
At December 31, 2008 our goodwill and intangible assets
were approximately $2,617.4 million, and represented
approximately 64.6% of our total assets. Declines in projected
future cash flows could result in
49
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
future goodwill and intangible impairments. Because of the
significance of our goodwill and intangible assets, any future
impairment of these assets could have a material adverse effect
on our financial statements.
We completed step one of our annual goodwill impairment
evaluation during the fourth quarter with each reporting
units fair value exceeding its carrying value.
Accordingly, step two of the impairment analysis was not
required.
Our primary identifiable intangible assets include trade marks
and trade names, brand names, patents, non-compete agreements,
proprietary technology, and customer relationships. Under the
provisions of SFAS No. 142, Goodwill and Other
Intangible Assets, identifiable intangibles with finite
lives are amortized and those identifiable intangibles with
indefinite lives are not amortized. Identifiable intangible
assets that are subject to amortization are evaluated for
impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Identifiable
intangible assets not subject to amortization are tested for
impairment annually or more frequently if events warrant. The
impairment test consists of a comparison of the fair value of
the intangible asset with its carrying amount. During the fourth
quarter of 2008, we completed our annual impairment test for
those identifiable assets not subject to amortization and
recorded an impairment charge of $1.0 million. The charge
was recorded in Selling, general and administrative in
our Consolidated Statements of Income.
Cost
and equity method investments
We have investments that are accounted for at historical cost
or, if we have significant influence over the investee, using
the equity method. Our proportionate share of income or losses
from investments accounted for under the equity method is
recorded in the Consolidated Statements of Income. We write down
or write off an investment and recognize a loss when events or
circumstances indicate there is impairment in the investment
that is
other-than-temporary.
This requires significant judgment, including assessment of the
investees financial condition and in certain cases the
possibility of subsequent rounds of financing, as well as the
investees historical and projected results of operations
and cash flows. If the actual outcomes for the investees are
significantly different from projections, we may incur future
charges for the impairment of these investments.
Income
taxes
In accordance with FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, the Company
recognizes the effect of income tax positions only if those
positions are more likely than not of being sustained.
Recognized income tax positions are measured at the largest
amount that is greater than 50% likely of being realized.
Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs.
We use the asset and liability approach to account for income
taxes. Under this method, deferred tax assets and liabilities
are recognized for the expected future tax consequences of
differences between the carrying amounts of assets and
liabilities and their respective tax basis using enacted tax
rates in effect for the year in which the differences are
expected to reverse. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period when the change is enacted. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Changes in
valuation allowances from period to period are included in our
tax provision in the period of change.
Environmental
In accordance with
SOP 96-1,
Environmental Remediation Liabilities, we recognize
environmental
clean-up
liabilities on an undiscounted basis when a loss is probable and
can be reasonably estimated. Such liabilities generally are not
subject to insurance coverage. The cost of each environmental
clean-up is
estimated by engineering, financial, and legal specialists based
on current law. Such estimates are based primarily upon the
50
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
estimated cost of investigation and remediation required and the
likelihood that, where applicable, other potentially responsible
parties (PRPs) will be able to fulfill their
commitments at the sites where Pentair may be jointly and
severally liable. The process of estimating environmental
clean-up
liabilities is complex and dependent primarily on the nature and
extent of historical information and physical data relating to a
contaminated site, the complexity of the site, the uncertainty
as to what remedy and technology will be required, and the
outcome of discussions with regulatory agencies and other PRPs
at multi-party sites. In future periods, new laws or
regulations, advances in
clean-up
technologies, and additional information about the ultimate
clean-up
remedy that is used could significantly change our estimates.
Accruals for environmental liabilities are included in Other
current liabilities and Other non-current liabilities
in the Consolidated Balance Sheets.
Insurance
subsidiary
We insure certain general and product liability, property,
workers compensation, and automobile liability risks
through our regulated wholly-owned captive insurance subsidiary,
Penwald Insurance Company (Penwald). Reserves for
policy claims are established based on actuarial projections of
ultimate losses. As of December 31, 2008 and 2007, reserves
for policy claims were $59.2 million ($10.0 million
included in Accrued product claims and warranties and
$49.2 million included in Other non-current
liabilities) and $61.4 million ($10.0 million
included in Accrued product claims and warranties and
$51.4 million included in Other non-current
liabilities), respectively.
Stock-based
compensation
We account for the fair value recognition provisions of
SFAS No. 123R (revised 2004), Share Based
Payment, (SFAS 123R) which revised
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123) and supersedes
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25)
requiring us to recognize expense related to the fair value of
our stock-based compensation awards.
In accordance with SFAS 123R, the estimated grant date fair
value of each stock-based award is recognized in income on an
accelerated basis over the requisite service period (generally
the vesting period). The estimated fair value of each option is
calculated using the Black-Scholes option-pricing model. From
time to time, we have elected to modify the terms of the
original grant. These modified grants are accounted for as a new
award and measured using the fair value method under
SFAS 123R, resulting in the inclusion of additional
compensation expense in our Consolidated Statements of Income.
Non-vested share awards are recorded as compensation cost over
the requisite service periods based on the market value on the
date of grant.
Earnings
per common share
Basic earnings per share are computed by dividing net income by
the weighted-average number of common shares outstanding.
Diluted earnings per share are computed by dividing net income
by the weighted average number of common shares outstanding
including the dilutive effects of common stock equivalents. The
dilutive effects of stock options and non-vested shares
increased weighted average common shares outstanding by 1,181
thousand, 1,443 thousand and 1,587 thousand in 2008, 2007 and
2006, respectively.
Stock options excluded from the calculation of diluted earnings
per share because the exercise price was greater than the
average market price of the common shares were 5,268 thousand,
2,841 thousand, and 3,089 thousand in 2008, 2007 and 2006,
respectively.
Derivative
financial instruments
We recognize all derivatives, including those embedded in other
contracts, as either assets or liabilities at fair value in our
Consolidated Balance Sheets. If the derivative is designated as
a fair-value hedge, the changes in the fair value of the
derivative and the hedged item are recognized in earnings. If
the derivative is designated and is effective as a cash-flow
hedge, changes in the fair value of the derivative are recorded
in other
51
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
comprehensive income (OCI) and are recognized in the
Consolidated Statements of Income when the hedged item affects
earnings. If the underlying hedged transaction ceases to exist
or if the hedge becomes ineffective, all changes in fair value
of the related derivatives that have not been settled are
recognized in current earnings. For a derivative that is not
designated as or does not qualify as a hedge, changes in fair
value are reported in earnings immediately.
We use derivative instruments for the purpose of hedging
interest rate and currency exposures, which exist as part of
ongoing business operations. All hedging instruments are
designated and effective as hedges, in accordance with the
provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedge Activities, as amended. We
do not hold or issue derivative financial instruments for
trading or speculative purposes. All other contracts that
contain provisions meeting the definition of a derivative also
meet the requirements of, and have been designated as, normal
purchases or sales. Our policy is not to enter into contracts
with terms that cannot be designated as normal purchases or
sales.
Foreign
currency translation
The financial statements of subsidiaries located outside of the
United States are measured using the local currency as the
functional currency. Assets and liabilities of these
subsidiaries are translated at the rates of exchange at the
balance sheet date. Income and expense items are translated at
average monthly rates of exchange. The resultant translation
adjustments are included in accumulated other comprehensive
income, a separate component of shareholders equity.
New
accounting standards
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value
measurements, but rather eliminates inconsistencies in guidance
found in various prior accounting pronouncements. SFAS 157
is effective for fiscal years beginning after November 15,
2007 (adopted by Pentair as of January 1, 2008), with the
exception of the application of the statement to the
determination of fair value of nonfinancial assets and
liabilities that are recognized or disclosed on a nonrecurring
basis, which is effective for fiscal years beginning after
November 15, 2008.
SFAS 157 establishes a valuation hierarchy for disclosure
of the inputs to valuation used to measure fair value. This
hierarchy prioritizes the inputs into three broad levels as
follows. Level 1 inputs are quoted prices (unadjusted) in
active markets for identical assets or liabilities. Level 2
inputs are quoted prices for similar assets and liabilities in
active markets or inputs that are observable for the asset or
liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial
instrument. Level 3 inputs are unobservable inputs based
upon our own assumptions used to measure assets and liabilities
at fair value. A financial asset or liabilitys
classification within the hierarchy is determined based on the
lowest level of input that is significant to the fair value
measurement.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS 159
permits entities to choose to measure many financial instruments
and certain other items at fair value that are not currently
required to be measured at fair value (the Fair Value
Option). SFAS 159 is effective for fiscal years
beginning after November 15, 2007. We have not chosen the
Fair Value Option; therefore, the adoption of SFAS 159 did
not have any impact on our consolidated results of operations
and financial condition.
In December 2007, the FASB issued SFAS No. 141
(Revised 2007), Business Combinations
(SFAS 141R). SFAS 141R replaces
SFAS No. 141. SFAS 141R retains the purchase
method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are
recognized in the purchase accounting. SFAS 141R also
changes the recognition of assets acquired and liabilities
assumed
52
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires
the expensing of acquisition-related costs as incurred.
SFAS 141R is effective for business combinations for which
the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008. We will apply SFAS 141R prospectively to business
combinations completed on or after that date. We do not expect
adoption to have a significant impact to our current
consolidated results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB 51
(SFAS 160). SFAS 160 changes the
accounting and reporting for minority interests. Minority
interests will be recharacterized as noncontrolling interests
and will be reported as a component of equity separate from the
parents equity, and purchases or sales of equity interests
that do not result in a change in control will be accounted for
as equity transactions. In addition, net income attributable to
the noncontrolling interest will be included in consolidated net
income on the face of the income statement and upon a loss of
control, the interest sold, as well as any interest retained,
will be recorded at fair value with any gain or loss recognized
in earnings. SFAS 160 is effective for financial statements
issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years, except for the
presentation and disclosure requirements, which will apply
retrospectively. Upon adoption, we will classify minority
interest as a component of equity for all periods presented.
In March 2008, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 161, Disclosures about
Derivative Instruments and Hedging Activities, an amendment of
FASB statement No. 133 (SFAS 161).
SFAS 161 expands the disclosure requirements in Statement
133 about an entitys derivative instruments and hedging
activities. SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after
November 15, 2008. The adoption of SFAS 161 will not
have a material impact on our consolidated results of operations
and financial condition.
On June 28, 2008, we entered into a transaction with GE
Water & Process Technologies (a unit of General
Electric Company) (GE) that was accounted for as an
acquisition of an 80.1 percent ownership interest in
GEs global water softener and residential water filtration
business in exchange for a 19.9 percent interest in our
global water softener and residential water filtration business.
The acquisition was effected through the formation of two new
entities (collectively, Pentair Residential
Filtration or PRF), a U.S. entity and an
international entity, into which we and GE contributed certain
assets, properties, liabilities and operations representing our
respective global water softener and residential water
filtration businesses. We are an 80.1 percent owner of PRF
and GE is a 19.9 percent owner. The fair value of the
acquisition was $229.2 million, which includes
approximately $3.3 million of acquisition related costs.
The acquisition and related sale of our 19.9 percent
interest resulted in a gain of $109.6 million
($85.8 million after tax), representing the difference
between the carrying amount and the fair value of the 19.9
percent interest sold.
With the formation of Pentair Residential Filtration, we believe
we will be better positioned to serve residential customers with
industry-leading technical applications in the areas of water
conditioning, whole-house filtration, point of use water
management and water sustainability and expect to accelerate
revenue growth by selling GEs existing residential
conditioning products through our sales channels.
The fair value of the 80.1% interest in the global water
softener and residential water filtration business of
GE Water and Process Technologies acquired was determined
using both an income approach and a market approach. The income
approach utilizes a discounted cash flow analysis based on
certain key assumptions including a discount rate based on a
computed weighted average cost of capital and expected long-term
revenue and expense growth rates. The market approach indicates
the fair value of a business based on a comparison of the
business to guideline publicly traded companies and transactions
in its industry.
53
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
The fair value of the business acquired was allocated to the
assets acquired and liabilities assumed based on their estimated
fair values. The excess of the fair value acquired over the
identifiable assets acquired and liabilities assumed is
reflected as goodwill. Goodwill recorded as part of the purchase
price allocation was approximately $137.9 million, none of
which is tax deductible. Identifiable intangible assets acquired
as part of the acquisition were $66.5 million, including
definite-lived intangibles, such as customer relationships,
proprietary technology and trade names with a weighted average
amortization period of approximately 15 years. We continue
to evaluate the purchase price allocation, including tangible
and intangible assets, which primarily consist of trademarks,
proprietary technology and customer relationships, contingent
liabilities and liabilities associated with exit or disposal
activities, and expect to revise the purchase price allocation
in future periods as these estimates are finalized. The
following table represents the preliminary purchase price
allocation:
|
|
|
|
|
In thousands
|
|
December 31, 2008
|
|
|
|
|
Inventory
|
|
$
|
12,188
|
|
Property, plant & equipment
|
|
|
12,934
|
|
Goodwill
|
|
|
137,868
|
|
Identifiable intangible assets
|
|
|
66,483
|
|
Current liabilities
|
|
|
(234
|
)
|
|
|
|
|
$
|
229,239
|
|
|
|
On May 7, 2007, we acquired as part of our Technical
Products Group the assets of Calmark Corporation
(Calmark), a privately held business, for
$28.4 million, including a cash payment of
$29.2 million and transaction costs of $0.2 million,
less cash acquired of $1.0 million. Calmarks results
of operations have been included in our consolidated financial
statements since the date of acquisition. Calmarks product
portfolio includes enclosures, guides, card locks, retainers,
extractors, card pullers and other products for the aerospace,
medical, telecommunications and military market segments, among
others. Goodwill recorded as part of the purchase price
allocation was $11.7 million, all of which is tax
deductible. Identifiable intangible assets acquired as part of
the acquisition were $14.0 million, including
definite-lived intangibles, such as non-compete agreements,
customer relationships and proprietary technology of
$10.5 million with a weighted average amortization period
of approximately 8 years.
On April 30, 2007, we acquired as part of our Water Group
all of the capital interests in Porous Media Corporation and
Porous Media, Ltd. (together, Porous Media), two
privately held filtration and separation technologies
businesses, for $224.9 million, including a cash payment of
$225.0 million and transaction costs of $0.4 million,
less cash acquired of $0.5 million. Porous Medias
results of operations have been included in our consolidated
financial statements since the date of acquisition. Porous Media
brings strong technical ability to our Water Group, including
engineering, material science, media development and application
capabilities. Porous Medias product portfolio includes
high-performance filter media, membranes and related filtration
products and purification systems for liquids, gases and solids
for the general industrial, petrochemical, refining and
healthcare market segments, among others. Goodwill recorded as
part of the purchase price allocation was $128.1 million,
all of which is tax deductible. Identifiable intangible assets
acquired as part of the acquisition were $73.8 million,
including definite-lived intangibles, such as proprietary
technology and customer relationships of $60.6 million with
a weighted average amortization period of approximately
11 years.
On February 2, 2007, we acquired as part of our Water Group
all the outstanding shares of capital stock of Jung Pumpen GmbH
(Jung Pump) for $229.5 million, including a
cash payment of $239.6 million and transaction costs of
$1.3 million, less cash acquired of $11.4 million.
Jung Pumps results of operations have been included in our
consolidated financial statements since the date of acquisition.
Jung Pump is a leading German manufacturer of wastewater
products for municipal and residential markets. Jung Pump brings
us its
54
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
strong application engineering expertise and a complementary
product offering, including a new line of water re-use products,
submersible wastewater and drainage pumps, wastewater disposal
units and tanks. Jung Pump also brings to Pentair its
well-established European presence, a
state-of-the-art
training facility in Germany and sales offices in Germany,
Austria, France, Hungary, Poland and Slovakia. Goodwill recorded
as part of the purchase price allocation was
$123.4 million, of which approximately $53 million is
tax deductible. Identifiable intangible assets acquired as part
of the acquisition were $135.7 million, including
definite-lived intangibles, primarily customer relationships of
$71.6 million with a weighted average amortization period
of approximately 15 years.
The following pro forma consolidated condensed financial results
of operations for the years ended December 31, 2008, and
2007 are presented as if the acquisitions had been completed at
the beginning of each period presented:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
In thousands, except per-share data
|
|
2008
|
|
|
2007
|
|
|
|
|
Pro forma net sales from continuing operations
|
|
$
|
3,406,449
|
|
|
$
|
3,390,975
|
|
Pro forma net income from continuing operations
|
|
|
256,363
|
|
|
|
211,932
|
|
Pro forma net income
|
|
|
228,734
|
|
|
|
210,741
|
|
Pro forma earnings per common share continuing
operations
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.62
|
|
|
$
|
2.15
|
|
Diluted
|
|
$
|
2.59
|
|
|
$
|
2.11
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
97,887
|
|
|
|
98,762
|
|
Diluted
|
|
|
99,068
|
|
|
|
100,205
|
|
These pro forma consolidated condensed financial results have
been prepared for comparative purposes only and include certain
adjustments, such as increased interest expense on acquisition
debt. The adjustments do not reflect the effect of synergies
that would have been expected to result from the integration of
these acquisitions. The pro forma information does not purport
to be indicative of the results of operations that actually
would have resulted had the combination occurred on January 1 of
each year presented, or of future results of the consolidated
entities.
|
|
3.
|
Discontinued
Operations/Divestitures
|
On December 15, 2008, we sold our Spa and Bath
(Spa/Bath) business to Balboa Water Group in a cash
transaction for $8.3 million including certain price
adjustments based on working capital at closing. The results of
Spa/Bath have been reported as discontinued operations for all
periods presented. The assets and liabilities of Spa/Bath have
been reclassified as discontinued operations for all periods
presented. Goodwill of $5.6 million was included in the
assets of Spa/Bath.
On February 28, 2008, we sold our National Pool Tile
(NPT) business to Pool Corporation in a cash
transaction for approximately $30.0 million subject to
certain price adjustments. The results of NPT have been reported
as discontinued operations for all periods presented. The assets
and liabilities of NPT have been reclassified as discontinued
operations for all periods presented. Goodwill of
$16.8 million was included in the assets of NPT.
55
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Operating results of the discontinued operations are summarized
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Net sales
|
|
$
|
43,346
|
|
|
$
|
117,795
|
|
|
$
|
131,867
|
|
Loss from discontinued operations before income taxes
|
|
|
(9,392
|
)
|
|
|
(2,917
|
)
|
|
|
(4,206
|
)
|
Income tax benefit
|
|
|
3,609
|
|
|
|
1,288
|
|
|
|
1,722
|
|
|
|
Loss from discontinued operations, net of income taxes
|
|
|
(5,783
|
)
|
|
|
(1,629
|
)
|
|
|
(2,484
|
)
|
Gain (loss) on disposal of discontinued operations, before taxes
|
|
|
(28,692
|
)
|
|
|
762
|
|
|
|
(3,621
|
)
|
Income tax (expense) benefit
|
|
|
6,846
|
|
|
|
(324
|
)
|
|
|
3,585
|
|
|
|
Gain (loss) on disposal of discontinued operations, net of tax
|
|
$
|
(21,846
|
)
|
|
$
|
438
|
|
|
$
|
(36
|
)
|
|
|
Net assets and liabilities of discontinued operations consist of
the following:
|
|
|
|
|
|
|
December 31
|
|
In thousands
|
|
2007
|
|
|
|
|
Accounts and notes receivable, net
|
|
$
|
10,814
|
|
Inventories
|
|
|
28,109
|
|
Other current assets
|
|
|
1,567
|
|
|
|
Current assets of discontinued operations
|
|
|
40,490
|
|
Property, plant and equipment, net
|
|
|
5,736
|
|
Goodwill
|
|
|
22,407
|
|
Other non-current assets
|
|
|
4,375
|
|
|
|
Non-current assets of discontinued operations
|
|
|
32,518
|
|
|
|
Total assets
|
|
$
|
73,008
|
|
|
|
Accounts payable
|
|
$
|
3,857
|
|
Other current liabilities
|
|
|
(153
|
)
|
|
|
Current liabilities of discontinued operations
|
|
|
3,704
|
|
Deferred income tax
|
|
|
3,116
|
|
Other non-current liabilities
|
|
|
888
|
|
|
|
Non-current liabilities of discontinued operations
|
|
|
4,004
|
|
|
|
Total liabilities
|
|
|
7,708
|
|
|
|
Net assets (liabilities) of discontinued operations
|
|
$
|
65,300
|
|
|
|
During 2008, we announced and initiated certain business
restructuring initiatives aimed at reducing our fixed cost
structure and rationalizing our manufacturing footprint. These
initiatives included the announcement of the closure of certain
manufacturing facilities as well as the reduction in hourly and
salaried headcount of approximately 1,700 employees, 1,300 in
the Water Group and 400 in the Technical Products Group. We
expect these actions to generally be completed by the end of
2009.
56
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Restructuring related costs included in Selling, general and
administrative expenses on the Consolidated Statements of
Income include costs for severance and related benefits, asset
impairment charges and other restructuring costs as follows:
|
|
|
|
|
|
|
Year ended
|
|
|
|
December 31
|
|
In thousands
|
|
2008
|
|
|
|
|
Severance and related costs
|
|
$
|
34,615
|
|
Asset impairment
|
|
|
5,282
|
|
Contract termination costs
|
|
|
5,309
|
|
|
|
Total restructuring costs
|
|
$
|
45,206
|
|
|
|
Restructuring accrual activity recorded on the Consolidated
Balance Sheets is summarized as follows:
|
|
|
|
|
Balance at January 1, 2008
|
|
$
|
|
|
|
|
Costs incurred
|
|
|
39,924
|
|
Cash payments & other
|
|
|
(5,750
|
)
|
|
|
Balance at December 31, 2008
|
|
$
|
34,174
|
|
|
|
|
|
5.
|
Goodwill
and Other Identifiable Intangible Assets
|
The changes in the carrying amount of goodwill for the years
ended December 31, 2008 and 2007 by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
|
|
|
In thousands
|
|
December 31, 2007
|
|
|
Acqusitions
|
|
|
Translation
|
|
|
December 31, 2008
|
|
|
|
|
Water
|
|
$
|
1,706,626
|
|
|
$
|
132,720
|
|
|
$
|
(20,876
|
)
|
|
$
|
1,818,470
|
|
Technical Products
|
|
|
292,493
|
|
|
|
106
|
|
|
|
(9,218
|
)
|
|
|
283,381
|
|
|
|
Consolidated Total
|
|
$
|
1,999,119
|
|
|
$
|
132,826
|
|
|
$
|
(30,094
|
)
|
|
$
|
2,101,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
|
|
|
In thousands
|
|
December 31, 2006
|
|
|
Acqusitions
|
|
|
Translation
|
|
|
December 31, 2007
|
|
|
|
|
Water
|
|
$
|
1,427,053
|
|
|
$
|
253,380
|
|
|
$
|
26,193
|
|
|
$
|
1,706,626
|
|
Technical Products
|
|
|
269,311
|
|
|
|
11,634
|
|
|
|
11,548
|
|
|
|
292,493
|
|
|
|
Consolidated Total
|
|
$
|
1,696,364
|
|
|
$
|
265,014
|
|
|
$
|
37,741
|
|
|
$
|
1,999,119
|
|
|
|
In 2008, the acquired goodwill in the Water Group is related
primarily to the formation of PRF and Jung Pump and in 2007, it
related primarily to Jung Pump and Porous Media. The acquired
goodwill in the Technical Products Group is related primarily to
our acquisition of Calmark during 2007. In 2008, goodwill
allocated to divested businesses was $22.4 million.
57
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
The detail of acquired intangible assets consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
In thousands
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
Finite-life intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
15,427
|
|
|
$
|
(9,774
|
)
|
|
$
|
5,653
|
|
|
$
|
15,457
|
|
|
$
|
(7,904
|
)
|
|
$
|
7,553
|
|
Non-compete agreements
|
|
|
4,722
|
|
|
|
(4,566
|
)
|
|
|
156
|
|
|
|
4,722
|
|
|
|
(4,050
|
)
|
|
|
672
|
|
Proprietary technology
|
|
|
72,375
|
|
|
|
(17,652
|
)
|
|
|
54,723
|
|
|
|
59,944
|
|
|
|
(12,564
|
)
|
|
|
47,380
|
|
Customer relationships
|
|
|
283,015
|
|
|
|
(46,841
|
)
|
|
|
236,174
|
|
|
|
238,712
|
|
|
|
(30,378
|
)
|
|
|
208,334
|
|
Brand names
|
|
|
961
|
|
|
|
(77
|
)
|
|
|
884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finite-life intangible assets
|
|
$
|
376,500
|
|
|
$
|
(78,910
|
)
|
|
$
|
297,590
|
|
|
$
|
318,835
|
|
|
$
|
(54,896
|
)
|
|
$
|
263,939
|
|
Indefinite-life intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand names
|
|
$
|
217,918
|
|
|
$
|
|
|
|
$
|
217,918
|
|
|
$
|
223,089
|
|
|
$
|
|
|
|
$
|
223,089
|
|
|
|
Total intangibles, net
|
|
$
|
594,418
|
|
|
$
|
(78,910
|
)
|
|
$
|
515,508
|
|
|
$
|
541,924
|
|
|
$
|
(54,896
|
)
|
|
$
|
487,028
|
|
|
|
Intangible asset amortization expense in 2008, 2007, and 2006
was $24.0 million, $21.8 million, and
$13.2 million, respectively.
Additionally, in 2008 we recorded an impairment charge to
write-off a brand name intangible assets of $1.0 million in
the Technical Products Group. The charge was recorded in
Selling, general and administrative in our Consolidated
Statement of Income.
The estimated future amortization expense for identifiable
intangible assets during the next five years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
|
Estimated amortization expense
|
|
$
|
26,015
|
|
|
$
|
25,331
|
|
|
$
|
25,327
|
|
|
$
|
24,214
|
|
|
$
|
24,053
|
|
|
|
6.
|
Supplemental
Balance Sheet Information
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
212,792
|
|
|
$
|
194,090
|
|
Work-in-process
|
|
|
53,241
|
|
|
|
50,785
|
|
Finished goods
|
|
|
151,254
|
|
|
|
134,143
|
|
|
|
Total inventories
|
|
$
|
417,287
|
|
|
$
|
379,018
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
$
|
32,949
|
|
|
$
|
35,038
|
|
Buildings and leasehold improvements
|
|
|
204,757
|
|
|
|
210,412
|
|
Machinery and equipment
|
|
|
580,632
|
|
|
|
548,042
|
|
Construction in progress
|
|
|
24,376
|
|
|
|
30,166
|
|
|
|
Total property, plant and equipment
|
|
|
842,714
|
|
|
|
823,658
|
|
Less accumulated depreciation and amortization
|
|
|
498,833
|
|
|
|
461,968
|
|
|
|
Property, plant and equipment, net
|
|
$
|
343,881
|
|
|
$
|
361,690
|
|
|
|
58
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Cost
method investments
As part of the sale of Lincoln Industrial in 2001, we received
37,500 shares of 5% Series C Junior Convertible
Redeemable Preferred Stock convertible into a 15% equity
interest in the new organization LN Holdings
Corporation. During the second quarter of 2005 we sold our
interest in the stock of LN Holdings Corporation for cash
consideration of $23.6 million, resulting in a pre-tax gain
of $5.2 million or an after-tax gain of $3.5 million.
The terms of the sale agreement established two escrow accounts
totaling $14 million. We received payments from an escrow
of $0.2 million during the fourth quarter of 2005,
increasing our gain. During 2006 we received $1.2 million
from the escrow accounts which also increased our gain from the
sale. Remaining escrow balances are to be distributed to former
shareholders in accordance with their ownership percentages. Any
funds received from settlement of escrows in future periods will
be accounted for as additional gain on sale of this interest.
Equity
method investments
We have a 50% investment in FARADYNE Motors LLC
(FARADYNE), a joint venture with ITT Water
Technologies, Inc. that began design, development, and
manufacturing of submersible pump motors in 2005. We do not
consolidate the investment in our financial statements as we do
not have a controlling interest over the investment. There were
no investments in or loans to FARADYNE in 2008. There were
investments in and loans to FARADYNE of $5.0 million and
$8.7 million at December 31, 2008 and
December 31, 2007, respectively, which is net of our
proportionate share of the results of their operations.
|
|
7.
|
Supplemental
Cash Flow Information
|
The following table summarizes supplemental cash flow
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Interest payments
|
|
$
|
63,851
|
|
|
$
|
66,044
|
|
|
$
|
51,375
|
|
Income tax payments
|
|
|
80,765
|
|
|
|
98,798
|
|
|
|
77,225
|
|
On June 28, 2008, we entered into a transaction with GE
that was accounted for as an acquisition of an 80.1 percent
ownership interest in GEs global water softener and
residential water filtration business in exchange for a
19.9 percent interest in our global water softener and
residential water filtration business. The transaction is more
fully described in Note 2. Acquisitions.
|
|
8.
|
Accumulated
Other Comprehensive Income (Loss)
|
Components of accumulated other comprehensive income (loss)
consist of the following:
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
|
|
Retirement liability adjustments, net of tax
|
|
$
|
(58,704
|
)
|
|
$
|
8,229
|
|
Foreign currency translation adjustments
|
|
|
45,300
|
|
|
|
117,417
|
|
Market value of derivative financial instruments, net of tax
|
|
|
(13,211
|
)
|
|
|
(3,780
|
)
|
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
(26,615
|
)
|
|
$
|
121,866
|
|
|
|
59
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
9. Debt
Debt and the average interest rates on debt outstanding as of
December 31 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Maturity
|
|
|
December 31
|
|
|
December 31
|
|
In thousands
|
|
2008
|
|
|
(Year)
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Commercial paper
|
|
|
2.61
|
%
|
|
|
|
|
|
$
|
249
|
|
|
$
|
105,990
|
|
Revolving credit facilities
|
|
|
1.21
|
%
|
|
|
2012
|
|
|
|
214,200
|
|
|
|
76,722
|
|
Private placement fixed rate
|
|
|
5.65
|
%
|
|
|
2013-17
|
|
|
|
400,000
|
|
|
|
400,000
|
|
Private placement floating rate
|
|
|
3.37
|
%
|
|
|
2012-13
|
|
|
|
205,000
|
|
|
|
205,000
|
|
Senior notes
|
|
|
7.85
|
%
|
|
|
2009
|
|
|
|
133,900
|
|
|
|
250,000
|
|
Other
|
|
|
4.44
|
%
|
|
|
2008-16
|
|
|
|
275
|
|
|
|
20,387
|
|
|
|
Total contractual debt obligations
|
|
|
|
|
|
|
|
|
|
|
953,624
|
|
|
|
1,058,099
|
|
Deferred income related to swaps
|
|
|
|
|
|
|
|
|
|
|
468
|
|
|
|
2,487
|
|
|
|
Total debt, including current portion per balance sheet
|
|
|
|
|
|
|
|
|
|
|
954,092
|
|
|
|
1,060,586
|
|
Less: Current maturities
|
|
|
|
|
|
|
|
|
|
|
(624
|
)
|
|
|
(5,075
|
)
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,586
|
)
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
$
|
953,468
|
|
|
$
|
1,041,925
|
|
|
|
We have a multi-currency revolving Credit Facility (Credit
Facility). The Credit Facility creates an unsecured,
committed revolving credit facility of up to $800 million,
with multi-currency sub facilities to support investments
outside the U.S. The Credit Facility expires on June 4,
2012. Borrowings under the Credit Facility will bear interest at
the rate of LIBOR plus 0.50%. Interest rates and fees on the
Credit Facility vary based on our credit ratings.
Total availability under our existing Credit Facility was
$585.6 million at December 31, 2008.
We are authorized to sell short-term commercial paper notes to
the extent availability exists under the Credit Facility. We use
the Credit Facility as
back-up
liquidity to support 100% of commercial paper outstanding. Our
use of commercial paper as a funding vehicle depends upon the
relative interest rates for our paper compared to the cost of
borrowing under our Credit Facility. As of December 31,
2008, we had $0.2 million of commercial paper outstanding
that matures within 41 days.
All of the commercial paper and Senior Notes were classified as
long-term as we have the intent and the ability to refinance
such obligations on a long-term basis under the Credit Facility.
In addition to the Credit Facility, we have $25.0 million
of uncommitted credit facilities, under which we had no
borrowings as of December 31, 2008.
Our debt agreements contain certain financial covenants, the
most restrictive of which is a leverage ratio (total
consolidated indebtedness, as defined, over consolidated EBITDA,
as defined) that may not exceed 3.5 to 1.0. We were in
compliance with all covenants in our debt agreements as of
December 31, 2008.
On July 8, 2008, we commenced a cash tender offer for all
of our outstanding $250 million aggregate principal 7.85%
Senior Notes due 2009 (the Notes). Upon expiration
of the tender offer on August 4, 2008, we purchased
$116.1 million aggregate principal amount of the Notes. As
a result of this transaction, we recognized a loss of
$4.6 million on early extinguishment of debt. The loss
included the write off of $0.1 million in unamortized
deferred financing fees in addition to recognition of
$0.6 million in previously unrecognized swap gains and cash
paid of $5.1 million related to the tender premium and
other costs associated with the purchase.
60
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Debt outstanding at December 31, 2008, matures on a
calendar year basis as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
Contractual debt obligation maturities
|
|
$
|
134,305
|
|
|
$
|
78
|
|
|
$
|
6
|
|
|
$
|
319,206
|
|
|
$
|
200,007
|
|
|
$
|
300,022
|
|
|
$
|
953,624
|
|
Other maturities
|
|
|
468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
468
|
|
|
|
Total maturities
|
|
$
|
134,773
|
|
|
$
|
78
|
|
|
$
|
6
|
|
|
$
|
319,206
|
|
|
$
|
200,007
|
|
|
$
|
300,022
|
|
|
$
|
954,092
|
|
|
|
10. Derivative
and Financial Instruments
Cash-flow hedges
In August 2007, we entered into a $105 million interest
rate swap agreement with a major financial institution to
exchange variable rate interest payment obligations for a fixed
rate obligation without the exchange of the underlying principal
amounts in order to manage interest rate exposures. The
effective date of the swap was August 30, 2007. The swap
agreement has a fixed interest rate of 4.89% and expires in May
2012. The fixed interest rate of 4.89% plus the .50% interest
rate spread over LIBOR results in an effective fixed interest
rate of 5.39%. The fair value of the swap was a liability of
$10.7 million and $3.7 million at December 31,
2008 and December 31, 2007, respectively, and was recorded
in Other non-current liabilities.
In September 2005, we entered into a $100 million interest
rate swap agreement with several 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.
The effective date of the fixed rate swap was April 25,
2006. The swap agreement has a fixed interest rate of 4.68% and
expires in July 2013. The fixed interest rate of 4.68% plus the
.60% interest rate spread over LIBOR results in an effective
fixed interest rate of 5.28%. The fair value of the swap was a
liability of $11.6 million and $2.5 million at
December 31, 2008 and December 31, 2007, respectively,
and was recorded in Other non-current liabilities.
The variable to fixed interest rate swaps are designated as and
are effective as cash-flow hedges. The fair value of these swaps
are recorded as assets or liabilities on the Consolidated
Balance Sheets, with changes in their fair value included in
Accumulated other comprehensive income (OCI).
Derivative gains and losses included in OCI are reclassified
into earnings at the time the related interest expense is
recognized or the settlement of the related commitment occurs.
Failure of one or more of our swap counterparties would result
in the loss of any benefit to us of the swap agreement. In this
case, we would continue to be obligated to pay the variable
interest payments per the underlying debt agreements which are
at variable interest rates of 3 month LIBOR plus .50% for
$105 million of debt and 3 month LIBOR plus .60% for
$100 million of debt. Additionally, failure of one or all
of our swap counterparties would not eliminate our obligation to
continue to make payments under our existing swap agreements if
we continue to be in a net pay position.
At December 31, 2008, our interest rate swaps are carried
at fair value measured on a recurring basis. Fair values are
determined through the use of models that consider various
assumptions, including time value, yield curves, as well as
other relevant economic measures, which are inputs that are
classified as Level 2 in the valuation hierarchy defined by
SFAS 157.
61
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Fair
value of financial instruments
The recorded amounts and estimated fair values of long-term
debt, excluding the effects of derivative financial instruments,
and the recorded amounts and estimated fair value of those
derivative financial instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Recorded
|
|
|
Fair
|
|
|
Recorded
|
|
|
Fair
|
|
In thousands
|
|
amount
|
|
|
value
|
|
|
amount
|
|
|
value
|
|
|
|
|
Total debt, including current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate
|
|
$
|
419,449
|
|
|
$
|
419,449
|
|
|
$
|
407,398
|
|
|
$
|
407,398
|
|
Fixed rate
|
|
|
534,175
|
|
|
|
482,148
|
|
|
|
650,701
|
|
|
|
662,906
|
|
|
|
Total
|
|
$
|
953,624
|
|
|
$
|
901,597
|
|
|
$
|
1,058,099
|
|
|
$
|
1,070,304
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value of variable to fixed interest rate swap (liability)
asset
|
|
$
|
(22,309
|
)
|
|
$
|
(22,309
|
)
|
|
$
|
(6,198
|
)
|
|
$
|
(6,198
|
)
|
|
|
The following methods were used to estimate the fair values of
each class of financial instrument:
|
|
|
short-term financial instruments (cash and cash equivalents,
accounts and notes receivable, accounts and notes payable, and
variable rate debt) recorded amount approximates
fair value because of the short maturity period;
|
|
|
long-term fixed rate debt, including current
maturities fair value is based on market quotes
available for issuance of debt with similar terms, which are
inputs that are classified as Level 2 in the valuation
hierarchy defined by SFAS 157; and
|
|
|
interest rate swap agreements fair values are
determined through the use of models that consider various
assumptions, including time value, yield curves, as well as
other relevant economic measures, which are inputs that are
classified as Level 2 in the valuation hierarchy defined by
SFAS 157.
|
Income from continuing operations before income taxes and
minority interest consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
United States
|
|
$
|
220,294
|
|
|
$
|
229,012
|
|
|
$
|
211,908
|
|
International
|
|
|
146,846
|
|
|
|
77,549
|
|
|
|
47,767
|
|
|
|
Income from continuing operations before taxes and minority
interest
|
|
$
|
367,140
|
|
|
$
|
306,561
|
|
|
$
|
259,675
|
|
|
|
62
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
The provision for income taxes for continuing operations
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Currently payable
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
41,985
|
|
|
$
|
70,610
|
|
|
$
|
54,319
|
|
State
|
|
|
5,140
|
|
|
|
9,851
|
|
|
|
10,168
|
|
International
|
|
|
25,735
|
|
|
|
19,250
|
|
|
|
13,390
|
|
|
|
Total current taxes
|
|
|
72,860
|
|
|
|
99,711
|
|
|
|
77,877
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal and state
|
|
|
35,535
|
|
|
|
3,405
|
|
|
|
(8,113
|
)
|
International
|
|
|
(51
|
)
|
|
|
(8,673
|
)
|
|
|
3,660
|
|
|
|
Total deferred taxes
|
|
|
35,484
|
|
|
|
(5,268
|
)
|
|
|
(4,453
|
)
|
|
|
Total provision for income taxes
|
|
$
|
108,344
|
|
|
$
|
94,443
|
|
|
$
|
73,424
|
|
|
|
Reconciliation of the U.S. statutory income tax rate to our
effective tax rate for continuing operations follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentages
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
U.S. statutory income tax rate
|
|
|
35.0
|
|
|
|
35.0
|
|
|
|
35.0
|
|
State income taxes, net of federal tax benefit
|
|
|
1.6
|
|
|
|
2.6
|
|
|
|
2.5
|
|
Tax effect of stock-based compensation
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.4
|
|
Tax effect of international operations
|
|
|
(6.1
|
)
|
|
|
(5.1
|
)
|
|
|
(8.1
|
)
|
Tax credits
|
|
|
(1.0
|
)
|
|
|
(0.8
|
)
|
|
|
(1.1
|
)
|
Domestic manufacturing deduction
|
|
|
(0.7
|
)
|
|
|
(1.3
|
)
|
|
|
(0.8
|
)
|
ESOP dividend benefit
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
All other, net
|
|
|
0.7
|
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
Effective tax rate on continuing operations
|
|
|
29.5
|
|
|
|
30.8
|
|
|
|
28.3
|
|
|
|
Reconciliation of the beginning and ending gross unrecognized
tax benefits follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
|
|
Gross unrecognized tax benefits beginning balance
|
|
$
|
23,879
|
|
|
$
|
16,923
|
|
Gross increases for tax positions in prior periods
|
|
|
3,526
|
|
|
|
4,476
|
|
Gross decreases for tax positions in prior periods
|
|
|
(411
|
)
|
|
|
(305
|
)
|
Gross increases based on tax positions related to the current
year
|
|
|
2,666
|
|
|
|
3,617
|
|
Reductions due to statute expiration
|
|
|
(1,521
|
)
|
|
|
(832
|
)
|
|
|
Gross unrecognized tax benefits at December 31
|
|
$
|
28,139
|
|
|
$
|
23,879
|
|
|
|
Included in the $28.1 million of total gross unrecognized
tax benefits as of December 31, 2008 was $25.2 million
of tax benefits that, if recognized, would impact the effective
tax rate. It is reasonably possible that the gross unrecognized
tax benefits as of December 31, 2008 may decrease by a
range of $0 to $14.5 million during the next twelve months
primarily as a result of the resolution of federal, state and
foreign examinations and the expiration of various statutes of
limitations.
The determination of annual income tax expense takes into
consideration amounts which may be needed to cover exposures for
open tax years. The Internal Revenue Service (IRS)
has examined our U.S. federal income tax returns through 2003
with no material adjustments. The IRS has also completed a
survey of our 2004 U.S. federal income tax return with no
material findings. In connection with the completion of the 2002
to 2003 federal income tax audit and the 2004 survey, we
recognized benefits of $8.0 million and $1.8 million
in our second and third quarter 2006 income statements,
respectively. The IRS is currently examining our
63
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
2005 and 2006 federal tax returns. No adjustments have been
proposed; however, actual settlements may differ from amounts
accrued.
We record penalties and interest related to unrecognized tax
benefits in Provision for income taxes and Net
interest expense, respectively, which is consistent with our
past practices. As of December 31, 2008, we had recorded
approximately $0.6 million for the possible payment of
penalties and $4.6 million related to the possible payment
of interest.
United States income taxes have not been provided on
undistributed earnings of international subsidiaries. It is our
intention to reinvest these earnings permanently or to
repatriate the earnings only when it is tax effective to do so.
As of December 31, 2008, approximately $145.1 million
of unremitted earnings attributable to international
subsidiaries were considered to be indefinitely invested. It is
not practicable to estimate the amount of tax that might be
payable if such earnings were to be remitted.
Deferred taxes arise because of different treatment between
financial statement accounting and tax accounting, known as
temporary differences. We record the tax effect of
these temporary differences as deferred tax assets
(generally items that can be used as a tax deduction or credit
in future periods) and deferred tax liabilities
(generally items for which we received a tax deduction but the
tax impact has not yet been recorded in the Consolidated
Statements of Income).
The tax effects of the major items recorded as deferred tax
assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Deferred tax
|
|
|
2007 Deferred tax
|
|
In thousands
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
Accounts receivable allowances
|
|
$
|
2,684
|
|
|
$
|
|
|
|
$
|
3,508
|
|
|
$
|
|
|
Inventory valuation
|
|
|
7,064
|
|
|
|
|
|
|
|
2,954
|
|
|
|
|
|
Accelerated depreciation/amortization
|
|
|
|
|
|
|
13,190
|
|
|
|
|
|
|
|
16,205
|
|
Accrued product claims and warranties
|
|
|
30,779
|
|
|
|
|
|
|
|
38,736
|
|
|
|
|
|
Employee benefit accruals
|
|
|
131,493
|
|
|
|
|
|
|
|
87,645
|
|
|
|
|
|
Goodwill and other intangibles
|
|
|
|
|
|
|
191,313
|
|
|
|
|
|
|
|
177,611
|
|
Other, net
|
|
|
|
|
|
|
54,637
|
|
|
|
|
|
|
|
46,819
|
|
|
|
Total deferred taxes
|
|
$
|
172,020
|
|
|
$
|
259,140
|
|
|
$
|
132,843
|
|
|
$
|
240,635
|
|
|
|
Net deferred tax liability
|
|
|
|
|
|
$
|
(87,120
|
)
|
|
|
|
|
|
$
|
(107,792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Other, net in the table above is a deferred tax
asset of $8.1 million and $10.7 million as of
December 31, 2008 and December 31, 2007, respectively,
related to a foreign tax credit carryover from the tax period
ended December 31, 2006. This foreign tax credit is
eligible for carryforward until the tax period ending
December 31, 2016. The deferred tax asset is included in
the Other line in our Consolidated Balance Sheets.
Non-U.S. tax
losses of $19.8 million and $27.0 million were
available for carryforward at December 31, 2008 and 2007,
respectively. A valuation allowance reflected above in other, of
$3.3 million and $2.4 million exists for deferred
income tax benefits related to the
non-U.S.
loss carryforwards available as of December 31, 2008 and
2007, respectively that may not be realized. We believe that
sufficient taxable income will be generated in the respective
countries to allow us to fully recover the remainder of the tax
losses. The
non-U.S.
operating losses are subject to varying expiration periods and
will begin to expire in 2009. State tax losses of
$73.0 million and $69.0 million were available for
carryforward at December 31, 2008 and 2007, respectively. A
valuation allowance reflected above in other, of
$2.0 million and $2.4 million exists for deferred
income tax benefits related to the carryforwards available at
December 31, 2008 and December 31, 2007, respectively.
Certain state tax losses will expire in 2009, while others are
subject to carryforward periods of up to twenty years.
64
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Pension
and post-retirement benefits
We sponsor domestic and foreign defined-benefit pension and
other post-retirement plans. Pension benefits are based
principally on an employees years of service
and/or
compensation levels near retirement. In addition, we also
provide certain post-retirement health care and life insurance
benefits. Generally, the post-retirement health care and life
insurance plans require contributions from retirees. We use a
December 31 measurement date each year.
In 2007, under the requirements of SFAS No. 88,
Employers Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination
Benefits, we recognized a pension curtailment gain of
$5.5 million related to the announcement that we will be
freezing certain pension plans as of December 31, 2017.
Also, we recognized a curtailment gain of $4.1 million
related to the termination of certain post-retirement health
care benefits.
Obligations
and Funded Status
The following tables present reconciliations of the benefit
obligation of the plans, the plan assets of the pension plans,
and the funded status of the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
Post-retirement
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation beginning of year
|
|
$
|
534,648
|
|
|
$
|
563,895
|
|
|
$
|
40,836
|
|
|
$
|
51,577
|
|
Service cost
|
|
|
14,104
|
|
|
|
17,457
|
|
|
|
263
|
|
|
|
585
|
|
Interest cost
|
|
|
32,383
|
|
|
|
31,584
|
|
|
|
2,534
|
|
|
|
2,983
|
|
Amendments
|
|
|
(207
|
)
|
|
|
76
|
|
|
|
|
|
|
|
|
|
Benefits curtailed
|
|
|
|
|
|
|
(16,323
|
)
|
|
|
|
|
|
|
(4,126
|
)
|
Actuarial gain
|
|
|
(26,978
|
)
|
|
|
(44,069
|
)
|
|
|
(1,624
|
)
|
|
|
(6,639
|
)
|
Translation (gain) loss
|
|
|
(5,446
|
)
|
|
|
7,700
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(26,806
|
)
|
|
|
(25,672
|
)
|
|
|
(3,592
|
)
|
|
|
(3,544
|
)
|
|
|
Benefit obligation end of year
|
|
$
|
521,698
|
|
|
$
|
534,648
|
|
|
$
|
38,417
|
|
|
$
|
40,836
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets beginning of year
|
|
$
|
388,037
|
|
|
$
|
373,229
|
|
|
$
|
|
|
|
$
|
|
|
Actual (loss)return on plan assets
|
|
|
(106,546
|
)
|
|
|
27,286
|
|
|
|
|
|
|
|
|
|
Company contributions
|
|
|
12,815
|
|
|
|
13,000
|
|
|
|
3,592
|
|
|
|
3,544
|
|
Translation (loss) gain
|
|
|
(2,388
|
)
|
|
|
194
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(26,806
|
)
|
|
|
(25,672
|
)
|
|
|
(3,592
|
)
|
|
|
(3,544
|
)
|
|
|
Fair value of plan assets end of year
|
|
$
|
265,112
|
|
|
$
|
388,037
|
|
|
$
|
|
|
|
$
|
|
|
|
|
Funded status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets less than benefit obligation
|
|
$
|
(256,586
|
)
|
|
$
|
(146,611
|
)
|
|
$
|
(38,417
|
)
|
|
$
|
(40,836
|
)
|
|
|
Net amount recognized
|
|
$
|
(256,586
|
)
|
|
$
|
(146,611
|
)
|
|
$
|
(38,417
|
)
|
|
$
|
(40,836
|
)
|
|
|
Of the $256.6 million underfunding at December 31,
2008, $102.8 million relates to foreign pension plans and
our supplemental executive retirement plans which are not
commonly funded.
65
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Amounts recognized in the Consolidated Balance Sheets are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
Post-retirement
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Noncurrent assets
|
|
$
|
|
|
|
$
|
154
|
|
|
$
|
|
|
|
$
|
|
|
Current liabilities
|
|
|
(5,197
|
)
|
|
|
(4,578
|
)
|
|
|
(3,693
|
)
|
|
|
(3,689
|
)
|
Noncurrent liabilities
|
|
|
(251,389
|
)
|
|
|
(142,187
|
)
|
|
|
(34,724
|
)
|
|
|
(37,147
|
)
|
|
|
Net amount recognized
|
|
$
|
(256,586
|
)
|
|
$
|
(146,611
|
)
|
|
$
|
(38,417
|
)
|
|
$
|
(40,836
|
)
|
|
|
The accumulated benefit obligation for all defined benefit plans
was $489.3 million and $482.7 million at
December 31, 2008, and 2007, respectively.
Information for pension plans with an accumulated benefit
obligation or projected benefit obligation in excess of plan
assets are as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
|
|
Pension plans with an accumulated benefit obligation in excess
of plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets
|
|
$
|
265,112
|
|
|
$
|
90,449
|
|
Accumulated benefit obligation
|
|
|
489,258
|
|
|
|
198,108
|
|
Pension plans with a projected benefit obligation in excess of
plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets
|
|
$
|
265,112
|
|
|
$
|
371,297
|
|
Accumulated benefit obligation
|
|
|
521,698
|
|
|
|
518,062
|
|
Components of net periodic benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
Post-retirement
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Service cost
|
|
$
|
14,104
|
|
|
$
|
17,457
|
|
|
$
|
18,411
|
|
|
$
|
263
|
|
|
$
|
585
|
|
|
$
|
735
|
|
Interest cost
|
|
|
32,383
|
|
|
|
31,584
|
|
|
|
29,676
|
|
|
|
2,534
|
|
|
|
2,983
|
|
|
|
3,195
|
|
Expected return on plan assets
|
|
|
(29,762
|
)
|
|
|
(28,539
|
)
|
|
|
(27,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of transition obligation
|
|
|
25
|
|
|
|
20
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior year service cost (benefit)
|
|
|
179
|
|
|
|
160
|
|
|
|
289
|
|
|
|
(136
|
)
|
|
|
(245
|
)
|
|
|
(236
|
)
|
Recognized net actuarial (gain) loss
|
|
|
121
|
|
|
|
3,195
|
|
|
|
4,119
|
|
|
|
(3,301
|
)
|
|
|
(1,423
|
)
|
|
|
(846
|
)
|
Curtailment gain
|
|
|
|
|
|
|
(5,533
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,126
|
)
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
17,050
|
|
|
$
|
18,344
|
|
|
$
|
24,538
|
|
|
$
|
(640
|
)
|
|
$
|
(2,226
|
)
|
|
$
|
2,848
|
|
|
|
Amounts not yet recognized in net periodic benefit cost and
included in accumulated other comprehensive income (pre-tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
Post-retirement
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Net transition obligation
|
|
$
|
37
|
|
|
$
|
50
|
|
|
$
|
|
|
|
$
|
|
|
Prior service cost (benefit)
|
|
|
170
|
|
|
|
404
|
|
|
|
357
|
|
|
|
222
|
|
Net actuarial (gain) loss
|
|
|
120,910
|
|
|
|
12,753
|
|
|
|
(25,238
|
)
|
|
|
(26,915
|
)
|
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
121,117
|
|
|
$
|
13,207
|
|
|
$
|
(24,881
|
)
|
|
$
|
(26,693
|
)
|
|
|
66
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
The estimated amount that will be amortized from accumulated
other comprehensive income into net periodic benefit cost in
2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Post-
|
|
In thousands
|
|
benefits
|
|
|
retirement
|
|
|
|
|
Net actuarial loss
|
|
$
|
67
|
|
|
$
|
|
|
Prior service cost
|
|
|
61
|
|
|
|
(41
|
)
|
Transition obligation
|
|
|
25
|
|
|
|
(3,060
|
)
|
|
|
Total estimated 2009 amortization
|
|
$
|
153
|
|
|
$
|
(3,101
|
)
|
|
|
Additional
Information
Change in accumulated other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
|
|
Beginning of the year
|
|
$
|
8,229
|
|
|
$
|
(28,972
|
)
|
Additional prior service cost incurred during the year
|
|
|
126
|
|
|
|
(46
|
)
|
Actuarial (losses) gains incurred during the year
|
|
|
(65,755
|
)
|
|
|
42,995
|
|
Translation gains (losses) incurred during the year
|
|
|
594
|
|
|
|
(900
|
)
|
Amortization during the year:
|
|
|
|
|
|
|
|
|
Transition obligation
|
|
|
15
|
|
|
|
12
|
|
Unrecognized prior service cost
|
|
|
27
|
|
|
|
(52
|
)
|
Actuarial gains
|
|
|
(1,940
|
)
|
|
|
(4,808
|
)
|
|
|
End of the year
|
|
$
|
(58,704
|
)
|
|
$
|
8,229
|
|
|
|
Assumptions
Weighted-average assumptions used to determine domestic benefit
obligations at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
Post-retirement
|
|
Percentages
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Discount rate
|
|
|
6.50
|
|
|
|
6.50
|
|
|
|
6.00
|
|
|
|
6.50
|
|
|
|
6.50
|
|
|
|
6.00
|
|
Rate of compensation increase
|
|
|
4.00
|
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine the domestic net
periodic benefit cost for years ending December 31 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
Post-retirement
|
|
Percentages
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Discount rate
|
|
|
6.50
|
|
|
|
6.00
|
|
|
|
5.75
|
|
|
|
6.50
|
|
|
|
6.00
|
|
|
|
5.75
|
|
Expected long-term return on plan assets
|
|
|
8.50
|
|
|
|
8.50
|
|
|
|
8.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
4.00
|
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
The discount rate reflects the current rate at which the pension
liabilities could be effectively settled at the end of the year
based on our December 31 measurement date. The discount rate was
determined by matching our expected benefit payments to payments
from a stream of AA or higher bonds available in the
marketplace, adjusted to eliminate the effects of call
provisions. This produced a discount rate for our U.S. plans of
6.50% in 2008, 6.50% in 2007 and 6.00% in 2006. The discount
rates on our foreign plans ranged from 2.00% to 6.25% in 2008,
2.00% to 5.25% in 2007 and 2.00% to 5.15% in 2006. There are no
other known or anticipated changes in our discount rate
assumption that will impact our pension expense in 2009.
67
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Expected
rate of return
Our expected rate of return on plan assets in 2008 equaled 8.5%,
which remained unchanged from 2007 and 2006. The expected rate
of return is designed to be a long-term assumption that may be
subject to considerable
year-to-year
variance from actual returns. In developing the expected
long-term rate of return, we considered our historical returns,
with consideration given to forecasted economic conditions, our
asset allocations, input from external consultants and broader
longer-term market indices. In 2008, the pension plan assets
yielded a loss of 28.8 %, compared to returns of 7.8% in 2007
and 12.3% in 2006.
We base our determination of pension expense or income on a
market-related valuation of assets which reduces
year-to-year
volatility. This market-related valuation recognizes investment
gains or losses over a
five-year
period from the year in which they occur. Investment gains or
losses for this purpose are the difference between the expected
return calculated using the market-related value of assets and
the actual return based on the market-related value of assets.
Since the market-related value of assets recognizes gains or
losses over a
five-year-period,
the future value of assets will be impacted as previously
deferred gains or losses are recorded.
Unrecognized
pension and post-retirement losses
As of our December 31, 2008 measurement date, our plans
have $95.7 million of cumulative unrecognized losses. To
the extent the unrecognized losses, when adjusted for the
difference between market and market related values of assets,
exceeds 10% of the projected benefit obligation, it will be
amortized into expense each year on a straight-line basis over
the remaining expected future-working lifetime of active
participants (currently approximating 12 years).
The assumed health care cost trend rates at December 31 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Health care cost trend rate assumed for next year
|
|
|
9.50
|
%
|
|
|
10.00
|
%
|
Rate to which the cost trend rate is assumed to decline (the
ultimate trend rate)
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
2018
|
|
|
|
2018
|
|
The assumed health care cost trend rates can have a significant
effect on the amounts reported for health care plans. A
one-percentage-point change in the assumed health care cost
trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-Point
|
|
|
1-Percentage-Point
|
|
In thousands
|
|
Increase
|
|
|
Decrease
|
|
|
|
|
Effect on total annual service and interest cost
|
|
$
|
38
|
|
|
$
|
(34
|
)
|
Effect on post-retirement benefit obligation
|
|
|
476
|
|
|
|
(427
|
)
|
Plan
Assets
Objective
The primary objective of our investment strategy is to meet the
pension obligation to our employees at a reasonable cost to the
company. This is primarily accomplished through growth of
capital and safety of the funds invested. The plans will
therefore be actively invested to achieve real growth of capital
over inflation through appreciation of securities held and
through the accumulation and reinvestment of dividend and
interest income.
68
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Asset
allocation
Our actual overall asset allocation for the plans as compared to
our investment policy goals is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Plan Assets
|
|
|
Target Allocation
|
|
Asset Class
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Equity Securities
|
|
|
59
|
%
|
|
|
66
|
%
|
|
|
60
|
%
|
|
|
70
|
%
|
Fixed Income Investments
|
|
|
10
|
%
|
|
|
9
|
%
|
|
|
30
|
%
|
|
|
10
|
%
|
Alternative Investments
|
|
|
24
|
%
|
|
|
22
|
%
|
|
|
10
|
%
|
|
|
20
|
%
|
Cash
|
|
|
7
|
%
|
|
|
3
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
During 2008, as part of our regular practice of reviewing asset
allocations and assessing target allocations, we increased the
targeted fixed income allocation from 10% to 30% and reduced the
equity securities allocation and alternative investment
allocation by 10% each. The transition to these new target
allocations will be conducted in an orderly manner. We plan to
increase our allocation to long duration fixed income securities
in future years as the funded status of our U.S. pension plans
improve.
While the target allocations do not have a percentage allocated
to cash, the plan assets will always include some cash due to
cash flow.
Equity securities include Pentair common stock in the amount of
$22.3 million and $32.8 million at December 31,
2008 and 2007, respectively.
Cash
Flows
Contributions
Pension contributions totaled $12.8 million and
$13.0 million in 2008 and 2007, respectively. Our 2009
pension contributions are expected to be in the range of
$40 million to $45 million. The increase in the 2009
expected contribution relates primarily to the enactment of the
Pension Protection Act of 2006. The 2009 expected contributions
will equal or exceed our minimum funding requirements.
Estimated
Future Benefit Payments
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid by the plans as
follows:
|
|
|
|
|
|
|
|
|
In millions
|
|
Pension benefits
|
|
|
Post-retirement
|
|
|
|
|
2009
|
|
$
|
30.1
|
|
|
$
|
3.7
|
|
2010
|
|
|
26.1
|
|
|
|
3.7
|
|
2011
|
|
|
26.6
|
|
|
|
3.7
|
|
2012
|
|
|
27.9
|
|
|
|
3.6
|
|
2013
|
|
|
28.9
|
|
|
|
3.6
|
|
2014-2018
|
|
|
165.7
|
|
|
|
16.5
|
|
Savings
plan
We have a 401(k) plan (the plan) with an employee
stock ownership (ESOP) bonus component, which covers
certain union and nearly all non-union U.S. employees who meet
certain age requirements. Under the plan, eligible U.S.
employees may voluntarily contribute a percentage of their
eligible compensation. The company matches contributions made by
employees who meet certain eligibility and service requirements.
Our matching contribution is 100% of eligible employee
contributions for the first 1% of eligible compensation, and 50%
of the next 5% of eligible compensation.
69
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
In addition to the matching contribution, all employees who meet
certain service requirements receive a discretionary ESOP
contribution equal to 1.5% of annual eligible compensation.
Our combined expense for the plan and ESOP was approximately
$17.0 million, $11.9 million, and $12.3 million,
in 2008, 2007, and 2006, respectively.
Other
retirement compensation
Total other accrued retirement compensation was
$13.6 million and $14.4 million in 2008 and 2007,
respectively, and is included in the pension and other
retirement compensation line of our Consolidated Balance Sheets.
Authorized
shares
We may issue up to 250 million shares of common stock. Our
Board of Directors may designate up to 15 million of those
shares as preferred stock. On December 10, 2004, the Board
of Directors designated a new series of preferred stock with
authorization to issue up to 2.5 million shares,
Series A Junior Participating Preferred Stock, par value
$0.10 per share. No shares of preferred stock were issued or
outstanding as of December 31, 2008 or December 31,
2007.
Purchase
rights
On December 10, 2004, our Board of Directors declared a
dividend of one preferred share purchase right (a
Right) for each outstanding share of common stock.
The dividend was payable upon the close of business on
January 28, 2005 to the shareholders of record upon the
close of business on January 28, 2005. Each Right entitles
the registered holder to purchase one one-hundredth of a share
of Series A Junior Participating Preferred Stock, at a
price of $240.00 per one one-hundredth of a share, subject to
adjustment. However, the Rights are not exercisable unless
certain change in control events occur, such as a person
acquiring or obtaining the right to acquire beneficial ownership
of 15% or more of our outstanding common stock. The description
and terms of the Rights are set forth in a Rights Agreement,
dated December 10, 2004. The Rights will expire on
January 28, 2015, unless the Rights are earlier redeemed or
exchanged in accordance with the terms of the Rights Agreement.
On January 28, 2005, the common share purchase rights
issued pursuant to the Rights Agreement dated July 31, 1995
were redeemed in their entirety for an amount equal to $0.0025
per right.
Share
repurchases
In December 2007, the Board of Directors authorized the
repurchase of shares of our common stock during 2008 up to a
maximum dollar limit of $50 million. As of
December 31, 2008, we had purchased 1,549,893 shares
for $50.0 million pursuant to this authorization. This
authorization expired on December 31, 2008.
Total stock-based compensation expense in 2008, 2007, and 2006
was $20.6 million, $22.9 million, and
$25.3 million, respectively.
70
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
We estimated the fair values using the Black-Scholes
option-pricing model, modified for dividends and using the
following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Risk-free interest rate
|
|
|
2.78
|
%
|
|
|
4.58
|
%
|
|
|
4.57
|
%
|
Expected dividend yield
|
|
|
2.12
|
%
|
|
|
1.92
|
%
|
|
|
1.45
|
%
|
Expected stock price volatility
|
|
|
27.00
|
%
|
|
|
28.50
|
%
|
|
|
31.50
|
%
|
Expected lives
|
|
|
4.8 yrs
|
|
|
|
4.8 yrs
|
|
|
|
4.5 yrs
|
|
Omnibus
stock incentive plans
In May 2008, the 2008 Omnibus Stock Incentive Plan as Amended
and Restated (the 2008 Plan) was approved by
shareholders. The 2008 Plan authorizes the issuance of
additional shares of our common stock and extends through
February 2018. The 2008 Plan allows for the granting of:
|
|
|
nonqualified stock options;
|
|
|
incentive stock options;
|
|
|
restricted shares;
|
|
|
restricted stock units;
|
|
|
dividend equivalent units;
|
|
|
stock appreciation rights;
|
|
|
performance shares;
|
|
|
performance units; and
|
|
|
other stock based awards.
|
The Plan is administered by our Compensation Committee (the
Committee), which is made up of independent members
of our Board of Directors. Employees eligible to receive awards
under the Plans are managerial, administrative, or other key
employees who are in a position to make a material contribution
to the continued profitable growth and long-term success of
Pentair. The Committee has the authority to select the
recipients of awards, determine the type and size of awards,
establish certain terms and conditions of award grants, and take
certain other actions as permitted under the Plan. The Plan
restricts the Committees authority to reprice awards or to
cancel and reissue awards at lower prices.
Non-qualified
and incentive stock options
Under the Plan, we may grant stock options to any eligible
employee with an exercise price equal to the market value of the
shares on the dates the options were granted. Options generally
vest over a three-year period commencing on the grant date and
expire ten years after the grant date. Prior to 2006, option
grants typically had a reload feature when shares are retired to
pay the exercise price, allowing individuals to receive
additional options upon exercise equal to the number of shares
retired. Option awards granted after 2005 under the 2004 Plan
and under the 2008 Plan do not have a reload feature attached to
the option. Annual expense for the value of stock options was
$10.5 million in 2008, $13.6 million in 2007 and
$14.3 million in 2006.
Restricted
shares and restricted stock units
Under the Plan, eligible employees are awarded restricted shares
or restricted stock units (awards) of our common stock. Share
awards generally vest from two to five years after issuance,
subject to continuous employment and certain other conditions.
Restricted share awards are valued at market value on the date
71
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
of grant and are expensed over the vesting period. Annual
expense for the value of restricted shares and restricted stock
units was $10.1 million in 2008, $9.3 million in 2007,
and $11.1 million in 2006.
Stock
appreciation rights, performance shares, and performance
units
Under the Plan, the Committee is permitted to issue these
awards; however, there have been no issuances of these awards.
Outside
directors nonqualified stock option plan
Nonqualified stock options were granted to outside directors
under the Outside Directors Nonqualified Stock Option Plan (the
Directors Plan) with an exercise price equal to the
market value of the shares on the option grant dates. Options
generally vest over a three-year period commencing on the grant
date and expire ten years after the grant date. The Directors
Plan expired in January 2008. Prior grants remain outstanding on
the terms in effect at the time of grant.
Non-employee Directors are also eligible to receive awards under
the 2008 Plan. Director awards are made by our Governance
Committee, which is made up of independent members of our Board
of Directors.
The Omnibus Stock Incentive Plan approved by the shareholders in
2004 (the 2004 Plan) expired upon approval of the
2008 Plan by shareholders. Prior grants made under the 2004 Plan
and earlier stock incentive plans remained outstanding on the
terms in effect at the time of grant.
Stock
options
The following table summarizes stock option activity under all
plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
Options Outstanding
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Intrinsic Value
|
|
|
|
|
Balance January 1, 2008
|
|
|
6,857,966
|
|
|
$
|
30.54
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,501,601
|
|
|
|
33.62
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(444,212
|
)
|
|
|
21.08
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(102,082
|
)
|
|
|
33.74
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(84,226
|
)
|
|
|
39.63
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008
|
|
|
7,729,047
|
|
|
$
|
31.54
|
|
|
|
6.0
|
|
|
$
|
7,625,417
|
|
|
|
Options exercisable December 31, 2008
|
|
|
5,158,679
|
|
|
$
|
30.75
|
|
|
|
4.5
|
|
|
$
|
7,624,052
|
|
Shares available for grant December 31, 2008
|
|
|
7,001,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of options granted in
2008, 2007, and 2006 was estimated to be $7.41, $8.44, and
$10.90 per share, respectively. The total intrinsic value of
options that were exercised during 2008, 2007, and 2006 was
$6.3 million, $12.6 million, and $8.5 million,
respectively. At December 31, 2008, the total unrecognized
compensation cost related to stock options was
$5.2 million. This cost is expected to be recognized over a
weighted average period of 1.4 years.
Cash received from option exercises for the years ended
December 31, 2008, 2007, and 2006 was $5.6 million,
$7.4 million, and $4.1 million, respectively. The
actual tax benefit realized for the tax deductions from option
exercises totaled $2.0 million, $4.1 million, and
$2.4 million for the years ended December 31, 2008,
2007, and 2006, respectively.
72
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Restricted
Share Awards
The following table summarizes restricted share award activity
under all plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
Restricted Shares Outstanding
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
Balance January 1, 2008
|
|
|
944,279
|
|
|
$
|
34.23
|
|
Granted
|
|
|
462,553
|
|
|
|
30.81
|
|
Vested
|
|
|
(235,765
|
)
|
|
|
30.95
|
|
Forfeited
|
|
|
(40,720
|
)
|
|
|
34.78
|
|
|
|
Balance December 31, 2008
|
|
|
1,130,347
|
|
|
$
|
33.49
|
|
|
|
As of December 31, 2008, there was $14.1 million of
unrecognized compensation cost related to restricted share
compensation arrangements granted under the 2004 Plan and the
2008 Plan. That cost is expected to be recognized over a
weighted average period of 2.2 years. The total fair value
of shares vested during the years ended December 31, 2008,
2007 and 2006, was $7.7 million, $13.5 million, and
$8.2 million, respectively.
The actual tax benefit realized for the tax deductions from
restricted share compensation arrangements totaled
$3.0 million, $4.2 million, and $2.6 million for
the years ended December 31, 2008, 2007, and 2006,
respectively.
During 2007, we increased the contractual term of options for
certain individuals resulting in additional compensation expense
of $0.9 million under SFAS 123R.
We classify our continuing operations into the following
business segments based primarily on types of products offered
and markets served:
|
|
|
Water manufactures and markets
essential products and systems used in the movement, storage,
treatment, and enjoyment of water. Water segment products
include water and wastewater pumps; filtration and purification
components and systems; storage tanks and pressure vessels; and
pool and spa equipment and accessories.
|
|
|
Technical Products designs,
manufactures, and markets standard, modified and custom
enclosures that house and protect sensitive electronics and
electrical components; thermal management products; and
accessories. Applications served include industrial machinery,
data communications, networking, telecommunications, test and
measurement, automotive, medical, security, defense, and general
electronics. Products include metallic and composite enclosures,
cabinets, cases, subracks, backplanes, and associated thermal
management systems.
|
|
|
Other is primarily composed of
unallocated corporate expenses, our captive insurance
subsidiary, intermediate finance companies, divested operations,
and intercompany eliminations.
|
The accounting policies of our operating segments are the same
as those described in the summary of significant accounting
policies. We evaluate performance based on the sales and
operating income of the segments and use a variety of ratios to
measure performance. These results are not necessarily
indicative of the results of operations that would have occurred
had each segment been an independent, stand-alone entity during
the periods presented.
73
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Financial information by reportable business segment is included
in the following summary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
|
Operating income (loss)
|
|
|
Water
|
|
$
|
2,206,142
|
|
|
$
|
2,230,770
|
|
|
$
|
2,023,358
|
|
|
$
|
206,357
|
|
|
$
|
273,677
|
|
|
$
|
219,611
|
|
Technical Products
|
|
|
1,145,834
|
|
|
|
1,050,133
|
|
|
|
999,244
|
|
|
|
169,315
|
|
|
|
153,586
|
|
|
|
148,905
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,987
|
)
|
|
|
(48,214
|
)
|
|
|
(55,573
|
)
|
|
|
|
|
|
|
Consolidated
|
|
$
|
3,351,976
|
|
|
$
|
3,280,903
|
|
|
$
|
3,022,602
|
|
|
$
|
324,685
|
|
|
$
|
379,049
|
|
|
$
|
312,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets(1)
|
|
|
Depreciation
|
|
|
Water
|
|
$
|
3,271,039
|
|
|
$
|
3,191,830
|
|
|
$
|
2,605,103
|
|
|
$
|
39,237
|
|
|
$
|
36,711
|
|
|
$
|
34,761
|
|
Technical Products
|
|
|
697,577
|
|
|
|
724,466
|
|
|
|
681,257
|
|
|
|
19,131
|
|
|
|
19,696
|
|
|
|
19,617
|
|
Other(1)
|
|
|
84,597
|
|
|
|
84,318
|
|
|
|
78,619
|
|
|
|
1,305
|
|
|
|
1,196
|
|
|
|
1,304
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
4,053,213
|
|
|
$
|
4,000,614
|
|
|
$
|
3,364,979
|
|
|
$
|
59,673
|
|
|
$
|
57,603
|
|
|
$
|
55,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Capital expenditures
|
|
|
Water
|
|
$
|
22,062
|
|
|
$
|
18,877
|
|
|
$
|
11,272
|
|
|
$
|
32,916
|
|
|
$
|
35,984
|
|
|
$
|
29,549
|
|
Technical Products
|
|
|
2,980
|
|
|
|
2,515
|
|
|
|
1,931
|
|
|
|
15,995
|
|
|
|
23,956
|
|
|
|
20,959
|
|
Other
|
|
|
2,566
|
|
|
|
4,169
|
|
|
|
4,974
|
|
|
|
4,178
|
|
|
|
1,576
|
|
|
|
386
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
27,608
|
|
|
$
|
25,561
|
|
|
$
|
18,177
|
|
|
$
|
53,089
|
|
|
$
|
61,516
|
|
|
$
|
50,894
|
|
|
|
|
|
|
|
The following table presents certain geographic information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
|
Long-lived assets
|
|
|
U.S
|
|
$
|
2,467,698
|
|
|
$
|
2,484,758
|
|
|
$
|
2,405,336
|
|
|
$
|
219,013
|
|
|
$
|
220,191
|
|
|
$
|
213,813
|
|
Europe
|
|
|
571,164
|
|
|
|
527,375
|
|
|
|
405,751
|
|
|
|
89,300
|
|
|
|
104,226
|
|
|
|
77,291
|
|
Asia and other
|
|
|
313,114
|
|
|
|
268,770
|
|
|
|
211,515
|
|
|
|
35,568
|
|
|
|
37,273
|
|
|
|
33,205
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
3,351,976
|
|
|
$
|
3,280,903
|
|
|
$
|
3,022,602
|
|
|
$
|
343,881
|
|
|
$
|
361,690
|
|
|
$
|
324,309
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All cash and cash equivalents are
included in Other.
|
Net sales are based on the location in which the sale
originated. Long-lived assets represent property, plant, and
equipment, net of related depreciation.
We offer a broad array of products and systems to multiple
markets and customers for which we do not have the information
systems to track revenues by primary product category. However,
our net sales by segment are representative of our sales by
major product category.
We sell our products through various distribution channels
including wholesale and retail distributors, original equipment
manufacturers, and home centers. In our Water segment, one
customer accounted for just over 10% of segment sales in 2008,
one customer accounted for just over 11% of segment sales in
2007 and one customer accounted for just over 10% of segment
sales in 2006. In our Technical Products segment, no single
customer accounted for more than 10% of segment sales in 2008,
2007, or 2006.
74
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
|
|
16.
|
Commitments
and Contingencies
|
Operating
lease commitments
Net rental expense under operating leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Gross rental expense
|
|
$
|
37,519
|
|
|
$
|
34,690
|
|
|
$
|
35,992
|
|
Sublease rental income
|
|
|
(172
|
)
|
|
|
(78
|
)
|
|
|
(264
|
)
|
|
|
Net rental expense
|
|
$
|
37,347
|
|
|
$
|
34,612
|
|
|
$
|
35,728
|
|
|
|
Future minimum lease commitments under non-cancelable operating
leases, principally related to facilities, vehicles, and
machinery and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
Minimum lease payments
|
|
$
|
26,409
|
|
|
$
|
20,267
|
|
|
$
|
18,271
|
|
|
$
|
13,359
|
|
|
$
|
9,121
|
|
|
$
|
11,952
|
|
|
$
|
99,379
|
|
Minimum sublease rentals
|
|
|
(457
|
)
|
|
|
(477
|
)
|
|
|
(498
|
)
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,481
|
)
|
|
|
Net future minimum lease commitments
|
|
$
|
25,952
|
|
|
$
|
19,790
|
|
|
$
|
17,773
|
|
|
$
|
13,310
|
|
|
$
|
9,121
|
|
|
$
|
11,952
|
|
|
$
|
97,898
|
|
|
|
Environmental
We have been named as defendants, targets, or PRP in a small
number of environmental
clean-ups,
in which our current or former business units have generally
been given de minimis status. To date, none of these
claims have resulted in
clean-up
costs, fines, penalties, or damages in an amount material to our
financial position or results of operations. We have disposed of
a number of businesses in recent years and in certain cases,
such as the disposition of the Cross Pointe Paper Corporation
uncoated paper business in 1995, the disposition of the Federal
Cartridge Company ammunition business in 1997, the disposition
of Lincoln Industrial in 2001, and the disposition of the Tools
Group in 2004, we have retained responsibility and potential
liability for certain environmental obligations. We have
received claims for indemnification from purchasers of these
businesses and have established what we believe to be adequate
accruals for potential liabilities arising out of retained
responsibilities. We settled some of the claims in prior years;
to date our recorded accruals have been adequate.
In addition, there are ongoing environmental issues at a limited
number of sites, including one site acquired in the acquisition
of Essef Corporation in 1999, which relate to operations no
longer carried out at the sites. We have established what we
believe to be adequate accruals for remediation costs at these
sites. We do not believe that projected response costs will
result in a material liability.
We may be named as a PRP at other sites in the future, for both
divested and acquired businesses. When the outcome of the matter
is probable and it is possible to provide reasonable estimates
of our liability with respect to environmental sites, provisions
have been made in accordance with generally accepted accounting
principles in the United States. As of December 31, 2008
and 2007, our undiscounted reserves for such environmental
liabilities were approximately $3.1 million and
$3.5 million, respectively. We cannot ensure that
environmental requirements will not change or become more
stringent over time or that our eventual environmental
clean-up
costs and liabilities will not exceed the amount of our current
reserves.
Litigation
We have been made parties to a number of actions filed or have
been given notice of potential claims relating to the conduct of
our business, including those pertaining to commercial disputes,
product liability, environmental, safety and health, patent
infringement, and employment matters.
75
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
We comply with the requirements of SFAS No. 5,
Accounting for Contingencies, and related guidance, and
record liabilities for an estimated loss from a loss contingency
where the outcome of the matter is probable and can be
reasonably estimated. Factors that are considered when
determining whether the conditions for accrual have been met
include the (a) nature of the litigation, claim, or
assessment, (b) progress of the case, including progress
after the date of the financial statements but before the
issuance date of the financial statements, (c) opinions of
legal counsel, and (d) managements intended response
to the litigation, claim, or assessment. Where the reasonable
estimate of the probable loss is a range, we record the most
likely estimate of the loss. When no amount within the range is
a better estimate than any other amount, however, the minimum
amount in the range is accrued. Gain contingencies are not
recorded until realized.
While we believe that a material adverse impact on our
consolidated financial position, results of operations, or cash
flows from any such future charges is unlikely, given the
inherent uncertainty of litigation, a remote possibility exists
that a future adverse ruling or unfavorable development could
result in future charges that could have a material adverse
impact. We do and will continue to periodically reexamine our
estimates of probable liabilities and any associated expenses
and receivables and make appropriate adjustments to such
estimates based on experience and developments in litigation. As
a result, the current estimates of the potential impact on our
consolidated financial position, results of operations, and cash
flows for the proceedings and claims could change in the future.
Product
liability claims
We are subject to various product liability lawsuits and
personal injury claims. A substantial number of these lawsuits
and claims are insured and accrued for by Penwald our captive
insurance subsidiary. Penwald records a liability for these
claims based on actuarial projections of ultimate losses. For
all other claims, accruals covering the claims are recorded, on
an undiscounted basis, when it is probable that a liability has
been incurred and the amount of the liability can be reasonably
estimated based on existing information. The accruals are
adjusted periodically as additional information becomes
available. We have not experienced significant unfavorable
trends in either the severity or frequency of product liability
lawsuits or personal injury claims.
Horizon
Litigation
The Horizon litigation against our subsidiary Essef Corporation
and certain of its subsidiaries by Celebrity Cruise Lines, Inc.
(Celebrity) was settled by payment of
$35 million to Celebrity in August 2008, a portion of which
was covered by insurance. As a result of the settlement, we
recorded a charge of $20.4 million in 2008 which is shown
on the line Legal settlement in the Consolidated
Statements of Income.
Warranties
and guarantees
In connection with the disposition of our businesses or product
lines, we may agree to indemnify purchasers for various
potential liabilities relating to the sold business, such as
pre-closing tax, product liability, warranty, environmental, or
other obligations. The subject matter, amounts, and duration of
any such indemnification obligations vary for each type of
liability indemnified and may vary widely from transaction to
transaction. Generally, the maximum obligation under such
indemnifications is not explicitly stated and as a result, the
overall amount of these obligations cannot be reasonably
estimated. Historically, we have not made significant payments
for these indemnifications. We believe that if we were to incur
a loss in any of these matters, the loss would not have a
material effect on our financial condition or results of
operations.
In accordance with FASB Interpretation No. 45
(FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Others, we recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee.
76
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
We provide service and warranty policies on our products.
Liability under service and warranty policies is based upon a
review of historical warranty and service claim experience.
Adjustments are made to accruals as claim data and historical
experience warrant.
The changes in the carrying amount of service and product
warranties for the year ended December 31, 2008 and 2007
are as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
2008
|
|
|
2007
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
39,077
|
|
|
$
|
33,764
|
|
Service and product warranty provision
|
|
|
62,655
|
|
|
|
68,257
|
|
Payments
|
|
|
(70,373
|
)
|
|
|
(64,474
|
)
|
Acquired
|
|
|
599
|
|
|
|
1,116
|
|
Foreign currency translation
|
|
|
(399
|
)
|
|
|
414
|
|
|
|
Balance at end of the year
|
|
$
|
31,559
|
|
|
$
|
39,077
|
|
|
|
Stand-by
letters of credit
In the ordinary course of business, we are required to commit to
bonds that require payments to our customers for any
non-performance. The outstanding face value of the bonds
fluctuates with the value of our projects in process and in our
backlog. In addition, we issue financial stand-by letters of
credit primarily to secure our performance to third parties
under self-insurance programs and certain legal matters. As of
December 31, 2008 and December 31, 2007, the
outstanding value of these instruments totaled
$64.5 million and $58.5 million, respectively.
77
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
|
|
17.
|
Selected
Quarterly Financial Data (Unaudited)
|
The following table represents the 2008 quarterly financial
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
In thousands, except per-share data
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Year
|
|
|
|
|
Net sales
|
|
$
|
830,146
|
|
|
$
|
898,378
|
|
|
$
|
855,815
|
|
|
$
|
767,637
|
|
|
$
|
3,351,976
|
|
Gross profit
|
|
|
250,694
|
|
|
|
278,410
|
|
|
|
255,953
|
|
|
|
229,493
|
|
|
|
1,014,550
|
|
Operating income
|
|
|
97,327
|
|
|
|
96,547
|
|
|
|
85,614
|
|
|
|
45,197
|
|
|
|
324,685
|
|
Income from continuing operations
|
|
|
52,463
|
|
|
|
139,837
|
|
|
|
42,902
|
|
|
|
21,161
|
|
|
|
256,363
|
|
Gain (loss) from discontinued operations, net of tax
|
|
|
(1,036
|
)
|
|
|
(1,102
|
)
|
|
|
(1,514
|
)
|
|
|
(2,131
|
)
|
|
|
(5,783
|
)
|
Gain (loss) on disposal of discontinued operations, net of tax
|
|
|
(7,137
|
)
|
|
|
|
|
|
|
(268
|
)
|
|
|
(14,441
|
)
|
|
|
(21,846
|
)
|
Net income
|
|
|
44,290
|
|
|
|
138,735
|
|
|
|
41,120
|
|
|
|
4,589
|
|
|
|
228,734
|
|
Earnings per common
share(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.53
|
|
|
$
|
1.43
|
|
|
$
|
0.44
|
|
|
$
|
0.22
|
|
|
$
|
2.62
|
|
Discontinued operations
|
|
|
(0.08
|
)
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
(0.17
|
)
|
|
|
(0.28
|
)
|
|
|
Basic earnings per common share
|
|
$
|
0.45
|
|
|
$
|
1.42
|
|
|
$
|
0.42
|
|
|
$
|
0.05
|
|
|
$
|
2.34
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.53
|
|
|
$
|
1.41
|
|
|
$
|
0.43
|
|
|
$
|
0.22
|
|
|
$
|
2.59
|
|
Discontinued operations
|
|
|
(0.08
|
)
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
(0.17
|
)
|
|
|
(0.28
|
)
|
|
|
Diluted earnings per common share
|
|
$
|
0.45
|
|
|
$
|
1.40
|
|
|
$
|
0.41
|
|
|
$
|
0.05
|
|
|
$
|
2.31
|
|
|
|
|
|
|
(1) |
|
Amounts may not total to annual
earnings because each quarter and year are calculated separately
based on basic and diluted weighted-average common shares
outstanding during that period.
|
78
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
The following table represents the 2007 quarterly financial
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
In thousands, except per-share data
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Year
|
|
|
|
|
Net sales
|
|
$
|
780,286
|
|
|
$
|
884,570
|
|
|
$
|
809,377
|
|
|
$
|
806,670
|
|
|
$
|
3,280,903
|
|
Gross profit
|
|
|
235,779
|
|
|
|
278,451
|
|
|
|
242,921
|
|
|
|
255,547
|
|
|
|
1,012,698
|
|
Operating income
|
|
|
82,501
|
|
|
|
112,952
|
|
|
|
92,596
|
|
|
|
91,000
|
|
|
|
379,049
|
|
Income from continuing operations
|
|
|
43,197
|
|
|
|
60,976
|
|
|
|
58,867
|
|
|
|
49,078
|
|
|
|
212,118
|
|
Gain (loss) from discontinued operations, net of tax
|
|
|
(1,067
|
)
|
|
|
1,025
|
|
|
|
(823
|
)
|
|
|
(764
|
)
|
|
|
(1,629
|
)
|
Gain (loss) on disposal of discontinued operations, net of tax
|
|
|
143
|
|
|
|
64
|
|
|
|
|
|
|
|
231
|
|
|
|
438
|
|
Net income
|
|
|
42,273
|
|
|
|
62,065
|
|
|
|
58,044
|
|
|
|
48,545
|
|
|
|
210,927
|
|
Earnings per common
share(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.44
|
|
|
$
|
0.62
|
|
|
$
|
0.60
|
|
|
$
|
0.50
|
|
|
$
|
2.15
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.01
|
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
Basic earnings per common share
|
|
$
|
0.43
|
|
|
$
|
0.63
|
|
|
$
|
0.59
|
|
|
$
|
0.49
|
|
|
$
|
2.14
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.43
|
|
|
$
|
0.61
|
|
|
$
|
0.59
|
|
|
$
|
0.49
|
|
|
$
|
2.12
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.01
|
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
Diluted earnings per common share
|
|
$
|
0.42
|
|
|
$
|
0.62
|
|
|
$
|
0.58
|
|
|
$
|
0.48
|
|
|
$
|
2.11
|
|
|
|
|
|
|
(1) |
|
Amounts may not total to annual
earnings because each quarter and year are calculated separately
based on basic and diluted weighted-average common shares
outstanding during that period.
|
79
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
|
|
18.
|
Financial
Statements of Subsidiary Guarantors
|
The Senior Notes due 2009 are jointly and severally guaranteed
by domestic subsidiaries (the Guarantor
Subsidiaries), each of which is directly or indirectly
wholly-owned by Pentair (the Parent Company). The
following supplemental financial information sets forth the
condensed consolidated balance sheets as of December 31,
2008 and 2007, the related condensed consolidated statements of
income and statements of cash flows for each of the three years
in the period ended December 31, 2008, for the Parent
Company, the Guarantor Subsidiaries, the Non-Guarantor
Subsidiaries, and total consolidated Pentair and subsidiaries.
Pentair,
Inc. and Subsidiaries
Condensed Consolidated Statements of Income
For the year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
In thousands
|
|
Company
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
2,560,930
|
|
|
$
|
1,021,096
|
|
|
$
|
(230,050
|
)
|
|
$
|
3,351,976
|
|
Cost of goods sold
|
|
|
40
|
|
|
|
1,847,160
|
|
|
|
719,534
|
|
|
|
(229,308
|
)
|
|
|
2,337,426
|
|
|
|
Gross profit
|
|
|
(40
|
)
|
|
|
713,770
|
|
|
|
301,562
|
|
|
|
(742
|
)
|
|
|
1,014,550
|
|
Selling, general and administrative
|
|
|
3,536
|
|
|
|
419,013
|
|
|
|
185,172
|
|
|
|
(741
|
)
|
|
|
606,980
|
|
Research and development
|
|
|
269
|
|
|
|
47,186
|
|
|
|
14,995
|
|
|
|
|
|
|
|
62,450
|
|
Legal settlement
|
|
|
20,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,435
|
|
|
|
Operating (loss) income
|
|
|
(24,280
|
)
|
|
|
247,571
|
|
|
|
101,395
|
|
|
|
(1
|
)
|
|
|
324,685
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from investment in subsidiary
|
|
|
(194,295
|
)
|
|
|
|
|
|
|
|
|
|
|
194,295
|
|
|
|
|
|
Gain on sale of interest in subsidiaries
|
|
|
|
|
|
|
(109,648
|
)
|
|
|
|
|
|
|
|
|
|
|
(109,648
|
)
|
Equity losses of unconsolidated subsidiary
|
|
|
|
|
|
|
3,041
|
|
|
|
|
|
|
|
|
|
|
|
3,041
|
|
Loss on early extinguishment of debt
|
|
|
4,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,611
|
|
Net interest (income) expense
|
|
|
(88,407
|
)
|
|
|
153,910
|
|
|
|
(6,068
|
)
|
|
|
|
|
|
|
59,435
|
|
Other
|
|
|
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
106
|
|
|
|
Income (loss) from continuing operations before income taxes and
minority interest
|
|
|
253,811
|
|
|
|
200,162
|
|
|
|
107,463
|
|
|
|
(194,296
|
)
|
|
|
367,140
|
|
Minority interest
|
|
|
|
|
|
|
2,482
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
2,433
|
|
Provision for income taxes
|
|
|
25,320
|
|
|
|
53,386
|
|
|
|
29,638
|
|
|
|
|
|
|
|
108,344
|
|
|
|
Income (loss) from continuing operations
|
|
|
228,491
|
|
|
|
144,294
|
|
|
|
77,874
|
|
|
|
(194,296
|
)
|
|
|
256,363
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
|
|
|
|
(6,597
|
)
|
|
|
814
|
|
|
|
|
|
|
|
(5,783
|
)
|
Gain (loss) on disposal of discontinued operations, net of tax
|
|
|
243
|
|
|
|
(17,570
|
)
|
|
|
(4,519
|
)
|
|
|
|
|
|
|
(21,846
|
)
|
|
|
Net income (loss)
|
|
$
|
228,734
|
|
|
$
|
120,127
|
|
|
$
|
74,169
|
|
|
$
|
(194,296
|
)
|
|
$
|
228,734
|
|
|
|
80
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Pentair,
Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
In thousands
|
|
Company
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,720
|
|
|
$
|
3,345
|
|
|
$
|
33,279
|
|
|
$
|
|
|
|
$
|
39,344
|
|
Accounts and notes receivable, net
|
|
|
454
|
|
|
|
338,134
|
|
|
|
133,640
|
|
|
|
(11,147
|
)
|
|
|
461,081
|
|
Inventories
|
|
|
|
|
|
|
291,264
|
|
|
|
126,023
|
|
|
|
|
|
|
|
417,287
|
|
Deferred tax assets
|
|
|
131,984
|
|
|
|
38,712
|
|
|
|
4,445
|
|
|
|
(123,787
|
)
|
|
|
51,354
|
|
Prepaid expenses and other current assets
|
|
|
36,331
|
|
|
|
10,522
|
|
|
|
32,305
|
|
|
|
(16,045
|
)
|
|
|
63,113
|
|
|
|
Total current assets
|
|
|
171,489
|
|
|
|
681,977
|
|
|
|
329,692
|
|
|
|
(150,979
|
)
|
|
|
1,032,179
|
|
Property, plant and equipment, net
|
|
|
8,012
|
|
|
|
210,901
|
|
|
|
124,968
|
|
|
|
|
|
|
|
343,881
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in/advances to subsidiaries
|
|
|
2,731,908
|
|
|
|
87,642
|
|
|
|
891,512
|
|
|
|
(3,711,062
|
)
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
1,643,123
|
|
|
|
458,728
|
|
|
|
|
|
|
|
2,101,851
|
|
Intangibles, net
|
|
|
|
|
|
|
349,670
|
|
|
|
165,838
|
|
|
|
|
|
|
|
515,508
|
|
Other
|
|
|
63,737
|
|
|
|
8,848
|
|
|
|
15,784
|
|
|
|
(28,575
|
)
|
|
|
59,794
|
|
|
|
Total other assets
|
|
|
2,795,645
|
|
|
|
2,089,283
|
|
|
|
1,531,862
|
|
|
|
(3,739,637
|
)
|
|
|
2,677,153
|
|
|
|
Total assets
|
|
$
|
2,975,146
|
|
|
$
|
2,982,161
|
|
|
$
|
1,986,522
|
|
|
$
|
(3,890,616
|
)
|
|
$
|
4,053,213
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Current maturities of long-term debt
|
|
|
113,070
|
|
|
|
139
|
|
|
|
147,500
|
|
|
|
(260,085
|
)
|
|
|
624
|
|
Accounts payable
|
|
|
1,963
|
|
|
|
160,700
|
|
|
|
114,380
|
|
|
|
(59,145
|
)
|
|
|
217,898
|
|
Employee compensation and benefits
|
|
|
13,075
|
|
|
|
42,663
|
|
|
|
34,472
|
|
|
|
|
|
|
|
90,210
|
|
Current pension and post-retirement benefits
|
|
|
8,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,890
|
|
Accrued product claims and warranties
|
|
|
|
|
|
|
27,421
|
|
|
|
14,138
|
|
|
|
|
|
|
|
41,559
|
|
Income taxes
|
|
|
40,106
|
|
|
|
(35,825
|
)
|
|
|
1,170
|
|
|
|
|
|
|
|
5,451
|
|
Accrued rebates and sales incentives
|
|
|
|
|
|
|
20,232
|
|
|
|
8,665
|
|
|
|
|
|
|
|
28,897
|
|
Other current liabilities
|
|
|
18,899
|
|
|
|
62,055
|
|
|
|
40,043
|
|
|
|
(16,022
|
)
|
|
|
104,975
|
|
|
|
Total current liabilities
|
|
|
196,003
|
|
|
|
277,385
|
|
|
|
360,368
|
|
|
|
(335,252
|
)
|
|
|
498,504
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
953,349
|
|
|
|
1,947,518
|
|
|
|
315,089
|
|
|
|
(2,262,488
|
)
|
|
|
953,468
|
|
Pension and other retirement compensation
|
|
|
181,695
|
|
|
|
18,135
|
|
|
|
70,309
|
|
|
|
|
|
|
|
270,139
|
|
Post-retirement medical and other benefits
|
|
|
20,703
|
|
|
|
42,594
|
|
|
|
|
|
|
|
(28,574
|
)
|
|
|
34,723
|
|
Long-term income taxes payable
|
|
|
28,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,139
|
|
Deferred tax liabilities
|
|
|
2,052
|
|
|
|
211,920
|
|
|
|
56,374
|
|
|
|
(123,787
|
)
|
|
|
146,559
|
|
Due to / (from) affiliates
|
|
|
(350,948
|
)
|
|
|
141,853
|
|
|
|
815,295
|
|
|
|
(606,200
|
)
|
|
|
|
|
Other non-current liabilities
|
|
|
45,472
|
|
|
|
(84,853
|
)
|
|
|
140,993
|
|
|
|
|
|
|
|
101,612
|
|
|
|
Total liabilities
|
|
|
1,076,465
|
|
|
|
2,554,552
|
|
|
|
1,758,428
|
|
|
|
(3,356,301
|
)
|
|
|
2,033,144
|
|
Minority Interest
|
|
|
|
|
|
|
119,623
|
|
|
|
1,765
|
|
|
|
|
|
|
|
121,388
|
|
Shareholders equity
|
|
|
1,898,681
|
|
|
|
307,986
|
|
|
|
226,329
|
|
|
|
(534,315
|
)
|
|
|
1,898,681
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
2,975,146
|
|
|
$
|
2,982,161
|
|
|
$
|
1,986,522
|
|
|
$
|
(3,890,616
|
)
|
|
$
|
4,053,213
|
|
|
|
81
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Pentair,
Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
In thousands
|
|
Company
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
228,734
|
|
|
$
|
120,127
|
|
|
$
|
74,169
|
|
|
$
|
(194,296
|
)
|
|
$
|
228,734
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) loss from discontinued operations
|
|
|
|
|
|
|
6,597
|
|
|
|
(814
|
)
|
|
|
|
|
|
|
5,783
|
|
(Gain) loss on disposal of discontinued operations
|
|
|
(243
|
)
|
|
|
21,292
|
|
|
|
797
|
|
|
|
|
|
|
|
21,846
|
|
Equity losses of unconsolidated subsidiary
|
|
|
|
|
|
|
3,041
|
|
|
|
|
|
|
|
|
|
|
|
3,041
|
|
Minority interest
|
|
|
|
|
|
|
2,295
|
|
|
|
138
|
|
|
|
|
|
|
|
2,433
|
|
Depreciation
|
|
|
1,305
|
|
|
|
38,338
|
|
|
|
20,030
|
|
|
|
|
|
|
|
59,673
|
|
Amortization
|
|
|
2,567
|
|
|
|
18,384
|
|
|
|
6,657
|
|
|
|
|
|
|
|
27,608
|
|
Earnings from investments in subsidiaries
|
|
|
(194,296
|
)
|
|
|
|
|
|
|
|
|
|
|
194,296
|
|
|
|
|
|
Deferred income taxes
|
|
|
(10,925
|
)
|
|
|
45,449
|
|
|
|
6,230
|
|
|
|
|
|
|
|
40,754
|
|
Stock compensation
|
|
|
20,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,572
|
|
Excess tax benefits from stock-based compensation
|
|
|
(1,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,617
|
)
|
Other
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
510
|
|
Gain on sale of interest in subsidiaries
|
|
|
|
|
|
|
(109,648
|
)
|
|
|
|
|
|
|
|
|
|
|
(109,648
|
)
|
Changes in assets and liabilities, net of effects of business
acquisitions and dispositions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable
|
|
|
1,895
|
|
|
|
(16,784
|
)
|
|
|
36,884
|
|
|
|
(40,242
|
)
|
|
|
(18,247
|
)
|
Inventories
|
|
|
|
|
|
|
(23,930
|
)
|
|
|
(9,381
|
)
|
|
|
|
|
|
|
(33,311
|
)
|
Prepaid expenses and other current assets
|
|
|
(51,789
|
)
|
|
|
285
|
|
|
|
30,913
|
|
|
|
(6,803
|
)
|
|
|
(27,394
|
)
|
Accounts payable
|
|
|
(4,813
|
)
|
|
|
(6,296
|
)
|
|
|
17,626
|
|
|
|
(8,490
|
)
|
|
|
(1,973
|
)
|
Employee compensation and benefits
|
|
|
(6,435
|
)
|
|
|
(15,616
|
)
|
|
|
132
|
|
|
|
|
|
|
|
(21,919
|
)
|
Accrued product claims and warranties
|
|
|
|
|
|
|
(6,812
|
)
|
|
|
(474
|
)
|
|
|
|
|
|
|
(7,286
|
)
|
Income taxes
|
|
|
43,567
|
|
|
|
(37,278
|
)
|
|
|
(10,698
|
)
|
|
|
|
|
|
|
(4,409
|
)
|
Other current liabilities
|
|
|
27,240
|
|
|
|
2
|
|
|
|
(25,085
|
)
|
|
|
6,830
|
|
|
|
8,987
|
|
Pension and post-retirement benefits
|
|
|
5,135
|
|
|
|
(7,746
|
)
|
|
|
2,912
|
|
|
|
|
|
|
|
301
|
|
Other assets and liabilities
|
|
|
39,526
|
|
|
|
8,842
|
|
|
|
(30,194
|
)
|
|
|
|
|
|
|
18,174
|
|
|
|
Net cash provided by (used for) continuing operations
|
|
|
100,933
|
|
|
|
40,542
|
|
|
|
119,842
|
|
|
|
(48,705
|
)
|
|
|
212,612
|
|
Net cash provided by (used for) discontinued operations
|
|
|
|
|
|
|
(10,239
|
)
|
|
|
1,842
|
|
|
|
|
|
|
|
(8,397
|
)
|
|
|
Net cash provided by operating activities
|
|
|
100,933
|
|
|
|
30,303
|
|
|
|
121,684
|
|
|
|
(48,705
|
)
|
|
|
204,215
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(4,177
|
)
|
|
|
(34,371
|
)
|
|
|
(14,541
|
)
|
|
|
|
|
|
|
(53,089
|
)
|
Proceeds from sale of property and equipment
|
|
|
|
|
|
|
288
|
|
|
|
4,453
|
|
|
|
|
|
|
|
4,741
|
|
Acquisitions, net of cash acquired or received
|
|
|
(2,046
|
)
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
(2,027
|
)
|
Divestitures
|
|
|
|
|
|
|
36,574
|
|
|
|
1,333
|
|
|
|
|
|
|
|
37,907
|
|
Other
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
Net cash provided by (used for ) investing activities of
continuing operations
|
|
|
(6,235
|
)
|
|
|
2,491
|
|
|
|
(8,736
|
)
|
|
|
|
|
|
|
(12,480
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net short-term borrowings (repayments)
|
|
|
(16,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,994
|
)
|
Proceeds from long-term debt
|
|
|
715,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
715,000
|
|
Repayment of long-term debt
|
|
|
(805,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(805,016
|
)
|
Debt issuance costs
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(114
|
)
|
Net change in advances to subsidiaries
|
|
|
107,951
|
|
|
|
(76,635
|
)
|
|
|
(80,024
|
)
|
|
|
48,708
|
|
|
|
|
|
Excess tax benefit from stock-based compensation
|
|
|
1,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,617
|
|
Proceeds from exercise of stock options
|
|
|
5,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,590
|
|
Repurchases of common stock
|
|
|
(50,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,000
|
)
|
Dividends paid
|
|
|
(56,631
|
)
|
|
|
39,193
|
|
|
|
(49,846
|
)
|
|
|
|
|
|
|
(67,284
|
)
|
|
|
Net cash provided by financing activities of continuing
operations
|
|
|
(98,597
|
)
|
|
|
(37,442
|
)
|
|
|
(129,870
|
)
|
|
|
48,708
|
|
|
|
(217,201
|
)
|
Effect of exchange rate changes on cash
|
|
|
154
|
|
|
|
(2,858
|
)
|
|
|
(3,281
|
)
|
|
|
|
|
|
|
(5,985
|
)
|
|
|
Change in cash and cash equivalents
|
|
|
(3,745
|
)
|
|
|
(7,506
|
)
|
|
|
(20,203
|
)
|
|
|
3
|
|
|
|
(31,451
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
6,465
|
|
|
|
10,848
|
|
|
|
53,482
|
|
|
|
|
|
|
|
70,795
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
2,720
|
|
|
$
|
3,342
|
|
|
$
|
33,279
|
|
|
$
|
3
|
|
|
$
|
39,344
|
|
|
|
82
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Pentair,
Inc. and Subsidiaries
Condensed Consolidated Statements of Income
For the year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
In thousands
|
|
Company
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
2,567,531
|
|
|
$
|
908,515
|
|
|
$
|
(195,143
|
)
|
|
$
|
3,280,903
|
|
Cost of goods sold
|
|
|
|
|
|
|
1,812,310
|
|
|
|
650,522
|
|
|
|
(194,627
|
)
|
|
|
2,268,205
|
|
|
|
Gross profit
|
|
|
|
|
|
|
755,221
|
|
|
|
257,993
|
|
|
|
(516
|
)
|
|
|
1,012,698
|
|
Selling, general and administrative
|
|
|
16,686
|
|
|
|
395,909
|
|
|
|
164,749
|
|
|
|
(516
|
)
|
|
|
576,828
|
|
Research and development
|
|
|
|
|
|
|
42,314
|
|
|
|
14,507
|
|
|
|
|
|
|
|
56,821
|
|
Legal settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(16,686
|
)
|
|
|
316,998
|
|
|
|
78,737
|
|
|
|
|
|
|
|
379,049
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from investment in subsidiary
|
|
|
(172,717
|
)
|
|
|
|
|
|
|
|
|
|
|
172,717
|
|
|
|
|
|
Gain on sale of interest in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity losses of unconsolidated subsidiary
|
|
|
|
|
|
|
2,865
|
|
|
|
|
|
|
|
|
|
|
|
2,865
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (income) expense
|
|
|
(76,516
|
)
|
|
|
147,900
|
|
|
|
(2,991
|
)
|
|
|
|
|
|
|
68,393
|
|
Other
|
|
|
|
|
|
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
1,230
|
|
|
|
Income (loss) from continuing operations before income taxes and
minority interest
|
|
|
232,547
|
|
|
|
165,003
|
|
|
|
81,728
|
|
|
|
(172,717
|
)
|
|
|
306,561
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
21,728
|
|
|
|
57,958
|
|
|
|
14,757
|
|
|
|
|
|
|
|
94,443
|
|
|
|
Income (loss) from continuing operations
|
|
|
210,819
|
|
|
|
107,045
|
|
|
|
66,971
|
|
|
|
(172,717
|
)
|
|
|
212,118
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
(330
|
)
|
|
|
(2,871
|
)
|
|
|
1,572
|
|
|
|
|
|
|
|
(1,629
|
)
|
Gain (loss) on disposal of discontinued operations, net of tax
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
438
|
|
|
|
Net income (loss)
|
|
$
|
210,927
|
|
|
$
|
104,174
|
|
|
$
|
68,543
|
|
|
$
|
(172,717
|
)
|
|
$
|
210,927
|
|
|
|
83
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Pentair,
Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
In thousands
|
|
Company
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,465
|
|
|
$
|
10,848
|
|
|
$
|
53,482
|
|
|
$
|
|
|
|
$
|
70,795
|
|
Accounts and notes receivable, net
|
|
|
522
|
|
|
|
325,718
|
|
|
|
186,558
|
|
|
|
(51,390
|
)
|
|
|
461,408
|
|
Inventories
|
|
|
|
|
|
|
257,527
|
|
|
|
121,491
|
|
|
|
|
|
|
|
379,018
|
|
Deferred tax assets
|
|
|
70,494
|
|
|
|
35,152
|
|
|
|
7,947
|
|
|
|
(63,082
|
)
|
|
|
50,511
|
|
Prepaid expenses and other current assets
|
|
|
12,119
|
|
|
|
9,283
|
|
|
|
37,246
|
|
|
|
(22,849
|
)
|
|
|
35,799
|
|
Current assets of discontinued operations
|
|
|
|
|
|
|
35,554
|
|
|
|
4,936
|
|
|
|
|
|
|
|
40,490
|
|
|
|
Total current assets
|
|
|
89,600
|
|
|
|
674,082
|
|
|
|
411,660
|
|
|
|
(137,321
|
)
|
|
|
1,038,021
|
|
Property, plant and equipment, net
|
|
|
5,139
|
|
|
|
214,969
|
|
|
|
141,582
|
|
|
|
|
|
|
|
361,690
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in/advances to subsidiaries
|
|
|
2,434,414
|
|
|
|
90,210
|
|
|
|
575,240
|
|
|
|
(3,099,864
|
)
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
1,582,395
|
|
|
|
416,724
|
|
|
|
|
|
|
|
1,999,119
|
|
Intangibles, net
|
|
|
|
|
|
|
324,821
|
|
|
|
162,207
|
|
|
|
|
|
|
|
487,028
|
|
Other
|
|
|
80,575
|
|
|
|
14,990
|
|
|
|
17,055
|
|
|
|
(30,382
|
)
|
|
|
82,238
|
|
Non-current assets of discontinued operations
|
|
|
|
|
|
|
32,238
|
|
|
|
280
|
|
|
|
|
|
|
|
32,518
|
|
|
|
Total other assets
|
|
|
2,514,989
|
|
|
|
2,044,654
|
|
|
|
1,171,506
|
|
|
|
(3,130,246
|
)
|
|
|
2,600,903
|
|
|
|
Total assets
|
|
$
|
2,609,728
|
|
|
$
|
2,933,705
|
|
|
$
|
1,724,748
|
|
|
$
|
(3,267,567
|
)
|
|
$
|
4,000,614
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,586
|
|
|
$
|
|
|
|
$
|
13,586
|
|
Current maturities of long-term debt
|
|
|
20,114
|
|
|
|
157
|
|
|
|
338,828
|
|
|
|
(354,024
|
)
|
|
|
5,075
|
|
Accounts payable
|
|
|
1,582
|
|
|
|
172,671
|
|
|
|
104,188
|
|
|
|
(50,655
|
)
|
|
|
227,786
|
|
Employee compensation and benefits
|
|
|
15,935
|
|
|
|
58,397
|
|
|
|
36,750
|
|
|
|
|
|
|
|
111,082
|
|
Current pension and post-retirement benefits
|
|
|
8,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,557
|
|
Accrued product claims and warranties
|
|
|
|
|
|
|
34,073
|
|
|
|
15,004
|
|
|
|
|
|
|
|
49,077
|
|
Income taxes
|
|
|
2,501
|
|
|
|
(3,547
|
)
|
|
|
16,045
|
|
|
|
|
|
|
|
14,999
|
|
Accrued rebates and sales incentives
|
|
|
|
|
|
|
27,976
|
|
|
|
8,454
|
|
|
|
|
|
|
|
36,430
|
|
Other current liabilities
|
|
|
19,509
|
|
|
|
52,585
|
|
|
|
40,779
|
|
|
|
(22,852
|
)
|
|
|
90,021
|
|
Current liabilities of discontinued operations
|
|
|
|
|
|
|
3,553
|
|
|
|
151
|
|
|
|
|
|
|
|
3,704
|
|
|
|
Total current liabilities
|
|
|
68,198
|
|
|
|
345,865
|
|
|
|
573,785
|
|
|
|
(427,531
|
)
|
|
|
560,317
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
1,021,463
|
|
|
|
1,972,655
|
|
|
|
34,140
|
|
|
|
(1,986,333
|
)
|
|
|
1,041,925
|
|
Pension and other retirement compensation
|
|
|
67,872
|
|
|
|
22,905
|
|
|
|
70,265
|
|
|
|
|
|
|
|
161,042
|
|
Post-retirement medical and other benefits
|
|
|
21,959
|
|
|
|
45,570
|
|
|
|
|
|
|
|
(30,382
|
)
|
|
|
37,147
|
|
Long-term income taxes payable
|
|
|
21,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,306
|
|
Deferred tax liabilities
|
|
|
3,429
|
|
|
|
168,098
|
|
|
|
58,472
|
|
|
|
(63,082
|
)
|
|
|
166,917
|
|
Due to / (from) affiliates
|
|
|
(542,056
|
)
|
|
|
199,609
|
|
|
|
688,652
|
|
|
|
(346,205
|
)
|
|
|
|
|
Other non-current liabilities
|
|
|
36,686
|
|
|
|
7,084
|
|
|
|
53,315
|
|
|
|
|
|
|
|
97,085
|
|
Non-current liabilities of discontinued operations
|
|
|
|
|
|
|
4,004
|
|
|
|
|
|
|
|
|
|
|
|
4,004
|
|
|
|
Total liabilities
|
|
|
698,857
|
|
|
|
2,765,790
|
|
|
|
1,478,629
|
|
|
|
(2,853,533
|
)
|
|
|
2,089,743
|
|
Minority Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
1,910,871
|
|
|
|
167,915
|
|
|
|
246,119
|
|
|
|
(414,034
|
)
|
|
|
1,910,871
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
2,609,728
|
|
|
$
|
2,933,705
|
|
|
$
|
1,724,748
|
|
|
$
|
(3,267,567
|
)
|
|
$
|
4,000,614
|
|
|
|
84
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Pentair,
Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
In thousands
|
|
Company
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
210,927
|
|
|
$
|
104,174
|
|
|
$
|
68,543
|
|
|
$
|
(172,717
|
)
|
|
$
|
210,927
|
|
Adjustments to reconcile net income to net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) loss from discontinued operations
|
|
|
330
|
|
|
|
2,870
|
|
|
|
(1,571
|
)
|
|
|
|
|
|
|
1,629
|
|
(Gain) loss on disposal of discontinued operations
|
|
|
(438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(438
|
)
|
Equity losses of unconsolidated subsidiary
|
|
|
|
|
|
|
2,865
|
|
|
|
|
|
|
|
|
|
|
|
2,865
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,197
|
|
|
|
38,031
|
|
|
|
18,375
|
|
|
|
|
|
|
|
57,603
|
|
Amortization
|
|
|
4,168
|
|
|
|
16,300
|
|
|
|
5,093
|
|
|
|
|
|
|
|
25,561
|
|
Earnings from investments in subsidiaries
|
|
|
(172,717
|
)
|
|
|
|
|
|
|
|
|
|
|
172,717
|
|
|
|
|
|
Deferred income taxes
|
|
|
(4,829
|
)
|
|
|
8,344
|
|
|
|
(20,167
|
)
|
|
|
|
|
|
|
(16,652
|
)
|
Stock compensation
|
|
|
22,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,913
|
|
Excess tax benefits from stock-based compensation
|
|
|
(4,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,204
|
)
|
Other
|
|
|
(1,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,929
|
)
|
Gain on sale of interest in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities, net of effects of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
business acquisitions and dispositions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable
|
|
|
3,927
|
|
|
|
(10,789
|
)
|
|
|
(19,280
|
)
|
|
|
7,074
|
|
|
|
(19,068
|
)
|
Inventories
|
|
|
|
|
|
|
5,344
|
|
|
|
9,370
|
|
|
|
|
|
|
|
14,714
|
|
Prepaid expenses and other current assets
|
|
|
(7,650
|
)
|
|
|
12,080
|
|
|
|
(8,708
|
)
|
|
|
6,453
|
|
|
|
2,175
|
|
Accounts payable
|
|
|
(174
|
)
|
|
|
15,756
|
|
|
|
10,967
|
|
|
|
(7,067
|
)
|
|
|
19,482
|
|
Employee compensation and benefits
|
|
|
(3,984
|
)
|
|
|
9,656
|
|
|
|
(1,677
|
)
|
|
|
|
|
|
|
3,995
|
|
Accrued product claims and warranties
|
|
|
|
|
|
|
5,447
|
|
|
|
(684
|
)
|
|
|
|
|
|
|
4,763
|
|
Income taxes
|
|
|
5,934
|
|
|
|
(6,667
|
)
|
|
|
3,582
|
|
|
|
|
|
|
|
2,849
|
|
Other current liabilities
|
|
|
11,264
|
|
|
|
(7,670
|
)
|
|
|
(355
|
)
|
|
|
(6,457
|
)
|
|
|
(3,218
|
)
|
Pension and post-retirement benefits
|
|
|
3,933
|
|
|
|
(9,074
|
)
|
|
|
5,147
|
|
|
|
|
|
|
|
6
|
|
Other assets and liabilities
|
|
|
7,454
|
|
|
|
5,060
|
|
|
|
503
|
|
|
|
|
|
|
|
13,017
|
|
|
|
Net cash provided by (used for) continuing operations
|
|
|
76,122
|
|
|
|
191,727
|
|
|
|
69,138
|
|
|
|
3
|
|
|
|
336,990
|
|
Net cash provided by (used for) discontinued operations
|
|
|
(330
|
)
|
|
|
3,757
|
|
|
|
861
|
|
|
|
|
|
|
|
4,288
|
|
|
|
Net cash provided by operating activities
|
|
|
75,792
|
|
|
|
195,484
|
|
|
|
69,999
|
|
|
|
3
|
|
|
|
341,278
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,577
|
)
|
|
|
(33,564
|
)
|
|
|
(26,375
|
)
|
|
|
|
|
|
|
(61,516
|
)
|
Proceeds from sale of property and equipment
|
|
|
|
|
|
|
933
|
|
|
|
4,265
|
|
|
|
|
|
|
|
5,198
|
|
Acquisitions, net of cash acquired or received
|
|
|
(487,211
|
)
|
|
|
|
|
|
|
(350
|
)
|
|
|
|
|
|
|
(487,561
|
)
|
Divestitures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,994
|
|
|
|
(4,038
|
)
|
|
|
(4,500
|
)
|
|
|
|
|
|
|
(5,544
|
)
|
|
|
Net cash provided by (used for ) investing activities of
continuing operations
|
|
|
(485,794
|
)
|
|
|
(36,669
|
)
|
|
|
(26,960
|
)
|
|
|
|
|
|
|
(549,423
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net short-term borrowings (repayments)
|
|
|
(1,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,830
|
)
|
Proceeds from long-term debt
|
|
|
1,269,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,269,428
|
|
Repayment of long-term debt
|
|
|
(954,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(954,077
|
)
|
Debt issuance costs
|
|
|
(1,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,876
|
)
|
Net change in advances to subsidiaries
|
|
|
(59,737
|
)
|
|
|
80,007
|
|
|
|
(20,262
|
)
|
|
|
(8
|
)
|
|
|
|
|
Excess tax benefit from stock-based compensation
|
|
|
4,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,204
|
|
Proceeds from exercise of stock options
|
|
|
7,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,388
|
|
Repurchases of common stock
|
|
|
(40,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,641
|
)
|
Dividends paid
|
|
|
176,187
|
|
|
|
(237,289
|
)
|
|
|
1,192
|
|
|
|
|
|
|
|
(59,910
|
)
|
|
|
Net cash provided by financing activities of continuing
operations
|
|
|
399,046
|
|
|
|
(157,282
|
)
|
|
|
(19,070
|
)
|
|
|
(8
|
)
|
|
|
222,686
|
|
Effect of exchange rate changes on cash
|
|
|
8,610
|
|
|
|
2,771
|
|
|
|
(9,947
|
)
|
|
|
|
|
|
|
1,434
|
|
|
|
Change in cash and cash equivalents
|
|
|
(2,346
|
)
|
|
|
4,304
|
|
|
|
14,022
|
|
|
|
(5
|
)
|
|
|
15,975
|
|
Cash and cash equivalents, beginning of period
|
|
|
8,810
|
|
|
|
6,550
|
|
|
|
39,460
|
|
|
|
|
|
|
|
54,820
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
6,464
|
|
|
$
|
10,854
|
|
|
$
|
53,482
|
|
|
$
|
(5
|
)
|
|
$
|
70,795
|
|
|
|
85
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Pentair,
Inc. and Subsidiaries
Condensed Consolidated Statements of Income
For the year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
In thousands
|
|
Company
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
2,472,021
|
|
|
$
|
715,360
|
|
|
$
|
(164,779
|
)
|
|
$
|
3,022,602
|
|
Cost of goods sold
|
|
|
647
|
|
|
|
1,768,080
|
|
|
|
522,455
|
|
|
|
(164,636
|
)
|
|
|
2,126,546
|
|
|
|
Gross profit
|
|
|
(647
|
)
|
|
|
703,941
|
|
|
|
192,905
|
|
|
|
(143
|
)
|
|
|
896,056
|
|
Selling, general and administrative
|
|
|
27,410
|
|
|
|
371,518
|
|
|
|
127,783
|
|
|
|
(143
|
)
|
|
|
526,568
|
|
Research and development
|
|
|
|
|
|
|
44,090
|
|
|
|
12,455
|
|
|
|
|
|
|
|
56,545
|
|
Legal settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(28,057
|
)
|
|
|
288,333
|
|
|
|
52,667
|
|
|
|
|
|
|
|
312,943
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from investment in subsidiary
|
|
|
(159,870
|
)
|
|
|
|
|
|
|
|
|
|
|
159,870
|
|
|
|
|
|
Gain on sale of interest in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity losses of unconsolidated subsidiary
|
|
|
|
|
|
|
3,332
|
|
|
|
|
|
|
|
|
|
|
|
3,332
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (income) expense
|
|
|
(63,992
|
)
|
|
|
117,880
|
|
|
|
(3,588
|
)
|
|
|
|
|
|
|
50,300
|
|
Other
|
|
|
(1,150
|
)
|
|
|
786
|
|
|
|
|
|
|
|
|
|
|
|
(364
|
)
|
|
|
Income (loss) from continuing operations before income taxes and
minority interest
|
|
|
196,955
|
|
|
|
166,335
|
|
|
|
56,255
|
|
|
|
(159,870
|
)
|
|
|
259,675
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
12,616
|
|
|
|
40,895
|
|
|
|
19,913
|
|
|
|
|
|
|
|
73,424
|
|
|
|
Income (loss) from continuing operations
|
|
|
184,339
|
|
|
|
125,440
|
|
|
|
36,342
|
|
|
|
(159,870
|
)
|
|
|
186,251
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
(572
|
)
|
|
|
(3,000
|
)
|
|
|
1,088
|
|
|
|
|
|
|
|
(2,484
|
)
|
Gain (loss) on disposal of discontinued operations, net of tax
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
Net income (loss)
|
|
$
|
183,731
|
|
|
$
|
122,440
|
|
|
$
|
37,430
|
|
|
$
|
(159,870
|
)
|
|
$
|
183,731
|
|
|
|
86
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements
(continued)
Condensed
Consolidated Statements of Cash Flows
For the year ended December 31, 2006
Pentair, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
In thousands
|
|
Company
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
183,731
|
|
|
$
|
122,908
|
|
|
$
|
36,962
|
|
|
$
|
(159,870
|
)
|
|
$
|
183,731
|
|
Adjustments to reconcile net income to net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) loss from discontinued operations
|
|
|
572
|
|
|
|
3,000
|
|
|
|
(1,088
|
)
|
|
|
|
|
|
|
2,484
|
|
(Gain) loss on disposal of discontinued operations
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
Equity losses of unconsolidated subsidiary
|
|
|
|
|
|
|
3,332
|
|
|
|
|
|
|
|
|
|
|
|
3,332
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,304
|
|
|
|
41,658
|
|
|
|
12,720
|
|
|
|
|
|
|
|
55,682
|
|
Amortization
|
|
|
4,974
|
|
|
|
12,179
|
|
|
|
1,024
|
|
|
|
|
|
|
|
18,177
|
|
Earnings from investments in subsidiaries
|
|
|
(159,870
|
)
|
|
|
|
|
|
|
|
|
|
|
159,870
|
|
|
|
|
|
Deferred income taxes
|
|
|
(10,895
|
)
|
|
|
(4,885
|
)
|
|
|
5,169
|
|
|
|
|
|
|
|
(10,611
|
)
|
Stock compensation
|
|
|
25,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,377
|
|
Excess tax benefits from stock-based compensation
|
|
|
(3,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,043
|
)
|
Other
|
|
|
(1,153
|
)
|
|
|
789
|
|
|
|
|
|
|
|
|
|
|
|
(364
|
)
|
Gain on sale of interest in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities, net of effects of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
business acquisitions and dispositions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable
|
|
|
(4,015
|
)
|
|
|
11,932
|
|
|
|
(2,732
|
)
|
|
|
10,285
|
|
|
|
15,470
|
|
Inventories
|
|
|
|
|
|
|
(23,662
|
)
|
|
|
(22,107
|
)
|
|
|
|
|
|
|
(45,769
|
)
|
Prepaid expenses and other current assets
|
|
|
(8,580
|
)
|
|
|
(11,197
|
)
|
|
|
3,434
|
|
|
|
11,335
|
|
|
|
(5,008
|
)
|
Accounts payable
|
|
|
(146
|
)
|
|
|
(12,599
|
)
|
|
|
4,621
|
|
|
|
(10,285
|
)
|
|
|
(18,409
|
)
|
Employee compensation and benefits
|
|
|
(4,760
|
)
|
|
|
(8,567
|
)
|
|
|
639
|
|
|
|
|
|
|
|
(12,688
|
)
|
Accrued product claims and warranties
|
|
|
|
|
|
|
1,313
|
|
|
|
(117
|
)
|
|
|
|
|
|
|
1,196
|
|
Income taxes
|
|
|
(72,902
|
)
|
|
|
(21,121
|
)
|
|
|
104,376
|
|
|
|
|
|
|
|
10,353
|
|
Other current liabilities
|
|
|
2,406
|
|
|
|
1,269
|
|
|
|
(5,631
|
)
|
|
|
(11,335
|
)
|
|
|
(13,291
|
)
|
Pension and post-retirement benefits
|
|
|
11,653
|
|
|
|
3,278
|
|
|
|
4,466
|
|
|
|
|
|
|
|
19,397
|
|
Other assets and liabilities
|
|
|
(6,079
|
)
|
|
|
(3,041
|
)
|
|
|
12,467
|
|
|
|
|
|
|
|
3,347
|
|
|
|
Net cash provided by (used for) continuing operations
|
|
|
(41,390
|
)
|
|
|
116,586
|
|
|
|
154,203
|
|
|
|
|
|
|
|
229,399
|
|
Net cash provided by (used for) discontinued operations
|
|
|
(524
|
)
|
|
|
1,821
|
|
|
|
761
|
|
|
|
|
|
|
|
2,058
|
|
|
|
Net cash provided by operating activities
|
|
|
(41,914
|
)
|
|
|
118,407
|
|
|
|
154,964
|
|
|
|
|
|
|
|
231,457
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(386
|
)
|
|
|
(24,438
|
)
|
|
|
(26,070
|
)
|
|
|
|
|
|
|
(50,894
|
)
|
Proceeds from sale of property and equipment
|
|
|
|
|
|
|
403
|
|
|
|
251
|
|
|
|
|
|
|
|
654
|
|
Acquisitions, net of cash acquired or received
|
|
|
(23,535
|
)
|
|
|
(217
|
)
|
|
|
(5,534
|
)
|
|
|
|
|
|
|
(29,286
|
)
|
Divestitures
|
|
|
(18,246
|
)
|
|
|
|
|
|
|
(5,761
|
)
|
|
|
|
|
|
|
(24,007
|
)
|
Other
|
|
|
(1,747
|
)
|
|
|
(4,623
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,370
|
)
|
|
|
Net cash provided by (used for ) investing activities of
continuing operations
|
|
|
(43,914
|
)
|
|
|
(28,875
|
)
|
|
|
(37,114
|
)
|
|
|
|
|
|
|
(109,903
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net short-term borrowings (repayments)
|
|
|
13,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,831
|
|
Proceeds from long-term debt
|
|
|
608,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
608,975
|
|
Repayment of long-term debt
|
|
|
(631,755
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(631,755
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in advances to subsidiaries
|
|
|
75,559
|
|
|
|
(90,120
|
)
|
|
|
14,561
|
|
|
|
|
|
|
|
|
|
Excess tax benefit from stock-based compensation
|
|
|
3,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,043
|
|
Proceeds from exercise of stock options
|
|
|
4,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,066
|
|
Repurchases of common stock
|
|
|
(59,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,359
|
)
|
Dividends paid
|
|
|
83,133
|
|
|
|
2,262
|
|
|
|
(141,978
|
)
|
|
|
|
|
|
|
(56,583
|
)
|
|
|
Net cash provided by financing activities of continuing
operations
|
|
|
97,493
|
|
|
|
(87,858
|
)
|
|
|
(127,417
|
)
|
|
|
|
|
|
|
(117,782
|
)
|
Effect of exchange rate changes on cash
|
|
|
(5,857
|
)
|
|
|
514
|
|
|
|
7,891
|
|
|
|
|
|
|
|
2,548
|
|
|
|
Change in cash and cash equivalents
|
|
|
5,808
|
|
|
|
2,188
|
|
|
|
(1,676
|
)
|
|
|
|
|
|
|
6,320
|
|
Cash and cash equivalents, beginning of period
|
|
|
3,002
|
|
|
|
4,362
|
|
|
|
41,136
|
|
|
|
|
|
|
|
48,500
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
8,810
|
|
|
$
|
6,550
|
|
|
$
|
39,460
|
|
|
$
|
|
|
|
$
|
54,820
|
|
|
|
87
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Our management, with the participation of our Chief Executive
Officer and our Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the year ended
December 31, 2008, pursuant to
Rule 13a-15(b)
of the Securities Exchange Act of 1934 (the Exchange
Act). Based upon their evaluation, our Chief Executive
Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of the year
ended December 31, 2008 to ensure that information required
to be disclosed by us in the reports we file or submit under the
Exchange Act is recorded, processed, summarized, and reported,
within the time periods specified in the Securities and Exchange
Commissions rules and forms, and to ensure that
information required to be disclosed by us in the reports we
file or submit under the Exchange Act is accumulated and
communicated to our management, including our principal
executive and principal financial officers, as appropriate to
allow timely decisions regarding required disclosures.
Managements
Annual Report on Internal Control Over Financial
Reporting
The report of management required under this ITEM 9A is
contained in ITEM 8 of this Annual Report on
Form 10-K
under the caption Managements Report on Internal
Control Over Financial Reporting.
Attestation
Report of Independent Registered Public Accounting
Firm
The attestation report required under this ITEM 9A is
contained in ITEM 8 of this Annual Report on
Form 10-K
under the caption Report of Independent Registered Public
Accounting Firm.
Changes
in Internal Control over Financial Reporting
There was no change in our internal control over financial
reporting that occurred during the quarter ended
December 31, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None
88
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERANCE
|
Information required under this item with respect to directors
is contained in our Proxy Statement for our 2009 annual meeting
of shareholders under the captions Corporate Governance
Matters, Proposal 1 Election of Certain
Directors and Section 16(a) Beneficial
Ownership Reporting Compliance and is incorporated herein
by reference.
Information required under this item with respect to executive
officers is contained in Part I of this
Form 10-K
under the caption Executive Officers of the
Registrant.
Our Board of Directors has adopted Pentairs Code of
Business Conduct and Ethics and designated it as
the code of ethics for the Companys Chief Executive
Officer and senior financial officers. The Code of Business
Conduct and Ethics also applies to all employees and directors
in accordance with New York Stock Exchange Listing Standards. We
have posted a copy of Pentairs Code of Business Conduct
and Ethics on
our website at www.pentair.com/code.html. Pentairs
Code of Business Conduct and Ethics is also available
in print free of charge, to any shareholder who requests it in
writing from our Corporate Secretary. We intend to satisfy the
disclosure requirements under Item 5.05 of
Form 8-K
regarding amendments to, or waivers
from, Pentairs Code of Business Conduct and Ethics by
posting such information on our website at
www.pentair.com/code.html.
We are not including the information contained on our website as
part of, or incorporating it by reference into, this report.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information required under this item is contained in our Proxy
Statement for our 2009 annual meeting of shareholders under the
captions Corporate Governance Matters
Compensation Committee, Compensation Discussion and
Analysis, Compensation Committee Report,
Executive Compensation and Director
Compensation and is incorporated herein by reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Information required under this item with respect to security
ownership is contained in our Proxy Statement for our 2009
annual meeting of shareholders under the captions Security
Ownership and is incorporated herein by reference.
89
The following table summarizes, as of December 31, 2008,
information about compensation plans under which our equity
securities are authorized for issuance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Securities to be
|
|
|
|
Number of Securities
|
|
|
|
|
Issued Upon
|
|
Weighted-average
|
|
Remaining Available for
|
|
|
|
|
Exercise of
|
|
Exercise Price of
|
|
Future Issuance Under
|
|
|
|
|
Outstanding
|
|
Outstanding
|
|
Equity Compensation Plans
|
|
|
|
|
Options, Warrants
|
|
Options, Warrants
|
|
(Excluding Securities
|
|
|
|
|
and Rights
|
|
and Rights
|
|
Reflected in Column (a))
|
|
|
Plan category
|
|
(a)
|
|
(b)
|
|
(c)
|
|
|
|
|
Equity compensation plans approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Omnibus Stock Incentive Plan
|
|
|
42,400
|
|
|
|
|
|
|
|
7,001,600
|
(1)
|
|
|
|
|
2004 Omnibus Stock Incentive Plan
|
|
|
7,025,123
|
|
|
$
|
31.67
|
|
|
|
|
(2)
|
|
|
|
|
Outside Directors Non-qualified Stock Option Plan
|
|
|
613,524
|
|
|
|
|
|
|
|
|
(2)
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
48,000
|
|
|
$
|
11.38
|
|
|
|
|
(3)
|
|
|
|
|
|
|
Total
|
|
|
7,729,047
|
|
|
$
|
31.54
|
|
|
|
7,001,600
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents securities remaining
available for issuance under the 2008 Plan.
|
(2) |
|
The 2004 Plan and the Directors
Plan were terminated in 2008. Options previously granted remain
outstanding under these plans, but no further options or shares
may be granted or issued under either plan.
|
(3) |
|
Represents ten-year options to
purchase common stock granted January 2, 2001 to Randall J.
Hogan, our Chairman and Chief Executive Officer at an exercise
price of $11.375 per share, which was the closing price of our
common stock on the date of grant.
|
All share numbers and per share amounts described in this
section have been adjusted to reflect our
2-for-1
stock split in 2004.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information required under this item is contained in our Proxy
Statement for our 2009 annual meeting of shareholders under the
captions Corporate Governance Matters
Independent Directors, and Corporate Governance
Matters Policies and Procedures Regarding Related
Person Transactions and is incorporated herein by
reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Information required under this item is contained in our Proxy
Statement for our 2009 annual meeting of shareholders under the
caption Audit Committee Disclosure and is
incorporated herein by reference.
90
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) List of documents filed as part of this report:
(1) Financial Statements
Consolidated Statements of Income for the Years Ended
December 31, 2008, 2007 and 2006
Consolidated Balance Sheets as of December 31, 2008 and
December 31, 2007
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2008, 2007 and 2006
Consolidated Statements of Changes in Shareholders Equity
for the Years Ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission have been omitted because they are not applicable or
the required information is shown in the financial statements or
notes thereto.
(3) Exhibits
The exhibits of this Annual Report on
Form 10-K
included herein are set forth on the attached Exhibit Index.
91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on February 24, 2009.
PENTAIR, INC.
John L. Stauch
Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated, on
February 24, 2009.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Randall
J. Hogan
Randall
J. Hogan
|
|
Chairman and Chief Executive Officer
|
|
|
|
/s/ John
L. Stauch
John
L. Stauch
|
|
Executive Vice President and Chief Financial Officer
|
|
|
|
/s/ Mark
C. Borin
Mark
C. Borin
|
|
Corporate Controller and Chief Accounting Officer
|
|
|
|
*
Leslie
Abi-Karam
|
|
Director
|
|
|
|
*
Glynis
A. Bryan
|
|
Director
|
|
|
|
*
Jerry
W. Burris
|
|
Director
|
|
|
|
*
T.
Michael Glenn
|
|
Director
|
|
|
|
*
Charles
A. Haggerty
|
|
Director
|
|
|
|
*
David
H. Y. Ho
|
|
Director
|
|
|
|
*
David
A. Jones
|
|
Director
|
|
|
|
*
Ronald
L. Merriman
|
|
Director
|
|
|
|
*
William
T. Monahan
|
|
Director
|
|
|
|
|
|
*By
|
|
/s/ Louis
L. Ainsworth
Louis
L. Ainsworth
Attorney-in-fact
|
|
|
92
Schedule II
Valuation and Qualifing Accounts
Pentair,
Inc and subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Charged to
|
|
|
|
|
|
Other
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
|
|
|
Changes
|
|
|
End of
|
|
In thousands
|
|
in Period
|
|
|
Expenses
|
|
|
Deductions
|
|
|
Add (Deduct)
|
|
|
Period
|
|
|
|
|
Allowances for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
$
|
8,073
|
|
|
$
|
3,044
|
|
|
$
|
1,629
|
(1)
|
|
$
|
(563
|
)(2)
|
|
$
|
8,925
|
|
Year ended December 31, 2007
|
|
$
|
13,941
|
|
|
$
|
(5,049
|
)
|
|
$
|
2,906
|
(1)
|
|
$
|
2,087
|
(2)
|
|
$
|
8,073
|
|
Year ended December 31, 2006
|
|
$
|
13,494
|
|
|
$
|
1,774
|
|
|
$
|
2,325
|
(1)
|
|
$
|
998
|
(2)
|
|
$
|
13,941
|
|
|
|
|
(1) |
|
Uncollectible accounts written off,
net of expense
|
|
(2) |
|
Result of acqusitions and foreign
currency effects
|
93
Exhibit Index
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit
|
|
|
3
|
.1
|
|
Third Restated Articles of Incorporation as amended through
May 3, 2007 (Incorporated by reference to Exhibit 3.1
contained in Pentairs Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2007).
|
|
3
|
.2
|
|
Fourth Amended and Superseding By-Laws as amended through
May 3, 2007 (Incorporated by reference to Exhibit 3.2
contained in Pentairs Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2007).
|
|
3
|
.3
|
|
Statement of Resolution of the Board of Directors Establishing
the Series and Fixing the Relative Rights and Preferences of
Series A Junior Participating Preferred Stock (Incorporated
by reference to Exhibit 3.1 contained in Pentairs
Current Report on
Form 8-K
dated December 10, 2004).
|
|
4
|
.1
|
|
Rights Agreement dated as of December 10, 2004 between
Pentair, Inc. and Wells Fargo Bank, N.A. (Incorporated by
reference to Exhibit 4.1 contained in Pentairs
Registration Statement on
Form 8-A,
dated as of December 31, 2004).
|
|
4
|
.2
|
|
Form of Indenture, dated June 1, 1999, between Pentair,
Inc. and U.S. Bank National Association, as Trustee Agent
(Incorporated by reference to Exhibit 4.2 contained in
Pentairs Annual Report on
Form 10-K
for the year ended December 31, 2000).
|
|
4
|
.3
|
|
Note Purchase Agreement dated as of July 25, 2003 for
$50,000,000 4.93% Senior Notes, Series A, due July 25,
2013, $100,000,000 Floating Rate Senior Notes, Series B,
due July 25, 2013, and $50,000,000 5.03% Senior Notes,
Series C, due October 15, 2013 (Incorporated by
reference to Exhibit 10.22 contained in Pentairs
Current Report on
Form 8-K
dated July 25, 2003).
|
|
4
|
.4
|
|
Supplemental Indenture between Pentair, Inc. and U.S. Bank
National Association, as Trustee, dated as of August 2,
2004 (Incorporated by reference to Exhibit 4.1 contained in
Pentairs Quarterly Report on
Form 10-Q
for the quarterly period ended October 2, 2004).
|
|
4
|
.5
|
|
Third Amended and Restated Credit Agreement dated June 4,
2007 by and among Pentair, Inc. and a consortium of financial
institutions including Bank of America, N.A., as Administrative
Agent and Issuing Bank, JPMorgan Chase Bank, N.A., as
Syndication Agent and The Bank of Tokyo-Mitsubishi UFJ, Ltd.,
U.S. Bank N.A. and Wells Fargo Bank, N.A., as Co-Documentation
Agents (incorporated by reference to Exhibit 4.1 contained
in Pentairs Current Report on
Form 8-K
dated June 4, 2007).
|
|
4
|
.6
|
|
First Amendment to Note Purchase agreement dated
July 19, 2005 by and among Pentair, Inc. and the
undersigned holders (Incorporated by reference to Exhibit 4
contained in Pentairs Quarterly Report on
Form 10-Q
for the quarterly period ended July 2, 2005).
|
|
4
|
.7
|
|
Form of Note Purchase Agreement, dated May 17, 2007,
by and among Pentair, Inc. and various institutional investors,
for the sale of $300 million aggregate principal amount of
Pentairs 5.87% Senior Notes, Series D, due
May 17, 2017, and $105 million aggregate principal
amount of Pentairs Floating Rate Senior Notes,
Series E, due May 17, 2012 (incorporated by reference
to Exhibit 4.1 contained in Pentairs Current Report
on
Form 8-K
dated May 17, 2007).
|
|
10
|
.1
|
|
Pentairs 1999 Supplemental Executive Retirement Plan as
Amended and Restated effective August 23, 2000
(Incorporated by reference to Exhibit 10.2 contained in
Pentairs Current Report on
Form 8-K
filed September 21, 2000).*
|
|
10
|
.2
|
|
Pentairs 1999 Supplemental Executive Retirement Plan as
Amended and Restated effective January 1, 2009.*
|
|
10
|
.3
|
|
Pentairs Restoration Plan as Amended and Restated
effective August 23, 2000 (Incorporated by reference to
Exhibit 10.3 contained in Pentairs Current Report on
Form 8-K
filed September 21, 2000).*
|
|
10
|
.4
|
|
Pentairs Restoration Plan as Amended and Restated
effective January 1, 2009.*
|
|
10
|
.5
|
|
Pentair, Inc. Non-Qualified Deferred Compensation Plan effective
January 1, 1996 (Incorporated by reference to
Exhibit 10.17 contained in Pentairs Annual Report on
Form 10-K
for the year ended December 31, 1995).*
|
|
10
|
.6
|
|
Trust Agreement for Pentair, Inc. Non-Qualified Deferred
Compensation Plan between Pentair, Inc. and Fidelity Management
Trust Company (Incorporated by reference to
Exhibit 10.18 contained in Pentairs Annual Report on
Form 10-K
for the year ended December 31, 1995).*
|
|
10
|
.7
|
|
Amendment effective August 23, 2000 to Pentairs
Non-Qualified Deferred Compensation Plan effective
January 1, 1996 (Incorporated by reference to
Exhibit 10.8 contained in Pentairs Current Report on
Form 8-K
filed September 21, 2000).*
|
94
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit
|
|
|
10
|
.8
|
|
Pentair, Inc. Non-Qualified Deferred Compensation Plan as
Amended and Restated effective January 1, 2009.*
|
|
10
|
.9
|
|
Pentair, Inc. Executive Officer Performance Plan as Amended and
Restated, effective January 1, 2003 (Incorporated by
reference to Appendix 1 contained in Pentairs Proxy
Statement for its 2003 annual meeting of shareholders).*
|
|
10
|
.10
|
|
Form of Key Executive Employment and Severance Agreement for
Randall J. Hogan.*
|
|
10
|
.11
|
|
Form of Key Executive Employment and Severance Agreement for
Louis Ainsworth, Michael V. Schrock, Frederick S. Koury and
Michael G. Meyer.*
|
|
10
|
.12
|
|
Form of Key Executive Employment and Severance Agreement for
John L. Stauch and Mark C. Borin.*
|
|
10
|
.13
|
|
Pentair, Inc. International Stock Purchase and Bonus Plan, as
Amended and Restated, effective May 1, 2004 (Incorporated
by reference to Appendix I contained in Pentairs
Proxy Statement for its 2004 annual meeting of shareholders). *
|
|
10
|
.14
|
|
Pentair, Inc. Compensation Plan for Non-Employee Directors, as
Amended and Restated, effective January 1, 2008
(Incorporated by reference to Exhibit 10.13 contained in
Pentairs Annual Report on
Form 10-K
for the year ended December 31, 2007).*
|
|
10
|
.15
|
|
Pentair, Inc. Omnibus Stock Incentive Plan, as Amended and
Restated, effective December 12, 2007 (Incorporated by
reference to Exhibit 10.14 contained in Pentairs
Annual Report on
Form 10-K
for the year ended December 31, 2007).*
|
|
10
|
.16
|
|
Pentair, Inc. Employee Stock Purchase and Bonus Plan, as Amended
and Restated, effective May 1, 2004 (Incorporated by
reference to Appendix H contained in Pentairs Proxy
Statement for its 2004 annual meeting of shareholders). *
|
|
10
|
.17
|
|
Summary of Board of Director Compensation, approved
July 27, 2007 (Incorporated by reference to
Exhibit 10.16 contained in Pentairs Annual Report on
Form 10-K
for the year ended December 31, 2007).*
|
|
10
|
.18
|
|
Letter Agreement, dated January 6, 2005, between Pentair,
Inc. and Michael Schrock (Incorporated by reference to
Exhibit 10.1 contained in Pentairs Current Report on
Form 8-K
dated January 6, 2005).*
|
|
10
|
.19
|
|
Confidentiality and Non-Competition Agreement, dated
January 6, 2005, between Pentair, Inc. and Michael Schrock
(Incorporated by reference to Exhibit 10.2 contained in
Pentairs Current Report on
Form 8-K
dated January 6, 2005).*
|
|
10
|
.20
|
|
Pentair, Inc. 2008 Omnibus Stock Incentive Plan, as Amended
Through July 29, 2008 (Incorporated by reference to
Exhibit 10.1 contained in Pentairs Quarterly Report
on
Form 10-Q
for the quarter ended September 27, 2008).*
|
|
10
|
.21
|
|
Form of award letter under the Pentair, Inc. 2008 Omnibus Stock
Incentive Plan, as amended (Incorporated by reference to
Exhibit 10.1 contained in Pentairs Current Report on
Form 8-K
filed January 8, 2009).*
|
|
10
|
.22
|
|
Amended and Restated Pentair, Inc. Outside Directors
Nonqualified Stock Option Plan as amended through
February 27, 2002 (Incorporated by reference to
Exhibit 10.7 contained in Pentairs Annual Report on
Form 10-K
for the year ended December 31, 2001).*
|
|
21
|
|
|
List of Pentair subsidiaries.
|
|
23
|
|
|
Consent of Independent Registered Public Accounting
Firm Deloitte & Touche LLP.
|
|
24
|
|
|
Power of Attorney.
|
|
31
|
.1
|
|
Certification of Chief Executive Officer required by
Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer required by
Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended.
|
|
32
|
.1
|
|
Certification of Chief Executive Officer, Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of Chief Financial Officer, Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
* |
|
A management contract or compensatory contract. |
95