XNYS:PNR Pentair PLC Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNYS:PNR (Pentair PLC): Fair Value Estimate
Premium
XNYS:PNR (Pentair PLC): Consider Buying
Premium
XNYS:PNR (Pentair PLC): Consider Selling
Premium
XNYS:PNR (Pentair PLC): Fair Value Uncertainty
Premium
XNYS:PNR (Pentair PLC): Economic Moat
Premium
XNYS:PNR (Pentair PLC): Stewardship
Premium
 
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-04689

Pentair, Inc.

 

(Exact name of Registrant as specified in its charter)

 

Minnesota

  

41-0907434

(State or other jurisdiction of incorporation or organization)    (I.R.S. Employer Identification number)

5500 Wayzata Blvd, Suite 800, Golden Valley, Minnesota

  

55416

(Address of principal executive offices)    (Zip code)

Registrant’s telephone number, including area code: (763) 545-1730

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§223.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer þ    Accelerated filer ¨    Non-accelerated filer ¨    Smaller reporting company ¨
      (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 Exchange Act).  Yes ¨ No þ

On June 30, 2012, 99,204,048 shares of Registrant’s common stock were outstanding.


Table of Contents

Pentair, Inc. and Subsidiaries

 

 

     Page (s)  

PART I FINANCIAL INFORMATION

  
ITEM 1.    Financial Statements (unaudited)   
   Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and July 2, 2011      3   
   Condensed Consolidated Balance Sheets as of June 30, 2012, December 31, 2011 and July 2, 2011      4   
   Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and July 2, 2011      5   
   Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2012 and July 2, 2011      6   
   Notes to Condensed Consolidated Financial Statements      7 –28   
ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      29 –39   
ITEM 3.    Quantitative and Qualitative Disclosures about Market Risk      39   
ITEM 4.    Controls and Procedures      39   

PART II OTHER INFORMATION

  
ITEM 1.    Legal Proceedings      40   
ITEM 1A.    Risk Factors      40   
ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds      44   
ITEM 5.    Other Information      45   
ITEM 6.    Exhibits      47   
   Signatures      48   

 

2


Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited)

 

                                                                                                   
     Three months ended     Six months ended  
  

 

 

   

 

 

 
In thousands, except per-share data     

 

June 30,

2012

  

 

   

 

July 2,

2011

  

 

   

 

June 30,

2012

  

 

   

 

July 2,

2011

  

 

 

 

Net sales

   $ 941,525     $ 910,175     $ 1,799,702     $ 1,700,448   

Cost of goods sold

     629,397       622,439       1,206,855       1,163,653   
   

Gross profit

     312,128       287,736       592,847       536,795   

Selling, general and administrative

     173,445       158,432       348,455       303,192   

Research and development

     20,891       19,882       41,648       38,004   
   

Operating income

     117,792       109,422       202,744       195,599   

Other (income) expense:

        

Equity income of unconsolidated subsidiaries

     (636     (672     (1,685     (907)   

Net interest expense

     16,079       14,613       30,847       23,938   
   

Income before income taxes and noncontrolling interest

     102,349       95,481       173,582       172,568   

Provision for income taxes

     28,864       27,344       37,943       52,397   
   

Net income before noncontrolling interest

     73,485       68,137       135,639       120,171   

Noncontrolling interest

     1,655       1,425       2,995       2,918   
   

Net income attributable to Pentair, Inc.

   $ 71,830     $ 66,712     $ 132,644     $ 117,253   

 

 

Comprehensive income (loss)

   $ (10,430   $ 92,306     $ 93,808     $ 187,119   

Less: Comprehensive income (loss) attributable to noncontrolling interest

     (223 )     2,216       2,020       5,621   
   

Comprehensive income (loss) attributable to Pentair, Inc.

   $ (10,207   $ 90,090     $ 91,788     $ 181,498   

 

 

Earnings per common share attributable to Pentair, Inc.

        

Basic

   $ 0.73     $ 0.68     $ 1.34     $ 1.19   

Diluted

   $ 0.71     $ 0.67     $ 1.32     $ 1.17   

Weighted average common shares outstanding

        

Basic

     99,047       98,333       98,856       98,190   

Diluted

     101,165       100,065       100,785       99,825   

Cash dividends declared per common share

   $ 0.22     $ 0.20     $ 0.44     $ 0.40   

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

 

                                                                                            
     June 30,     December 31,     July 2,  
In thousands, except share and per-share data    2012     2011     2011  
   
Assets       

Current assets

      

Cash and cash equivalents

   $ 60,598     $ 50,077     $ 68,972   

Accounts and notes receivable, net of allowances of $32,958, $39,111 and $41,120, respectively

     572,144       569,204       595,407   

Inventories

     460,039       449,863       484,795   

Deferred tax assets

     58,899       60,899       60,833   

Prepaid expenses and other current assets

     124,345       107,792       124,632   
   

Total current assets

     1,276,025       1,237,835       1,334,639   

Property, plant and equipment, net

     381,063       387,525       410,547   

Other assets

      

Goodwill

     2,255,134       2,273,918       2,573,430   

Intangibles, net

     570,503       592,285       654,908   

Other

     103,544       94,750       78,788   
   

Total other assets

     2,929,181       2,960,953       3,307,126   
   

Total assets

   $ 4,586,269     $ 4,586,313     $ 5,052,312   

 

 

 

Liabilities and Shareholders’ Equity

      

Current liabilities

      

Short-term borrowings

   $ 222     $ 3,694     $ 21,451   

Current maturities of long-term debt

     1,193       1,168       1,289   

Accounts payable

     288,265       294,858       315,403   

Employee compensation and benefits

     89,514       109,361       108,836   

Current pension and post-retirement benefits

     9,052       9,052       8,733   

Accrued product claims and warranties

     44,935       42,630       47,259   

Income taxes

     32,228       14,547       21,498   

Accrued rebates and sales incentives

     45,870       37,009       42,567   

Other current liabilities

     150,437       129,522       144,366   
   

Total current liabilities

     661,716       641,841       711,402   

Other liabilities

      

Long-term debt

     1,233,794       1,304,225       1,384,167   

Pension and other retirement compensation

     247,324       248,615       217,021   

Post-retirement medical and other benefits

     29,921       31,774       27,954   

Long-term income taxes payable

     13,294       26,470       23,832   

Deferred tax liabilities

     190,173       188,957       235,422   

Other non-current liabilities

     92,175       97,039       85,660   
   

Total liabilities

     2,468,397       2,538,921       2,685,458   

Commitments and contingencies

      

Shareholders’ equity

      

Common shares par value $0.16 2/3; 99,204,048, 98,622,564 and 98,766,335 shares issued and outstanding, respectively

     16,534       16,437       16,460   

Additional paid-in capital

     509,558       488,843       488,873   

Retained earnings

     1,667,794       1,579,290       1,702,119   

Accumulated other comprehensive income (loss)

     (192,097     (151,241     41,902   

Noncontrolling interest

     116,083       114,063       117,500   
   

Total shareholders’ equity

     2,117,872       2,047,392       2,366,854   
   

Total liabilities and shareholders’ equity

   $ 4,586,269     $ 4,586,313     $ 5,052,312   

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

                                                             
     Six months ended  
     June 30,     July 2,  
In thousands    2012     2011  
   

Operating activities

    

Net income before noncontrolling interest

   $ 135,639     $ 120,171   

Adjustments to reconcile net income to net cash provided by (used for) operating activities

    

Equity income of unconsolidated subsidiaries

     (1,685     (907)   

Depreciation

     32,666       32,685   

Amortization

     19,677       17,180   

Deferred income taxes

     3,654       3,012   

Stock compensation

     10,075       10,527   

Excess tax benefits from stock-based compensation

     (1,740     (1,465)   

Loss (gain) on sale of assets

     (3,106     229   

Changes in assets and liabilities, net of effects of business acquisitions and dispositions

    

Accounts and notes receivable

     (5,531     (1,111)   

Inventories

     (12,276     2,425   

Prepaid expenses and other current assets

     (983     (2,696)   

Accounts payable

     (4,271     (22,878)   

Employee compensation and benefits

     (18,686     (22,675)   

Accrued product claims and warranties

     2,466       2,901   

Income taxes

     17,709       12,780   

Other current liabilities

     10,209       25,481   

Pension and post-retirement benefits

     (553     (853)   

Other assets and liabilities

     (16,503     (22,195)   
   

Net cash provided by (used for) operating activities

     166,761       152,611   

Investing activities

    

Capital expenditures

     (31,312     (35,221)   

Proceeds from sale of property and equipment

     4,868       89   

Acquisitions, net of cash acquired

     (19,905     (733,105)   

Other

     (3,073     119   
   

Net cash provided by (used for) investing activities

     (49,422     (768,118)   

Financing activities

    

Net short-term borrowings

     (3,472     16,518   

Proceeds from long-term debt

     352,463       1,320,957   

Repayment of long-term debt

     (420,810     (661,422)   

Debt issuance costs

            (8,721)   

Excess tax benefits from stock-based compensation

     1,740       1,465   

Stock issued to employees, net of shares withheld

     16,163       9,551   

Repurchases of common stock

            (287)   

Dividends paid

     (44,140     (39,739)   
   

Net cash provided by (used for) financing activities

     (98,056     638,322   

Effect of exchange rate changes on cash and cash equivalents

     (8,762     101   
   

Change in cash and cash equivalents

     10,521       22,916   

Cash and cash equivalents, beginning of period

     50,077       46,056   
   

Cash and cash equivalents, end of period

   $ 60,598     $ 68,972   

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

 

                                                                                                                                                       
In thousands, except share    Common shares    

Additional  

paid-in     

    Retained        

  Accumulated

  other

  comprehensive

       Total     Noncontrolling        
and per-share data    Number           Amount           capital          earnings           income (loss)        Pentair, Inc.       interest     Total  
   

Balance - December 31, 2011

     98,622,564     $ 16,437     $ 488,843     $ 1,579,290     $ (151,241   $ 1,933,329     $ 114,063     $ 2,047,392   

Net income

           132,644         132,644       2,995       135,639   

Change in cumulative translation adjustment

             (44,006     (44,006     (975     (44,981)   

Changes in market value of derivative financial instruments, net of $1,436 tax

             3,150       3,150         3,150   

Cash dividends - $0.44 per common share

           (44,140       (44,140       (44,140)   

Exercise of stock options, net of 35,570 shares tendered for payment

     492,777       82       14,973           15,055         15,055   

Issuance of restricted shares, net of cancellations

     154,536       26       3,532           3,558         3,558   

Amortization of restricted shares

         352           352         352   

Shares surrendered by employees to pay taxes

     (65,829     (11     (2,439         (2,450       (2,450)   

Stock compensation

         4,297           4,297         4,297   
   

Balance - June 30, 2012

     99,204,048     $ 16,534     $ 509,558     $ 1,667,794     $ (192,097   $ 2,001,789     $ 116,083     $ 2,117,872  

 

 
                

Additional  

paid-in     

capital     

   

Retained    

earnings

   

  Accumulated

  other

  comprehensive

  income (loss)

   

   Total

   Pentair, Inc.

   

Noncontrolling

  interest

   

Total

 
                          
In thousands, except share    Common shares              
and per-share data    Number             Amount                    
   

Balance - December 31, 2010

     98,409,192     $ 16,401     $ 474,489     $ 1,624,605     $ (22,342   $ 2,093,153     $ 111,879     $ 2,205,032   

Net income

           117,253         117,253       2,918       120,171   

Change in cumulative translation adjustment

             62,456       62,456       2,703       65,159   

Changes in market value of derivative financial instruments, net of $1,249 tax

             1,788       1,788         1,788   

Cash dividends - $0.40 per common share

           (39,739       (39,739       (39,739)   

Share repurchase

     (7,826     (1     (286         (287       (287)   

Exercise of stock options, net of 3,266 shares tendered for payment

     408,637       68       10,741           10,809         10,809   

Issuance of restricted shares, net of cancellations

     29,131       5       1,432           1,437         1,437   

Amortization of restricted shares

         480           480         480   

Shares surrendered by employees to pay taxes

     (72,799     (13     (2,683         (2,696       (2,696)   

Stock compensation

         4,700           4,700         4,700   
   

Balance - July 2, 2011

     98,766,335     $ 16,460     $ 488,873     $ 1,702,119     $ 41,902     $ 2,249,354     $ 117,500     $ 2,366,854   

 

 

See accompanying notes to condensed consolidated financial statements

 

6


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

1. Basis of Presentation and Responsibility for Interim Financial Statements

We prepared the unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States can be condensed or omitted.

We are responsible for the unaudited financial statements included in this document. The financial statements include all normal recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. As these are condensed financial statements, one should also read our consolidated financial statements and notes thereto for the year ended December 31, 2011, which are included in our 2011 Annual Report on Form 10-K for the year ended December 31, 2011.

Revenues, expenses, cash flows, assets and liabilities can and do vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be indicative of those for a full year.

Our fiscal year ends on December 31. We report our interim quarterly periods on a 13-week basis ending on a Saturday.

In connection with preparing the unaudited condensed consolidated financial statements for the six months ended June 30, 2012, we have evaluated subsequent events for potential recognition and disclosure through the date of this filing.

 

2. New Accounting Standards

In May 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance to improve the consistency of fair value measurement and disclosure requirements between US Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards. The provisions of this guidance change certain of the fair value principles related to the highest and best use premise, the consideration of blockage factors and other premiums and discounts, and the measurement of financial instruments held in a portfolio and instruments classified within shareholders’ equity. Further, the guidance provides additional disclosure requirements surrounding Level 3 fair value measurements, the uses of nonfinancial assets in certain circumstances, and identification of the level in the fair value hierarchy used for assets and liabilities which are not recorded at fair value, but where fair value is disclosed. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on our financial condition or results of operations.

In June 2011, the FASB issued authoritative guidance surrounding the presentation of comprehensive income, with an objective of increasing the prominence of items reported in other comprehensive income (“OCI”). This guidance provides entities with the option to present the total of comprehensive income, the components of net income and the components of OCI in either a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, entities must present on the face of the financial statement, items reclassified from OCI to net income in the section of the financial statement where the components of net income and OCI are presented, regardless of the option selected to present comprehensive income. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The FASB subsequently deferred the effective date of certain provisions of this standard pertaining to the reclassification of items out of accumulated other comprehensive income, pending the issuance of further guidance on that matter. We have adopted this guidance as of January 1, 2012, and have presented total comprehensive income (loss) in our Condensed Consolidated Statements of Income and Comprehensive Income (Loss).

 

3. Stock-based Compensation

Total stock-based compensation expense was $4.8 million for each of the three months ended June 30, 2012 and July 2, 2011, and was $10.1 million and $10.5 million for the six months ended June 30, 2012 and July 2, 2011, respectively.

During the first half of 2012, restricted shares and restricted stock units of our common stock were granted under the 2008 Omnibus Stock Incentive Plan to eligible employees with a vesting period of three to four years after issuance. Restricted share awards and restricted stock units are valued at market value on the date of grant and are typically expensed over the vesting period. Total compensation expense for restricted share awards and restricted stock units was $2.8 million and $2.5 million for the three months ended June 30, 2012 and July 2, 2011, respectively, and was $5.8 million for each of the six months ended June 30, 2012 and July 2, 2011.

During the first half of 2012, option awards were granted under the 2008 Omnibus Stock Incentive Plan with an exercise price equal to the market price of our common stock on the date of grant. Option awards are typically expensed over the vesting period. Total compensation expense for stock option awards was $2.0 million and $2.3 million for the three months ended June 30, 2012 and July 2, 2011, respectively, and $4.3 million and $4.7 million for the six months ended June 30, 2012 and July 2, 2011, respectively.

 

7


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

We estimated the fair value of each stock option award on the date of grant using a Black-Scholes option pricing model, modified for dividends and using the following assumptions:

 

                                                             
     June 30,    
2012    
     July 2,      
2011      
 

 

 

Expected stock price volatility

     36.5%         35.5%   

Expected life

     5.7 yrs         5.5 yrs   

Risk-free interest rate

     0.90%         2.12%   

Dividend yield

     2.29%         2.16%   

The weighted-average fair value of options granted during the second quarter of 2012 and 2011 were $11.74 and $10.89 per share, respectively.

These estimates require us to make assumptions based on historical results, observance of trends in our stock price, changes in option exercise behavior, future expectations and other relevant factors. If other assumptions had been used, stock-based compensation expense, as calculated and recorded under the accounting guidance, could have been affected.

We based the expected life assumption on historical experience as well as the terms and vesting periods of the options granted. For purposes of determining expected volatility, we considered a rolling average of historical volatility measured over a period approximately equal to the expected option term. The risk-free rate for periods that coincide with the expected life of the options is based on the U.S. Treasury Department yield curve in effect at the time of grant.

 

4.     Earnings Per Common Share

Basic and diluted earnings per share were calculated using the following:

 

                                                                                                                           
         Three months ended              Six months ended      
  

 

 

    

 

 

 
In thousands        June 30,  
2012  
         July 2,  
2011  
         June 30,  
2012  
     July 2,             
2011              
 

 

 

Weighted average common shares outstanding — basic

     99,047        98,333        98,856        98,190        

Dilutive impact of stock options and restricted stock

     2,118        1,732        1,929        1,635        

 

 

Weighted average common shares outstanding — diluted

     101,165        100,065        100,785        99,825        

 

 

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

     443        1,776        2,010        2,001        

 

8


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

5. Restructuring

During 2012 and 2011, we initiated certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business. The 2012 initiatives included the reduction in hourly and salaried headcount of approximately 140 employees, which included 85 in Water & Fluid Solutions and 55 in Technical Products. The 2011 initiatives included the reduction in hourly and salaried headcount of approximately 210 employees, which included 160 in Water & Fluid Solutions and 50 in Technical Products.

Restructuring related costs included in Selling, general and administrative expenses on the Condensed Consolidated Statements of Income and Comprehensive Income (Loss) include costs for severance and other restructuring costs as follows for the six months ended June 30, 2012, and July 2, 2011, and the year ended December 31, 2011:

 

                                                                                            
In thousands    June 30,
    2012     
     December 31,
2011        
       July 2,
  2011
 

 

 

Severance and related costs

   $ 9,660      $ 11,500      $ —    

Asset impairment and other restructuring costs

     710        1,500        —    

 

 

Total restructuring costs

   $ 10,370      $ 13,000      $ —    

 

 

Restructuring accrual activity recorded in Other current liabilities and Employee compensation and benefits on the Condensed Consolidated Balance Sheets is summarized as follows for the six months ended June 30, 2012, and July 2, 2011, and the year ended December 31, 2011:

 

                                                                                            
In thousands    June 30,
    2012     
    December 31,
2011        
      July 2,
  2011
 

 

 

Beginning balance

   $ 12,805     $ 3,994     $ 3,994   

Costs incurred

     9,660       11,500       —    

Cash payments and other

     (8,570     (2,689     (909)    

 

 

Ending balance

   $ 13,895     $ 12,805     $ 3,085   

 

 

 

6.         Acquisitions

On April 4, 2012, we acquired, as part of Water & Fluid Solutions, all of the outstanding shares of capital stock of Sibrape Indústria E Comércio de Artigos Para Lazer Ltda. and its subsidiary Hidrovachek Ltda. (collectively “Sibrape”) for $19.9 million, net of cash acquired. The Sibrape results have been included in our consolidated financial statements since the date of acquisition. Sibrape offers a complete line of pool products and is a market leader in pool liner sales throughout Brazil. Goodwill recorded as part of the purchase price allocation was $8.8 million, none of which is tax deductible. Identified intangible assets acquired as part of the acquisition were $4.8 million and were comprised entirely of customer lists, which have an estimated life of 11 years. The pro forma impact of this acquisition was not deemed material.

In May 2011, we acquired, as part of Water & Fluid Solutions, the Clean Process Technologies (“CPT”) division of privately held Norit Holding B.V. for $715.3 million (€502.7 million translated at the May 12, 2011 exchange rate). CPT’s results of operations have been included in our consolidated financial statements since the date of acquisition. CPT is a global leader in membrane solutions and clean process technologies in the high growth water and beverage filtration and separation segments. CPT provides sustainable purification systems and solutions for desalination, water reuse, industrial applications and beverage segments that effectively address the increasing challenges of clean water scarcity, rising energy costs and pollution. CPT’s product offerings include innovative ultrafiltration and nanofiltration membrane technologies, aseptic valves, CO2 recovery and control systems and specialty pumping equipment. Based in the Netherlands, CPT has broad sales diversity with the majority of 2011 and 2010 revenues generated in European Union and Asia-Pacific countries.

The fair value of CPT 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 $451.8 million, none of which is tax deductible. Identifiable intangible assets acquired as part of the acquisition were $197.2 million, including definite-lived intangibles, such as customer relationships and proprietary technology with a weighted average amortization period of approximately 10 years.

 

9


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

The following pro forma consolidated condensed financial results of operations are presented as if the CPT acquisition described above had been completed at the beginning of the comparable period:

 

                                                             
     Three months ended      Six months ended  
In thousands, except share and per-share data    July 2, 2011      July 2, 2011  

 

 

Pro forma net sales

   $ 953,375      $ 1,822,224  

Pro forma income before noncontrolling interest

     66,075        115,517  

Pro forma net income attributable to Pentair, Inc.

     64,650        112,599  

Pro forma earnings per common share

     

Basic

   $ 0.66      $ 1.15  

Diluted

   $ 0.65      $ 1.13  

Weighted average common shares outstanding

     

Basic

     98,333        98,190  

Diluted

     100,065        99,825  

The 2011 unaudited pro forma net income was adjusted to exclude the impact of approximately $5.5 million in non-recurring items related to acquisition date fair value adjustments to inventory and customer backlog. Acquisition-related transaction costs of approximately $6.1 million and $7.8 million associated with the CPT acquisition were excluded from the pro forma net income for the three and six month periods ended July 2, 2011, respectively.

These pro forma condensed consolidated financial results have been prepared for comparative purposes only and include certain adjustments, such as increased interest expense on acquisition debt. They do not reflect the effect of costs or synergies that would have been expected to result from the integration of the 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 at the beginning of each period presented, or of future results of the consolidated entities.

In January 2011 we acquired as part of Water & Fluid Solutions all of the outstanding shares of capital stock of Hidro Filtros do Brasil (“Hidro Filtros”) for cash of $14.9 million and a note payable of $2.1 million. The Hidro Filtros results of operations have been included in our consolidated financial statements since the date of acquisition. Hidro Filtros is a leading manufacturer of water filters and filtering elements for residential and industrial applications operating in Brazil and neighboring countries. Goodwill recorded as part of the purchase price allocation was $10.1 million, none of which is tax deductible. Identified intangible assets acquired as part of the acquisition were $6.3 million including definite-lived intangibles, primarily customer relationships of $5.5 million, with an estimated life of 13 years. The pro forma impact of this acquisition was not material.

Additionally, during 2011, we completed other small acquisitions with purchase prices totaling $4.6 million, consisting of $2.9 million in cash and $1.7 million as a note payable, adding to Water & Fluid Solutions. Total goodwill recorded as part of the purchase price allocation was $4.3 million, none of which is tax deductible. The pro forma impact of these acquisitions was not material.

 

10


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

7.     Supplemental Balance Sheet Disclosures

 

                                                                                            

In thousands

 

Inventories

   June 30,
    2012      
     December 31,
    2011       
          July 2,
     2011
 

 

 

Raw materials and supplies

   $ 227,780      $ 219,487      $ 246,414   

Work-in-process

     50,860        47,707        49,515   

Finished goods

     181,399        182,669        188,866   

 

 

Total inventories

   $ 460,039      $ 449,863      $ 484,795  

 

 

Property, plant and equipment

        

Land and land improvements

   $ 40,519      $ 41,111      $ 43,322   

Buildings and leasehold improvements

     251,977        244,246        255,317   

Machinery and equipment

     713,819        692,930        697,802   

Construction in progress

     34,699        40,251        41,066   

 

 

Total property, plant and equipment

     1,041,014        1,018,538        1,037,507   

Less accumulated depreciation and amortization

     659,951        631,013        626,960   

 

 

Property, plant and equipment, net

   $ 381,063      $ 387,525      $ 410,547   

 

 

 

8.     Goodwill and Other Identifiable Intangible Assets

The changes in the carrying amount of goodwill by segment were as follows:

 

                                                                                                                           
In thousands    December 31, 2011      Acquisitions/ 
divestitures 
     Foreign currency 
translation/other 
    June 30, 2012     

 

 

Water & Fluid Solutions

   $ 1,994,781      $ 8,768      $ (25,034   $ 1,978,515   

Technical Products

     279,137                (2,518     276,619   

 

 

Consolidated Total

   $ 2,273,918      $ 8,768      $ (27,552   $ 2,255,134  

 

 
In thousands    December 31, 2010      Acquisitions/ 
divestitures 
     Foreign currency 
translation/other 
    July 2, 2011     

 

 

Water & Fluid Solutions

   $ 1,784,100      $ 466,182      $ 35,686     $ 2,285,968   

Technical Products

     281,944                5,518       287,462   

 

 

Consolidated Total

   $ 2,066,044      $ 466,182      $ 41,204     $ 2,573,430   

 

 

Accumulated goodwill impairment losses were $200.5 million, $200.5 million and $0 as of June 30, 2012, December 31, 2011, and July 2, 2011, respectively.

 

11


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

The detail of acquired intangible assets consisted of the following:

 

                                                                                                                                                        
    June 30, 2012     December 31, 2011     July 2, 2011  
In thousands   Gross
carrying
amount
    Accumulated
amortization
    Net     Gross
carrying
amount
    Accumulated
amortization
    Net     Gross
carrying
amount
    Accumulated
amortization
    Net  

 

 

 

 
Finite-life intangibles                  

Patents

  $ 5,895     $ (4,298   $ 1,597     $ 5,896     $ (4,038   $ 1,858     $ 15,485     $ (13,306   $ 2,179   
Proprietary technology     129,748       (45,994     83,754       128,841       (39,956     88,885       136,737       (34,423     102,314   
Customer relationships     356,814       (120,738     236,076       358,410       (109,887     248,523       380,263       (97,232     283,031   

Trade names

    1,501       (600     901       1,515       (530     985       1,569       (467     1,102   

 

 

Total finite-life intangibles

  $ 493,958     $ (171,630   $ 322,328     $ 494,662     $ (154,411   $ 340,251     $ 534,054     $ (145,428   $ 388,626   

 

 

Indefinite-life intangibles

                 

Trade names

    248,175       —         248,175       252,034       —         252,034       266,282       —         266,282   

 

 

Total intangibles, net

  $ 742,133     $ (171,630   $ 570,503     $ 746,696     $ (154,411   $ 592,285     $ 800,336     $ (145,428   $ 654,908   

 

 

Intangible asset amortization expense was approximately $9.9 million and $10.8 million for the three months ended June 30, 2012 and July 2, 2011, respectively, and was approximately $19.7 million and $17.2 million for the six months ended June 30, 2012 and July 2, 2011, respectively.

The estimated future amortization expense for identifiable intangible assets during the remainder of 2012 and the next five years is as follows:

 

                                                                                                                                                                                         
     Q3-Q4                                     
In thousands    2012      2013      2014      2015      2016      2017  

 

 

Estimated amortization expense

   $ 19,253      $ 38,685      $ 38,331      $ 38,047      $ 37,137      $ 35,542  

 

9. Debt

Debt and the average interest rates on debt outstanding are summarized as follows:

 

                                                                                                                                                          
In thousands    Average
interest rate
June 30, 2012
  Maturity
(Year)
   June 30,
2012
    December 31,
2011
    July 2,
2011
 

 

 

Commercial paper

   1.22%   2016    $ 6,993     $ 3,497     $ —    

Revolving credit facilities

   1.99%   2016      205,600       168,500       262,064   

Private placement - fixed rate

   5.65%   2013-2017      400,000       400,000       400,000   

Private placement - floating rate

   1.07%   2013      100,000       205,000       205,000   

Public - fixed rate

   5.00%   2021      500,000       500,000       500,000   

Capital lease obligations

   3.72%   2025      14,671       15,788       18,362   

Other

   3.10%   2012-2016      7,945       16,302       21,481   

 

 
Total debt           1,235,209       1,309,087       1,406,907   

Less: Current maturities

          (1,193     (1,168     (1,289)    

          Short-term borrowings

          (222     (3,694     (21,451)    

 

 

Long-term debt

        $ 1,233,794     $ 1,304,225     $ 1,384,167   

 

 

 

12


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

The fair value of total debt excluding the effect of the interest rate swaps was $1,299.2 million, $1,361.0 million and $1,440.1 million as of June 30, 2012, December 31, 2011 and July 2, 2011, respectively. This fair value measurement of debt is classified as Level 2 in the valuation hierarchy as defined in Note 10, “Derivatives and Financial Instruments”.

In May 2011, we completed a public offering of $500 million aggregate principal amount of our 5.00% Senior Notes due 2021 (the “Notes”). The Notes are guaranteed by certain of our wholly-owned domestic subsidiaries that are also guarantors under our primary bank credit facility. We used the net proceeds from the offering of the Notes to finance in part the CPT acquisition.

In April 2011, we entered into a Fourth Amended and Restated Credit Agreement (the “Credit Facility”). The Credit Facility replaced our previous $800 million revolving credit facility. The Credit Facility creates an unsecured, committed credit facility of up to $700 million, with multi-currency sub facilities to support investments outside the U.S. The Credit Facility expires on April 28, 2016. Borrowings under the Credit Facility currently bear interest at the rate of London Interbank Offered Rate (“LIBOR”) plus 1.75%. Interest rates and fees on the Credit Facility will vary based on our credit ratings. We used borrowings under the Credit Facility to fund a portion of the CPT acquisition and to fund ongoing operations.

We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We use the Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. Our use of commercial paper as a funding vehicle depends upon the relative interest rates for our commercial paper compared to the cost of borrowing under our Credit Facility. As of June 30, 2012, we had $7.0 million of commercial paper outstanding.

In May 2012, we repaid $105 million of matured private placement debt with borrowings under the Credit Facility.

All of the commercial paper and private placement – floating rate debt was classified as long-term as we have the intent and the ability to refinance such obligations on a long-term basis under the Credit Facility.

Total availability under our Credit Facility was $487.4 million as of June 30, 2012, which was not limited by the leverage ratio financial covenant in the credit agreement.

Our debt agreements contain certain financial covenants, the most restrictive of which is a leverage ratio in the Credit Facility (total consolidated indebtedness, as defined, over consolidated net income before interest, taxes, depreciation, amortization and non-cash compensation expense, as defined) that may not exceed 3.5 to 1.0 as of the last date of each of our fiscal quarters. As of June 30, 2012, we were in compliance with all financial covenants in our debt agreements.

In addition to the Credit Facility, we have various other credit facilities with an aggregate availability of $73.1 million, of which $7.6 million was outstanding at June 30, 2012. Borrowings under these credit facilities bear interest at variable rates.

Debt outstanding at June 30, 2012 matures on a calendar year basis as follows:

 

                                                                                                                                       
         Q3 -Q4                                                   
In thousands   

 

      2012

          2013           2014          2015          2016          2017      Thereafter           Total  

 

 

Contractual debt obligation maturities

   $ 246      $ 200,057      $ 17      $       $ 220,218      $ 300,000      $ 500,000      $ 1,220,538  

Capital lease obligations

     585        1,169        1,169        1,169        1,169        1,170        8,240        14,671  

 

 

Total maturities

   $ 831      $ 201,226      $ 1,186      $ 1,169      $ 221,387      $ 301,170      $ 508,240      $ 1,235,209  

 

 

As part of the CPT acquisition, we assumed two capital lease obligations related to land and buildings. As of June 30, 2012, December 31, 2011 and July 2, 2011, we recorded cost of $22.0 million, $22.7 million and $25.6 million and accumulated amortization of $5.2 million, $5.1 million and $5.3 million, respectively, all of which are included in Property, plant and equipment on the Condensed Consolidated Balance Sheets.

Capital lease obligations consist of total future minimum lease payments of $17.4 million less the imputed interest of $2.7 million as of June 30, 2012.

 

13


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

10.       Derivatives and Financial Instruments

Fair value measurements

Fair value is defined 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.
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.

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 had a fixed interest rate of 4.89% and expired in May 2012. The fixed interest rate of 4.89% plus the .50% interest rate spread over LIBOR resulted in an effective fixed interest rate of 5.39%. The fair value of the swap was a liability of $1.7 million and $4.2 million at December 31, 2011 and July 2, 2011, respectively, and was recorded in Accumulated other comprehensive income (loss) (“AOCI”) on the Condensed Consolidated Balance Sheets.

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 $4.5 million, $6.3 million and $8.3 million at June 30, 2012, December 31, 2011 and July 2, 2011, respectively, and was recorded in AOCI on the Condensed Consolidated Balance Sheets.

The variable to fixed interest rate swaps are designated as and are effective as cash-flow hedges. The fair values of these swaps are recorded as assets or liabilities on the Condensed Consolidated Balance Sheets, with changes in their fair value included in AOCI. Derivative gains and losses included in AOCI are reclassified into earnings at the time the related interest expense is recognized or the settlement of the related commitment occurs. Realized income/expense and amounts to/from swap counterparties are recorded in Net interest expense in our Condensed Consolidated Statements of Income and Comprehensive Income (Loss). We realized incremental expense resulting from the swaps of $1.7 million and $2.3 million for the three months ended and $3.9 million and $4.7 million for the six months ended June 30, 2012 and July 2, 2011, respectively.

Failure of one or more of our swap counterparties would result in the loss of any benefit to us of the swap agreement. In this case, we would continue to be obligated to pay the variable interest payments per the underlying debt agreements which are at a variable interest rate of 3 month LIBOR plus 0.60% 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.

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.

 

14


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

In April 2011, as part of our planned debt issuance to fund the CPT acquisition, we entered into interest rate swap contracts to hedge movement in interest rates through the expected date of closing for a portion of the expected fixed rate debt offering. The swaps had a notional amount of $400 million with an average interest rate of 3.65%. In May 2011, upon the sale of the Notes, the swaps were terminated at a cost of $11.0 million. Because we used the contracts to hedge future interest payments, the short term and long term portions are recorded in Prepaid expenses and other current assets and Other, respectively, within the Condensed Consolidated Balance Sheets and will be amortized as interest exposure over the 10 year life of the Notes.

Foreign currency contract

We manage our economic and transaction exposure to certain market-based risks through the use of foreign currency derivative instruments. Our objective in holding derivatives is to reduce the volatility of net earnings and cash flows associated with changes in foreign currency exchange rates.

In March 2011, we entered into a foreign currency option contract to reduce our exposure to fluctuations in the euro related to our €503 million acquisition of CPT. The contract had a notional amount of €286.0 million, a strike price of 1.4375 and matured May 13, 2011. The fair value of the contract was an asset of $2.8 million at April 2, 2011, and was recorded in Prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. In May 2011, we sold the foreign currency option contract for $1.0 million. The net cost of $2.1 million was recorded in Selling, general and administrative on the Condensed Consolidated Statements of Income and Comprehensive Income (Loss).

Fair value of financial information

Financial assets and liabilities measured at fair value on a recurring basis were as follows:

 

                                                                                           
Recurring fair value measurements    As of June 30, 2012          
In thousands   

 

Fair value

   

 

(Level 1)

    

 

(Level 2)

   

 

(Level 3)

 

 

 

Cash-flow hedges

   $ (4,519   $       $ (4,519   $ —    

Foreign currency contract

     (1,425             (1,425     —    

Deferred compensation plan (1)

     26,327       26,327               —    

 

 

Total recurring fair value measurements

   $ 20,383     $ 26,327      $ (5,944   $ —    

 

 
Recurring fair value measurements    As of December 31, 2011          
In thousands   

 

Fair value

   

 

(Level 1)

    

 

(Level 2)

   

 

(Level 3)

 

 

   

 

 

 

Cash-flow hedges

   $ (8,034   $       $ (8,034   $ —    

Foreign currency contract

     (99             (99     —    

Deferred compensation plan (1)

     22,987       22,987               —    

 

 

Total recurring fair value measurements

   $ 14,854     $ 22,987      $ (8,133   $ —    

 

 

Nonrecurring fair value measurements

         

 

 

Goodwill (2)

   $ 242,800     $       $      $ 242,800   

 

 

Total nonrecurring fair value measurement

   $ 242,800     $       $      $ 242,800   

 

 
Recurring fair value measurements    As of July 2, 2011          
In thousands   

 

Fair value

   

 

(Level 1)

    

 

(Level 2)

   

 

(Level 3)

 

 

 

Cash-flow hedges

   $ (12,486   $       $ (12,486   $ —    

Foreign currency contract

                           —    

Deferred compensation plan (1)

     24,967       24,967               —    

 

 

Total recurring fair value measurements

   $ 12,481     $ 24,967      $ (12,486   $ —    

 

 

 

15


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

(1) Deferred compensation plan assets include mutual funds and cash equivalents for payment of certain non-qualified benefits for retired, terminated and active employees. The fair value of these assets was based on quoted market prices in active markets.

 

(2) In the fourth quarter of 2011, we completed our annual goodwill impairment review. As a result, we recorded a pre-tax non-cash goodwill impairment charge of $200.5 million in our Residential Filtration reporting unit. 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. 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.

 

11.         Income Taxes

The provision for income taxes consists of provisions for federal, state and foreign income taxes. We operate in an international environment with operations in various locations outside the U.S. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates.

The effective income tax rate for the six months ended June 30, 2012 was 21.9% compared to 30.4% for the six months ended July 2, 2011. Our effective tax rate was lower due to the resolution of U.S. federal and state tax audits, the mix of global earnings and favorable benefits related to the May 2011 acquisition of CPT.

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.

The total gross liability for uncertain tax positions was $13.3 million, $26.5 million and $24.8 million at June 30, 2012, December 31, 2011 and July 2, 2011, respectively. We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Net interest expense, respectively, on the Condensed Consolidated Statements of Income and Comprehensive Income (Loss), which is consistent with our past practices.

 

16


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

12.     Benefit Plans

Components of net periodic benefit cost were as follows:

 

                                                                                                           
     Three months ended  
  

 

 

 
     Pension benefits     Post-retirement  
  

 

 

   

 

 

 

In thousands

  

June 30,

2012

   

July 2,

2011

   

June 30,

2012

   

July 2,

2011

 
        

 

 

Service cost

   $ 3,761     $ 3,131     $ 55     $ 45   

Interest cost

     8,087       8,225       422       472   

Expected return on plan assets

     (7,844     (7,964              

Amortization of prior year service cost (benefit)

                   (6     (7)   

Recognized net actuarial loss (gains)

     2,577       972       (602     (827)   

 

 

Net periodic benefit cost (income)

   $ 6,581     $ 4,364     $ (131   $ (317)   

 

 
     Six months ended  
  

 

 

 
     Pension benefits     Post-retirement  
  

 

 

   

 

 

 
In thousands    June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2,
2011
 

 

 

Service cost

   $ 7,522     $ 6,261     $ 110     $ 90   

Interest cost

     16,174       16,450       844       944   

Expected return on plan assets

     (15,688     (15,927              

Amortization of prior year service cost (benefit)

                   (12     (14)   

Recognized net actuarial loss (gains)

     5,154       1,943       (1,204     (1,653)   

 

 

Net periodic benefit cost (income)

   $ 13,162     $ 8,727     $ (262   $ (633)   

 

 

 

13.         Business Segments

Financial information by reportable segment is shown below:

 

                                                                                                           
     Three months ended     Six months ended  
  

 

 

   

 

 

 
In thousands    June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2, 2011  

 

 

Net sales to external customers

        

Water & Fluid Solutions

   $ 675,522     $ 631,994     $ 1,262,500     $ 1,147,362   

Technical Products

     266,003       278,181       537,202       553,086   

 

 

Consolidated

   $ 941,525     $ 910,175     $ 1,799,702     $ 1,700,448   

 

 

Intersegment sales

        

Water & Fluid Solutions

   $ (116   $ 316     $ (43   $ 771   

Technical Products

     1,535       1,559       2,894       2,558   

Other

     (1,419     (1,875     (2,851     (3,329)   

 

 

Consolidated

   $      $      $      $   

 

 

Operating income (loss)

        

Water & Fluid Solutions

   $ 91,989     $ 84,521     $ 155,666     $ 141,049   

Technical Products

     50,624       48,261       101,083       96,348   

Other

     (24,821     (23,360     (54,005     (41,798)   

 

 

Consolidated

   $ 117,792     $ 109,422     $ 202,744     $ 195,599   

 

 

 

17


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

14.         Warranty

The changes in the carrying amount of service and product warranties for the six months ended June 30, 2012, and July 2, 2011, and the year ended December 31, 2011, were as follows:

 

                                                              

In thousands

  

June 30,

2012

   

December 31,

2011

   

July 2,

2011

 
      

 

 

Balance at beginning of the year

   $ 29,355     $ 30,050     $ 30,050   

Service and product warranty provision

     26,579       50,096       26,035   

Payments

     (24,025     (53,937     (25,040)   

Acquired

     156       3,575       3,623   

Translation

     (222     (429     343   

 

 

Balance at end of the period

   $ 31,843     $ 29,355     $ 35,011   

 

 

 

15.         Commitments and Contingencies

There have been no further material developments from the disclosures contained in our 2011 Annual Report on Form 10-K.

 

18


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

16.   Financial Statements of Subsidiary Guarantors

Certain of the domestic subsidiaries (the “Guarantor Subsidiaries”) of Pentair, Inc. (the “Parent Company”), each of which is directly or indirectly wholly-owned by the Parent Company, jointly and severally, and fully and unconditionally, guarantee the Parent Company’s indebtedness under the Notes and the Credit Facility. The following supplemental financial information sets forth the Condensed Consolidated Statements of Income and Comprehensive Income (Loss), the Condensed Consolidated Balance Sheets, and the Condensed Consolidated Statements of Cash Flows for the Parent Company, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries, and total consolidated Pentair and subsidiaries

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

For the three months ended June 30, 2012

 

                                                                                                        
     Parent     Guarantor     Non-guarantor              
In thousands    company     subsidiaries     subsidiaries     Eliminations     Consolidated   

 

 

Net sales

   $      $ 628,860     $ 392,347     $ (79,682   $ 941,525   

Cost of goods sold

            421,655       287,437       (79,695     629,397   

 

 

Gross profit

            207,205       104,910       13       312,128   

Selling, general and administrative

     11,905       85,781       75,746       13       173,445   

Research and development

     245       10,958       9,688              20,891   

 

 

Operating income (loss)

     (12,150     110,466       19,476              117,792   

Earnings from investment in subsidiaries

     (62,199     (527     600       62,126       —    

Other (income) expense:

          

Equity income of unconsolidated subsidiaries

            (636                   (636)   

Net interest (income) expense

     (27,676     38,301       5,454              16,079   

 

 

Income before income taxes and noncontrolling interest

     77,725       73,328       13,422       (62,126     102,349   

Provision for income taxes

     5,895       23,935       (966            28,864   

 

 

Net income before noncontrolling interest

     71,830       49,393       14,388       (62,126     73,485   

Noncontrolling interest

                   1,655              1,655   

 

 

Net income attributable to Pentair, Inc.

   $ 71,830     $ 49,393     $ 12,733     $ (62,126   $ 71,830   

 

 

Comprehensive income (loss)

   $ (10,207   $ 22,945     $ (42,332   $ 19,164     $ (10,430)   

Less: Comprehensive income attributable to noncontrolling interest

                   (223            (223)  

 

 

Comprehensive income (loss) attributable to Pentair, Inc.

   $ (10,207   $ 22,945     $ (42,109   $ 19,164     $ (10,207)   

 

 

 

 

19


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

For the six months ended June 30, 2012

 

                                                                                                                            
     Parent     Guarantor     Non-guarantor              
In thousands    company     subsidiaries     subsidiaries     Eliminations     Consolidated   

 

 

Net sales

   $      $ 1,186,928     $ 778,524     $ (165,750   $ 1,799,702   

Cost of goods sold

            807,713       564,599       (165,457     1,206,855   

 

 

Gross profit

            379,215       213,925       (293     592,847   

Selling, general and administrative

     28,789       174,144       145,815       (293     348,455   

Research and development

     468       21,568       19,612              41,648   

 

 

Operating income (loss)

     (29,257     183,503       48,498              202,744   

Earnings from investment in subsidiaries

     (115,592     (1,325     (364     117,281       —    

Other (income) expense:

          

Equity income of unconsolidated subsidiaries

            (1,544     (141            (1,685)   

Net interest (income) expense

     (56,710     76,484       11,073              30,847   

 

 

Income before income taxes and noncontrolling interest

     143,045       109,888       37,930       (117,281     173,582   

Provision for income taxes

     10,401       24,242       3,300              37,943   

 

 

Net income before noncontrolling interest

     132,644       85,646       34,630       (117,281     135,639   

Noncontrolling interest

                   2,995              2,995   

 

 

Net income attributable to Pentair, Inc.

   $ 132,644     $ 85,646     $ 31,635     $ (117,281   $ 132,644   

 

 

Comprehensive income (loss)

   $ 91,788     $ 59,198     $ 16,435      $ (73,613   $ 93,808   

Less: Comprehensive income attributable to noncontrolling interest

                   2,020              2,020   

 

 

Comprehensive income (loss) attributable to Pentair, Inc.

   $ 91,788     $ 59,198     $ 14,415      $ (73,613   $ 91,788   

 

 

 

20


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

June 30, 2012

 

                                                                                                                  
In thousands   

Parent

company

   

Guarantor

subsidiaries

   

Non-guarantor

subsidiaries

    Eliminations     Consolidated   

 

 
Assets   

Current assets

          

Cash and cash equivalents

   $ 6,135     $ 14,339     $ 40,124     $      $ 60,598   

Accounts and notes receivable, net

     736       348,556       281,087       (58,235     572,144   

Inventories

            241,629       218,410              460,039   

Deferred tax assets

     130,151       40,698       12,674       (124,624     58,899   

Prepaid expenses and other current assets

     44,061       12,282       107,023       (39,021     124,345   

 

 

Total current assets

     181,083       657,504       659,318       (221,880     1,276,025   

Property, plant and equipment, net

     17,953       132,314       230,796              381,063   

Other assets

          

Investments in/advances to subsidiaries

     2,911,498       1,414,260       85,952       (4,411,710     —    

Goodwill

            1,330,265       924,869              2,255,134   

Intangibles, net

            243,431       327,072              570,503   

Other

     65,638       8,931       48,115       (19,140     103,544   

 

 

Total other assets

     2,977,136       2,996,887       1,386,008       (4,430,850     2,929,181   

 

 

Total assets

   $ 3,176,172     $ 3,786,705     $ 2,276,122     $ (4,652,730   $ 4,586,269   

 

 

 

Liabilities and Shareholders’ Equity

  

Current liabilities

          

Short-term borrowings

   $      $      $ 222     $      $ 222   

Current maturities of long-term debt

                   1,193              1,193   

Accounts payable

     5,334       188,673       152,549       (58,291     288,265   

Employee compensation and benefits

     15,771       19,855       53,888              89,514   

Current pension and post-retirement benefits

     9,052                            9,052   

Accrued product claims and warranties

     165       24,385       20,385              44,935   

Income taxes

     35,498       (1,801     (1,469            32,228   

Accrued rebates and sales incentives

            36,212       9,658              45,870   

Other current liabilities

     30,824       64,436       94,191       (39,014     150,437   

 

 

Total current liabilities

     96,644       331,760       330,617       (97,305     661,716   

Other liabilities

          

Long-term debt

     1,245,055       2,417,922       520,265       (2,949,448     1,233,794   

Pension and other retirement compensation

     185,513       (10,541     72,352              247,324   

Post-retirement medical and other benefits

     17,512       31,549              (19,140     29,921   

Long-term income taxes payable

     13,294                            13,294   

Deferred tax liabilities

            229,962       84,835       (124,624     190,173   

Due to (from) affiliates

     (442,406     675,455       601,727       (834,776     —    

Other non-current liabilities

     58,771       1,323       32,081              92,175   

 

 

Total liabilities

     1,174,383       3,677,430       1,641,877       (4,025,293     2,468,397   

 

 

Shareholders’ equity attributable to Pentair, Inc.

     2,001,789       109,275       518,162       (627,437     2,001,789   

Noncontrolling interest

                   116,083              116,083   

 

 

Total shareholders’ equity

     2,001,789       109,275       634,245       (627,437     2,117,872   

 

 

Total liabilities and shareholders’ equity

   $ 3,176,172     $ 3,786,705     $ 2,276,122     $ (4,652,730   $ 4,586,269   

 

 

 

21


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the six months ended June 30, 2012

 

                                                                
     Parent     Guarantor     Non-guarantor               
In thousands    company     subsidiaries     subsidiaries     Eliminations      Consolidated    

 

 

Net cash provided by (used for) operating activities

   $ 10,612     $ 108,550     $ 47,599     $       $ 166,761   

Investing activities

           

Capital expenditures

     (1,980     (14,562     (14,770             (31,312)   

Proceeds from sale of property and equipment

            1,538       3,330               4,868   

Acquisitions, net of cash acquired

                   (19,905             (19,905)   

Other

                   (3,073             (3,073)   

 

 

Net cash provided by (used for) investing activities

     (1,980     (13,024     (34,418             (49,422)   

Financing activities

           

Net short-term borrowings

     (3,472                           (3,472)   

Proceeds from long-term debt

     352,463                             352,463   

Repayment of long-term debt

     (420,810                           (420,810)   

Net change in advances to subsidiaries

     98,720       (84,519     (14,201             —    

Excess tax benefits from stock-based compensation

     1,740                             1,740   

Stock issued to employees, net of shares withheld

     16,163                             16,163   

Dividends paid

     (43,628            (512             (44,140)   

 

 

Net cash provided by (used for) financing activities

     1,176       (84,519     (14,713             (98,056)   

Effect of exchange rate changes on cash and cash equivalents

     (6,770            (1,992             (8,762)   

 

 

Change in cash and cash equivalents

     3,038       11,007       (3,524             10,521   

Cash and cash equivalents, beginning of period

     3,097       3,332       43,648               50,077   

 

 

Cash and cash equivalents, end of period

   $ 6,135     $ 14,339     $ 40,124     $       $ 60,598   

 

 

 

22


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

For the three months ended July 2, 2011

 

                                                                                                                                      
     Parent     Guarantor      Non-guarantor              
In thousands    company     subsidiaries      subsidiaries     Eliminations     Consolidated    

 

 

Net sales

   $      $ 586,395      $ 398,634     $ (74,854   $ 910,175   

Cost of goods sold

            399,270        297,830       (74,661     622,439   

 

 

Gross profit

            187,125        100,804       (193     287,736   

Selling, general and administrative

     6,664       83,632        68,329       (193     158,432   

Research and development

     435       10,509        8,938              19,882   

 

 

Operating (loss) income

     (7,099     92,984        23,537              109,422   

Earnings from investment in subsidiaries

     (53,988                    53,988       —    

Other (income) expense:

           

Equity income of unconsolidated subsidiaries

     (607             (65            (672)   

Net interest (income) expense

     (26,636     38,107        3,142              14,613   

 

 

Income before income taxes and noncontrolling interest

     74,132       54,877        20,460       (53,988     95,481   

Provision for income taxes

     7,420       18,301        1,623              27,344   

 

 

Net income before noncontrolling interest

     66,712       36,576        18,837       (53,988     68,137   

Noncontrolling interest

                    1,425              1,425   

 

 

Net income attributable to Pentair, Inc.

   $ 66,712     $ 36,576      $ 17,412     $ (53,988   $ 66,712   

 

 

Comprehensive income (loss)

   $ 90,090     $ 41,534      $ 29,491     $ (68,809   $ 92,306   

Less: Comprehensive income attributable to noncontrolling interest

                    2,216              2,216   

 

 

Comprehensive income (loss) attributable to Pentair, Inc.

   $ 90,090     $ 41,534      $ 27,275     $ (68,809   $ 90,090   

 

 

 

23


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

For the six months ended July 2, 2011

 

                                                                                                                            
In thousands    Parent
company
    Guarantor
subsidiaries
     Non-guarantor
subsidiaries
    Eliminations     Consolidated  

 

 

Net sales

   $      $ 1,101,449      $ 740,212     $ (141,213   $ 1,700,448   

Cost of goods sold

            754,831        549,560       (140,738     1,163,653   

 

 

Gross profit

            346,618        190,652       (475     536,795   

Selling, general and administrative

     13,272       168,751        121,644       (475     303,192   

Research and development

     605       21,355        16,044              38,004   

 

 

Operating (loss) income

     (13,877     156,512        52,964              195,599   

Earnings from investment in subsidiaries

     (91,295                    91,295       —    

Other (income) expense:

           

Equity income of unconsolidated subsidiaries

     (783             (124            (907)   

Net interest (income) expense

     (54,016     76,593        1,361              23,938   

 

 

Income before income taxes and noncontrolling interest

     132,217       79,919        51,727       (91,295     172,568   

Provision for income taxes

     14,964       26,782        10,651              52,397   

 

 

Net income before noncontrolling interest

     117,253       53,137        41,076       (91,295     120,171   

Noncontrolling interest

                    2,918              2,918   

 

 

Net income attributable to Pentair, Inc.

   $ 117,253     $ 53,137      $ 38,158     $ (91,295   $ 117,253   

 

 

Comprehensive income (loss)

   $ 181,498     $ 63,306      $ 67,508     $ (125,193   $ 187,119   

Less: Comprehensive income attributable to noncontrolling interest

                    5,621              5,621   

 

 

Comprehensive income (loss) attributable to Pentair, Inc.

   $         181,498     $           63,306      $             61,887       $        (125,193)      $         181,498    

 

 

 

24


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

July 2, 2011

 

                                                                                              
In thousands    Parent
company
    Guarantor
subsidiaries
   

Non-

guarantor
subsidiaries

     Eliminations     Consolidated  

 

 
Assets   

Current assets

           

Cash and cash equivalents

   $ 4,836     $ 4,651     $ 59,485      $      $ 68,972   

Accounts and notes receivable, net

     796       317,365       375,242        (97,996     595,407   

Inventories

            203,998       280,797               484,795   

Deferred tax assets

     113,205       40,363       13,247        (105,982     60,833   

Prepaid expenses and other current assets

     8,958       14,973       118,638        (17,937     124,632   

 

 

Total current assets

     127,795       581,350       847,409        (221,915     1,334,639   

Property, plant and equipment, net

     20,172       110,551       279,824               410,547   

Other assets

           

Investments in/advances to subsidiaries

     2,856,562       599,056       686,070        (4,141,688     —    

Goodwill

            1,471,582       1,101,848               2,573,430   

Intangibles, net

            217,311       437,597               654,908   

Other

     75,538       4,821       23,477        (25,048     78,788   

 

 

Total other assets

     2,932,100       2,292,770       2,248,992        (4,166,736     3,307,126   

 

 

Total assets

   $ 3,080,067     $ 2,984,671     $ 3,376,225      $ (4,388,651   $ 5,052,312   

 

 

 

Liabilities and Shareholders’ Equity

  

Current liabilities

           

Short-term borrowings

   $      $      $ 21,451      $      $ 21,451   

Current maturities of long-term debt

     2,905              29,220        (30,836     1,289   

Accounts payable

     5,781       160,537       247,182        (98,097     315,403   

Employee compensation and benefits

     32,294       22,791       53,751               108,836   

Current pension and post-retirement benefits

     8,733                             8,733   

Accrued product claims and warranties

     12,248       22,574       12,437               47,259   

Income taxes

     9,106       5,720       6,672               21,498   

Accrued rebates and sales incentives

            32,219       10,348               42,567   

Other current liabilities

     14,874       37,558       110,149        (18,215     144,366   

 

 

Total current liabilities

     85,941       281,399       491,210        (147,148     711,402   

Other liabilities

           

Long-term debt

     1,265,400       2,417,890       1,033,600        (3,332,723     1,384,167   

Pension and other retirement compensation

     136,901       38       80,082               217,021   

Post-retirement medical and other benefits

     17,679       35,323               (25,048     27,954   

Long-term income taxes payable

     23,832                             23,832   

Deferred tax liabilities

     10       213,201       128,192        (105,981     235,422   

Due to (from) affiliates

     (743,661     (261,361     1,024,935        (19,913     —    

Other non-current liabilities

     44,611       1,701       39,348               85,660   

 

 

Total liabilities

     830,713       2,688,191       2,797,367        (3,630,813     2,685,458   

 

 

Shareholders’ equity attributable to Pentair, Inc.

     2,249,354       296,480       461,358        (757,838     2,249,354   

Noncontrolling interest

                   117,500               117,500   

 

 

Total shareholders’ equity

     2,249,354       296,480       578,858        (757,838     2,366,854   

 

 

Total liabilities and shareholders’ equity

   $       3,080,067     $       2,984,671     $       3,376,225        $      (4,388,651)      $       5,052,312   

 

 

 

25


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the six months ended July 2, 2011

 

                                                                                                                  
In thousands    Parent
company
    Guarantor
subsidiaries
   

Non-

guarantor
subsidiaries

    Eliminations      Consolidated    

 

 
Net cash provided by (used for) operating activities    $ (12,254   $ 190,161     $ (25,296   $       $ 152,611   

Investing activities

           

Capital expenditures

     (5,368     (13,584     (16,269             (35,221)   

Proceeds from sale of property and equipment

            42       47               89   

Acquisitions, net of cash acquired

                   (733,105             (733,105)   

Other

     902       (783                    119   

 

 

Net cash provided by (used for) investing activities

     (4,466     (14,325     (749,327             (768,118)   

Financing activities

           

Net short-term borrowings

     16,518       (29     29               16,518   

Proceeds from long-term debt

     1,320,957                             1,320,957   

Repayment of long-term debt

     (661,422                           (661,422)   

Debt issuance costs

     (8,721                           (8,721)   

Net change in advances to subsidiaries

     (670,522     (174,560     845,082               —    

Excess tax benefits from stock-based compensation

     1,465                             1,465   

Stock issued to employees, net of shares withheld

     9,551                             9,551   

Repurchases of common stock

     (287                           (287)   

Dividends paid

     (39,730            (9             (39,739)   

 

 

Net cash provided by (used for) financing activities

     (32,191     (174,589     845,102               638,322   

Effect of exchange rate changes on cash and cash equivalents

     50,546              (50,445             101   

 

 

Change in cash and cash equivalents

     1,635       1,247       20,034               22,916   

Cash and cash equivalents, beginning of period

     3,201       3,404       39,451               46,056   

 

 

Cash and cash equivalents, end of period

   $         4,836     $         4,651     $         59,485     $         —       $         68,972   

 

 

 

26


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

December 31, 2011

 

<
                                                                          
In thousands    Parent
company
    Guarantor
subsidiaries
   

Non-

guarantor
subsidiaries

     Eliminations     Consolidated  

 

 
Assets   

Current assets

           

Cash and cash equivalents

   $ 3,097     $ 3,332     $ 43,648      $      $ 50,077   
Accounts and notes receivable, net      828       360,027       263,201        (54,852     569,204   

Inventories

            227,472       222,391               449,863   
Deferred tax assets      134,240       40,698       13,382        (127,421     60,899   

Prepaid expenses and other current assets

     28,937       (6,886     107,121        (21,380     107,792   

 

 
Total current assets      167,102       624,643       649,743        (203,653     1,237,835   

Property, plant and equipment, net

     19,693       136,102       231,730               387,525   
Other assets            

Investments in/advances to subsidiaries

     2,910,927       1,447,522       92,396        (4,450,845     —    
Goodwill             1,330,265       943,653               2,273,918   

Intangibles, net

            250,792       341,493               592,285   
Other      63,508       27,337       23,045        (19,140     94,750   

 

 

Total other assets

     2,974,435       3,055,916       1,400,587        (4,469,985     2,960,953   

 

 
Total assets    $ 3,161,230     $ 3,816,661     $ 2,282,060      $ (4,673,638   $ 4,586,313   

 

 

 

Liabilities and Shareholders’ Equity

  

Current liabilities

           

Short-term borrowings

   $      $      $ 3,694      $      $ 3,694   
Current maturities of long-term debt      2,585              1,168        (2,585     1,168   

Accounts payable

     5,036       189,355       152,065        (51,598     294,858   
Employee compensation and benefits      24,466       30,015       54,880               109,361   

Current pension and post-retirement benefits

     9,052                             9,052   
Accrued product claims and warranties      165       22,037       20,428               42,630   

Income taxes

     40,999       (28,717     2,265               14,547   
Accrued rebates and sales incentives             25,612       11,397               37,009   

Other current liabilities

     25,050       53,960       71,890        (21,378     129,522   

 

 
Total current liabilities      107,353       292,262       317,787        (75,561     641,841   

Other liabilities

           
Long-term debt      1,312,053       2,417,922       542,411        (2,968,161     1,304,225   

Pension and other retirement compensation

     182,556       (7,701     73,760               248,615   
Post-retirement medical and other benefits      17,024       33,890               (19,140     31,774   

Long-term income taxes payable

     26,470                             26,470   
Deferred tax liabilities             229,962       86,416        (127,421     188,957   

Due to (from) affiliates

     (479,943     751,145       711,705        (982,907     —    
Other non-current liabilities      62,388       1,508       33,143               97,039   

 

 

Total liabilities

     1,227,901       3,718,988       1,765,222        (4,173,190     2,538,921   

 

 
Shareholders’ equity attributable to Pentair, Inc.      1,933,329       97,673       402,775        (500,448     1,933,329   

Noncontrolling interest

                   114,063               114,063