Waters Edge Plaza
Pentair's willingness to change has been an integral part of its success and ability to build shareholder value. Over the last three years, Pentair has reinvented itself with the goal of being a sharply focused, industrial growth company. This process has led the Company to form three new operating groups--Professional Tools and Equipment; Water and Fluid Technologies; and Electric and Electronic Enclosures--replacing the Specialty Products and General Industrial Equipment groups established in 1991. This reorganization allows Pentair to communicate its financial performance in a way that parallels its operating structure, and it reflects the sharper strategic focus that will guide the Company's growth and development in the years ahead.
Pentair, Inc. is a diversified manufacturer of woodworking equipment, vehicle service equipment, power tools, water pumps and systems, water conditioning control valves, automated lubrication systems and equipment, and electrical and electronic enclosures. Its enviable record of growth (since 1969, return on common equity has averaged nearly 17 percent) is due to its highly distinctive, corporate strategy of buying underperforming--even foundering--concerns and then implementing capital and management improvements to effect quick turnarounds. In the early years of the company's history, the plan was adopted for purposes of sheer survival, but as the company prospered despite periods of debt load, it became apparent that regular acquisitions through leveraged financing would be the company's mainstay. Firmly committed to both shareholders and employees, Pentair has rebuffed three takeover attempts during its history and has pledged to remain independent and devoted to long-term growth. Pentair divides its subsidiaries into three groups: Professional Tools and Equipment; Water and Fluid Technologies, and Electrical and Electronic Enclosures. Autonomously operated, subsidiaries in these groups (which include market leaders Delta International Machinery Corp., Porter-Cable Corporation, Fleck Controls, Hoffman Enclosures Inc., and Schroff) maintain 50 locations in North America, Europe, and Asia.
Balloons, Then Canoes, Then Paper
Pentair was founded in July 1966 in Arden Hills, Minnesota, as a five-person partnership with the purpose of manufacturing high-altitude research balloons. The company founders--three engineers, a foreman, and a salesman--were all former employees of a local branch of Litton Industries. The partners incorporated as Pentair Industries, Inc. in August and completed an initial public offering in January 1967 to sustain their seriously undercapitalized business. Further complicating matters at the time was the lagging market for inflatables. Following the guidance of cofounder and acting manager Murray Harpole, the company decided to purchase a neighboring, virtually bankrupt business for the small sum of $14,500. With some modest engineering applications this new venture, the American Thermo-Vac Company, promised at least one saleable product: vacuum-formed, high-quality canoes. By the fall of that year red-and-white Penta Craft canoes were being successfully manufactured and sold. However, both the canoe and inflatables businesses were fraught with problems; by the end of 1967, the company had few assets, zero profits, and little direction.
As Del Marth later reported, "By June, 1968, before Pentair was two years old, the corporate dream had become a nightmare. The company had no product to speak of, it was nearly out of money, one cofounder had died and three others had abandoned the venture." What sustained the company was Harpole's pledge to commit himself entirely to the business for at least five years--this and the entry of high-risk investor Ben Westby. Although Westby did not formally join the company until May 1968, he had been in close contact with Harpole for some time and had accompanied the founder on a business trip to Wisconsin, to consider the purchase of then debt-ridden, privately owned Peavey Paper Mills, Inc.
A manufacturer of absorbent tissue paper, Peavey was acquired in June and became Pentair's first wholly owned subsidiary. The deal that Westby and Harpole had arranged was important for two reasons. First was the low cost: $10,000 down, $20,000 due in one year, and an additional five percent of after-tax profits for the first five years. Second, and most importantly, was the paper mill's potential: annual sales of $4 million even in its current state of disrepair and mismanagement. Of course, with this ostensibly one-of-a-kind deal came a particularly painful and hidden price: Peavey's $1.5 million in debt. Despite this preventable surprise, a lesson in cautious and thorough research, the acquisition was made profitable within three months due primarily to Harpole's management and labor-negotiation skills. The purchase also left Pentair free to divest itself of its first two, nonproducing businesses. Now a viable paper company with substantial assets, Pentair began attracting considerable notice from the investment community and, with both a three-year Procter & Gamble contract and a preliminary agreement to acquire a Trinidad paper mill, Pentair closed the year on a high note.
1970s Paper Acquisitions
In 1969, due to Pentair's new status as an acquisition-oriented, international corporation, company stock soared from $2 per share to $25 and a 3-for-1 split was declared. Before the end of the year, however, operations at the Trinidad paper mill were halted due to social and political unrest in that country. The contract with Procter & Gamble to produce absorbent wadding for use in its disposable Pampers fueled the company's growth for the next few years. Still Harpole and Westby considered Pentair's position tenuous. Ensuing diversifications into leather goods, meat-rendering, and computer software by and large failed to give the company the stability required for uninterrupted long-term growth. Then came the acquisitions of Niagara of Wisconsin Paper, Miami Paper, and Flambeau Paper Corporations, in 1972, 1974, and 1978, respectively. Initial annual sales for the three totaled some $90 million. Although Pentair had sold Peavey in 1976 due to plant and market limitations, it had now established itself as a major supplier of coated groundwood, book grade, and commercial printing papers, producing some 350,000 tons annually.
Pentair signaled its arrival as a major corporation by declaring its first quarterly cash dividend in 1976. Four years earlier the company had sustained a debt-to-equity ratio of greater than 7-to-1, but by 1979, after paying down debt with paper profits, it had more than reversed these numbers and gained some valuable banking partners in the process.
The 1970s were also notable for several management developments, including the departure of Westby in 1974 and the hiring of D. Eugene Nugent, an ITT executive, as vice-president of operations in 1975. Harpole, singularly aware that tenacious and disciplined management had become the key to Pentair's success, handpicked Nugent as his likely successor. Both agreed that maintaining a lean corporate staff, which then numbered only ten despite more than 1,000 employees and widespread operations, would be a continuing goal for the company. (Management actually became proportionally leaner as employee levels continued to rise.) As Jeffrey Trachtenberg stated, reporting on Nugent's management style for Forbes in 1984, "Big corporation management stifles risk-taking at the operational level. Pentair's setup is that of a slim holding company running herd over a pack of operating subsidiaries.... It pushes decision-making out where it belongs, among the operating managers."
Diversification Highlighted in the 1980s
The "pack" Trachtenberg referred to was the early fruition of a carefully thought out strategy by Harpole and Nugent to diversify into industrial products manufactured primarily for industrial users. As early as 1978 the two had commenced their search for such businesses to offset the capital-intensive and cyclical paper group, which, led by Niagara, nonetheless represented a fairly consistent source of cash flow. According to Harpole, whose Living the American Dream recounts the corporation's history, he and Nugent "had to be successful on their first venture because the investment community was skeptical of our ability to expand beyond paper." The initial goal was for a company with annual sales of $25 to $100 million, preferably floundering and consequently available at a bargain price. Unfortunately, the realization of the goal was postponed, largely due to a time-consuming battle against a takeover threat by Steak and Ale founder Peter Wray, an attempt that ended only after Pentair agreed to a $4.5 million settlement in early 1981. By the middle of that year Pentair had researched and considered more than 125 manufacturers before deciding in October to acquire Porter-Cable Corporation (the portable power tools division of Rockwell International) of Jackson, Tennessee, for $16 million. Another debt-laden but revenue-heavy paper mill acquisition in 1983, as well as the 1984 purchase of Rockwell's woodworking machinery division renamed Delta International, boosted earnings to $21 million on annual sales of $545 million, vaulting the paper-and-tools company into the Fortune 500 rankings. The company had flourished beyond anyone's expectations.
With Nugent established as CEO and Harpole imparting a legacy stretching well beyond his retirement as chairperson in 1986, Pentair fortified itself for years to come with additional forays into industrial products, beginning with the acquisition of McNeil Corporation and its two major divisions: Lincoln, a St. Louis-based maker of lubricating products and automotive service equipment, and F.E. Myers, an Ohio-based producer of water pumps. Lincoln was eventually split into Lincoln Automotive and Lincoln Industrial. The transaction expanded the industrial group considerably, so that it accounted for 32 percent of sales and 43 percent of operating profits. In 1988 Pentair completed one of its largest purchases, that of Federal-Hoffman Corporation (FC Holdings, Inc.), a Minnesota-based manufacturer of sports ammunition as well as metal and composite electrical enclosures. Divided into Federal Cartridge and Hoffman Engineering, FC Holdings commanded $300 million in annual sales, or nearly 40 percent of Pentair's total sales for the previous year. A decade after its stated objective to strengthen through diversification, the company had reduced its dependency on paper sales to just 30 percent while multiplying its total equity tenfold.
Late in 1985, the company announced an ambitious $400 million joint venture between Pentair and Minnesota Power of Duluth to form Lake Superior Paper Industries (LSPI). The venture was to be the company's first sustained "ground-floor-up" business, with the culmination of years of technical expertise, industry-specific knowledge, and financial clout put to the test. LSPI, the newest and most efficient paper mill in North America, began start-up operations in late 1987 and, by March 1988, was producing supercalendered, publication-grade paper (SCA) for a highly competitive U.S. market. The difficulty of the market and the huge capital outlay worried investors from the start. Nevertheless, "while others either wrung their hands or snickered," wrote Alyssa Lappen for Forbes, "Nugent pressed ahead with a capital investment project that now claims customers ranging from Sears and J.C. Penney to Rolling Stone. Foreign competitors like West Germany's Haindl Papier and Feldmühle have been squeezed, while more customers line up for Pentair's paper every day." In its second year of operations, LSPI was operating at 87 percent of its 245,000-ton-per-year capacity and had positioned itself as the domestic leader of SCA. By the end of 1991, production had risen 93 percent and earnings had increased 58 percent over 1990 levels.
Mid-1990s: Exit from Paper, Several Acquisitions
In August 1992 Winslow Buxton, former president of Niagara of Wisconsin, succeeded Nugent as CEO; Buxton was then named chairman as well in January 1993. One of his initial goals, inherited from Nugent, was to acquire another manufacturing company with sales from $200 to $500 million while elevating overall corporate sales to $2 billion by 1996. Sales growth in 1990 of only one percent and a fractional sales loss in 1991 made such an acquisition a near imperative, given Pentair's history. But it would take until January 1994 for Buxton to find a suitable match. That month Pentair acquired Schroff GmbH from Fried. Krupp AG Hoesch-Krupp, the company's first acquisition in almost seven years. Schroff, a maker of electronics enclosures, fit well alongside the Hoffman electrical enclosures unit.
In September 1994 Pentair announced that it was examining the future of its paper businesses. The cyclical nature of the paper industry proved to be a drag on the company's stock. Pentair could no longer afford to ride the ups and downs of a noncore business (only 10 percent of 1994 operating income came from paper), and management decided to jettison all the paper operations. In April 1995 Pentair sold Cross Pointe Paper Corporation to Noranda Forest, Inc. for $203.3 million. Two months later came the sale of Niagara of Wisconsin, the 50 percent interest in LSPI, and a 12 percent stake in Superior Recycled Fiber Industries to Consolidated Papers, Inc. for $115.6 million and the assumption of debt.
Freed to concentrate on its industrial manufacturing units, Pentair went on a targeted spending spree, in the process building upon its already strong businesses. The acquisitions also led to a January 1998 restructuring of Pentair units into three operating groups: Professional Tools and Equipment; Water and Fluid Technologies; and Electrical and Electronic Enclosures. The first of these operating groups developed around Lincoln Automotive, Delta International, and Porter-Cable. In November 1995 Biesemeyer Manufacturing Corporation, maker of precision woodworking accessories, was acquired and became a subsidiary of Delta. In June 1996 Pentair added a German manufacturer of portable power tools, Flex Elektrowerkzeuge GmbH, which became part of Porter-Cable. Pentair acquired another manufacturer of vehicle service equipment, Century Manufacturing Company, in November 1996. Subsequently added to Century were P&F Technologies Ltd., a manufacturer of automotive refrigerant recycling systems, in July 1997; and T-Tech Industries, specializing in automotive transmission fluid exchanger systems, in April 1998.
The Water and Fluid Technologies group developed around Lincoln Industrial and F.E. Myers. Pentair paid $130 million for Fleck Controls, Inc. in October 1995, gaining a leading maker of control valves for water systems. Pentair bought reciprocating pump maker Aplex Industries, Inc. in January 1996 and made it a subsidiary of F.E. Myers. In December of that year, Italian water conditioning control equipment manufacturer SIATA S.p.A. was acquired and became part of Fleck Controls. In August 1997 Pentair spent $200 million to acquire General Signal Pump Group, a maker of fluid handling products and systems. This business was subsequently combined with F.E. Myers to form the Pentair Pump Group. Also, in January 1998 Pentair purchased ORSCO, Inc., producer of precision oil dispensing systems. ORSCO became a wholly owned subsidiary of Lincoln Industrial.
Pentair's Electrical and Electronic Enclosures group centered around Hoffman and Schroff. Growth for this unit mainly came in Europe, where Schroff was the leader in electronic enclosures. Pentair bought Transrack S.A. of France in January 1997 and Walker Dickson Group Limited of Scotland in October 1998. Earlier in 1998 the company had attempted to acquire electronics enclosure maker VERO Group plc of Southampton, England, but was outbid by Applied Power, Inc. of Butler, Wisconsin.
While building up these three core areas, Pentair also made one other significant divestment of a peripheral business, selling Federal Cartridge to Blount International, Inc. for $112 million in October 1997. Looking to increase profitability, Pentair announced in June 1998 that it had launched an effort to cut costs by $60 million over a two-year period. With an increased emphasis on cost control and a disciplined approach to acquisitions that resulted in synergistic growth within core areas, Pentair was well-positioned for increasing growth and profits into the 21st century.
Principal Subsidiaries: Aplex Industries, Inc.; Biesemeyer Manufacturing Corporation; Century Manufacturing Co.; Delta International Machinery Corp.; Fleck Controls, Inc.; Hoffman Enclosures Inc.; HS Systems, Inc.; McNeil Corporation; ORSCO Acquisition Corp.; Pentair Pump Group; Penwald Insurance Company; Porter-Cable Corporation; Schroff Inc.; Telestack Company; Pentair Canada, Inc.; Pentair Halifax, Inc. (Canada); Pentair Nova Scotia Co. (Canada); Lincoln Czech Republic; Fleck Europe, SAS (France); Schroff SAS (France); Transrack S.A. (France); EuroPentair, GmbH (Germany); Flex Elektrowerkzeuge GmbH (Germany); Lincoln GmbH (Germany); Schroff, GmbH (Germany); Pentair Financial Services Ireland; Schroff S.r.L. (Italy); SIATA S.p.A. (Italy); Schroff K.K. (Japan); APNO, S.A. de C.V. (Mexico); Hoffman Engineering, S.A. de C.V. de SrL (Mexico); Hoffman-Schroff PTE Ltd. (Singapore); Pentair Asia, PTE Ltd. (Singapore); Schroff Scandinavia AB (Sweden); Schroff Co. Ltd. (Taiwan); Hoffman Engineering Co Limited (U.K.); Lincoln U.K. Ltd.; Pentair U.K. Ltd.; Schroff U.K. Ltd.; Pentair FSC Corporation (U.S. Virgin Islands).
Principal Operating Units: Professional Tools and Equipment Group; Water and Fluid Technologies Group; Electrical and Electronic Enclosures Group.