Pentair, Inc.

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Pentair, Inc.

Waters Edge Plaza
1500 Country Road B2 West
St. Paul, MN 55113-3105
U.S.A.
(612) 636-7920
Fax: (612) 639-5203

Public Company
Incorporated: 1966 as Pentair Industries Incorporated
Employees: 8,300
Sales: $1.23 billion
Stock Exchanges: NASDAQ
SICs: 3981 Diversified Conglomerate; 3553 Woodworking Machinery; 3482 Small Arms Ammunition; 2678 Stationery Products

A diversified manufacturer of industrial equipment, water pumps, power tools, sporting ammunition, and premium-grade paper, Pentair, Inc. is a top-performing Fortune 500 company that holds from 10 to 30 percent market share in many of its businesses. Its enviable record of growth (since 1969, return on common equity has averaged 17 percent) is due to its highly distinctive, corporate strategy of buying underperforming—even floundering—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; 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 ten subsidiaries into three groups: Specialty Products, General Industrial Equipment, and Paper. Autonomously operated, subsidiaries in these groups (which include market leaders Cross Pointe Paper Corporation, Delta International Machinery Corporation, and Hoffman Engineering Company) maintain 24 locations in the North America and Europe.

Pentair was founded in July 1966 in Arden Hills, Minnesota, as a five-person partnership for the purpose of manufacturing high-altitude research balloons. The partners, three engineers, a foreman, and a salesman—all former employees of a local branch of Litton Industries—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 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.

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-l 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 was still 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 affirmed itself as a major supplier of coated groundwood, book grade, and commercial printing papers, producing some 350,000 tons annually. The company signaled its arrival as a major corporation by declaring its first quarterly cash dividend in 1976. Four years earlier it had sustained a debt-to-equity ratio of greater than 7-to-l, but by 1979, after paying down debt with paper profits, it had more than reversed the 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.”

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 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 which 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 and 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 now 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. Now, 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 of 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. However, “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 Feldmuhle 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 to 93 percent and earnings had increased 58 percent over 1990 levels.

In 1992 Winslow Buxton, former president of Niagara of Wisconsin, succeeded Nugent as CEO. One of his short-term goals, inherited from Nugent, is 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 1 percent and a fractional sales loss in 1991 make such an acquisition a near imperative, given Pent-air’s history. In a June 1992 article “Pentair on the Prowl,” Susan E. Peterson reported that “the company has investigated more than 150 possible candidates in the past 18 months but has had a tougher time finding a suitable match than during past acquisition searches.” The search continues into 1993, past Nugent’s target date of late 1992. For investors, the delay will no doubt be worth it: Pentair, with a 17.7 percent compounded dividend return since 1976, has earned high esteem from shareholders and analysts alike. Market-maker Piper Jaffray raised its opinion of Pentair stock (PNTA) to “buy” in January after determining that current trading levels were low, especially given a projected 8.5 percent growth in earnings for 1993. “We believe,” the report states, “that as PNTA continues to de-emphasize its coated paper businesses and report significant gains in its industrial businesses, the analytical focus and price/ earnings ratio will reflect the underlying performance of the core, non-paper businesses.”

Regardless of whether divestitures of one or more of the company’s paper mills will result from the impending industrial acquisition, Pentair maintains its commitment to its trademark leverage strategy. “There’s a lesson to be learned,” writes Jill Fraser, “from Pentair’s highly disciplined approach to leverage. It has adhered rigidly to five basic principles: buy cheap; raise productivity fast; utilize cash flow from existing businesses to pay down debt; shun junk bonds; and above all, protect existing relations with bankers.” This is the strategy that will sustain Pentair well into the 21st century. The markets it serves—industrial, construction, woodworking, automotive, recreation, consumer, and printing—may change, but its hard-won policies will undoubtedly remain much the same.

Principal Subsidiaries

Cross Pointe Paper Corporation; Delta International Machinery Corporation; Federal Cartridge Company; Hoffman Engineering Company; F. E. Myers Co.; Niagara of Wisconsin Paper Corporation; Porter-Cable Corporation; Lincoln Automotive; Lincoln Industrial; Lake Superior Paper Industries (50%).