PENTAIR PLC
10-Ks and 10-Qs
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Table of Contents
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, 2009 | ||||
|
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 | |
|
incorporation or organization) |
Identification number) |
|
|
5500 Wayzata Boulevard,
Suite 800, Golden Valley, Minnesota |
55416-1259
|
|
| (Address of principal executive offices) |
Registrant’s 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,
$0.16
2
/
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 whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the Registrant was required to submit to post such
files). Yes
o
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 registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
PART III of this
Form 10-K
or any amendment to this
Form 10-K.
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 the 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 $25.34 per share as reported on the New York Stock
Exchange on June 25, 2009 (the last business day of
Registrant’s most recently completed second quarter):
$2,372,363,058
The number of shares outstanding of Registrant’s only class
of common stock on December 31, 2009 was 98,655,506.
DOCUMENTS
INCORPORATED BY REFERENCE
Parts of the Registrant’s definitive proxy statement for
its annual meeting to be held on April 29, 2010, 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, 2009
2
Table of Contents
| ITEM 1. | BUSINESS |
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, and protect the people
that use them.
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 markets: Flow Technologies (approximately 40% of group
sales), Filtration (approximately 30% of group sales), and Pool
(approximately 30% of group sales).
3
Table of Contents
Residential
Flow Market
Our Residential Flow business is a leader in the global
residential water pump market. Our primary markets are those
serving residential well water installers, distributors and
residential end users; waste water dealers and distributors and
those participants in the agricultural irrigation and crop
protection industries. We also have offerings into the
RV / Marine and Mobile Fire markets. We address these
markets with products ranging from light duty diaphragm pumps to
submersible, sump and sewage pumps to pumps for agricultural
irrigation and crop spraying. In addition to pumps, we offer
pressure tanks for multiple residential applications.
Application for our broad range of products includes pumps for
fluid delivery, circulation, transfer, pressure boosting, and
engine cooling.
Trade names for the Residential Flow markets include
STA-RITE
®
,
Myers
®
,
Hydromatic
®
,
Flotec
®
,
Water
Ace
®
,
Berkeley
®
,
Aermotor
tm
,
Simer
®
,
Hypro
®
,
FoamPro
®
,
SHURflo
®
,
Onga
tm
,
Nocchi
tm
,
and
JUNG
®
.
Residential
Filtration Market
Our Residential Filtration business competes in residential and
commercial water softening and filtration markets globally. We
address the market with control valves, pressure tanks,
membranes, carbon products, point of entry and point of use
systems, and other filter cartridges. Residential Filtration
products are used in the manufacture of water softeners;
filtration and deionization systems; and commercial and
residential water filtration applications.
Trade names for the Residential Filtration market include
Fleck
®
,
Autotrol
®
,
Structural
tm
,
Aquamatic
®
,
Pentek
®
,
SIATA
tm
,
WellMate
tm
,
American
Plumber
®
,
GE
®
,
OMNIFILTER
®
,
and
Fibredyne
tm
.
Our Residential Filtration business was formed by a transaction
between GE Water & Process Technologies (a unit of
General Electric Company) (“GE”) and Pentair.
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.
Trade names for the Pool market include Pentair Pool
Products
®
,
Pentair Water Pool and
Spa
tm
,
STA-RITE
®
,
Paragon
Aquatics
®
,
Kreepy
Krauly
®
,
WhisperFlo
®
,
Rainbow
tm
,
IntelliTouch
tm
,
IntelliFlo
®
,
IntelliBrite
®
,
IntelliChlor
®
,
EasyTouch
®
,
SunTouch
®
,
EQ
Series
tm
and
Acu-Trol
®
.
Engineered
Flow Market
Our Engineered Flow business is a global leader in municipal,
commercial and industrial water and fluid handling markets. Our
primary markets are those serving 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, wastewater and a variety of industrial
applications. Applications for our broad range of products
include pumps for municipal wells, water treatment, wastewater
solids handling, pressure boosting, engine cooling, fluid
delivery, circulation, fire suppression and transfer.
Trade names for the Engineered Flow market include,
Myers
®
,
Aurora
®
,
Hydromatic
®
,
Fairbanks
Morse
tm
,
Layne/Verti-line
®
,
FoamPro
®
,
Edwards
®
,
Aplex and Delta Environmental.
Filtration
Solutions
Our Filtration Solutions business competes in selected
commercial and 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 filter systems, filter cartridges, pressure vessels, and
specialty dispensing pumps providing flow solutions for specific
end-user market applications including, commercial, foodservice,
industrial, marine, and aviation. Filtration products are used
in the manufacture of filtration, deionization, and
4
Table of Contents
desalination systems; industrial and commercial water filtration
applications; and filtration and separation technologies for
hydrocarbon, medical and hydraulic applications.
Trade names for the Filtration Solutions market include
Everpure
®
,
SHURflo
®
,
CodeLine
®
,
and Porous
Media
tm
.
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 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 trade 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 trade 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 and protect the people that use them. We have
identified a target market of $11 billion. Our Technical
Products Group focuses its business portfolio on eight primary
vertical markets: Industrial (35% of group sales),
Communications (25% of group sales), General Electronics (10% of
group sales), Energy (10% of group sales), and Commercial,
Security and Defense, Infrastructure and Medical (these four
vertical combined represent approximately 20% of group sales).
The primary trade names for the Technical Products Group are:
Hoffman
®
,
Schroff
®
,
McLean
®
,
Taunus
tm
,
Birtcher
®
,
Calmark
®
and Aspen
Motion
tm
.
Products include metallic and composite enclosures, cabinets,
cases, subracks, backplanes and associated thermal management
systems. 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 affected by
seasonal demand fluctuations.
5
Table of Contents
Competition
Competition in the technical products markets can be intense,
particularly in the Communications market, 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 sales decreases in the Technical Products
Group are the result of market declines due to the global
recession. The impact of these market declines has been
partially offset by growth initiatives focused on product
development, continued channel penetration, growth in targeted
market segments, geographic expansion, and price increases.
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 global
manufacturing capability and broad product portfolio to support
the globalization and outsourcing trends.
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 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 we expect acquisitions to be an important part of
our future growth. There were no material acquisitions or
divestitures completed in 2009.
Also refer to ITEM 7, Management’s Discussion and
Analysis, and ITEM 8, Note 3 of the Notes to
Consolidated Financial Statements, included in this
Form 10-K.
INFORMATION
REGARDING ALL BUSINESS SEGMENTS
Backlog
Our backlog of orders as of December 31 by segment was:
| In thousands | 2009 | 2008 | $ change | % change | ||||||||||||
|
Water Group
|
$ | 304,449 | $ | 324,748 | $ | (20,299 | ) | (6.3 | )% | |||||||
|
Technical Products Group
|
94,503 | 111,678 | (17,175 | ) | (15.4 | )% | ||||||||||
|
Total
|
$ | 398,952 | $ | 436,426 | $ | (37,474 | ) | (8.6 | )% | |||||||
The $20.3 million decrease in Water Group backlog was
primarily due to decreased backlog for the Filtration Solutions
CodeLine product line, capacity constraints in 2008 led to above
average backlogs, compounded by volume declines in Q4 2009.
These decreases were partially offset by the timing of the early
buy program shipments in residential pool markets. The
$17.2 million decrease in the Technical Products Group
backlog reflected declining market conditions, especially in our
Electronics 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 material. 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, 2009 will be filled in 2010.
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 2009, 2008, and
2007 were $57.9 million, $62.5 million, and
$56.8 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.
6
Table of Contents
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 and trade 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 and trade name.
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, 2009, we employed approximately
13,150 people worldwide. Total employees in the United
States were approximately 6,600, of whom approximately 530 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 investor’s
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.
7
Table of Contents
| ITEM 1A. | RISK FACTORS |
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 recession adversely affected the
robustness of our markets throughout 2009. Important factors
that impact 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 in
each of the past three years, and particularly in 2009, which
reduced revenue in each of the businesses within our Water Group
over this period. We believe that weakness in the residential
housing market and the recent dramatic slowdown in our
industrial and commercial markets will likely continue to affect
our revenues and margins into 2010. Any continuing weakness in
these markets beyond 2009 will negatively affect our sales and
financial performance in future periods.
Continuing
market weakness is likely to limit recovery in our revenues and
profitability from
pre-recessionary
levels.
Over the past four years, our organic growth has been 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 in
late 2008 and throughout 2009 adversely affected our ability to
grow our revenues over this period. These economic conditions
materially and adversely impacted our financial performance in
2009; we did not meet our projected revenue growth or earnings
targets for the year 2009. We believe that these market
weaknesses have started to stabilize in many of our end markets,
but we can not assure you that these markets will continue to
improve nor that we will be able to increase revenues and
profitability to match our earlier financial performance. Rather
than focus our sales 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.
8
Table of Contents
Material
cost and other inflation have adversely affected and could
continue to affect our results of operations.
In previous 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 dramatically weakened in late 2008 and
early 2009 as a result of general economic conditions, 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.
Intellectual
property challenges may hinder product development and
marketing.
Patents, non-compete agreements, proprietary technologies,
customer relationships, trade marks and trade 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, and increased costs may hinder our product
development and marketing.
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 have an active product safety program,
and 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 are uncertain whether we will be able to make major
acquisitions until business conditions improve further. We
cannot assure you that we would be able to continue to grow our
revenue 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.
9
Table of Contents
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 share issuances could be
dilutive to your equity investment if we sell shares into the
market or issue additional stock as consideration in any
acquisition. 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 34% of our
net sales in 2009, down from 35% in 2008. 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; |
| • | 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; |
| • | 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; |
| • | changes in tax laws or rulings could have an adverse impact on our effective tax rate; |
| • | 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 through 2009. 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.
10
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We are also exposed to the risk of fluctuation of foreign
currency exchange rates which may affect our financial results.
In 2009, the weakness of the US dollar slightly benefited our
financial results in foreign jurisdictions. We are uncertain
whether weakness in the US dollar will continue, and if so, the
extent to which it 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 the accounting
guidance, by comparing the estimated fair value of each of our
reporting units to their respective carrying values on our
balance sheet. Goodwill and indefinite-lived intangible assets
are evaluated for impairment annually as of the first day of our
third quarter using management’s operating budget and
internal five-year forecast to estimate expected future cash
flows. Projecting discounted future cash flows requires us 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,
and consideration of our market capitalization in comparison to
the estimated fair values of our reporting units. During the
fourth quarter of 2009, we completed our annual impairment test
for goodwill and indefinite-lived intangible assets and recorded
an impairment charge of $11.3 million to write-down certain
trade name intangible assets to their current estimated fair
value.
At December 31, 2009 our goodwill and intangible assets
were approximately $2,575.2 million, and represented
approximately 65.8% of our total assets. If we experience
further declines in sales and operating profit or do not meet
our operating forecasts, we may be subject to future
impairments. Additionally, changes in assumptions regarding the
future performance of our businesses, increases in the discount
rate used to determine the discounted cash flows of our
businesses, or significant declines in our stock price could be
indicators of impairment losses. 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 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.
11
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We may
be exposed to certain regulatory and financial risks related to
climate change.
Climate change is receiving ever increasing attention worldwide.
Many scientists, legislators and others attribute global warming
to increased levels of greenhouse gases, including carbon
dioxide, which has led to significant legislative and regulatory
efforts to limit greenhouse gas emissions. There are a number of
pending legislative and regulatory proposals to address
greenhouse gas emissions. For example, in June 2009 the
U.S. House of Representatives passed the American Clean
Energy and Security Act that would phase-in significant
reductions in greenhouse gas emissions if enacted into law. The
U.S. Senate is considering a different bill, and it is
uncertain whether, when and in what form a federal mandatory
carbon dioxide emissions reduction program may be adopted.
Similarly, certain countries have adopted the Kyoto Protocol,
and this and other international initiatives under consideration
could affect our international operations. These actions could
increase costs associated with our operations, including costs
for raw materials and transportation. Because it is uncertain
what laws will be enacted, we cannot predict the potential
impact of such laws on our future consolidated financial
condition, results of operations or cash flows.
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.
| ITEM 2. | PROPERTIES |
Our principal executive office is in leased premises located in
Golden Valley, Minnesota. We carry out our Water Group
manufacturing operations at 27 plants located throughout the
United States and at 14 plants located in 10 other countries. In
addition, our Water Group has 22 distribution facilities and 40
sales offices located in numerous countries throughout the
world. We carry out our Technical Products Group manufacturing
operations at 7 plants located throughout the United States and
10 plants located in 8 other countries. In addition, our
Technical Products Group has 8 distribution facilities and 25
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.
| 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 accrue for potential environmental losses in a manner
consistent with accounting principles generally accepted in the
United States; that is, we 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
12
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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) management’s 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 the past 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 relating 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 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 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, 2009
and 2008, our undiscounted reserves for such environmental
liabilities were approximately $2.3 million and
$3.1 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 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.
13
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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
|
54 | 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 Pentair’s 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
|
57 | 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
|
45 | 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
|
62 | Senior Vice President, Legal Affairs and Assistant Secretary since February 2010; Senior Vice President and General Counsel, July 1997 — February 2010 and Secretary, January 2002 — February 2010; Shareholder and Officer of the law firm of Henson & Efron, P. A., November 1985 — June 1997. | ||
|
Frederick S. Koury
|
49 | Senior Vice President, Human Resources, since August 2003; Vice President of Human Resources at Limited Brands, September 2000 — August 2003; PepsiCo, Inc., various executive positions, June 1985 — September 2000. | ||
|
Michael G. Meyer
|
51 | 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
|
42 | 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. | ||
|
Angela D. Lageson
|
41 | Senior Vice President, General Counsel and Secretary since February 2010; Assistant General Counsel, November 2002 — February 2010; Shareholder and Officer of the law firm of Henson & Efron, P.A., January 2000-2002; Associate Attorney in the law firm of Henson & Efron, October 1996 — January 2000. |
14
Table of Contents
| ITEM 5. | MARKET FOR REGISTRANT’S 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, 2009, there were 3,860 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
2009 and 2008 were as follows:
| 2009 | 2008 | |||||||||||||||||||||||||||||||
| First | Second | Third | Fourth | First | Second | Third | Fourth | |||||||||||||||||||||||||
|
High
|
$ | 26.38 | $ | 29.07 | $ | 31.69 | $ | 34.27 | $ | 34.98 | $ | 38.76 | $ | 41.00 | $ | 38.50 | ||||||||||||||||
|
Low
|
$ | 17.23 | $ | 20.91 | $ | 23.20 | $ | 28.18 | $ | 26.02 | $ | 31.14 | $ | 31.72 | $ | 18.42 | ||||||||||||||||
|
Close
|
$ | 22.05 | $ | 25.54 | $ | 29.26 | $ | 32.30 | $ | 31.48 | $ | 33.87 | $ | 38.52 | $ | 23.67 | ||||||||||||||||
|
Dividends declared
|
$ | 0.18 | $ | 0.18 | $ | 0.18 | $ | 0.18 | $ | 0.17 | $ | 0.17 | $ | 0.17 | $ | 0.17 | ||||||||||||||||
Pentair has paid 136 consecutive quarterly dividends and has
increased dividends each year for 33 consecutive years.
15
Table of Contents
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, 2004 and the
reinvestment of all dividends since that date to
December 31, 2009. 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 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||||
|
PENTAIR INC
|
100 | 80.32 | 74.27 | 83.82 | 58.20 | 81.62 | ||||||||||||||||||
|
S&P 500 INDEX
|
100 | 104.91 | 121.48 | 128.16 | 80.74 | 102.11 | ||||||||||||||||||
|
S&P MIDCAP 400 INDEX
|
100 | 112.56 | 124.17 | 134.08 | 85.50 | 117.46 | ||||||||||||||||||
16
Table of Contents
Purchases
of Equity Securities
The following table provides information with respect to
purchases made by Pentair of common stock during the fourth
quarter of 2009:
|
(c)
|
(c)
|
|||||||||||||||
|
Total Number of
|
Dollar Value of
|
|||||||||||||||
|
(a)
|
Shares Purchased
|
Shares that
|
||||||||||||||
|
Total Number
|
(b)
|
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 27 — October 24, 2009
|
10,476 | $ | 28.61 | — | $ | 0 | ||||||||||
|
October 25 — November 21, 2009
|
2,024 | $ | 30.07 | — | $ | 0 | ||||||||||
|
November 22 — December 31, 2009
|
1,362 | $ | 32.05 | — | $ | 0 | ||||||||||
|
Total
|
13,862 | — | ||||||||||||||
| (a) | The purchases in this column reflect shares 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 reflects the per share value of shares deemed surrendered to us by participants in the Plans to satisfy the exercise price for the exercise of stock options and withholding tax obligations due upon stock option exercises and vesting of restricted shares. | |
| (c) | Our board of directors has not authorized a share repurchase plan for 2009. |
17
Table of Contents
| 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, 2009.
| Years Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Statement of Operations Data:
|
||||||||||||||||||||
|
Net sales
|
$ | 2,692,468 | $ | 3,351,976 | $ | 3,280,903 | $ | 3,022,602 | $ | 2,801,715 | ||||||||||
|
Operating income
|
219,948 | 324,685 | 379,049 | 312,943 | 313,320 | |||||||||||||||
|
Income from continuing operations
|
115,512 | 256,363 | 212,118 | 186,251 | 179,183 | |||||||||||||||
|
Per Share Data:
|
||||||||||||||||||||
|
Basic:
|
||||||||||||||||||||
|
EPS from continuing operations
|
$ | 1.19 | $ | 2.62 | $ | 2.15 | $ | 1.87 | $ | 1.78 | ||||||||||
|
Weighted average shares
|
97,415 | 97,887 | 98,762 | 99,784 | 100,665 | |||||||||||||||
|
Diluted
|
||||||||||||||||||||
|
EPS from continuing operations
|
$ | 1.17 | $ | 2.59 | $ | 2.12 | $ | 1.84 | $ | 1.75 | ||||||||||
|
Weighted average shares
|
98,522 | 99,068 | 100,205 | 101,371 | 102,618 | |||||||||||||||
|
Cash dividends declared per common share
|
$ | 0.72 | $ | 0.68 | $ | 0.60 | $ | 0.56 | $ | 0.52 | ||||||||||
|
Balance Sheet Data:
|
||||||||||||||||||||
|
Total assets
|
$ | 3,911,334 | $ | 4,053,213 | $ | 4,000,614 | $ | 3,364,979 | $ | 3,253,755 | ||||||||||
|
Total debt
|
805,637 | 954,092 | 1,060,586 | 743,552 | 752,614 | |||||||||||||||
|
Total shareholders equity
|
2,126,340 | 2,020,069 | 1,910,871 | 1,669,999 | 1,555,610 | |||||||||||||||
In December 2005, we acquired as part of our Technical Products
Group the McLean Thermal Management, Aspen Motion Technologies
and Electronic 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 GE’s 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.
18
Table of Contents
| ITEM 7. | MANAGEMENT’S 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 or stabilization of the global economy; | |
| • | continued deterioration in or stabilization of the North American and Western European housing markets; | |
| • | 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 our 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 to lower-cost locations; |
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| • | 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 and protect the people
that use them. In 2010, we expect our Water Group and Technical
Products Group to generate approximately 2/3 and 1/3 of our
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
$1.8 billion in 2009. 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 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
that was accounted for as an acquisition of an 80.1 percent
ownership interest in GE’s 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, a
U.S. entity and an international entity, (collectively
“Pentair Residential Filtration” or “PRF”)
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 PRF, we believe we are 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 GE’s existing residential conditioning products
through our sales channels.
On December 15, 2008, we sold our 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 energy, medical and security and defense. 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 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
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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. In 2009, sales revenues
in our Technical Products Group declined significantly due to
the impact of the global recession.
Key
Trends and Uncertainties
Our sales revenue for the full year of 2009 was approximately
$2.7 billion, decreasing 20% from sales in the prior year.
Our Water Group sales declined 16% in the year to approximately
$1.8 billion, compared to the same period in 2008. Our
Technical Products Group sales decreased 26% to approximately
$0.8 billion in 2009 compared to the same period in 2008.
The following trends and uncertainties affected our financial
performance in 2009 and will likely impact our results in 2010
and beyond:
| • | Most markets we serve slowed dramatically in late 2008 and throughout 2009 as a result of the global recession. These markets are showing signs of stabilizing, although at lower levels than we expected would be the case twelve months ago. In response to market conditions over the past year, we significantly restructured our operations to both reduce cost and reduce or relocate capacity. 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 2010 and beyond. |
| • | We have also identified specific market opportunities that we have been and are pursuing that we find attractive, both within and outside the United States. We are reinforcing our businesses to more effectively address these opportunities through research and development and additional sales and marketing resources. Unless we successfully penetrate these product and geographic markets, our organic growth will be limited due to continuing stagnation or slower growth in other markets. |
| • | New home building and new pool starts have contracted for each of the past four years in the United States and have slowed significantly in Europe as well. Overall, we believe approximately 55% of sales by our water businesses (flow, filtration and pool equipment) are used in residential applications — for new construction, remodeling and repair, replacement and refurbishment. We saw some stabilization of order rates in the second half of 2009 and anticipate continuing stability, but not significant volume increases, in 2010. We do believe that housing construction will improve in 2010 from historically low levels in 2009, and we anticipate a slightly stronger market will have a favorable impact on these businesses, but our participation in trends appears to lag approximately six months from inception. |
| • | Industrial, communications and commercial markets for all of our businesses, including commercial and industrial construction, also slowed significantly over the past year. Order rates and sales stabilized in our industrial and communications businesses somewhat in the fourth quarter, although commercial and industrial construction markets are still shrinking. We believe that the outlook for most of these markets is mixed, and we expect that construction will continue to decline over 10% year over year in 2010. |
| • | We experienced material cost and other deflation in a number of our businesses during 2009. We expect the current economic environment will result in continuing price volatility for many of our raw materials. We believe that the impact of lower commodity prices will continue to impact us favorably in the first half of 2010, but we are uncertain on the timing and impact of a return of cost inflation as the economy improves over the next year. |
| • | Our unfunded pension liability increased in 2008 from $147 million to $257 million, primarily reflecting our reduced investment return and significantly lower asset values in our U.S. defined benefit plans at the end of that year. Primarily as a result of better investment returns and higher contributions in 2009, our unfunded pension liabilities declined to approximately $223 million as of the end of 2009. The contributions included a discretionary contribution of $25 million in December to improve plan balances and reduce future contributions. We anticipate that our future pension expense will increase over 2009 levels. |
| • | 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 |
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| expenditures plus proceeds from sale of property and equipment. Free cash flow for the full year 2009 was approximately $207 million, or 179% of our net income; this amount was below our target of $225 million. The shortfall reflects the discretionary contribution to our pension plan of $25 million in December 2009, which we undertook in large part because of our somewhat higher than anticipated free cash flow for the fourth quarter and full year. In addition, we did not sell customer receivables in 2009 as we have in prior years. Our target for free cash flow in 2010 continues to be greater than or equal to 100% conversion of our net income for the year. Last year, we instituted several measures internally to maintain our strong collection experience and to decrease working capital. We are continuing to target reductions in working capital, and particularly inventory, as a percentage of sales. 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. We believe that this seasonality will continue in the second and third quarters of 2010, as it did modestly in 2009, but 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 we have historically seen. |
| • | We experienced year over year unfavorable foreign currency effects on net sales and operating results in 2008 and 2009, as a result of the weakening of the U.S. dollar in relation to other foreign currencies. Due to recent strength in the US dollar, we anticipate some modest unfavorable foreign exchange impact, but believe longer-term that foreign exchange will be favorable. Our currency effect is primarily for the U.S. dollar against the euro, which may or may not trend favorably in the future. |
| • | The effective income tax rate for 2009 was 32.7%. We estimate our effective tax rate for the full year 2010 to be between 32% and 34%. 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 2010, our operating objectives include the following:
| • | Increasing our vertical market focus within each of our Global Business Units to grow in those markets in which we have competitive advantages; |
| • | Leveraging our technological capabilities to increasingly generate innovative new products; |
| • | Driving operating excellence through lean enterprise initiatives, with special focus on sourcing and supply management, cash flow management, and lean operations; and |
| • | Stressing proactive talent development, particularly in international management and other key functional areas. |
On February 2, 2010, we announced our results of operations
for fiscal year 2009 and our earnings guidance for the first
quarter of 2010 of a range of $0.32 to $0.35 per share on a
diluted basis for the full year 2010 of a range of $1.75 to
$1.90 per share on a diluted basis. Prior full year guidance was
to equal $1.70 per share or higher on a fully-diluted basis. We
are uncertain of the trajectory of the economic recovery, both
in the United States and globally, for the balance of the year
and on into 2011. As noted above, significant deterioration in
general economic conditions in our primary markets and
geographies would adversely impact our anticipated annual
revenues and financial performance.
This outlook is based on several variables. First, our guidance
anticipates modest organic revenue gains in our businesses as a
whole in the
low-to-mid
single digit range as a result of overall market conditions,
which we expect to bring our total revenue to approximately
$2.8 billion for the full year. Second, based upon that
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revenue expectation, we project net earnings of $1.75 to $1.90
per share as a result of higher operating margins due to
carryover of productivity gains from our restructuring projects
in 2009 and favorable commodities pricing in the first half of
2010, offset somewhat by reinstatement of certain employee
benefits and wage increases and higher spending on research and
development, and sales and marketing resources. Third, we
believe our tax rate and pension expense will be slightly higher
than in 2009, with some reduction in interest expense as a
result of lower borrowing levels and continuing low interest
rates. We also believe that should we experience volume gains in
excess of those we are projecting, we will be able to convert
those extra revenues into operating income at an approximate 40%
rate, consistent with our productivity assumptions.
Our guidance assumes an absence of significant acquisitions or
divestitures in 2010. We continue to look for smaller
acquisitions 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 2010
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 | 2009 vs. 2008 | 2008 vs. 2007 | ||||||
|
Volume
|
(19.7 | ) | (1.6 | ) | ||||
|
Price
|
1.2 | 2.3 | ||||||
|
Currency
|
(1.2 | ) | 1.5 | |||||
|
Total
|
(19.7 | ) | 2.2 | |||||
The
19.7 percent decrease in consolidated net sales in 2009
from 2008 was primarily the result of:
| • | lower sales of certain pump, pool and filtration products primarily related to the downturn in the North American and Western European residential housing markets and other global markets; |
| • | lower Technical Products Group sales in both the Electrical and Electronics businesses; and |
| • | unfavorable foreign currency effects. |
These decreases were partially offset by:
| • | selective increases in selling prices to mitigate inflationary cost increases; and |
| • | an increase in sales volume related to the formation of PRF. |
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; |
| • | an increase in sales volume due to the formation of PRF and our February 2, 2007 acquisition of Jung Pump and our April 30, 2007 acquisition of 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 related to the downturn in the North American residential housing market throughout 2008 and other global markets starting in the fourth quarter of 2008. |
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Sales by
segment and the
year-over-year
changes were as follows:
| 2009 vs. 2008 | 2008 vs. 2007 | |||||||||||||||||||||||||||
| In thousands | 2009 | 2008 | 2007 | $ change | % change | $ change | % change | |||||||||||||||||||||
|
Water
|
$ | 1,847,764 | $ | 2,206,142 | $ | 2,230,770 | $ | (358,378 | ) | (16.2 | )% | $ | (24,628 | ) | (1.1 | )% | ||||||||||||
|
Technical Products
|
844,704 | 1,145,834 | 1,050,133 | (301,130 | ) | (26.3 | )% | 95,701 | 9.1 | % | ||||||||||||||||||
|
Total
|
$ | 2,692,468 | $ | 3,351,976 | $ | 3,280,903 | $ | (659,508 | ) | (19.7 | )% | $ | 71,073 | 2.2 | % | |||||||||||||
Water
The
16.2 percent decrease in Water Group sales in 2009 from
2008 was primarily the result of:
| • | organic sales decline (excluding acquisitions and foreign currency exchange) of 16.1% primarily due to lower sales of certain pump, pool and filtration products primarily related to the downturn in the North American and Western European residential housing markets and other global markets; and |
| • | unfavorable foreign currency effects. |
These
decreases were partially offset by:
| • | selective increases in selling prices to mitigate inflationary cost increases; and |
| • | an increase in sales volume due to the formation of PRF. |
The
1.1 percent decrease in Water Group sales in 2008 from 2007
was primarily the result of:
| • | organic sales decline (excluding acquisitions and foreign currency exchange) of 5.1% 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. |
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. |
Technical
Products
The
26.3 percent decrease in Technical Products Group sales in
2009 from 2008 was primarily the result of:
| • | organic sales decline (excluding foreign currency exchange) of 25.4% primarily related to: |
| • | a decrease in sales to electrical markets resulting from lower capital spending by customers in the industrial vertical market; | |
| • | a decrease in sales to electronics markets that was largely attributable to reduced spending in the communications and general electronics vertical markets; and |
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| • | unfavorable foreign currency effects. |
These
decreases were partially offset by:
| • | selective increases in selling prices to mitigate inflationary cost increases. |
The
9.1 percent increase in Technical Products Group 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. |
Gross
profit
| In thousands | 2009 | % of sales | 2008 | % of sales | 2007 | % of sales | ||||||||||||||||||
|
Gross profit
|
$ | 785,135 | 29.2 | % | $ | 1,014,550 | 30.3 | % | $ | 1,012,698 | 30.9 | % | ||||||||||||
|
Percentage point change
|
(1.1 | ) pts | (0.6 | ) pts | ||||||||||||||||||||
The
1.1 percentage point decrease in gross profit as a percent
of sales in 2009 from 2008 was primarily the result
of:
| • | lower sales of certain pump, pool and filtration products primarily related to the downturn in the North American and Western European residential housing markets and other global market downturns; |
| • | lower sales volume in our Technical Products Group and lower fixed cost absorption resulting from that volume decline; |
| • | inflationary increases related to raw materials and labor costs; and |
| • | period restructuring costs and write-offs of inventory associated with the consolidation of facilities. |
These
decreases were partially offset by:
| • | cost savings from restructuring actions and other personnel reductions taken in response to the economic downturn and resulting volume decline; |
| • | selective increases in selling prices in our Water and Technical Products Groups to mitigate inflationary cost increases; |
| • | savings generated from our PIMS initiatives, including lean and supply management practices; and |
| • | higher cost of goods sold in 2008 as a result of a fair market value inventory step-up related to the formation of PRF. |
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; |
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| • | 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. |
Selling,
general and administrative (SG&A)
| In thousands | 2009 | % of sales | 2008 | % of sales | 2007 | % of sales | ||||||||||||||||||
|
*SG&A
|
$ | 507,303 | 18.8 | % | $ | 627,415 | 18.7 | % | $ | 576,828 | 17.6 | % | ||||||||||||
|
Percentage point change
|
0.1 pts | 1.1 pts | ||||||||||||||||||||||
| * | Includes Legal settlement in 2008 of $20.4 million, which is presented on a separate line in the Consolidated Statements of Income |
The
0.1 percentage point increase in SG&A expense as a
percent of sales in 2009 from 2008 was primarily the result
of:
| • | lower sales volume and the resultant loss of leverage on the SG&A expense spending; |
| • | expense associated with incremental restructuring actions in both our Water and Technical Products Groups in 2009; |
| • | impairment charge of $11.3 million for selected trade names resulting from significant volume declines; |
| • | higher costs associated with the integration of and intangible amortization related to the June 2008 formation of PRF; and |
| • | continued investments in future growth with emphasis on growth in international markets, including personnel and business infrastructure investments. |
These
increases were offset by:
| • | 2008 charges for the Horizon legal settlement, which were non-recurring in 2009; and |
| • | reduced costs related to productivity actions taken throughout 2008 and 2009 to consolidate facilities and streamline general and administrative costs. |
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. |
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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. |
Research
and development (R&D)
| In thousands | 2009 | % of sales | 2008 | % of sales | 2007 | % of sales | ||||||||||||||||||
|
R&D
|
$ | 57,884 | 2.2 | % | $ | 62,450 | 1.9 | % | $ | 56,821 | 1.7 | % | ||||||||||||
|
Percentage point change
|
0.3 pts | 0.2 pts | ||||||||||||||||||||||
The
0.3 percentage point increase in R&D expense as a
percent of sales in 2009 from 2008 was primarily the result
of:
| • | lower sales volume and the resultant loss of leverage on the R&D expense spending. |
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. |
Operating
income
Water
| In thousands | 2009 | % of sales | 2008 | % of sales | 2007 | % of sales | ||||||||||||||||||
|
Operating income
|
$ | 163,745 | 8.9 | % | $ | 206,357 | 9.4 | % | $ | 273,677 | 12.3 | % | ||||||||||||
|
Percentage point change
|
(0.5 | ) pts | (2.9 | ) pts | ||||||||||||||||||||
The
0.5 percentage point decrease in Water Group operating
income as a percent of net sales in 2009 from 2008 was primarily
the result of:
| • | lower sales of certain pump, pool and filtration products resulting from the downturn in the North American and Western European residential housing markets; |
| • | inflationary increases related to raw materials and labor; |
| • | incremental restructuring actions taken in 2009; |
| • | continued investments in future growth with emphasis on growth in international markets, including personnel and business infrastructure investments; |
| • | impairment charge of $11.3 million for selected trade names resulting from significant volume declines; and |
| • | higher costs associated with the integration of and intangible amortization related to the June 2008 formation of PRF. |
These
decreases were partially offset by:
| • | selective increases in selling prices to mitigate inflationary cost increases; |
| • | cost savings from restructuring actions and other personnel reductions taken in response to the current economic downturn and resulting volume decline; |
| • | savings generated from our PIMS initiatives including lean and supply management practices; and |
| • | 2008 charges for the Horizon legal settlement, which were non-recurring in 2009. |
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The
2.9 percentage point decrease in Water Group 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
decreases 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; |
| • | the 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. |
Technical
Products
| In thousands | 2009 | % of sales | 2008 | % of sales | 2007 | % of sales | ||||||||||||||||||
|
Operating income
|
$ | 100,355 | 11.9 | % | $ | 169,315 | 14.8 | % | $ | 153,586 | 14.6 | % | ||||||||||||
|
Percentage point change
|
(2.9 | ) pts | 0.2 pts | |||||||||||||||||||||
The
2.9 percentage point decrease in Technical Products Group
operating income as a percent of net sales in 2009 from 2008 was
primarily the result of:
| • | a decrease in sales to electrical markets resulting from lower capital spending by customers in the industrial vertical market; |
| • | a decrease in sales into electronics markets that was largely attributable to reduced spending in the communications and general electronics vertical markets; |
| • | lower fixed cost absorption resulting from the sales volume decline; and |
| • | incremental restructuring actions taken in 2009 and the associated period costs related to the closure of certain facilities. |
These
decreases were partially offset by:
| • | cost savings from restructuring actions and other personnel reductions taken in response to the current economic downturn and resulting volume decline; |
| • | savings generated from our PIMS initiatives, including lean and supply management practices; and |
| • | lower material cost for key commodities such as carbon steel. |
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The
0.2 percentage point increase in Technical Products Group
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; and |
| • | 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. |
Net
interest expense
| In thousands | 2009 | 2008 | Difference | % change | 2008 | 2007 | Difference | % change | ||||||||||||||||||||||||
|
Net interest expense
|
$ | 41,118 | $ | 59,435 | $ | (18,317 | ) | (30.8 | )% | $ | 59,435 | $ | 68,393 | $ | (8,958 | ) | (13.1 | %) | ||||||||||||||
The
30.8 percent decrease in interest expense from continuing
operations in 2009 from 2008 was primarily the result
of:
| • | favorable impact of lower variable interest rates and lower debt levels in part attributable to the redemption on April 15, 2009 of our 7.85% Senior Notes due 2009. |
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. |
Gain
on sale of interest in subsidiaries
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 GE’s 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, 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. The acquisition and related sale of our
19.9 percent interest resulted in a gain of
$109.6 million representing the difference between the
carrying amount and the fair value of the 19.9 percent
interest sold.
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 in 2008. 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.
On March 16, 2009, we announced the redemption of all of
our remaining outstanding $133.9 million aggregate
principal of Notes. The Notes were redeemed on April 15,
2009 at a redemption price of $1,035.88 per $1,000 of principal
outstanding plus accrued interest thereon. As a result of this
transaction, we recognized a loss of $4.8 million on early
extinguishment of debt in the second quarter of 2009. The loss
included the
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write off of $0.1 million in unamortized deferred financing
fees in addition to recognition of $0.3 million in
previously unrecognized swap gains, and cash paid of
$5.0 million related to the redemption and other costs
associated with the purchase.
Provision
for income taxes from continuing operations
| In thousands | 2009 | 2008 | 2007 | |||||||||
|
Income from continuing operations before income taxes and
minority interest
|
$ | 172,647 | $ | 367,140 | $ | 306,561 | ||||||
|
Provision for income taxes
|
56,428 | 108,344 | 94,443 | |||||||||
|
Effective tax rate
|
32.7 | % | 29.5 | % | 30.8 | % | ||||||
The
3.2 percentage point increase in the tax rate in 2009 from
2008 was primarily the result of:
| • | a portion of the gain on the formation of PRF in 2008 being taxed at a rate of 0%. |
This
increase was partially offset by:
| • | favorable adjustments in 2009 related to prior years’ tax returns. |
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. |
We expect our full year effective tax rate in 2010 to be between
32% and 34%. 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 uncertain economic situation, we do not
currently plan to make any significant acquisitions in 2010,
although we may undertake smaller acquisitions. For the second
year in a row, our Board did not authorize our annual share
repurchase program that we had undertaken prior to 2009. We
continue to focus 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.
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 ample borrowing capacity
for our currently projected needs ($601.7 million at
December 31, 2009 which would be limited to
$390.2 million based on the credit agreement’s
leverage ratio covenant).
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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 $258.4 million in
2009, or $54.2 million higher than in 2008. The increase in
cash provided by operating activities was due primarily to a
reduction in working capital, offset by a discretionary pension
contribution of $25 million and lower income from
continuing operations.
Cash provided by operating activities was $204.2 million in
2008, or $137.1 million lower than 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.
In December 2008 and 2007, we sold approximately
$44 million and $50 million, respectively, of a
customer’s account receivable to a third-party financial
institution to mitigate accounts receivable concentration risk.
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, respectively, related to the sale of accounts
receivable and is included in the line item
Other
in
our Consolidated Statements of Income. We did not undertake a
similar sale of customer receivables in 2009, in part because of
lower receivable balances and higher transactions costs.
Investing
activities
Capital expenditures in 2009, 2008, and 2007 were
$54.1 million, $53.1 million and $61.5 million,
respectively. We anticipate capital expenditures for fiscal 2010
to be approximately $55 to $65 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.
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 $9.2 million.
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 $29.8 million. 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
$1.2 million in 2009 was related to various asset
dispositions. Cash proceeds from the sale of property and
equipment of $4.7 million in 2008 was primarily
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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 $209.1 million
in 2009 and $217.2 in 2008 versus net cash provided by financing
activities of $222.7 in 2007. The difference in cash usage
between 2009 and 2008 was primarily the result of debt
repayments in 2008. The difference in cash usage between 2008
and 2007 was primarily attributable to 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
0.625%. 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 and when 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 paper compared to the cost of
borrowing under our Credit Facility. As of December 31,
2009, we had no outstanding commercial paper. As of
December 31, 2008 we had $0.2 million of commercial
paper outstanding. All of the commercial paper at
December 31, 2008 was classified as long-term as we had 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.
On July 8, 2008, we commenced a cash tender offer for all
of our outstanding $250 million aggregate principal of
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 in 2008. 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.
On March 16, 2009, we announced the redemption of all of
our remaining outstanding $133.9 million aggregate
principle of Notes to take advantage of lower interest rates
available under the Credit Facility. The Notes were redeemed on
April 15, 2009 at a redemption price of $1,035.88 per
$1,000 of principal outstanding plus accrued interest thereon
utilizing funds on hand and drawings under our Credit Facility.
No other significant debt obligations mature until 2012. As a
result of this transaction, we recognized a loss of
$4.8 million on early extinguishment of debt in the second
quarter of 2009. The loss included the write off of
$0.1 million in unamortized deferred financing fees in
addition to recognition of $0.3 million in previously
unrecognized swap gains, and cash paid of $5.0 million
related to the redemption and other costs associated with the
purchase.
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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, 2009.
In addition to the Credit Facility, we have $40.0 million
of uncommitted credit facilities, under which we had
$2.1 million of borrowings as of December 31, 2009.
Our current credit ratings are as follows:
|
Long-Term Debt
|
Current Rating
|
|||||||
|
Rating Agency
|
Rating
|
Outlook
|
||||||
|
Standard & Poor’s
|
BBB- | Stable | ||||||
|
Moody’s
|
Baa3 | Negative | ||||||
Our long-term debt rating is an investment grade rating.
Investment grade is a credit rating of BBB- or higher by
Standard & Poor’s or Baa3 or higher by
Moody’s.
On March 6, 2009, Standard & Poor’s
(“S&P”) lowered our credit rating from BBB to
BBB- and changed the outlook from negative to stable.
S&P’s rating action reflects their expectation that
the difficult global economic environment will likely delay
improvement in our credit metrics, resulting in metrics that are
more consistent with a BBB- rating. On May 1, 2009,
Moody’s Investors Service affirmed its Baa3 rating and
changed the outlook from stable to negative. Our credit rating
continues to be an investment grade rating, which is a credit
rating of BBB- or higher by S&P and Baa3 or higher by
Moody’s.
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 & Poor’s or Moody’s.
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 & Poor’s or Moody’s
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 annually.
We have the ability and sufficient capacity to meet these cash
requirements, by using available cash and internally generated
funds, and to borrow under our committed and uncommitted credit
facilities.
We paid dividends in 2009 of $70.9 million, compared with
$67.3 million in 2008 and $59.9 million in 2007. We
recently announced an increase in our dividend rate for 2010
from $0.72 per share in 2009 to $0.76 per share in 2010, which
is the 34th 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
was sought from or granted by our Board for 2009 or 2010.
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The following summarizes our significant contractual
obligations that impact our liquidity:
| Payments Due by Period | ||||||||||||||||||||||||||||
|
More than
|
||||||||||||||||||||||||||||
| In thousands | 2010 | 2011 | 2012 | 2013 | 2014 | 5 Years | Total | |||||||||||||||||||||
|
Long-term debt obligations
|
$ | 2,286 | $ | 15 | $ | 303,306 | $ | 200,007 | $ | 8 | $ | 300,015 | $ | 805,637 | ||||||||||||||
|
Interest obligations on fixed-rate debt , including effects of
derivative financial instruments
|
33,524 | 33,524 | 30,697 | 26,550 | 17,610 | 44,025 | 185,930 | |||||||||||||||||||||
|
Operating lease obligations, net of sublease rentals
|
21,791 | 17,804 | 14,425 | 9,574 | 7,663 | 11,153 | 82,410 | |||||||||||||||||||||
|
Pension and post retirement plan contributions
|
11,300 | 36,500 | 34,600 | 35,700 | 35,000 | 102,200 | 255,300 | |||||||||||||||||||||
|
Other long-term liabilities
|
552 | 235 | 118 | — | — | — | 905 | |||||||||||||||||||||
|
Total contractual cash
obligations, net |
$ | 69,453 | $ | 88,078 | $ | 383,146 | $ | 271,831 | $ | 60,281 | $ | 457,393 | $ | 1,330,182 | ||||||||||||||
In addition to the summary of significant contractual
obligations, we will incur annual interest expense on
outstanding variable rate debt. As of December 31, 2009,
variable interest rate debt, including the effects of derivative
financial instruments, was $200.5 million at a weighted
average interest rate of 0.90%.
The estimated annual pension plan contribution amounts are
intended to achieve fully funded status of our domestic
qualified pension plan in accordance with the Pension Protection
Act of 2006.
Pension and post retirement plan contributions are based on an
assumed discount rate of 6.0% for all periods and an expected
rate of return on plan assets ranging from 6.0% to 8.5%. In
December 2009, we made a discretionary contribution of
$25 million to our defined benefit pension plan.
The total gross liability for uncertain tax positions at
December 31, 2009 is estimated to be approximately
$30.0 million. 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,
2009, we had recorded approximately $0.6 million for the
possible payment of penalties and $5.5 million related to
the possible payment of interest.
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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 | 2009 | 2008 | 2007 | |||||||||
|
Net cash provided by (used for) continuing operations
|
$ | 259,900 | $ | 212,612 | $ | 336,990 | ||||||
|
Capital expenditures
|
(54,137 | ) | (53,089 | ) | (61,516 | ) | ||||||
|
Proceeds from sale of property and equipment
|
1,208 | 4,741 | 5,198 | |||||||||
|
Free cash flow
|
206,971 | 164,264 | 280,672 | |||||||||
|
Net income from continuing operations attributable to Pentair,
Inc.
|
115,512 | 256,363 | 212,118 | |||||||||
|
Conversion of net income from continuing operations attributable
to Pentair, Inc.
|
179 | % | 64 | % | 132 | % | ||||||
In 2010, our objective is to generate free cash flow that equals
or exceeds 100% conversion of net income.
Off-balance
sheet arrangements
At December 31, 2009, 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 relating 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, 2009 and 2008, our undiscounted reserves
for such environmental liabilities were approximately
$2.3 million and $3.1 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.
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Table of Contents
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, 2009 and 2008, the outstanding value of these
instruments totaled $51.2 million and $64.5 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
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 and Indefinite-Lived Intangibles
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 unit’s 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 and market approach. Projecting
discounted future cash flows requires us to make significant
estimates regarding future revenues and expenses, projected
capital expenditures, changes in working capital and the
appropriate discount rate. Use of the market approach consists
of comparisons to comparable publicly-traded companies that are
similar in size and industry. Actual results may differ from
those used in our valuations.
In developing our discounted cash flow analysis, assumptions
about future revenues and expenses, capital expenditures, and
changes in working capital are based on our annual operating
plan and long term business plan for each of our reporting
units. These plans take into consideration numerous factors
including historical experience, anticipated future economic
conditions, changes in raw material prices, and growth
expectations for the industries and end markets we participate
in. These assumptions are determined over a five year long term
planning period. The five year growth rates for revenues and
operating profits vary for each reporting
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unit being evaluated. Revenues and operating profit beyond 2016
are projected to grow at a 3% perpetual growth rate for all
reporting units.
Discount rate assumptions for each reporting unit take into
consideration our assessment of risks inherent in the future
cash flows of the respective reporting unit and our
weighted-average cost of capital. We utilized a discount rate
ranging from 12% to 13% in determining the discounted cash flows
in our fair value analysis.
In estimating fair value using the market approach, we identify
a group of comparable publicly-traded companies for each
operating segment that are similar in terms of size and product
offering. These groups of comparable companies are used to
develop multiples based on total market-based invested capital
as a multiple of earnings before interest, taxes, depreciation
and amortization (EBITDA). We determine our estimated values by
applying these comparable EBITDA multiples to the operating
results of our reporting units. The ultimate fair value of each
reporting unit is determined considering the results of both
valuation methods.
Indefinite-Lived
Intangibles
Our primary identifiable intangible assets include trade marks
and trade names, patents, non-compete agreements, proprietary
technology, and customer relationships. 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. During the fourth quarter of 2009
and 2008, we completed our annual impairment test for those
identifiable assets not subject to amortization and recorded
impairment charges of $11.3 million and $1.0 million,
respectively. These charges were recorded in
Selling, general
and administrative
in our Consolidated Statements of Income.
The impairment test consists of a comparison of the fair value
of the trade name with its carrying value. Fair value is
measured using the relief-from-royalty method. This method
assumes the trade name has value to the extent that their owner
is relieved of the obligation to pay royalties for the benefits
received from them. This method requires us to estimate the
future revenue for the related brands, the appropriate royalty
rate and the weighted average cost of capital. The impairment
charge was the result of significant declines in sales volume.
At December 31, 2009 our goodwill and intangible assets
were approximately $2,575.2 million, and represented
approximately 65.8% of our total assets. If we experience
further declines in sales and operating profit or do not meet
our operating forecasts, we may be subject to future
impairments. Additionally, changes in assumptions regarding the
future performance of our businesses, increases in the discount
rate used to determine the discounted cash flows of our
businesses, or significant declines in our stock price or the
market as a whole could result in additional impairment
indicators. 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.
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 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
37
Table of Contents
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.
We recognize the overfunded or underfunded status of our defined
benefit and retiree medical plans as an asset or liability in
our 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 6.00% in 2009 and 6.50% in 2008 and 2007. The
discount rates on our foreign plans ranged from 2.00% to 6.0% in
2009, 2.00% to 6.25% in 2008 and 2.00% to 5.25% in 2007. There
are no other known or anticipated changes in our discount rate
assumption that will impact our pension expense in 2010.
Expected
rate of return
Our expected rate of return on plan assets in 2009 equaled 8.5%,
which remained unchanged from 2008 and 2007. 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 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 changes
in interest rates. 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.
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, excluding impact of swap agreements, as of
December 31, 2009 was comprised of debt predominantly
denominated in U.S. dollars. This debt portfolio is
comprised of 50% fixed-rate debt and 50%
38
Table of Contents
variable-rate debt, not considering the effects of our interest
rate swaps. Taking into account the variable to fixed rate swap
agreements we entered with an effective date of April 2006 and
August 2007, our debt portfolio is comprised of 75% fixed-rate
debt and 25% 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 fair value 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 fixed-rate debt included in our debt portfolio, as
of December 31, 2009, a 100 basis point increase or
decrease in interest rates would result in a $20.0 million
increase or decrease in fair value.
Based on the variable-rate debt included in our debt portfolio,
including the interest rate swap agreements, as of
December 31, 2009, a 100 basis point increase or
decrease in interest rates would result in a $2.0 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
Table of Contents
MANAGEMENT’S
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 Company’s 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 Company’s 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 Company’s 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 Company’s
internal control over financial reporting as of
December 31, 2009. 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, 2009, the Company’s
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 Company’s internal control over financial
reporting as of year ended December 31, 2009. That
attestation report is set forth immediately following this
management report.
| Randall J. Hogan | John L. Stauch | |
|
Chairman and Chief Executive Officer
|
Executive Vice President and Chief Financial Officer |
40
Table of Contents
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, 2009, based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s 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
Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Company’s 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 company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s 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 company’s
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
company’s 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, 2009, 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, 2009, of the Company and our report
dated February 23, 2010, expressed an unqualified opinion
on those consolidated financial statements and financial
statement schedule and included an explanatory paragraph
regarding the Company’s adoption of a new accounting
standard.
Minneapolis, Minnesota
February 23, 2010
41
Table of Contents
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, 2009 and 2008, and the related consolidated
statements of income, changes in shareholders’ equity, and
cash flows for each of the three years in the period ended
December 31, 2009. 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 Company’s management. Our
responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with 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, 2009 and 2008, and the results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2009, 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 Note 1 to the consolidated financial
statements, the Company changed its method of accounting and
reporting for noncontrolling interests for all periods presented.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of
December 31, 2009, 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, 2010 expressed
an unqualified opinion on the Company’s internal control
over financial reporting.
Minneapolis, Minnesota
February 23, 2010
42
Table of Contents
| Years Ended December 31 | ||||||||||||
| In thousands, except per-share data | 2009 | 2008 | 2007 | |||||||||
|
Net sales
|
$ | 2,692,468 | $ | 3,351,976 | $ | 3,280,903 | ||||||
|
Cost of goods sold
|
1,907,333 | 2,337,426 | 2,268,205 | |||||||||
|
Gross profit
|
785,135 | 1,014,550 | 1,012,698 | |||||||||
|
Selling, general and administrative
|
507,303 | 606,980 | 576,828 | |||||||||
|
Research and development
|
57,884 | 62,450 | 56,821 | |||||||||
|
Legal settlement
|
— | 20,435 | — | |||||||||
|
Operating income
|
219,948 | 324,685 | 379,049 | |||||||||
|
Other (income) expense:
|
||||||||||||
|
Gain on sale of interest in subsidiaries
|
— | (109,648 | ) | — | ||||||||
|
Equity losses of unconsolidated subsidiary
|
1,379 | 3,041 | 2,865 | |||||||||
|
Loss on early extinguishment of debt
|
4,804 | 4,611 | — | |||||||||
|
Interest income
|
(999 | ) | (2,029 | ) | (1,510 | ) | ||||||
|
Interest expense
|
42,117 | 61,464 | 69,903 | |||||||||
|
Other
|
— | 106 | 1,230 | |||||||||
|
Income from continuing operations before income taxes and
noncontrolling interest
|
172,647 | 367,140 | 306,561 | |||||||||
|
Provision for income taxes
|
56,428 | 108,344 | 94,443 | |||||||||
|
Income from continuing operations
|
116,219 | 258,796 | 212,118 | |||||||||
|
Loss from discontinued operations, net of tax
|
— | (5,783 | ) | (1,629 | ) | |||||||
|
Gain (loss) on disposal of discontinued operations, net of tax
|
(19 | ) | (21,846 | ) | 438 | |||||||
|
Net income before noncontrolling interest
|
116,200 | 231,167 | 210,927 | |||||||||
|
Noncontrolling interest
|
707 | 2,433 | — | |||||||||
|
Net income attributable to Pentair, Inc.
|
$ | 115,493 | $ | 228,734 | $ | 210,927 | ||||||
|
Net income from continuing operations attributable to Pentair,
Inc.
|
$ | 115,512 | $ | 256,363 | $ | 212,118 | ||||||
|
Earnings (loss) per common share attributable to Pentair,
Inc.
|
||||||||||||
|
Basic
|
||||||||||||
|
Continuing operations
|
$ | 1.19 | $ | 2.62 | $ | 2.15 | ||||||
|
Discontinued operations
|
— | (0.28 | ) | (0.01 | ) | |||||||
|
Basic earnings per common share
|
$ | 1.19 | $ | 2.34 | $ | 2.14 | ||||||
|
Diluted
|
||||||||||||
|
Continuing operations
|
$ | 1.17 | $ | 2.59 | $ | 2.12 | ||||||
|
Discontinued operations
|
— | (0.28 | ) | (0.01 | ) | |||||||
|
Diluted earnings per common share
|
$ | 1.17 | $ | 2.31 | $ | 2.11 | ||||||
|
Weighted average common shares outstanding
|
||||||||||||
|
Basic
|
97,415 | 97,887 | 98,762 | |||||||||
|
Diluted
|
98,522 | 99,068 | 100,205 | |||||||||
See accompanying notes to consolidated financial statements.
43
Table of Contents
|
December 31
|
December 31
|
|||||||
| In thousands, except share and per-share data | 2009 | 2008 | ||||||
|
ASSETS
|
||||||||
|
Current assets
|
||||||||
|
Cash and cash equivalents
|
$ | 33,396 | $ | 39,344 | ||||
|
Accounts and notes receivable, net of allowances of $27,081 and
$25,156, respectively
|
455,090 | 461,081 | ||||||
|
Inventories
|
360,627 | 417,287 | ||||||
|
Deferred tax assets
|
49,609 | 51,354 | ||||||
|
Prepaid expenses and other current assets
|
47,576 | 63,113 | ||||||
|
Total current assets
|
946,298 | 1,032,179 | ||||||
|
Property, plant and equipment, net
|
333,688 | 343,881 | ||||||
|
Other assets
|
||||||||
|
Goodwill
|
2,088,797 | 2,101,851 | ||||||
|
Intangibles, net
|
486,407 | 515,508 | ||||||
|
Other
|
56,144 | 59,794 | ||||||
|
Total other assets
|
2,631,348 | 2,677,153 | ||||||
|
Total assets
|
$ | 3,911,334 | $ | 4,053,213 | ||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current liabilities
|
||||||||
|
Short-term borrowings
|
$ | 2,205 | $ | — | ||||
|
Current maturities of long-term debt
|
81 | 624 | ||||||
|
Accounts payable
|
207,661 | 217,898 | ||||||
|
Employee compensation and benefits
|
74,254 | 90,210 | ||||||
|
Current pension and post-retirement benefits
|
8,948 | 8,890 | ||||||
|
Accrued product claims and warranties
|
34,288 | 41,559 | ||||||
|
Income taxes
|
5,659 | 5,451 | ||||||
|
Accrued rebates and sales incentives
|
27,554 | 28,897 | ||||||
|
Other current liabilities
|
85,629 | 104,975 | ||||||
|
Total current liabilities
|
446,279 | 498,504 | ||||||
|
Other liabilities
|
||||||||
|
Long-term debt
|
803,351 | 953,468 | ||||||
|
Pension and other retirement compensation
|
234,948 | 270,139 | ||||||
|
Post-retirement medical and other benefits
|
31,790 | 34,723 | ||||||
|
Long-term income taxes payable
|
26,936 | 28,139 | ||||||
|
Deferred tax liabilities
|
146,630 | 146,559 | ||||||
|
Other non-current liabilities
|
95,060 | 101,612 | ||||||
|
Total liabilities
|
1,784,994 | 2,033,144 | ||||||
|
Commitments and contingencies
|
||||||||
|
Shareholders’ equity
|
||||||||
|
Common shares par value $0.16
2/3
;
98,655,506 and 98,276,919 shares issued and outstanding,
respectively
|
16,442 | 16,379 | ||||||
|
Additional paid-in capital
|
472,807 | 451,241 | ||||||
|
Retained earnings
|
1,502,242 | 1,457,676 | ||||||
|
Accumulated other comprehensive income (loss)
|
20,597 | (26,615 | ) | |||||
|
Noncontrolling interest
|
114,252 | 121,388 | ||||||
|
Total shareholders’ equity
|
2,126,340 | 2,020,069 | ||||||
|
Total liabilities and shareholders’ equity
|
$ | 3,911,334 | $ | 4,053,213 | ||||
See accompanying notes to consolidated financial statements.
44
Table of Contents
| Year Ended | ||||||||||||
|
December 31
|
December 31
|
December 31
|
||||||||||
| In thousands | 2009 | 2008 | 2007 | |||||||||
|
Operating activities
|
||||||||||||
|
Net income before noncontrolling interest
|
$ | 116,200 | $ | 231,167 | $ | 210,927 | ||||||
|
Adjustments to reconcile net income to net cash provided by
(used for) operating activities
|
||||||||||||
|
Loss from discontinued operations
|
— | 5,783 | 1,629 | |||||||||
|
(Gain) loss on disposal of discontinued operations
|
19 | 21,846 | (438 | ) | ||||||||
|
Equity losses of unconsolidated subsidiary
|
1,379 | 3,041 | 2,865 | |||||||||
|
Depreciation
|
64,823 | 59,673 | 57,603 | |||||||||
|
Amortization
|
40,657 | 27,608 | 25,561 | |||||||||
|
Deferred income taxes
|
30,616 | 40,754 | (16,652 | ) | ||||||||
|
Stock compensation
|
17,324 | 20,572 | 22,913 | |||||||||
|
Excess tax benefits from stock-based compensation
|
(1,746 | ) | (1,617 | ) | (4,204 | ) | ||||||
|
(Gain) loss on sale of assets
|
985 | 510 | (1,929 | ) | ||||||||
|
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
|
11,307 | (18,247 | ) | (19,068 | ) | |||||||
|
Inventories
|
66,684 | (33,311 | ) | 14,714 | ||||||||
|
Prepaid expenses and other current assets
|
16,202 | (27,394 | ) | 2,175 | ||||||||
|
Accounts payable
|
(13,822 | ) | (1,973 | ) | 19,482 | |||||||
|
Employee compensation and benefits
|
(22,431 | ) | (21,919 | ) | 3,995 | |||||||
|
Accrued product claims and warranties
|
(7,440 | ) | (7,286 | ) | 4,763 | |||||||
|
Income taxes
|
1,972 | (4,409 | ) | 2,849 | ||||||||
|
Other current liabilities
|
(21,081 | ) | 8,987 | (3,218 | ) | |||||||
|
Pension and post-retirement benefits
|
(39,607 | ) | 301 | 6 | ||||||||
|
Other assets and liabilities
|
(2,141 | ) | 18,174 | 13,017 | ||||||||
|
Net cash provided by (used for) continuing operations
|
259,900 | 212,612 | 336,990 | |||||||||
|
Net cash provided by (used for) operating activities of
discontinued operations
|
(1,531 | ) | (8,397 | ) | 4,288 | |||||||
|
Net cash provided by (used for) operating activities
|
258,369 | 204,215 | 341,278 | |||||||||
|
Investing activities
|
||||||||||||
|
Capital expenditures
|
(54,137 | ) | (53,089 | ) | (61,516 | ) | ||||||
|
Proceeds from sale of property and equipment
|
1,208 | 4,741 | 5,198 | |||||||||
|
Acquisitions, net of cash acquired
|
— | (2,027 | ) | (487,561 | ) | |||||||
|
Divestitures
|
1,567 | 37,907 | — | |||||||||
|
Other
|
(3,224 | ) | (12 | ) | (5,544 | ) | ||||||
|
Net cash provided by (used for) investing activities
|
(54,586 | ) | (12,480 | ) | (549,423 | ) | ||||||
|
Financing activities
|
||||||||||||
|
Net short-term borrowings
|
2,205 | (16,994 | ) | (1,830 | ) | |||||||
|
Proceeds from long-term debt
|
580,000 | 715,000 | 1,269,428 | |||||||||
|
Repayment of long-term debt
|
(730,304 | ) | (805,016 | ) | (954,077 | ) | ||||||
|
Debt issuance costs
|
(50 | ) | (114 | ) | (1,876 | ) | ||||||
|
Excess tax benefits from stock-based compensation
|
1,746 | 1,617 | 4,204 | |||||||||
|
Proceeds from exercise of stock options
|
8,247 | 5,590 | 7,388 | |||||||||
|
Repurchases of common stock
|
— | (50,000 | ) | (40,641 | ) | |||||||
|
Dividends paid
|
(70,927 | ) | (67,284 | ) | (59,910 | ) | ||||||
|
Net cash provided by (used for) financing activities
|
(209,083 | ) | (217,201 | ) | 222,686 | |||||||
|
Effect of exchange rate changes on cash and cash
equivalents
|
(648 | ) | (5,985 | ) | 1,434 | |||||||
|
Change in cash and cash equivalents
|
(5,948 | ) | (31,451 | ) | 15,975 | |||||||
|
Cash and cash equivalents, beginning of period
|
39,344 | 70,795 | 54,820 | |||||||||
|
Cash and cash equivalents, end of period
|
$ | 33,396 | $ | 39,344 | $ | 70,795 | ||||||
See accompanying notes to consolidated financial statements.
45
Table of Contents
|
Accumulated
|
||||||||||||||||||||||||||||||||||||
|
Additional
|
other
|
|||||||||||||||||||||||||||||||||||
| Common shares |
paid-in
|
Retained
|
comprehensive
|
Total
|
Noncontrolling
|
Comprehensive
|
||||||||||||||||||||||||||||||
| In thousands, except share and per-share data | Number | Amount | capital | earnings | income (loss) | Pentair, Inc. | Interest | Total | income | |||||||||||||||||||||||||||
|
Balance — December 31, 2006
|
99,777,165 | $ | 16,629 | $ | 488,540 | $ | 1,148,126 | $ | 16,704 | $ | 1,669,999 | $ | — | $ | 1,669,999 | |||||||||||||||||||||
|
Net income
|
210,927 | 210,927 | 210,927 | $ | 210,927 | |||||||||||||||||||||||||||||||
|
Change in cumulative translation adjustment
|
72,901 | 72,901 | 72,901 | 72,901 | ||||||||||||||||||||||||||||||||
|
Adjustment in retirement liability, net of $23,784 tax
|
37,201 | 37,201 | 37,201 | 37,201 | ||||||||||||||||||||||||||||||||
|
Changes in market value of derivative financial instruments, net
of ($3,158) tax
|
(4,940 | ) | (4,940 | ) | (4,940 | ) | (4,940 | ) | ||||||||||||||||||||||||||||
|
Comprehensive income
|
$ | 316,089 | ||||||||||||||||||||||||||||||||||
|
Adjustment to initially apply tax guidance
|
(2,917 | ) | (2,917 | ) | (2,917 | ) | ||||||||||||||||||||||||||||||
|
Tax benefit of stock compensation
|
5,654 | 5,654 | 5,654 | |||||||||||||||||||||||||||||||||
|
Cash dividends — $0.60 per common share
|
(59,910 | ) | (59,910 | ) | (59,910 | ) | ||||||||||||||||||||||||||||||
|
Share repurchases
|
(1,209,257 | ) | (202 | ) | (40,439 | ) | (40,641 | ) | (40,641 | ) | ||||||||||||||||||||||||||
|
Exercise of stock options, net of 342,870 shares tendered
for payment
|
491,618 | 83 | 4,348 | 4,431 | 4,431 | |||||||||||||||||||||||||||||||
|
Issuance of restricted shares, net of cancellations
|
313,160 | 52 | 530 | 582 | 582 | |||||||||||||||||||||||||||||||
|
Amortization of restricted shares
|
9,256 | 9,256 | 9,256 | |||||||||||||||||||||||||||||||||
|
Shares surrendered by employees to pay taxes
|
(150,855 | ) | (25 | ) | (4,820 | ) | (4,845 | ) | (4,845 | ) | ||||||||||||||||||||||||||
|
Stock compensation
|
13,173 | 13,173 | 13,173 | |||||||||||||||||||||||||||||||||
|
Balance — December 31, 2007
|
99,221,831 | $ | 16,537 | $ | 476,242 | $ | 1,296,226 | $ | 121,866 | $ | 1,910,871 | $ | — | $ | 1,910,871 | |||||||||||||||||||||
|
Net income
|
228,734 | 228,734 | 228,734 | $ | 228,734 | |||||||||||||||||||||||||||||||
|
Change in cumulative translation adjustment
|
(72,117 | ) | (72,117 | ) | (72,117 | ) | (72,117 | ) | ||||||||||||||||||||||||||||
|
Adjustment in retirement liability, net of 42,793 tax
|
(66,933 | ) | (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 | ) | (9,431 | ) | ||||||||||||||||||||||||||||
|
Comprehensive income
|
$ | 80,253 | ||||||||||||||||||||||||||||||||||
|
Tax benefit of stock compensation
|
2,247 | 2,247 | 2,247 | |||||||||||||||||||||||||||||||||
|
Cash dividends — $0.68 per common share
|
(67,284 | ) | (67,284 | ) | (67,284 | ) | ||||||||||||||||||||||||||||||
|
Share repurchases
|
(1,549,893 | ) | (258 | ) | (49,742 | ) | (50,000 | ) | (50,000 | ) | ||||||||||||||||||||||||||
|
Exercise of stock options, net of 121,638 shares tendered
for payment
|
322,574 | 53 | 4,948 | 5,001 | 5,001 | |||||||||||||||||||||||||||||||
|
Issuance of restricted shares, net of cancellations
|
366,005 | 61 | 388 | 449 | 449 | |||||||||||||||||||||||||||||||
|
Amortization of restricted shares
|
9,378 | 9,378 | 9,378 | |||||||||||||||||||||||||||||||||
|
Shares surrendered by employees to pay taxes
|
(83,598 | ) | (14 | ) | (2,730 | ) | (2,744 | ) | (2,744 | ) | ||||||||||||||||||||||||||
|
Stock compensation
|
10,510 | 10,510 | 10,510 | |||||||||||||||||||||||||||||||||
|
PRF Acquisition
|
121,388 | 121,388 | ||||||||||||||||||||||||||||||||||
|
Balance — December 31, 2008
|
98,276,919 | $ | 16,379 | $ | 451,241 | $ | 1,457,676 | $ | (26,615 | ) | $ | 1,898,681 | $ | 121,388 | $ | 2,020,069 | ||||||||||||||||||||
|
Net income
|
115,493 | 115,493 | 707 | 116,200 | $ | 115,493 | ||||||||||||||||||||||||||||||
|
Change in cumulative translation adjustment
|
43,371 | 43,371 | (7,843 | ) | 35,528 | 43,371 | ||||||||||||||||||||||||||||||
|
Adjustment in retirement liability, net of $164 tax
|
256 | 256 | 256 | 256 | ||||||||||||||||||||||||||||||||
|
Changes in market value of derivative financial instruments, net
of $2,3,23 tax
|
3,585 | 3,585 | 3,585 | 3,585 | ||||||||||||||||||||||||||||||||
|
Comprehensive income
|
$ | 162,705 | ||||||||||||||||||||||||||||||||||
|
Tax benefit of stock compensation
|
1,025 | 1,025 | 1,025 | |||||||||||||||||||||||||||||||||
|
Cash dividends — $0.72 per common share
|
(70,927 | ) | (70,927 | ) | (70,927 | ) | ||||||||||||||||||||||||||||||
|
Exercise of stock options, net of 124,613 shares tendered
for payment
|
433,533 | 72 | 7,639 | 7,711 | 7,711 | |||||||||||||||||||||||||||||||
|
Issuance of restricted shares, net of cancellations
|
24,531 | 4 | 516 | 520 | 520 | |||||||||||||||||||||||||||||||
|
Amortization of restricted shares
|
7,190 | 7,190 | 7,190 | |||||||||||||||||||||||||||||||||
|
Shares surrendered by employees to pay taxes
|
(79,477 | ) | (13 | ) | (1,867 | ) | (1,880 | ) | (1,880 | ) | ||||||||||||||||||||||||||
|
Stock compensation
|
7,063 | 7,063 | 7,063 | |||||||||||||||||||||||||||||||||
|
Balance — December 31, 2009
|
98,655,506 | $ | 16,442 | $ | 472,807 | $ | 1,502,242 | $ | 20,597 | $ | 2,012,088 | $ | 114,252 | $ | 2,126,340 | |||||||||||||||||||||
See accompanying notes to consolidated financial statements.
46
Table of Contents
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.
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 indefinite-life intangibles; 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 seller’s 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
Table of Contents
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. One customer had a
receivable balance of approximately 10% of the total net
receivable balance as of December 31, 2009. No customer
receivable balances exceeded 10% of total net receivable
balances as of December 31, 2008.
In December 2008 and 2007, we sold approximately
$44 million and $50 million, respectively, of one
customer’s accounts receivable to a third-party financial
institution to mitigate accounts receivable concentration risk.
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. We did not undertake a similar sale of
customer receivables in 2009.
48
Table of Contents
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
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. This non-recurring fair value measurement is a
“Level 3” measurement under the fair value
hierarchy described below. 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 unit’s 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 and market approach. Projecting
discounted future cash flows requires us to make significant
estimates regarding future revenues and expenses, projected
capital expenditures, changes in working capital and the
appropriate discount rate. Use of the market approach consists
of comparisons to comparable publicly-traded companies that are
similar in size and industry. Actual results may differ from
those used in our valuations.
49
Table of Contents
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
In developing our discounted cash flow analysis, assumptions
about future revenues and expenses, capital expenditures, and
changes in working capital, are based on our annual operating
plan and long term business plan for each of our reporting
units. These plans take into consideration numerous factors
including historical experience, anticipated future economic
conditions, changes in raw material prices, and growth
expectations for the industries and end markets we participate
in. These assumptions are determined over a five year long term
planning period. The five year growth rates for revenues and
operating profits vary for each reporting unit being evaluated.
Revenues and operating profit beyond 2016 are projected to grow
at a 3% perpetual growth rate for all reporting units.
Discount rate assumptions for each reporting unit take into
consideration our assessment of risks inherent in the future
cash flows of the respective reporting unit and our
weighted-average cost of capital. We utilized a discount rate
ranging from 12% to 13% in determining the discounted cash flows
in our fair value analysis.
In estimating fair value using the market approach, we identify
a group of comparable publicly-traded companies for each
operating segment that are similar in terms of size and product
offering. These groups of comparable companies are used to
develop multiples based on total market-based invested capital
as a multiple of earnings before interest, taxes, depreciation
and amortization (EBITDA). We determine our estimated values by
applying these comparable EBITDA multiples to the operating
results of our reporting units. The ultimate fair value of each
reporting unit is determined considering the results of both
valuation methods.
We completed step one of our annual goodwill impairment
evaluation during the fourth quarter with each reporting
unit’s fair value exceeding its carrying value.
Accordingly, step two of the impairment analysis was not
required.
Identifiable
intangible assets
Our primary identifiable intangible assets include trade marks
and trade names, patents, non-compete agreements, proprietary
technology, and customer relationships. 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. During the fourth quarter of 2009
and 2008, we completed our annual impairment test for those
identifiable assets not subject to amortization and recorded
impairment charges of $11.3 million and $1.0 million,
respectively, related to trade names. These charges were
recorded in
Selling, general and administrative
in our
Consolidated Statements of Income.
The impairment test consists of a comparison of the fair value
of the trade name with its carrying value. Fair value is
measured using the relief-from-royalty method. This method
assumes the trade name has value to the extent that their owner
is relieved of the obligation to pay royalties for the benefits
received from them. This method requires us to estimate the
future revenue for the related brands, the appropriate royalty
rate and the weighted average cost of capital. This
non-recurring fair value measurement is a
“Level 3” measurement under the fair value
hierarchy described below. The impairment charge was the result
of significant declines in sales volume. These charges were
recorded in
Selling, general and administrative
in our
Consolidated Statements of Income.
At December 31, 2009 our goodwill and intangible assets
were approximately $2,575.2 million, and represented
approximately 65.8% of our total assets. If we experience
further declines in sales and operating profit or do not meet
our operating forecasts, we may be subject to future
impairments. Additionally, changes in assumptions regarding the
future performance of our businesses, increases in the discount
rate used to determine the discounted cash flows of our
businesses, or significant declines in our stock price or the
market as a whole could result in additional impairment
indicators. 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.
50
Table of Contents
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
Equity
method investments
We have investments that are accounted 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
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. We recognize 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.
Environmental
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
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, 2009 and 2008, reserves
for policy claims were $56.3 million ($10.0 million
included in A
ccrued product claims and warranties
and
$46.3 million included in
Other non-current
liabilities
) and $59.2 million ($10.0 million
included in
Accrued product claims and warranties
and
$49.2 million included in
Other non-current
liabilities
), respectively.
51
Table of Contents
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
Stock-based
compensation
We account for stock-based compensation awards on a fair value
basis. 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, resulting in the inclusion of
additional compensation expense in our Consolidated Statements
of Income. Restricted share awards and units 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 restricted share awards
and units increased weighted average common shares outstanding
by 1,107 thousand, 1,181 thousand and 1,443 thousand in 2009,
2008 and 2007, 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 5,283 thousand,
5,268 thousand, and 2,841 thousand in 2009, 2008 and 2007,
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 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. 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.
Fair
value measurements
The accounting guidance defines fair value as the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date. Assets and liabilities measured at fair
value are classified using the following hierarchy, which is
based upon the transparency of inputs to the valuation as of the
measurement date:
Level 1:
Valuation is based on observable
inputs such as quoted market prices (unadjusted) for identical
assets or liabilities in active markets.
Level 2:
Valuation is based on inputs
such as quoted market prices for similar assets or liabilities
in active markets or other inputs that are observable for the
asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument.
52
Table of Contents
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
Level 3:
Valuation is based upon other
unobservable inputs that are significant to the fair value
measurement.
In making fair value measurements, observable market data must
be used when available. When inputs used to measure fair value
fall within different levels of the hierarchy, the level within
which the fair value measurement is categorized is based on the
lowest level input that is significant to the fair value
measurement.
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 June 2009, the FASB issued an amendment to the accounting and
disclosure requirements for the consolidation of variable
interest entities. The guidance affects the overall
consolidation analysis and requires enhanced disclosures on
involvement with variable interest entities. The guidance is
effective for fiscal years beginning after November 15,
2009. We are evaluating the impact the new guidance will have on
our consolidated financial statements.
On January 1, 2009, we adopted new accounting guidance that
changes the accounting and reporting for minority interests.
Minority interests have been recharacterized as noncontrolling
interests and are reported as a component of equity separate
from the parent’s equity. 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 Consolidated 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. We have classified
noncontrolling interest (previously minority interest) as a
component of equity for all periods presented.
In December 2008, we adopted new accounting guidance that
requires more detailed disclosures about employers’ pension
plan assets. New disclosures include more information on
investment strategies, major categories of plan assets,
concentrations of risk within plan assets and valuation
techniques used to measure the fair value of plan assets. This
new standard required new disclosures only, and had no impact on
our consolidated financial position, results of operations or
cash flows. These new disclosures are included in Note 12
to the Consolidated Financial Statements.
Subsequent
events
In connection with preparing the audited consolidated financial
statements for the year ended December 31, 2009, we have
evaluated subsequent events for potential recognition and
disclosure through the date of this filing.
2. 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
GE’s 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
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Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
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 are 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 GE’s 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.
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.
The following pro forma consolidated condensed financial results
of operations for the year ended December 31, 2008 is
presented as if the acquisition had been completed at the
beginning of the period presented:
| In thousands, except per-share data | ||||
|
Pro forma net sales from continuing operations
|
$ | 3,406,449 | ||
|
Pro forma net income from continuing operations
|
256,363 | |||
|
Pro forma net income
|
228,734 | |||
|
Pro forma earnings per common share — continuing
operations
|
||||
|
Basic
|
$ | 2.62 | ||
|
Diluted
|
$ | 2.59 | ||
|
Weighted average common shares outstanding
|
||||
|
Basic
|
97,887 | |||
|
Diluted
|
99,068 | |||
These pro forma consolidated condensed financial results have
been prepared for comparative purposes only and include certain
adjustments. The adjustments do not reflect the effect of
synergies that would have been expected to result from the
integration of this acquisition. 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, 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 $9.2 million. 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 $29.8 million. The results of NPT have been
reported as discontinued operations for all periods
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Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
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.
Operating results of the discontinued operations are summarized
below.
| In thousands | 2009 | 2008 | 2007 | |||||||||
|
Net sales
|
$ | — | $ | 43,346 | $ | 117,795 | ||||||
|
Loss from discontinued operations before income taxes
|
— | (9,392 | ) | (2,917 | ) | |||||||
|
Income tax benefit
|
— | 3,609 | 1,288 | |||||||||
|
Loss from discontinued operations, net of income taxes
|
— | (5,783 | ) | (1,629 | ) | |||||||
|
Gain (loss) on disposal of discontinued operations, before taxes
|
221 | (28,692 | ) | 762 | ||||||||
|
Income tax (expense) benefit
|
(240 | ) | 6,846 | (324 | ) | |||||||
|
Gain (loss) on disposal of discontinued operations, net of tax
|
$ | (19 | ) | $ | (21,846 | ) | $ | 438 | ||||
| 4. | Restructuring |
During 2009 and 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 800 and
1700 employees in 2009 and 2008, respectively, which
included 350 and 1,300 in the Water Group and 450 and 400 in the
Technical Products Group. These actions were generally completed
by the end of 2009.
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:
| Years Ended December 31 | ||||||||
| In thousands | 2009 | 2008 | ||||||
|
Severance and related costs
|
$ | 11,160 | $ | 34,615 | ||||
|
Asset impairment
|
4,050 | 5,282 | ||||||
|
Contract termination costs
|
2,030 | 5,309 | ||||||
|
Total restructuring costs
|
$ | 17,240 | $ | 45,206 | ||||
Total restructuring costs related to the Water Group and the
Technical Products Group were $7.7 million and
$9.5 million, respectively, for year ended
December 31, 2009. Total restructuring costs related to the
Water Group and the Technical Products Group were
$36.3 million and $8.9 million, respectively, for year
ended December 31, 2008.
Restructuring accrual activity recorded on the Consolidated
Balance Sheets is summarized as follows:
| Years Ended December 31 | ||||||||
| In thousands | 2009 | 2008 | ||||||
|
Beginning balance
|
$ | 34,174 | $ | — | ||||
|
Costs incurred
|
13,190 | 39,924 | ||||||
|
Cash payments and other
|
(32,855 | ) | (5,750 | ) | ||||
|
Ending balance
|
$ | 14,509 | $ | 34,174 | ||||
55
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Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
| 5. | Goodwill and Other Identifiable Intangible Assets |
The changes in the carrying amount of goodwill for the years
ended December 31, 2009 and 2008 by segment are as follows:
|
Acquisitions/
|
Foreign Currency
|
|||||||||||||||
| In thousands | December 31, 2008 | Divestitures | Translation/Other | December 31, 2009 | ||||||||||||
|
Water Group
|
$ | 1,818,470 | $ | 895 | $ | (16,452 | ) | $ | 1,802,913 | |||||||
|
Technical Products Group
|
283,381 | — | 2,503 | 285,884 | ||||||||||||
|
Consolidated Total
|
$ | 2,101,851 | $ | 895 | $ | (13,949 | ) | $ | 2,088,797 | |||||||
Included in “foreign currency translation/other” is
the correction of an immaterial error related to the previous
accounting treatment for certain acquisitions. The correction
resulted in a decrease in goodwill and a decrease of deferred
tax liabilities of $28.5 million ($27.5 million in the
Water Group and $1.0 million in the Technical Products
Group).
|
Acquisitions/
|
Foreign Currency
|
|||||||||||||||
| In thousands | December 31, 2007 | Divestitures | Translation/Other | December 31, 2008 | ||||||||||||
|
Water Group
|
$ | 1,706,626 | $ | 132,720 | $ | (20,876 | ) | $ | 1,818,470 | |||||||
|
Technical Products Group
|
292,493 | 106 | (9,218 | ) | 283,381 | |||||||||||
|
Consolidated Total
|
$ | 1,999,119 | $ | 132,826 | $ | (30,094 | ) | $ | 2,101,851 | |||||||
In 2008, the acquired goodwill in the Water Group is related
primarily to the formation of PRF and the 2007 acquisition of
Jung Pump. In 2008, goodwill allocated to divested businesses
was $22.4 million.
The detail of acquired intangible assets consisted of the
following:
| 2009 | 2008 | |||||||||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Accumulated
|
|||||||||||||||||||||
| In thousands | Amount | Amortization | Net | Amount | Amortization | Net | ||||||||||||||||||
|
Finite-life intangible assets
|
||||||||||||||||||||||||
|
Patents
|
$ | 15,458 | $ | (11,502 | ) | $ | 3,956 | $ | 15,427 | $ | (9,774 | ) | $ | 5,653 | ||||||||||
|
Non-compete agreements
|
4,522 | (4,522 | ) | — | 4,722 | (4,566 | ) | 156 | ||||||||||||||||
|
Proprietary technology
|
73,244 | (23,855 | ) | 49,389 | 72,375 | (17,652 | ) | 54,723 | ||||||||||||||||
|
Customer relationships
|
288,122 | (66,091 | ) | 222,031 | 283,015 | (46,841 | ) | 236,174 | ||||||||||||||||
|
Trade names
|
1,562 | (235 | ) | 1,327 | 961 | (77 | ) | 884 | ||||||||||||||||
|
Total finite-life intangible assets
|
$ | 382,908 | $ | (106,205 | ) | $ | 276,703 | $ | 376,500 | $ | (78,910 | ) | $ | 297,590 | ||||||||||
|
Indefinite-life intangible assets
|
||||||||||||||||||||||||
|
Trade names
|
$ | 209,704 | $ | — | $ | 209,704 | $ | 217,918 | $ | — | $ | 217,918 | ||||||||||||
|
Total intangibles, net
|
$ | 592,612 | $ | (106,205 | ) | $ | 486,407 | $ | 594,418 | $ | (78,910 | ) | $ | 515,508 | ||||||||||
Intangible asset amortization expense in 2009, 2008, and 2007
was $27.3 million, $24.0 million, and
$21.8 million, respectively.
In 2009 we recorded an impairment charge to write down trade
name intangible assets of $11.3 million in the Water Group.
Additionally, in 2008 we recorded an impairment change to
write-off a trade name intangible asset of $1.0 million in
the Technical Products Group.
56
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Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
The impairment test consists of a comparison of the fair value
of the trade name with its carrying value. Fair value is
measured using the relief-from-royalty method which would be a
“Level 3” measurement under the fair value
hierarchy described in Note 1. This method assumes the
trade name has value to the extent that their owner is relieved
of the obligation to pay royalties for the benefits received
from them. This method requires us to estimate the future
revenue for the related brands, the appropriate royalty rate and
the weighted average cost of capital. The impairment charge was
the result of significant declines in sales volume. These
charges were recorded in
Selling, general and administrative
in our Consolidated Statements of Income.
The estimated future amortization expense for identifiable
intangible assets during the next five years is as follows:
| In thousands | 2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||||||
|
Estimated amortization expense
|
$ | 25,134 | $ | 25,042 | $ | 24,205 | $ | 23,857 | $ | 23,534 | ||||||||||
| 6. | Supplemental Balance Sheet Information |
| In thousands | 2009 | 2008 | ||||||
|
Inventories
|
||||||||
|
Raw materials and supplies
|
$ | 200,931 | $ | 212,792 | ||||
|
Work-in-process
|
38,338 | 53,241 | ||||||
|
Finished goods
|
121,358 | 151,254 | ||||||
|
Total inventories
|
$ | 360,627 | $ | 417,287 | ||||
|
Property, plant and equipment
|
||||||||
|
Land and land improvements
|
$ | 36,635 | $ | 32,949 | ||||
|
Buildings and leasehold improvements
|
213,453 | 204,757 | ||||||
|
Machinery and equipment
|
586,764 | 580,632 | ||||||
|
Construction in progress
|
28,408 | 24,376 | ||||||
|
Total property, plant and equipment
|
865,260 | 842,714 | ||||||
|
Less accumulated depreciation and amortization
|
531,572 | 498,833 | ||||||
|
Property, plant and equipment, net
|
$ | 333,688 | $ | 343,881 | ||||
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 consolidated financial
statements as we do not have a controlling interest over the
investment. There were investments in and loans to FARADYNE of
$4.5 million and $5.0 million at December 31,
2009 and December 31, 2008, 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 | 2009 | 2008 | 2007 | |||||||||
|
Interest payments
|
$ | 43,010 | $ | 63,851 | $ | 66,044 | ||||||
|
Income tax payments
|
8,719 | 80,765 | 98,798 | |||||||||
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 GE’s global water softener and
residential water filtration business in
57
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Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
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)
consists of the following:
| In thousands | 2009 | 2008 | ||||||
|
Retirement liability adjustments, net of tax
|
$ | (58,448 | ) | $ | (58,704 | ) | ||
|
Cumulative translation adjustments
|
88,671 | 45,300 | ||||||
|
Market value of derivative financial instruments, net of tax
|
(9,626 | ) | (13,211 | ) | ||||
|
Accumulated other comprehensive income (loss)
|
$ | 20,597 | $ | (26,615 | ) | |||
| 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 | 2009 | (Year) | 2009 | 2008 | ||||||||||||
|
Commercial paper
|
0.00 | % | 2012 | $ | — | $ | 249 | |||||||||
|
Revolving credit facilities
|
0.86 | % | 2012 | 198,300 | 214,200 | |||||||||||
|
Private placement — fixed rate
|
5.65 | % | 2013-2017 | 400,000 | 400,000 | |||||||||||
|
Private placement — floating rate
|
0.83 | % | 2012-2013 | 205,000 | 205,000 | |||||||||||
|
Senior notes
|
7.85 | % | 2009 | — | 133,900 | |||||||||||
|
Other
|
4.64 | % | 2010-2016 | 2,337 | 275 | |||||||||||
|
Total contractual debt obligations
|
805,637 | 953,624 | ||||||||||||||
|
Deferred income related to swaps
|
— | 468 | ||||||||||||||
|
Total debt, including current portion per balance sheet
|
805,637 | 954,092 | ||||||||||||||
|
Less: Current maturities
|
(81 | ) | (624 | ) | ||||||||||||
|
Short-term borrowings
|
(2,205 | ) | — | |||||||||||||
|
Long-term debt
|
$ | 803,351 | $ | 953,468 | ||||||||||||
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 0.625%. Interest rates
and fees on the Credit Facility vary based on our credit ratings.
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,
2009, we had no outstanding commercial paper. As of
December 31, 2008 we had $0.2 million of commercial
paper outstanding.
All of the commercial paper and $133.9 million aggregate
principle 7.85% Senior Notes due 2009 (the
“Notes”) at December 31, 2008 were classified as
long-term as we had the intent and the ability to refinance such
obligations on a long-term basis under the Credit Facility.
58
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Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
In addition to the Credit Facility, we have $40.0 million
of uncommitted credit facilities, under which we had $2.1 of
borrowings as of December 31, 2009.
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 financial covenants in our debt agreements
as of December 31, 2009.
Total availability under our existing Credit Facility was
$601.7 million at December 31, 2009, which would be
limited to $390.2 million based on the credit
agreement’s leverage ratio covenant.
On July 8, 2008, we commenced a cash tender offer for all
of our outstanding 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 in 2008. The loss included the write off
of $0.1 million in unamortized deferred financing fees and
$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.
On March 16, 2009, we announced the redemption of all of
our remaining outstanding $133.9 million aggregate
principal of Notes. The Notes were redeemed on April 15,
2009 at a redemption price of $1,035.88 per $1,000 of principal
outstanding plus accrued interest thereon. As a result of this
transaction, we recognized a loss of $4.8 million on early
extinguishment of debt in the second quarter of 2009. The loss
included the write off of $0.1 million in unamortized
deferred financing fees in addition to recognition of
$0.3 million in previously unrecognized swap gains, and
cash paid of $5.0 million related to the redemption and
other costs associated with the purchase.
Debt outstanding at December 31, 2009, matures on a
calendar year basis as follows:
| In thousands | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | |||||||||||||||||||||
|
Contractual debt obligation maturities
|
$ | 2,286 | $ | 15 | $ | 303,306 | $ | 200,007 | $ | 8 | $ | 300,015 | $ | 805,637 | ||||||||||||||
| 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
$8.1 million and $10.7 million at December 31,
2009 and December 31, 2008, 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 $8.3 million and $11.6 million at
December 31, 2009 and December 31, 2008, respectively,
and was recorded in
Other non-current liabilities
.
The variable to fixed interest rate swaps are designated as
cash-flow hedges. The fair value of these swaps are recorded as
assets or liabilities on the Consolidated Balance Sheet.
Unrealized income/expense is included in Accumulated other
comprehensive income (“OCI”) and realized
income/expense, amounts due to/from swap
59
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Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
counterparties, are included in earnings. We realized
incremental interest expense resulting from the swaps of
$7.9 million and $3.4 million at December 31,
2009 and December 31, 2008, respectively.
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, 2009 and 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
the accounting guidance.
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:
| 2009 | 2008 | |||||||||||||||
|
Recorded
|
Fair
|
Recorded
|
Fair
|
|||||||||||||
| In thousands | amount | value | amount | value | ||||||||||||
|
Total debt, including current portion
|
||||||||||||||||
|
Variable rate
|
$ | 405,505 | $ | 405,505 | $ | 419,449 | $ | 419,449 | ||||||||
|
Fixed rate
|
400,132 | 390,930 | 534,175 | 482,148 | ||||||||||||
|
Total
|
$ | 805,637 | $ | 796,435 | $ | 953,624 | $ | 901,597 | ||||||||
|
Derivative financial instruments
|
||||||||||||||||
|
Market value of variable to fixed interest rate swap (liability)
asset
|
$ | (16,354 | ) | $ | (16,354 | ) | $ | (22,309 | ) | $ | (22,309 | ) | ||||
The following methods were used to estimate the fair values of
each class of financial instrument measured on a recurring basis:
| • | 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 the accounting guidance; 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 the accounting guidance. |
60
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Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
| 11. | Income Taxes |
Income from continuing operations before income taxes and
noncontrolling interest consisted of the following:
| In thousands | 2009 | 2008 | 2007 | |||||||||
|
United States
|
$ | 111,530 | $ | 220,294 | $ | 229,012 | ||||||
|
International
|
61,117 | 146,846 | 77,549 | |||||||||
|
Income from continuing operations before taxes and
noncontrolling interest
|
$ | 172,647 | $ | 367,140 | $ | 306,561 | ||||||
The provision for income taxes for continuing operations
consisted of the following:
| In thousands | 2009 | 2008 | 2007 | |||||||||
|
Currently payable
|
||||||||||||
|
Federal
|
$ | 10,502 | $ | 41,985 | $ | 70,610 | ||||||
|
State
|
2,456 | 5,140 | 9,851 | |||||||||
|
International
|
13,947 | 25,735 | 19,250 | |||||||||
|
Total current taxes
|
26,905 | 72,860 | 99,711 | |||||||||
|
Deferred
|
||||||||||||
|
Federal and state
|
26,733 | 35,535 | 3,405 | |||||||||
|
International
|
2,790 | (51 | ) | (8,673 | ) | |||||||
|
Total deferred taxes
|
29,523 | 35,484 | (5,268 | ) | ||||||||
|
Total provision for income taxes
|
$ | 56,428 | $ | 108,344 | $ | 94,443 | ||||||
Reconciliation of the U.S. statutory income tax rate to our
effective tax rate for continuing operations follows:
| Percentages | 2009 | 2008 | 2007 | |||||||||
|
U.S. statutory income tax rate
|
35.0 | 35.0 | 35.0 | |||||||||
|
State income taxes, net of federal tax benefit
|
2.6 | 1.6 | 2.6 | |||||||||
|
Tax effect of stock-based compensation
|
0.2 | 0.2 | 0.3 | |||||||||
|
Tax effect of international operations
|
(3.5 | ) | (6.1 | ) | (5.1 | ) | ||||||
|
Tax credits
|
(1.4 | ) | (1.0 | ) | (0.8 | ) | ||||||
|
Domestic manufacturing deduction
|
(0.4 | ) | (0.7 | ) | (1.3 | ) | ||||||
|
ESOP dividend benefit
|
(0.4 | ) | (0.2 | ) | (0.2 | ) | ||||||
|
All other, net
|
0.6 | 0.7 | 0.3 | |||||||||
|
Effective tax rate on continuing operations
|
32.7 | 29.5 | 30.8 | |||||||||
Reconciliation of the beginning and ending gross unrecognized
tax benefits follows:
| In thousands | 2009 | 2008 | ||||||
|
Gross unrecognized tax benefits — beginning balance
|
$ | 28,139 | $ | 23,879 | ||||
|
Gross increases for tax positions in prior periods
|
3,191 | 3,526 | ||||||
|
Gross decreases for tax positions in prior periods
|
(2,433 | ) | (411 | ) | ||||
|
Gross increases based on tax positions related to the current
year
|
1,789 | 2,666 | ||||||
|
Gross decreases related to settlements with taxing authorities
|
(209 | ) | — | |||||
|
Reductions due to statute expiration
|
(515 | ) | (1,521 | ) | ||||
|
Gross unrecognized tax benefits at December 31
|
$ | 29,962 | $ | 28,139 | ||||
61
Table of Contents
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
Included in the $30.0 million of total gross unrecognized
tax benefits as of December 31, 2009 was $26.8 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, 2009 may decrease by a
range of $0 to $22.8 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. The IRS is currently examining our 2005 and
2006 federal tax returns. No material 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, 2009, we had recorded
approximately $0.6 million for the possible payment of
penalties and $5.5 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, 2009, approximately $173.0 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).
Deferred taxes were classified in the consolidated balance sheet
as follows:
| December 31, | ||||||||
| In thousands | 2009 | 2008 | ||||||
|
Deferred tax assets
|
$ | 49,609 | $ | 51,354 | ||||
|
Other noncurrent assets
|
5,132 | 8,085 | ||||||
|
Other noncurrent liabilities
|
(149 | ) | — | |||||
|
Deferred tax liabilities
|
(146,630 | ) | (146,559 | ) | ||||
|
Net deferred tax liability
|
$ | (92,038 | ) | $ | (87,120 | ) | ||
62
Table of Contents
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
The tax effects of the major items recorded as deferred tax
assets and liabilities are as follows:
| 2009 Deferred tax | 2008 Deferred tax | |||||||||||||||
| In thousands | Assets | Liabilities | Assets | Liabilities | ||||||||||||
|
Accounts receivable allowances
|
$ | 4,073 | $ | — | $ | 2,684 | $ | — | ||||||||
|
Inventory valuation
|
11,005 | — | 7,064 | — | ||||||||||||
|
Accelerated depreciation/amortization
|
— | 12,893 | — | 13,190 | ||||||||||||
|
Accrued product claims and warranties
|
24,558 | — | 30,779 | — | ||||||||||||
|
Employee benefit accruals
|
119,357 | — | 131,493 | — | ||||||||||||
|
Goodwill and other intangibles
|
— | 172,675 | — | 191,313 | ||||||||||||
|
Other, net
|
— | 65,463 | — | 54,637 | ||||||||||||
|
Total deferred taxes
|
$ | 158,993 | $ | 251,031 | $ | 172,020 | $ | 259,140 | ||||||||
|
Net deferred tax liability
|
$ | (92,038 | ) | $ | (87,120 | ) | ||||||||||
Included in Other, net in the table above are deferred tax
assets of $4.7 million and $8.1 million as of
December 31, 2009 and December 31, 2008, respectively,
related to a foreign tax credit carryover from the tax period
ended December 31, 2006 and related to state net operating
losses. The foreign tax credit is eligible for carryforward
until the tax period ending December 31, 2016.
Non-U.S. tax
losses of $49.1 million and $19.8 million were
available for carryforward at December 31, 2009 and 2008,
respectively. A valuation allowance reflected above in other,
net of $7.5 million and $3.3 million exists for
deferred income tax benefits related to the
non-U.S. loss
carryforwards available as of December 31, 2009 and 2008,
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 2010. State tax losses of $73.0 million and
$73.0 million were available for carryforward at
December 31, 2009 and 2008, respectively. A valuation
allowance reflected above in other, net of $2.6 million and
$2.0 million exists for deferred income tax benefits
related to the carryforwards available at December 31, 2009
and December 31, 2008, respectively. Certain state tax
losses will expire in 2010, while others are subject to
carryforward periods of up to twenty years.
| 12. | Benefit Plans |
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 employee’s 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.
We recognized a pension curtailment gain in December 2007, 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.
63
Table of Contents
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
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 | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Change in benefit obligation
|
||||||||||||||||
|
Benefit obligation beginning of year
|
$ | 521,698 | $ | 534,648 | $ | 38,417 | $ | 40,836 | ||||||||
|
Service cost
|
12,334 | 14,104 | 214 | 263 | ||||||||||||
|
Interest cost
|
32,612 | 32,383 | 2,377 | 2,534 | ||||||||||||
|
Amendments
|
3 | (207 | ) | (1,303 | ) | — | ||||||||||
|
Actuarial (gain) loss
|
13,309 | (26,978 | ) | (1,517 | ) | (1,624 | ) | |||||||||
|
Translation (gain) loss
|
2,469 | (5,446 | ) | — | — | |||||||||||
|
Benefits paid
|
(30,116 | ) | (26,806 | ) | (2,887 | ) | (3,592 | ) | ||||||||
|
Benefit obligation end of year
|
$ | 552,309 | $ | 521,698 | $ | 35,301 | $ | 38,417 | ||||||||
|
Change in plan assets
|
||||||||||||||||
|
Fair value of plan assets beginning of year
|
$ | 265,112 | $ | 388,037 | $ | — | $ | — | ||||||||
|
Actual gain (loss) return on plan assets
|
44,521 | (106,546 | ) | — | — | |||||||||||
|
Company contributions
|
49,044 | 12,815 | 2,887 | 3,592 | ||||||||||||
|
Translation gain (loss)
|
627 | (2,388 | ) | — | — | |||||||||||
|
Benefits paid
|
(30,116 | ) | (26,806 | ) | (2,887 | ) | (3,592 | ) | ||||||||
|
Fair value of plan assets end of year
|
$ | 329,188 | $ | 265,112 | $ | — | $ | — | ||||||||
|
Funded status
|
||||||||||||||||
|
Plan assets less than benefit obligation
|
$ | (223,121 | ) | $ | (256,586 | ) | $ | (35,301 | ) | $ | (38,417 | ) | ||||
|
Net amount recognized
|
$ | (223,121 | ) | $ | (256,586 | ) | $ | (35,301 | ) | $ | (38,417 | ) | ||||
Of the $223.1 million underfunding at December 31,
2009, $115.9 million relates to foreign pension plans and
our supplemental executive retirement plans which are not
commonly funded.
Amounts recognized in the Consolidated Balance Sheets are as
follows:
| Pension benefits | Post-retirement | |||||||||||||||
| In thousands | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Current liabilities
|
$ | (5,437 | ) | $ | (5,197 | ) | $ | (3,511 | ) | $ | (3,693 | ) | ||||
|
Noncurrent liabilities
|
(217,684 | ) | (251,389 | ) | (31,790 | ) | (34,724 | ) | ||||||||
|
Net amount recognized
|
$ | (223,121 | ) | $ | (256,586 | ) | $ | (35,301 | ) | $ | (38,417 | ) | ||||
The accumulated benefit obligation for all defined benefit plans
was $534.9 million and $489.3 million at
December 31, 2009, and 2008, respectively.
64
Table of Contents
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
Information for pension plans with an accumulated benefit
obligation or projected benefit obligation in excess of plan
assets are as follows:
| In thousands | 2009 | 2008 | ||||||
|
Pension plans with an accumulated benefit obligation in excess
of plan assets:
|
||||||||
|
Fair value of plan assets
|
$ | 329,188 | $ | 265,112 | ||||
|
Accumulated benefit obligation
|
534,936 | 489,258 | ||||||
|
Pension plans with a projected benefit obligation in excess of
plan assets:
|
||||||||
|
Fair value of plan assets
|
$ | 329,188 | $ | 265,112 | ||||
|
Accumulated benefit obligation
|
552,309 | 521,698 | ||||||
Components of net periodic benefit cost are as follows:
| Pension benefits | Post-retirement | |||||||||||||||||||||||
| In thousands | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
|
Service cost
|
$ | 12,334 | $ | 14,104 | $ | 17,457 | $ | 214 | $ | 263 | $ | 585 | ||||||||||||
|
Interest cost
|
32,612 | 32,383 | 31,584 | 2,377 | 2,534 | 2,983 | ||||||||||||||||||
|
Expected return on plan assets
|
(30,286 | ) | (29,762 | ) | (28,539 | ) | — | — | — | |||||||||||||||
|
Amortization of transition
|
||||||||||||||||||||||||
|
obligation
|
25 | 25 | 20 | — | — | — | ||||||||||||||||||
|
Amortization of prior year
|
||||||||||||||||||||||||
|
service cost (benefit)
|
23 | 179 | 160 | (41 | ) | (136 | ) | (245 | ) | |||||||||||||||
|
Recognized net actuarial (gain) loss
|
82 | 121 | 3,195 | (3,326 | ) | (3,301 | ) | (1,423 | ) | |||||||||||||||
|
Settlement gain
|
(9 | ) | — | — | — | — | — | |||||||||||||||||
|
Curtailment gain
|
— | — | (5,533 | ) | — | — | (4,126 | ) | ||||||||||||||||
|
Net periodic benefit cost
|
$ | 14,781 | $ | 17,050 | $ | 18,344 | $ | (776 | ) | $ | (640 | ) | $ | (2,226 | ) | |||||||||
Amounts not yet recognized in net periodic benefit cost and
included in accumulated other comprehensive income (pre-tax):
| Pension benefits | Post-retirement | |||||||||||||||
| In thousands | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Net transition obligation
|
$ | 11 | $ | 37 | $ | — | $ | — | ||||||||
|
Prior service cost (benefit)
|
118 | 170 | (905 | ) | 357 | |||||||||||
|
Net actuarial (gain) loss
|
120,022 | 120,910 | (23,429 | ) | (25,238 | ) | ||||||||||
|
Accumulated other comprehensive (income) loss
|
$ | 120,151 | $ | 121,117 | $ | (24,334 | ) | $ | (24,881 | ) | ||||||
The estimated amount that will be amortized from accumulated
other comprehensive income into net periodic benefit cost in
2010 is as follows:
|
Pension
|
Post-
|
|||||||
| In thousands | benefits | retirement | ||||||
|
Net transition obligation
|
$ | 11 | $ | — | ||||
|
Prior service cost (benefit)
|
24 | (27 | ) | |||||
|
Net actuarial (gain) loss
|
1,672 | (3,356 | ) | |||||
|
Total estimated 2010 amortization
|
$ | 1,707 | $ | (3,383 | ) | |||
65
Table of Contents
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
Additional
Information
Change in accumulated other comprehensive income, net of tax:
| In thousands | 2009 | 2008 | ||||||
|
Beginning of the year
|
$ | (58,704 | ) | $ | 8,229 | |||
|
Additional prior service cost incurred during the year
|
794 | 126 | ||||||
|
Actuarial gains (losses) incurred during the year
|
1,500 | (65,755 | ) | |||||
|
Translation gains (losses) incurred during the year
|
(63 | ) | 594 | |||||
|
Amortization during the year:
|
||||||||
|
Transition obligation
|
15 | 15 | ||||||
|
Unrecognized prior service cost (benefit)
|
(11 | ) | 27 | |||||
|
Actuarial gains
|
(1,979 | ) | (1,940 | ) | ||||
|
End of the year
|
$ | (58,448 | ) | $ | (58,704 | ) | ||
Assumptions
Weighted-average assumptions used to determine domestic benefit
obligations at December 31 are as follows:
| Pension benefits | Post-retirement | |||||||||||||||||||||||
| Percentages | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
|
Discount rate
|
6.00 | 6.50 | 6.50 | 6.00 | 6.50 | 6.50 | ||||||||||||||||||
|
Rate of compensation increase
|
4.00 | 4.00 | 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 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
|
Discount rate
|
6.50 | 6.50 | 6.00 | 6.50 | 6.50 | 6.00 | ||||||||||||||||||
|
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 6.00% in 2009, 6.50% in 2008 and 2007. The
discount rates on our foreign plans ranged from 2.00% to 6.00%
in 2009, 2.00% to 6.25% in 2008 and 2.00% to 5.25% in 2007.
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 2009 equaled 8.5%,
which remained unchanged from 2008 and 2007. 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 2009, the pension plan assets
yielded returns of 19.5%, compared to a loss of 28.8% in 2008
and returns of 7.8% in 2007.
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-
66
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Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
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, 2009 measurement date, our plans
have $96.6 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:
| 2009 | 2008 | |||||||
|
Health care cost trend rate assumed for next year
|
7.70 | % | 9.50 | % | ||||
|
Rate to which the cost trend rate is assumed to decline (the
ultimate trend rate)
|
4.50 | % | 5.00 | % | ||||
|
Year that the rate reaches the ultimate trend rate
|
2027 | 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
|
$ | 31 | $ | (28 | ) | |||
|
Effect on post-retirement benefit obligation
|
842 | (748 | ) | |||||
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.
Asset
allocation
Our actual overall asset allocation for the plans as compared to
our investment policy goals is as follows:
| Plan Assets | Target Allocation | |||||||||||||||
| Asset Class | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Equity Securities
|
53 | % | 59 | % | 60 | % | 60 | % | ||||||||
|
Fixed Income Investments
|
22 | % | 10 | % | 30 | % | 30 | % | ||||||||
|
Alternative Investments
|
14 | % | 24 | % | 10 | % | 10 | % | ||||||||
|
Cash
|
11 | % | 7 | % | 0 | % | 0 | % | ||||||||
While the target allocations do not have a percentage allocated
to cash, the plan assets will always include some cash due to
cash flow. In 2009, as a result of our year end decision to make
a $25 million discretionary pension plan contribution, a
higher percentage of assets were held in cash equivalents. This
contribution was
67
Table of Contents
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
directed to be invested in fixed income investments and was
invested shortly after year end. After taking this into
consideration, our fixed income investment percentage would have
been 30% and our cash percentage would have been 3%.
As part of our strategy to reduce U.S. pension plan funded
status volatility, we plan to increase the allocation to long
duration fixed income securities in future years as the funded
status of our U.S. pension plans improve. In 2009 we
increased our fixed income investments from 10% to 30%.
Fair
Value Measurement
The following table presents our plan assets using the fair
value hierarchy as of December 31, 2009.
|
Quoted Prices in
|
Significant
|
|||||||||||||||||||
|
Active Markets for
|
Significant Other
|
Unobservable
|
||||||||||||||||||
|
Identical Assets
|
Observable Inputs
|
Inputs
|
||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||||||
|
Cash Equivalents
|
$ | — | $ | 35,575 | $ | — | $ | 35,575 | ||||||||||||
|
Fixed Income:
|
||||||||||||||||||||
|
Fixed Income Securities
|
— | 58,389 | — | 58,389 | ||||||||||||||||
|
Fixed Income Commingled Funds
|
— | 12,556 | 2,739 | 15,295 | ||||||||||||||||
|
Global Equity Securities:
|
||||||||||||||||||||
|
Equity Securities
|
37,281 | — | — | 37,281 | ||||||||||||||||
|
Pentair Company Stock
|
21,742 | — | — | 21,742 | ||||||||||||||||
|
Global Equity Commingled Funds
|
— | 113,606 | — | 113,606 | ||||||||||||||||
|
Other Investments
|
— | 32,873 | 14,427 | 47,300 | ||||||||||||||||
|
Total
|
$ | 59,023 | $ | 252,999 | $ | 17,166 | $ | 329,188 | ||||||||||||
Valuation methodologies used for investments measured at fair
value are as follows:
| • | Cash Equivalents: Consist of investments in commingled funds valued based on observable market data. Such investments are classified as Level 2. |
| • | Fixed Income: Investments in corporate bonds, government securities, mortgages and asset backed securities are value based upon quoted market prices for identical or similar securities and other observable market data. Investments in commingled funds are generally valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices or by a pricing service. Such investments are classified as Level 2. Certain investments in commingled funds are valued based on unobservable inputs due to liquidation restrictions. These investments are classified as Level 3. |
| • | Global Equity Securities: Equity securities and Pentair common stock are valued based on the closing market price in an active market and are classified as Level 1. Investments in commingled funds are valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices or by a pricing service. Such investments are classified as Level 2. |
| • | Other Investments: Other investments include investments in commingled funds with diversified investment strategies. Investments in commingled funds that are valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices or by a pricing service are classified as Level 2. Investments in commingled funds that are valued based on unobservable inputs due to liquidation restrictions are classified as Level 3. |
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Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
The following table presents a reconciliation of Level 3
assets held during the year ended December 31, 2009.
|
Net realized
|
Net purchases,
|
Net
|
||||||||||||||||||
|
Balance
|
and unrealized
|
issuances and
|
transfers into
|
Balance
|
||||||||||||||||
| January 1, 2009 | gains (losses) | settlements | (out of) level 3 | December 31, 2009 | ||||||||||||||||
|
Other Investments
|
$ | 32,083 | $ | (774 | ) | $ | — | $ | (16,882 | ) | $ | 14,427 | ||||||||
|
Fixed Income Commingled Funds
|
25,640 | 1,027 | — | (23,928 | ) | 2,739 | ||||||||||||||
| $ | 57,723 | $ | 253 | $ | — | $ | (40,810 | ) | $ | 17,166 | ||||||||||
Cash
Flows
Contributions
Pension contributions totaled $49.0 million and
$12.8 million in 2009 and 2008, respectively. Our 2010
required pension contributions are expected to be in the range
of $10 million to $15 million. The decrease in the
2010 expected contribution is primarily a result of the December
2009 discretionary contribution of $25 million to our
defined benefit pension plan. The 2010 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 | ||||||
|
2010
|
$ | 32.9 | $ | 3.5 | ||||
|
2011
|
30.4 | 3.4 | ||||||
|
2012
|
31.6 | 3.3 | ||||||
|
2013
|
33.5 | 3.3 | ||||||
|
2014
|
33.8 | 3.2 | ||||||
|
2015-2019
|
201.3 | 14.0 | ||||||
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.
In June 2009, we temporarily suspended the company match of the
plan and ESOP.
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
$6.7 million, $17.0 million, and $11.9 million,
in 2009, 2008, and 2007, respectively.
Other
retirement compensation
Total other accrued retirement compensation was
$17.3 million and $13.6 million in 2009 and 2008,
respectively, and is included in the pension and other
retirement compensation line of our Consolidated Balance Sheet.
69
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Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
| 13. | Shareholders’ Equity |
Authorized
shares
We may issue up to 250 million shares of common stock. Our
Board of Directors may designate up to 15 million of those
shares as preferred stock. 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, 2009 or December 31,
2008.
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. There were no
share repurchase authorizations for 2009.
| 14. | Stock Plans |
Total stock-based compensation expense in 2009, 2008, and 2007
was $17.3 million, $20.6 million, and
$22.9 million, respectively.
Omnibus
stock incentive plans
In May 2008, the 2008 Omnibus Stock Incentive Plan as Amended
and Restated (the “2008 Plan” or the “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. |
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Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
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 Committee’s authority to reprice awards or to
cancel and reissue awards at lower prices.
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.
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
$7.1 million in 2009, $10.5 million in 2008 and
$13.6 million in 2007.
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
of grant and are expensed over the vesting period. Annual
expense for the value of restricted shares and restricted stock
units was $10.2 million in 2009, $10.1 million in
2008, and $9.3 million in 2007.
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.
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Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
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, 2009
|
7,729,047 | $ | 31.54 | |||||||||||||
|
Granted
|
1,269,219 | 22.85 | ||||||||||||||
|
Exercised
|
(558,146 | ) | 19.82 | |||||||||||||
|
Forfeited
|
(132,053 | ) | 31.02 | |||||||||||||
|
Expired
|
(345,548 | ) | 38.32 | |||||||||||||
|
Balance December 31, 2009
|
7,962,519 | $ | 30.70 | 6.0 | $ | 30,904,688 | ||||||||||
|
Options exercisable December 31, 2009
|
5,415,765 | $ | 31.98 | 4.4 | $ | 18,544,323 | ||||||||||
|
Options expected to vest December 31, 2009
|
2,497,856 | $ | 27.97 | 8.4 | $ | 12,360,365 | ||||||||||
|
Shares available for grant December 31, 2009
|
4,491,331 | |||||||||||||||
The weighted-average grant date fair value of options granted in
2009, 2008, and 2007 was estimated to be $5.09, $7.41, and $8.44
per share, respectively. The total intrinsic value of options
that were exercised during 2009, 2008, and 2007 was
$5.2 million, $6.3 million, and $12.6 million,
respectively. At December 31, 2009, the total unrecognized
compensation cost related to stock options was
$3.5 million. This cost is expected to be recognized over a
weighted average period of 1.3 years.
We estimated the fair values using the Black-Scholes
option-pricing model, modified for dividends and using the
following assumptions:
| 2009 | 2008 | 2007 | ||||||||||
|
Risk-free interest rate
|
1.77 | % | 2.78 | % | 4.58 | % | ||||||
|
Expected dividend yield
|
3.20 | % | 2.12 | % | 1.92 | % | ||||||
|
Expected stock price volatility
|
32.50 | % | 27.00 | % | 28.50 | % | ||||||
|
Expected lives
|
5.2 yrs | 4.8 yrs | 4.8 yrs | |||||||||
Cash received from option exercises for the years ended
December 31, 2009, 2008, and 2007 was $8.2 million,
$5.6 million, and $7.4 million, respectively. The
actual tax benefit realized for the tax deductions from option
exercises totaled $1.9 million, $2.0 million, and
$4.1 million for the years ended December 31, 2009,
2008, and 2007, respectively.
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
|
1,130,347 | $ | 33.49 | |||||
|
Granted
|
428,965 | 21.57 | ||||||
|
Vested
|
(232,693 | ) | 37.58 | |||||
|
Forfeited
|
(48,565 | ) | 31.89 | |||||
|
Balance December 31
|
1,278,054 | $ | 28.81 | |||||
As of December 31, 2009, there was $13.6 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
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Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
ended December 31, 2009, 2008 and 2007, was
$5.5 million, $7.7 million, and $13.5 million,
respectively. The actual tax benefit realized for the tax
deductions from restricted share compensation arrangements
totaled $2.2 million, $3.0 million, and
$4.2 million for the years ended December 31, 2009,
2008, and 2007, respectively.
During 2007, we increased the contractual term of options for
certain individuals resulting in additional compensation expense
of $0.9 million.
| 15. | Business Segments |
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 and protect the people that use them. 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
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Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
Financial information by reportable business segment is included
in the following summary:
| In thousands | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
| Net sales to external customers | Operating income (loss) | |||||||||||||||||||||||
|
Water Group
|
$ | 1,847,764 | $ | 2,206,142 | $ | 2,230,770 | $ | 163,745 | $ | 206,357 | $ | 273,677 | ||||||||||||
|
Technical Products Group
|
844,704 | 1,145,834 | 1,050,133 | 100,355 | 169,315 | 153,586 | ||||||||||||||||||
|
Other
|
— | — | — | (44,152 | ) | (50,987 | ) | (48,214 | ) | |||||||||||||||
|
Consolidated
|
$ | 2,692,468 | $ | 3,351,976 | $ | 3,280,903 | $ | 219,948 | $ | 324,685 | $ | 379,049 | ||||||||||||
| Identifiable assets (1) | Depreciation | |||||||||||||||||||||||
|
Water Group
|
$ | 3,205,774 | $ | 3,271,039 | $ | 3,191,830 | $ | 44,063 | $ | 39,237 | $ | 36,711 | ||||||||||||
|
Technical Products Group
|
716,092 | 697,577 | 724,466 | 19,035 | 19,131 | 19,696 | ||||||||||||||||||
|
Other
(1)
|
(10,532 | ) | 84,597 | 84,318 | 1,725 | 1,305 | 1,196 | |||||||||||||||||
|
Consolidated
|
$ | 3,911,334 | $ | 4,053,213 | $ | 4,000,614 | $ | 64,823 | $ | 59,673 | $ | 57,603 | ||||||||||||
| Amortization | Capital expenditures | |||||||||||||||||||||||
|
Water Group
|
$ | 34,919 | $ | 22,062 | $ | 18,877 | $ | 36,513 | $ | 32,916 | $ | 35,984 | ||||||||||||
|
Technical Products Group
|
2,687 | 2,980 | 2,515 | 15,388 | 15,995 | 23,956 | ||||||||||||||||||
|
Other
|
3,051 | 2,566 | 4,169 | 2,236 | 4,178 | 1,576 | ||||||||||||||||||
|
Consolidated
|
$ | 40,657 | $ | 27,608 | $ | 25,561 | $ | 54,137 | $ | 53,089 | $ | 61,516 | ||||||||||||
The following table presents certain geographic information:
| In thousands | 2009 | 2008 | 2008 | 2009 | 2008 | 2008 | ||||||||||||||||||
| Net sales to external customers | Long-lived assets | |||||||||||||||||||||||
|
U.S.
|
$ | 1,964,138 | $ | 2,467,698 | $ | 2,484,758 | $ | 203,206 | $ | 219,013 | $ | 220,191 | ||||||||||||
|
Europe
|
439,312 | 571,164 | 527,375 | 87,880 | 89,300 | 104,226 | ||||||||||||||||||
|
Asia and other
|
289,018 | 313,114 | 268,770 | 42,602 | 35,568 | 37,273 | ||||||||||||||||||
|
Consolidated
|
$ | 2,692,468 | $ | 3,351,976 | $ | 3,280,903 | $ | 333,688 | $ | 343,881 | $ | 361,690 | ||||||||||||
| (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, no single
customer accounted for more than 10% of segment sales in 2009,
one customer accounted for just over 10% of segment sales in
2008 and one customer accounted for just over 11% of segment
sales in 2007. In our Technical Products segment, no single
customer accounted for more than 10% of segment sales in 2009,
2008, or 2007.
74
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Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
| 16. | Commitments and Contingencies |
Operating
lease commitments
Net rental expense under operating leases follows:
| In thousands | 2009 | 2008 | 2007 | |||||||||
|
Gross rental expense
|
$ | 32,799 | $ | 37,519 | $ | 34,690 | ||||||
|
Sublease rental income
|
(74 | ) | (172 | ) | (78 | ) | ||||||
|
Net rental expense
|
$ | 32,725 | $ | 37,347 | $ | 34,612 | ||||||
Future minimum lease commitments under non-cancelable operating
leases, principally related to facilities, vehicles, and
machinery and equipment are as follows:
| In thousands | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | |||||||||||||||||||||
|
Minimum lease payments
|
$ | 22,437 | $ | 18,336 | $ | 14,498 | $ | 9,574 | $ | 7,663 | $ | 11,153 | $ | 83,661 | ||||||||||||||
|
Minimum sublease rentals
|
(646 | ) | (532 | ) | (73 | ) | — | — | — | (1,251 | ) | |||||||||||||||||
|
Net future minimum lease commitments
|
$ | 21,791 | $ | 17,804 | $ | 14,425 | $ | 9,574 | $ | 7,663 | $ | 11,153 | $ | 82,410 | ||||||||||||||
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 the past 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, 2009
and 2008, our undiscounted reserves for such environmental
liabilities were approximately $2.3 million and
$3.1 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.
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Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
We 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) management’s 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.
We recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the
guarantee.
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.
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Table of Contents
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
The changes in the carrying amount of service and product
warranties for the year ended December 31, 2009 and 2008
are as follows:
| In thousands | 2009 | 2008 | ||||||
|
Balance at beginning of the year
|
$ | 31,559 | $ | 39,077 | ||||
|
Service and product warranty provision
|
55,232 | 62,655 | ||||||
|
Payments
|
(62,672 | ) | (70,373 | ) | ||||
|
Acquired
|
23 | 599 | ||||||
|
Foreign currency translation
|
146 | (399 | ) | |||||
|
Balance at end of the year
|
$ | 24,288 | $ | 31,559 | ||||
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, 2009 and December 31, 2008, the
outstanding value of these instruments totaled
$51.2 million and $64.5 million, respectively.
| 17. | Selected Quarterly Financial Data (Unaudited) |
The following table represents the 2009 quarterly financial
information:
| 2009 | ||||||||||||||||||||
| In thousands, except per-share data | First | Second | Third | Fourth | Year | |||||||||||||||
|
Net sales
|
$ | 633,840 | $ | 693,712 | $ | 662,665 | $ | 702,251 | $ | 2,692,468 | ||||||||||
|
Gross profit
|
169,232 | 196,479 | 206,967 | 212,457 | 785,135 | |||||||||||||||
|
Operating income
|
37,214 | 63,560 | 66,682 | 52,492 | 219,948 | |||||||||||||||
|
Income from continuing operations
|
17,721 | 32,427 | 38,677 | 27,394 | 116,219 | |||||||||||||||
|
Gain (loss) on disposal of discontinued operations, net of tax
|
10 | (78 | ) | (85 | ) | 134 | (19 | ) | ||||||||||||
|
Net income from continuing operations attributable to Pentair,
Inc.
|
17,255 | 32,006 | 37,033 | 29,218 | 115,512 | |||||||||||||||
|
Earnings per common share attributable to Pentair,
Inc.
(1)
|
||||||||||||||||||||
|
Basic
|
||||||||||||||||||||
|
Continuing operations
|
$ | 0.18 | $ | 0.33 | $ | 0.38 | $ | 0.30 | $ | 1.19 | ||||||||||
|
Discontinued operations
|
— | — | — | — | — | |||||||||||||||
|
Basic earnings per common share
|
$ | 0.18 | $ | 0.33 | $ | 0.38 | $ | 0.30 | $ | 1.19 | ||||||||||
|
Diluted
|
||||||||||||||||||||
|
Continuing operations
|
$ | 0.18 | $ | 0.33 | $ | 0.38 | $ | 0.29 | $ | 1.17 | ||||||||||
|
Discontinued operations
|
— | — | — | — | — | |||||||||||||||
|
Diluted earnings per common share
|
$ | 0.18 | $ | 0.33 | $ | 0.38 | $ | 0.29 | $ | 1.17 | ||||||||||
| (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. |
77
Table of Contents
Pentair,
Inc. and Subsidiaries
Notes to
consolidated financial statements —
(continued)
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 | 45,002 | 21,494 | 258,796 | |||||||||||||||
|
Loss from discontinued operations, net of tax
|
(1,036 | ) | (1,102 | ) | (1,514 | ) | (2,131 | ) | (5,783 | ) | ||||||||||
|
Loss on disposal of discontinued operations, net of tax
|
(7,137 | ) | — | (268 | ) | (14,441 | ) | (21,846 | ) | |||||||||||
|
Net income from continuing operations attributable to Pentair,
Inc.
|
52,463 | 139,837 | 42,902 | 21,161 | 256,363 | |||||||||||||||
|
Earnings per common share attributable to Pentair,
Inc.
(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
Table of Contents
| 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, 2009, 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, 2009 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
Commission’s 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.
Management’s
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 “Management’s 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, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
Louis L. Ainsworth, the Company’s Senior Vice President,
General Counsel and Secretary informed the Company’s Board
of Directors on February 23, 2010 that he intends to retire
from the Company effective August 1, 2010.
Mr. Ainsworth was appointed as the Company’s Senior
Vice President, Legal Affairs and Assistant Secretary.
On February 23, 2010, the Board of Directors appointed
Angela D. Lageson to the position of Senior Vice President,
General Counsel and Secretary, effective immediately.
Ms. Lageson has served as Assistant General Counsel for the
Company since November 2002.
79
Table of Contents
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Information required under this item with respect to directors
is contained in our Proxy Statement for our 2010 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 Pentair’s Code of
Business Conduct and Ethics and designated it as the code of
ethics for the Company’s 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
Pentair’s Code of Business Conduct and Ethics on our
website at
www.pentair.com/code.html
. We intend to
satisfy the disclosure requirements under Item 5.05 of
Form 8-K
regarding amendments to, or waivers from, Pentair’s 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 2010 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.
The following table summarizes, as of December 31, 2009,
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
|
Future Issuance Under
|
||||||||||||||
|
Outstanding
|
of 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
|
1,295,192 | $ | 23.26 | 4,491,331 | (1) | |||||||||||
|
2004 Omnibus Stock Incentive Plan
|
6,054,403 | $ | 32.26 | — | (2) | |||||||||||
|
Outside Directors Non-qualified Stock Option Plan
|
580,924 | $ | 32.01 | — | (2) | |||||||||||
|
Equity compensation plans not approved by security holders
|
32,000 | $ | 11.38 | — | (3) | |||||||||||
|
Total
|
7,962,519 | $ | 30.70 | 4,491,331 | ||||||||||||
80
Table of Contents
| (1) | Represents securities remaining available for issuance under the 2008 Omnibus Plan. | |
| (2) | The 2004 Omnibus 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 2010 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 2010 annual meeting of shareholders under the
caption “Audit Committee Disclosure” and is
incorporated herein by reference.
81
Table of Contents
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) List of documents filed as part of this report:
(1) Financial Statements
Consolidated Balance Sheets as of December 31, 2009 and
December 31, 2008
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2009, 2008 and 2007
Consolidated Statements of Changes in Shareholders’ Equity
for the Years Ended December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
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.
82
Table of Contents
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 23, 2010.
PENTAIR, INC.
| By |
/s/ John
L. Stauch
|
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 23, 2010.
|
Signature
|
Title
|
|||
|
/s/ Randall
J. Hogan
|
Chairman and Chief Executive Officer | |||
|
/s/ John
L. Stauch
|
Executive Vice President and Chief Financial Officer | |||
|
/s/ Mark
C. Borin
|
Corporate Controller and Chief Accounting Officer | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
| *By |
/s/ Louis
L. Ainsworth
Attorney-in-fact |
|||
83
Table of Contents
Schedule II —
Valuation and Qualifying Accounts
Pentair,
Inc and subsidiaries
|
Additions
|
||||||||||||||||||||
|
Balance
|
Charged to
|
Other
|
Balance
|
|||||||||||||||||
|
Beginning
|
Costs and
|
Changes
|
End
|
|||||||||||||||||
| in thousands | in Period | Expenses | Deductions | Add (deduct) | of Period | |||||||||||||||
|
Allowances for doubtful accounts
|
||||||||||||||||||||
|
Year ended December 31, 2009
|
$ | 8,925 | $ | 6,832 | $ | 2,449 | (1) | $ | 846 | (2) | $ | 14,154 | ||||||||
|
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 | |||||||
| (1) | Uncollectible accounts written off, net of expense | |
| (2) | Result of acquisitions and foreign currency effects |
84
Table of Contents
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 Pentair’s 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 Pentair’s 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 Pentair’s 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 Pentair’s Registration Statement on Form 8-A, dated as of December 31, 2004). | ||
| 4 | .2 | 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 Pentair’s Current Report on Form 8-K dated July 25, 2003). | ||
| 4 | .3 | 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 Pentair’s Current Report on Form 8-K dated June 4, 2007). | ||
| 4 | .4 | 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 Pentair’s Quarterly Report on Form 10-Q for the quarterly period ended July 2, 2005). | ||
| 4 | .5 | 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 Pentair’s 5.87% Senior Notes, Series D, due May 17, 2017, and $105 million aggregate principal amount of Pentair’s Floating Rate Senior Notes, Series E, due May 17, 2012 (Incorporated by reference to Exhibit 4.1 contained in Pentair’s Current Report on Form 8-K dated May 17, 2007). | ||
| 10 | .1 | Pentair’s 1999 Supplemental Executive Retirement Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Current Report on Form 8-K filed September 21, 2000).* | ||
| 10 | .2 | Pentair’s 1999 Supplemental Executive Retirement Plan as Amended and Restated effective January 1, 2009 (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 2008).* | ||
| 10 | .3 | Pentair’s Restoration Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.3 contained in Pentair’s Current Report on Form 8-K filed September 21, 2000).* | ||
| 10 | .4 | Pentair’s Restoration Plan as Amended and Restated effective January 1, 2009 (Incorporated by reference to Exhibit 10.4 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 2008).* | ||
| 10 | .5 | Pentair, Inc. Non-Qualified Deferred Compensation Plan effective January 1, 1996 (Incorporated by reference to Exhibit 10.17 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 2005).* | ||
| 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 Pentair’s Annual Report on Form 10-K for the year ended December 31, 1995).* | ||
| 10 | .7 | Amendment effective August 23, 2000 to Pentair’s Non-Qualified Deferred Compensation Plan effective January 1, 1996 (Incorporated by reference to Exhibit 10.8 contained in Pentair’s Current Report on Form 8-K filed September 21, 2000).* | ||
| 10 | .8 | Pentair, Inc. Non-Qualified Deferred Compensation Plan effective January 1, 2009, as Amended and Restated Through July 29, 2009 (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Quarterly Report on Form 10-Q for the year ended September 26, 2009).* | ||
85
Table of Contents
|
Exhibit
|
||||
|
Number
|
Exhibit
|
|||
| 10 | .9 | Pentair, Inc. Executive Officer Performance Plan as Amended and Restated, effective January 1, 2009 (Incorporated by reference to Appendix B contained in Pentair’s Proxy Statement for its 2009 annual meeting of shareholders).* | ||
| 10 | .10 | Form of Key Executive Employment and Severance Agreement for Randall J. Hogan (Incorporated by reference to Exhibit 10.10 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 2008).* | ||
| 10 | .11 | Form of Key Executive Employment and Severance Agreement for Louis Ainsworth, Michael V. Schrock, Frederick S. Koury and Michael G. Meyer (Incorporated by reference to Exhibit 10.11 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 2008).* | ||
| 10 | .12 | Form of Key Executive Employment and Severance Agreement for John L. Stauch and Mark C. Borin (Incorporated by reference to Exhibit 10.12 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 2008).* | ||
| 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 Pentair’s Proxy Statement for its 2004 annual meeting of shareholders).* | ||
| 10 | .14 | Pentair, Inc. Compensation Plan for Non-Employee Directors, as Amended and Restated Through December 16, 2009.* | ||
| 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 Pentair’s 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 Pentair’s Proxy Statement for its 2004 annual meeting of shareholders).* | ||
| 10 | .17 | Letter Agreement, dated January 6, 2005, between Pentair, Inc. and Michael Schrock (Incorporated by reference to Exhibit 10.1 contained in Pentair’s Current Report on Form 8-K dated January 6, 2005).* | ||
| 10 | .18 | Confidentiality and Non-Competition Agreement, dated January 6, 2005, between Pentair, Inc. and Michael Schrock (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Current Report on Form 8-K dated January 6, 2005).* | ||
| 10 | .19 | Pentair, Inc. 2008 Omnibus Stock Incentive Plan, as Amended and Restated Through July 29, 2009 (Incorporated by reference to Exhibit 10.1 contained in Pentair’s Quarterly Report on Form 10-Q for the quarter ended September 26, 2009).* | ||
| 10 | .20 | Form of award letter for executive officers under the Pentair, Inc. 2008 Omnibus Stock Incentive Plan, as amended (Incorporated by reference to Exhibit 10.1 contained in Pentair’s Current Report on Form 8-K filed January 8, 2009).* | ||
| 10 | .21 | Form of award letter for directors under the Pentair, Inc. 2008 Omnibus Stock Incentive Plan, as amended.* | ||
| 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 Pentair’s 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. |
86
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Registrant S Common Stock, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules