PENTAIR plc — Interim / Quarterly Report 2001

Aug 14, 2001

10-Q 1 j1527_10q.htm 10-Q Prepared by MerrillDirect

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2001

o
Commission
file number 1-11625

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)
1500 County Road B2 West, Suite 400, St. Paul, Minnesota	55113
(Address of principal executive offices)	(Zip code)
Registrant’s
telephone number, including area code: (651) 636-7920

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 ý No o

On July 27, 2001, 49,080,234 shares of the Registrant's common stock were outstanding.

Pentair, Inc. and Subsidiaries

| Part I Financial
Information | |
| --- | --- |
| Item 1. | Financial Statements |
| | Condensed
Consolidated Statements of Income for the three and six months ended June 30,
2001 and July 1, 2000 |
| | Condensed
Consolidated Balance Sheets as of June 30, 2001, December 31, 2000, and July
1, 2000 |
| | Condensed
Consolidated Statements of Cash Flows for the six months ended June 30, 2001
and July 1, 2000 |
| | Notes
to Condensed Consolidated Financial Statements |
| Item
2. | Management’s
Discussion and Analysis of Financial Condition and Results of Operations |
| Item
3. | Quantitative
and Qualitative Disclosures about Market Risk |
| Part
II Other Information | |
| Item 1. | Legal Proceedings |
| Item 6. | Exhibits and
Reports on Form 8-K |
| Signatures | |

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Pentair, Inc. and Subsidiaries Condensed Consolidated Statements of Income (Unaudited)

	Three months ended — June 30	July 1		Six months ended — June 30	July 1
In thousands, except
per-share data	2001	2000		2001	2000
Net
sales	$ 702,076	$ 733,761		$ 1,373,459	$ 1,381,452
Cost
of goods sold	531,294	541,614		1,038,690	1,009,403
Gross
profit	170,782	192,147		334,769	372,049
Selling,
general and administrative	103,183	105,182		206,575	206,182
Research
and development	7,250	7,528		14,989	16,146
Restructuring
charge (income)	—	—		—	(2,468	)
Operating
income	60,349	79,437		113,205	152,189
Net
interest expense	16,241	18,579		33,957	37,527
Other
expense	—	—		2,500	—
Income
from continuing operations before income taxes	44,108	60,858		76,748	114,662
Provision
for income taxes	15,552	22,185		27,629	42,348
Income
from continuing operations	28,556	38,673		49,119	72,314
Loss
from discontinued operations, net of tax	—	(1,440	)	—	(2,415	)
Cumulative
effect of accounting change, net of tax	—	—		—	(1,222	)
Net
income	$ 28,556	$ 37,233		$ 49,119	$ 68,677
Earnings per common share
Basic
Continuing operations	$ 0.58	$ 0.80		$ 1.00	$ 1.49
Loss from discontinued operations	—	(0.03	)	—	(0.05	)
Cumulative effect of accounting
change	—	—		—	(0.02	)
Basic earnings per common share	$ 0.58	$ 0.77		$ 1.00	$ 1.42
Diluted
Continuing operations	$ 0.58	$ 0.79		$ 1.00	$ 1.48
Loss from discontinued operations	—	(0.03	)	—	(0.05	)
Cumulative effect of accounting
change	—	—		—	(0.02	)
Diluted earnings per common share	$ 0.58	$ 0.76		$ 1.00	$ 1.41
Weighted average common
shares outstanding
Basic	49,032	48,517		49,019	48,485
Diluted	49,274	48,742		49,200	48,658
Cash dividends declared per
common share	$ 0.17	$ 0.16		$ 0.34	$ 0.32

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries Condensed Consolidated Balance Sheets

| In thousands, except
per-share data | June 30 2001 — (Unaudited) | | December 31 2000 | | July 1 2000 — (Unaudited ) | |
| --- | --- | --- | --- | --- | --- | --- |
| Assets | | | | | | |
| Current assets | | | | | | |
| Cash
and cash equivalents | $ 27,689 | | $ 34,944 | | $ 45,188 | |
| Accounts
and notes receivable, net | 475,813 | | 468,081 | | 527,128 | |
| Inventories | 345,097 | | 392,495 | | 421,586 | |
| Deferred
income taxes | 72,585 | | 72,577 | | 50,073 | |
| Prepaid
expenses and other current assets | 23,745 | | 22,442 | | 23,506 | |
| Net
assets of discontinued operations | 109,060 | | 101,263 | | 153,397 | |
| Total current assets | 1,053,989 | | 1,091,802 | | 1,220,878 | |
| Property, plant and
equipment, net | 341,037 | | 352,984 | | 355,637 | |
| Other assets | | | | | | |
| Goodwill,
net | 1,114,115 | | 1,141,102 | | 1,135,810 | |
| Other | 91,275 | | 58,137 | | 59,380 | |
| Total
other assets | 1,205,390 | | 1,199,239 | | 1,195,190 | |
| Total
assets | $ 2,600,416 | | $ 2,644,025 | | $ 2,771,705 | |
| Liabilities and
Shareholders' Equity | | | | | | |
| Current liabilities | | | | | | |
| Short-term
borrowings | $ 98,828 | | $ 108,141 | | $ 195,964 | |
| Current
maturities of long-term debt | 4,463 | | 23,999 | | 21,341 | |
| Accounts
and notes payable | 230,286 | | 250,088 | | 248,639 | |
| Employee
compensation and benefits | 66,259 | | 84,197 | | 87,048 | |
| Accrued
product claims and warranties | 41,441 | | 42,189 | | 44,963 | |
| Income
taxes | 11,867 | | 5,487 | | 39,487 | |
| Other
current liabilities | 125,164 | | 134,691 | | 88,177 | |
| Total current
liabilities | 578,308 | | 648,792 | | 725,619 | |
| Long-term
debt | 780,888 | | 781,834 | | 839,003 | |
| Pension
and other retirement compensation | 60,799 | | 59,313 | | 55,582 | |
| Postretirement
medical and other benefits | 33,653 | | 34,213 | | 33,507 | |
| Deferred
income taxes | 36,930 | | 37,133 | | 5,265 | |
| Other
noncurrent liabilities | 67,961 | | 72,149 | | 76,105 | |
| Total
liabilities | 1,558,539 | | 1,633,434 | | 1,735,081 | |
| Commitments
and contingencies | | | | | | |
| Shareholders' equity | | | | | | |
| Common
shares — par value $0.16 2/3 ; 49,065,155, 48,711,955 and
48,529,635 shares issued and outstanding, respectively | 8,178 | | 8,119 | | 8,089 | |
| Additional
paid-in capital | 476,880 | | 468,425 | | 462,452 | |
| Retained
earnings | 600,540 | | 568,084 | | 597,397 | |
| Unearned
restricted stock compensation | (11,838 | ) | (7,285 | ) | (5,511 | ) |
| Accumulated
other comprehensive loss | (31,883 | ) | (26,752 | ) | (25,803 | ) |
| Total
shareholders' equity | 1,041,877 | | 1,010,591 | | 1,036,624 | |
| Total
liabilities and shareholders' equity | $ 2,600,416 | | $ 2,644,025 | | $ 2,771,705 | |

See accompanying notes to condensed consolidated financial statements .

Pentair, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)

	Six months ended — June 30		July 1
In thousands	2001		2000
Operating activities
Net
income	$ 49,119		$ 68,677
Depreciation	32,830		32,366
Amortization	20,565		19,893
Deferred
income taxes	264		335
Restructuring
charge (income)	—		(2,468	)
Other
expense, write-off of investment	2,500		—
Cumulative
effect of accounting change	—		1,222
Changes in assets and
liabilities, net of effects of business acquisitions
Accounts and notes receivable	(16,233	)	(40,088	)
Inventories	42,753		(67,222	)
Prepaid expenses and other
current assets	(7,462	)	(11,309	)
Accounts payable	(15,222	)	31,070
Employee compensation and
benefits	(16,600	)	(8,017	)
Accrued product claims and
warranties	(563	)	(1,394	)
Income taxes	7,000		24,492
Other current liabilities	(5,754	)	(33,250	)
Pension and post-retirement
benefits	3,499		193
Other assets and liabilities	(5,784	)	(12,705	)
Net cash provided by continuing
operations	90,912		1,795
Net cash used for discontinued
operations	(12,387	)	(8,697	)
Net cash provided by (used for)
operating activities	78,525		(6,902	)
Investing activities
Capital
expenditures	(25,131	)	(28,449	)
Acquisitions,
net of cash acquired	(1,937	)	—
Equity
investments	(16,698	)	—
Net cash used for investing activities	(43,766	)	(28,449	)
Financing activities
Net
short-term borrowings (repayments)	(8,586	)	45,352
Proceeds
from long-term debt	2,413		4,968
Repayment
of long-term debt	(21,683	)	(26,036	)
Proceeds
from exercise of stock options	1,648		1,558
Dividends
paid	(16,665	)	(15,517	)
Net cash provided by (used for)
financing activities	(42,873	)	10,325
Effect of exchange rate
changes on cash	859		7,199
Change in cash and cash
equivalents	(7,255	)	(17,827	)
Cash and cash equivalents,
beginning of period	34,944		63,015
Cash and cash equivalents,
end of period	$ 27,689		$ 45,188

See accompanying notes to condensed consolidated financial statements.

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 made
certain reclassifications to the 2000 condensed consolidated financial
statements to conform to the 2001 presentation. |
| | 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 which are included in our 2000 Annual Report on Form 10-K. |
| | 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 the same as those for
the full year. |
| 2. | Cumulative
Effects of Changes in Accounting Principles |
| | Effective January 1, 2001, we adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities (SFAS 133), as
amended. These standards require us
to recognize all derivatives as either assets or liabilities at fair value in
our balance sheet. If the
derivative is designated as a fair-value hedge, the changes in the fair value
of the derivative and the hedged item is recognized in earnings. If the derivative is designated and is
effective as a cash-flow hedge, changes in the fair value of the derivative
is recorded in other comprehensive income (OCI) and is recognized in the
consolidated statements of income when the hedged item affects earnings. SFAS 133 defines new requirements for
designation and documentation of hedging relationships as well as ongoing
effectiveness assessments in order to use hedge accounting. For a derivative that is not designated as
or does not qualify as a hedge, changes in fair value are reported in
earnings immediately. |
| | The adoption of SFAS 133 on January 1, 2001, resulted in an increase to
other assets and other noncurrent liabilities of $7.5 million and $0.8
million, respectively, and a cumulative transition adjustment of $6.7 million
in OCI. The transition adjustment
relates to our hedging activities through December 31, 2000. Prior to the adoption of SFAS 133,
financial instruments designated as cash-flow hedges were not recorded in the
financial statements, but cash flows from such contracts were recorded as
adjustments to earnings as the hedged items effected earnings. |
| | In December 1999, the
Securities and Exchange Commission (SEC) staff issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which among other guidance, clarified the Staff’s views on various
revenue recognition and reporting matters. |
| | In the fourth quarter
of 2000, we changed our method of accounting for certain sales transactions
to comply with SAB 101. As a result
of this change, we reported a change in accounting principle in accordance
with APB Opinion No. 20 (APB 20), Accounting Changes , by a cumulative
effect adjustment. Because we are a
calendar year entity that adopted SAB 101 in the fourth quarter of 2000, the
cumulative effect of the change was included in the first quarter of 2000
pursuant to APB 20, which requires that the change be made as of the beginning
of the year (January 1, 2000) and that the financial information for
pre-change interim periods be restated by applying SAB 101 to those
periods. Accordingly, quarterly
results for 2000 were restated pursuant to the adoption of SAB 101. |
| 3. | Comprehensive Income |
| | Comprehensive income and its components, net of tax, are
as follows: |

	Three months ended — June 30		July 1		Six months ended — June 30		July 1
In thousands	2001		2000		2001		2000
Net
income	$ 28,556		$ 37,233		$ 49,119		$ 68,677
Changes
in cumulative translation adjustment	(7,693	)	(4,841	)	(15,212	)	(10,204	)
Changes
in market value of derivative financial instruments classified as
cash flow hedges	3,098		—		3,815		—
Unrealized
loss from marketable securities classified as available for sale	(25	)	—		(473	)	—
Cumulative
effect of accounting change — SFAS 133	—		—		6,739		—
Comprehensive
income	$ 23,936		$ 32,392		$ 43,988		$ 58,473

4.
Basic and diluted earnings per
share were calculated using the following:

x	Three months ended — June 30	July 1		June 30	July 1
In thousands, except
per-share data	2001	2000		2001	2000
Earnings per common share —
basic
Income
from continuing operations	$ 28,556	$ 38,673		$ 49,119	$ 72,314
Loss
from discontinued operations	—	(1,440	)	—	(2,415	)
Cumulative
effect of accounting change	—	—		—	(1,222	)
Income
available to common shareholders	$ 28,556	$ 37,233		$ 49,119	$ 68,677
Continuing
operations	$ 0.58	$ 0.80		$ 1.00	$ 1.49
Loss
from discontinued operations	—	(0.03	)	—	(0.05	)
Cumulative
effect of accounting change	—	—		—	(0.02	)
Earnings
per common share	$ 0.58	$ 0.77		$ 1.00	$ 1.42
Earnings per common share —
diluted
Income
from continuing operations	$ 28,556	$ 38,673		$ 49,119	$ 72,314
Loss
from discontinued operations	—	(1,440	)	—	(2,415	)
Cumulative
effect of accounting change	—	—		—	(1,222	)
Income
available to common shareholders	$ 28,556	$ 37,233		$ 49,119	$ 68,677
Continuing
operations	$ 0.58	$ 0.79		$ 1.00	$ 1.48
Loss
from discontinued operations	—	(0.03	)	—	(0.05	)
Cumulative
effect of accounting change	—	—		—	(0.02	)
Earnings
per common share	$ 0.58	$ 0.76		$ 1.00	$ 1.41
Weighted average common
shares outstanding — basic	49,032	48,517		49,019	48,485
Dilutive
impact of stock options and restricted stock	242	225		181	173
Weighted average common
shares outstanding — diluted	49,274	48,742		49,200	48,658

| | The
computations of diluted earnings per share do not include 1.5 million and 0.6
million of anti-dilution stock options with exercise prices greater than the
average market price of our common stock in the second quarter of 2001 and
2000, respectively, and 1.6 million and 0.5 million for the year-to-date
periods, respectively. |
| --- | --- |
| 5. | Inventories |
| | Inventories were comprised of: |

	June 30 — 2001	2000	July 1 — 2000
In thousands	(Unaudited	)	(Unaudited	)
Raw
materials and supplies	$ 107,096	$ 110,935	$ 106,727
Work-in-process	42,542	48,392	47,118
Finished
goods	195,459	233,168	267,741
Total
inventories	$ 345,097	$ 392,495	$ 421,586

6.	Restructuring Charge
	In the fourth quarter of 2000, we initiated a
restructuring program to decentralize certain corporate service functions and
reorganize our Tools segment infrastructure.
As a result, we recorded a restructuring charge of $26.8 million. Cash outlays associated with the charge
were $11.8 million in the first half of 2001.
		Utilization
					Six months ended				Balance
		Initial	Year		June 30				June 30
	In thousands	accrual	2000		2001				2001
	Employee termination benefits	$ 7,888	$ —		$ (6,474			)	$ 1,414
	Non-cash asset disposals	10,518	(10,518	)	—				—
	Exit costs	8,394	(87	)	(5,308			)	2,999
		$ 26,800	$ (10,605	)	$ (11,782			)	$ 4,413
	Included
in other current liabilities in the June 30, 2001 condensed consolidated
balance sheet is the unused portion of the restructuring charge of $4.4
million. We expect to complete
restructuring activities and utilize the majority of the remaining charge by
the end of 2001.
	Workforce
reductions related to the restructuring charge is for approximately 225
employees, most of which have been terminated as of the end of the second
quarter of 2001. Employee termination
benefits are primarily for severance related costs and outplacement
counseling fees. Non-cash asset
disposals related to the restructuring charge consisted of the abandonment of
leasehold improvements and the abandonment of internal use software under
development. Exit costs are primarily
related to contract and lease termination costs.
7.	Business Segments
	Financial
information by reportable business segment is included in the following
summary:
		Three months ended (1)				Six months ended (1) (2)
		June 30		July 1		June 30		July 1
	In thousands	2001		2000		2001		2000
	Net sales
to external customers
	Tools	$ 285,905		$ 275,375		$ 526,297		$ 506,985
	Water	241,017		261,727		461,869		493,694
	Enclosures	175,154		196,659		385,293		380,773
	Consolidated	$ 702,076		$ 733,761		$ 1,373,459		$ 1,381,452
	Operating
income (loss
	Tools	$ 18,218		$ 17,235		$ 26,081		$ 40,411
	Water	35,650		41,448		63,843		72,197
	Enclosures	9,834		24,542		31,071		48,988
	Corporate/other	(3,353	)	(3,788	)	(7,790	)	(9,407	)
	Consolidated	$ 60,349		$ 79,437		$ 113,205		$ 152,189
	(1)	Tools
segment operating income reflects a one-time pre-tax cost to establish an
additional $5.0 million in accounts receivable reserves in the second quarter
of 2000.
	(2)	Tools
and Enclosures segment operating income includes restructuring charge income
of $1,171 and $1,297, respectively, recorded in the first quarter of 2000 due
to a change in estimate of 1999 restructuring liabilities.
	Corporate/other
operating income is primarily composed of unallocated corporate expenses, and
expenses of our insurance subsidiary, intermediate finance companies, as well
as intercompany eliminations.

8.	Acquisitions
	In
February 2001, we acquired Taunus, a Brazilian enclosures manufacturer, for
approximately $6.9 million cash plus debt assumed of $1.7 million. Goodwill recorded as part of the purchase
was $5.4 million and is being amortized over 20 years.
	In
the second quarter of 2001, we received $5.0 million for the settlement of a
purchase price dispute related to an earlier acquisition. The amount received
was accounted for as a reduction in goodwill.
9.	Equity Investments
	In
the second quarter of 2001, we invested $3.0 million to take a minority
equity interest in a privately-held developer and manufacturer of laser
leveling and measuring devices. This
investment is accounted for under the cost method and is included in Other assets in the condensed
consolidated balance sheet.
	We
are investing approximately $23.0 million to take a 40 percent interest in
certain joint venture operations of an Asian supplier for bench and portable
tools, of which $13.7 million has been paid.
We hold an option to increase our ownership interest in these joint
ventures to as much as 100 percent.
These investments are accounted for under the equity method and are
included in Other assets in the
condensed consolidated balance sheet.
Our equity in the earnings of these joint ventures is included in cost
of goods sold.
10.	New Accounting Standards
	In June 2001, the
Financial Accounting Standards Board approved Statements of Financial
Accounting Standards No. 141, Business Combinations (SFAS 141), and
No. 142, Goodwill
and Other Intangible Assets (SFAS 142). SFAS 141 requires that all Business combinations subsequent to
June 30, 2001 be accounted for under the purchase method of accounting. SFAS 142 eliminates the amortization of
goodwill and requires periodic evaluation of the goodwill carrying
value. The provisions of SFAS 142 are
effective for fiscal years beginning after December 15, 2001. We are currently in the process of assessing
the impact of adopting these new standards.

ITEM 2 . MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our disclosure and analysis in this report may contain some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expected,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” or the negative thereof or similar words. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results. They can be affected by assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. Actual results may vary materially. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all-potential risks and uncertainties.

Any change in the following factors may impact the achievement of results:

| • | changes
in industry conditions, such as: | |
| --- | --- | --- |
| | • | the
strength of product demand; |
| | • | the
intensity of competition; |
| | • | pricing
pressures; |
| | • | market
acceptance of new product introductions; |
| | • | the
introduction of new products by competitors; |
| | • | our
ability to source components from third parties without interruption and at
reasonable prices; and |
| | • | the
financial condition of our customers. |
| • | changes
in our business strategies; | |
| • | general
economic conditions, such as the rate of economic growth in our principal
geographic or product markets or fluctuations in exchange rates; | |
| • | changes
in operating factors, such as continued improvement in manufacturing
activities and the achievement of related efficiencies and inventory risks
due to shifts in market demand; and | |
| • | our
ability to accurately evaluate the effects of contingent liabilities such as
taxes, product liability, environmental, and other liabilities. | |

The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business.

RESULTS OF OPERATIONS The following table sets forth information from our condensed consolidated statements of income.

| In thousands | Three months ended — June 30 2001 | July 1 2000 | | %
change | | Six months ended — June 30 2001 | July 1 2000 | | %
change | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Net
sales | $ 702,076 | $ 733,761 | | (4.3 | )% | $ 1,373,459 | $ 1,381,452 | | (0.6 | )% |
| Cost
of goods sold | 531,294 | 541,614 | | (1.9 | )% | 1,038,690 | 1,009,403 | | 2.9 | % |
| Gross
profit | 170,782 | 192,147 | | (11.1 | )% | 334,769 | 372,049 | | (10.0 | )% |
| % of net sales | 24.3 % | 26.2 | % | | | 24.4 % | 26.9 | % | | |
| SG&A
and R&D | 110,433 | 112,710 | | (2.0 | )% | 221,564 | 222,328 | | (0.3 | )% |
| % of net sales | 15.7 % | 15.4 | % | | | 16.1 % | 16.1 | % | | |
| Restructuring
charge (income) | — | — | | nm | | — | (2,468 | ) | nm | |
| % of net sales | nm | nm | | | | nm | (0.2 | )% | | |
| Operating
income | 60,349 | 79,437 | | (24.0 | )% | 113,205 | 152,189 | | (25.6 | )% |
| % of net sales | 8.6 % | 10.8 | % | | | 8.2 % | 11.0 | % | | |
| Net
interest expense | 16,241 | 18,579 | | (12.6 | )% | 33,957 | 37,527 | | (9.5 | )% |
| % of net sales | 2.3 % | 2.5 | % | | | 2.5 % | 2.7 | % | | |
| Other
expense | — | — | | nm | | 2,500 | — | | nm | |
| % of net sales | nm | nm | | | | 0.2 % | nm | | | |
| Income
from continuing operations before income taxes | 44,108 | 60,858 | | (27.5 | )% | 76,748 | 114,662 | | (33.1 | )% |
| % of net sales | 6.3 % | 8.3 | % | | | 5.6 % | 8.3 | % | | |
| Provision
for income taxes | 15,552 | 22,185 | | (29.9 | )% | 27,629 | 42,348 | | (34.8 | )% |
| Effective tax rate | 35.3 % | 36.5 | % | | | 36.0 % | 36.9 | % | | |
| Income
from continuing operations | 28,556 | 38,673 | | (26.2 | )% | 49,119 | 72,314 | | (32.1 | )% |
| % of net sales | 4.1 % | 5.3 | % | | | 3.6 % | 5.2 | % | | |
| Loss
from discontinued operations, net of tax | — | (1,440 | ) | nm | | — | (2,415 | ) | nm | |
| Cumulative
effect of accounting change, net of tax | — | — | | nm | | — | (1,222 | ) | nm | |
| Net
income | $ 28,556 | $ 37,233 | | (23.3 | )% | $ 49,119 | $ 68,677 | | (28.5 | )% |

Percentages may reflect rounding adjustments. SG&A and R&D — Selling, general and administrative; and Research and development. nm — not measured

Net sales The components of the net sales decreases were as follows:

| | %
change from 2000 — Second quarter | | Six months | |
| --- | --- | --- | --- | --- |
| Volume | (3.7 | )% | 0.3 | % |
| Price | 0.1 | % | (0.1 | )% |
| Currency | (0.7 | )% | (0.8 | )% |
| Total
net sales decrease | (4.3 | )% | (0.6 | )% |

Net sales in the second quarter and first half of 2001 totaled $702.1 million and $1,373.5 million, compared with $733.8 million and $1,381.5 million for the same periods in 2000. The second quarter decrease of $31.7 million or 4.3 percent was primarily due to volume declines in our Enclosures and Water segments, partially offset by volume growth in our Tools segment. The first half decrease of $8.0 million or 0.6 percent was primarily due to a volume decline in our Water segment as the weaker economy slowed demand for our industrial pumps and sales of pool equipment. This was partially offset by volume growth in our Tools and Enclosures segments in the first half of 2001. The negative currency impact on second quarter and first half of 2001 sales reflects the year-over-year decline primarily in the value of certain European currencies relative to the U.S. dollar.

Sales by segment and the change from the prior year periods were as follows:

| | Three months ended — June 30 | July 1 | Favorable (Unfavorable) | | | | Six months ended — June 30 | July 1 | Favorable
(Unfavorable) | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| In thousands | 2001 | 2000 | $ change | | %
change | | 2001 | 2000 | $ change | | %
change | |
| Tools | $ 285,905 | $ 275,375 | $ 10,530 | | 3.8 | % | $ 526,297 | $ 506,985 | $ 19,312 | | 3.8 | % |
| Water | 241,017 | 261,727 | (20,710 | ) | (7.9 | )% | 461,869 | 493,694 | (31,825 | ) | (6.4 | )% |
| Enclosures | 175,154 | 196,659 | (21,505 | ) | (10.9 | )% | 385,293 | 380,773 | 4,520 | | 1.2 | % |
| Total | $ 702,076 | $ 733,761 | $ (31,685 | ) | (4.3 | )% | $ 1,373,459 | $ 1,381,452 | $ (7,993 | ) | (0.6 | )% |

Tools

| The
3.8 percent increases in Tools segment sales in both the second quarter and
first half of 2001 from 2000 was primarily driven by: | |
| --- | --- |
| Ø | increased
pressure washer and air compressor sales in the second quarter of 2001; and |
| Ø | higher
sales volume in our Porter-Cable/Delta business in the first half of 2001. |
| These
increases were partially offset by: | |
| Ø | lower
selling prices due to last summer’s price discounting, which was done to
recover market share in our Porter-Cable/Delta business, and has subsequently
resulted in difficulties in reestablishing appropriate price levels. |
| We
are successfully implementing our turnaround strategies to return the Tools
segment to more historical profitability levels. Some of the initiatives we are undertaking include: | |
| Ø | cost
reduction through supply chain
management and the introduction of lean manufacturing processes; |
| Ø | overhauling
our pricing practices by creating a more-robust pricing process and reducing price
discounting activities; |
| Ø | intensifying
our focus on addressing the needs of previously under-served channels and
geographies and aggressively positioning the businesses to regain brand
preference in the markets we serve through channel management ; |
| Ø | increasing innovation through new product development; and |
| Ø | improved leadership that is now driving change throughout the organization. |
| Water | |
| The
7.9 percent and 6.4 percent declines in Water segment sales in the second
quarter and first half of 2001 from 2000 was primarily due to: | |
| Ø | lower
volume as a weaker economy slowed demand for our industrial pumps and sales
of pool equipment, and the timing of shipments for several large pump
projects; and |
| Ø | unfavorable
foreign currency translation resulting from the stronger U.S. dollar. |
| These
decreases were partially offset by: | |
| Ø | slight
increases in average selling prices. |
| Enclosures | |
| The 10.9 percent decrease in Enclosures segment sales
in the second quarter of 2001 from 2000 was primarily due to: | |
| Ø | lower
sales volume resulting from reduced capital spending in the industrial market
reflecting a weaker economy, coupled with the downturn in the datacom and
telecom markets; and |
| Ø | unfavorable
foreign currency translation resulting from the stronger U.S. dollar. |
| These
decreases were partially offset by: | |
| Ø | slight
price increases; and |
| Ø | the
February 2001 acquisition of Taunus, a Brazilian enclosures manufacturer. |
| The
1.2 percent increase in Enclosures segment sales in the first half of 2001
from 2000 was primarily due to: | |
| Ø | higher
first quarter 2001 sales volume to customers in the datacom and telecom
markets versus a decrease in the second quarter; |
| Ø | slight
price increases; and |
| Ø | the
Taunus acquisition. |
| These
increases were partially offset by: | |
| Ø | unfavorable
foreign currency translation resulting from the stronger U.S. dollar. |

Gross margin
Gross
margin was 24.3 percent and 24.4 percent in the second quarter and first half
of 2001, compared with 26.2 percent and 26.9 percent for the same periods
last year.
The
1.9 percentage point and 2.5 percentage point declines in the second quarter
and first half of 2001 from 2000 was primarily the result of:
Ø	lower
sales volume resulting in unabsorbed overhead;
Ø	unfavorable
product mix; and
Ø	higher
energy costs resulting from an increase in oil and gas prices.

SG&A and R&D SG&A and R&D expenses were 15.7 percent of sales and 16.1 percent of sales in the second quarter and first half of 2001, up 0.3 percentage points and flat for the same periods in 2000. The slight increase in the second quarter of 2001 is the result of additional spending to redefine and streamline business processes primarily in the areas of supply chain management and lean manufacturing to improve our overall cost structure.

Operating income Operating income by segment and the change from the prior year periods were as follows:

| | | | | | | | | | Six months ended (1)
(2) | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | June 30 | | July 1 | | Favorable
(Unfavorable) | | | | June 30 | | July 1 | | Favorable (Unfavorable) | | | |
| In thousands | 2001 | | 2000 | | $ change | | % change | | 2001 | | 2000 | | $ change | | %
change | |
| Tools | $ 18,218 | | $ 17,235 | | $ 983 | | 5.7 | % | $ 26,081 | | $ 40,411 | | $ (14,330 | ) | (35.5 | )% |
| % of net sales | 6.4 | % | 6.3 | % | | | | | 5.0 | % | 8.0 | % | | | | |
| Water | 35,650 | | 41,448 | | (5,798 | ) | (14.0 | )% | 63,843 | | 72,197 | | (8,354 | ) | (11.6 | )% |
| % of net sales | 14.8 | % | 15.8 | % | | | | | 13.8 | % | 14.6 | % | | | | |
| Enclosures | 9,834 | | 24,542 | | (14,708 | ) | (59.9 | )% | 31,071 | | 48,988 | | (17,917 | ) | (36.6 | )% |
| % of net sales | 5.6 | % | 12.5 | % | | | | | 8.1 | % | 12.9 | % | | | | |
| Corporate/other | (3,353 | ) | (3,788 | ) | 435 | | 11.5 | % | (7,790 | ) | (9,407 | ) | 1,617 | | 17.2 | % |
| Total | $ 60,349 | | $ 79,437 | | (19,088 | ) | (24.0 | )% | $ 113,205 | | $ 152,189 | | $ (38,984 | ) | (25.6 | )% |
| % of net sales | 8.6 | % | 10.8 | % | | | | | 8.2 | % | 11.0 | % | | | | |
| (1) | Tools
segment operating income reflects a one-time pre-tax cost to establish an
additional $5.0 million in accounts receivable reserves in the second quarter
of 2000. | | | | | | | | | | | | | | | |
| (2) | Tools
and Enclosures segment operating income includes restructuring charge income
of $1,171 and $1,297, respectively, recorded in the first quarter of 2000 due
to a change in estimate of 1999 restructuring liabilities. | | | | | | | | | | | | | | | |
| Tools | | | | | | | | | | | | | | | | |
| The
5.7 percent increase in Tools segment operating income in the second quarter
of 2001 from 2000 was primarily due to: | | | | | | | | | | | | | | | | |
| Ø | higher
sales volume, primarily for pressure washers and air compressors; | | | | | | | | | | | | | | | |
| Ø | favorable
product mix; and | | | | | | | | | | | | | | | |
| Ø | lower
bad debt expense due to the establishment of $5.0 million in accounts
receivable reserves in the second quarter of 2000. | | | | | | | | | | | | | | | |
| These
increases were partially offset by: | | | | | | | | | | | | | | | | |
| Ø | lower
selling prices due to last summer’s price discounting; | | | | | | | | | | | | | | | |
| Ø | additional
spending in 2001 to redefine and streamline business processes; and | | | | | | | | | | | | | | | |
| Ø | higher
pension costs due to lower return on pension assets. | | | | | | | | | | | | | | | |
| The
35.5 percent decrease in Tools segment operating income in the first half of
2001 from 2000 was primarily due to: | | | | | | | | | | | | | | | | |
| Ø | lower
selling prices due to last summer’s price discounting; | | | | | | | | | | | | | | | |
| Ø | unfavorable
product mix, primarily in our Porter-Cable/Delta business; | | | | | | | | | | | | | | | |
| Ø | additional
spending in 2001 to redefine and streamline business processes; | | | | | | | | | | | | | | | |
| Ø | higher
pension costs due to lower return on pension assets; and | | | | | | | | | | | | | | | |
| Ø | restructuring
charge income recorded in the first quarter of 2000. | | | | | | | | | | | | | | | |
| These
decreases were partially offset by: | | | | | | | | | | | | | | | | |
| Ø | higher
sales volume in our Porter-Cable/Delta business in the first half of 2001;
and | | | | | | | | | | | | | | | |
| Ø | lower
bad debt expense due to the establishment of $5.0 million in accounts
receivable reserves in the second quarter of 2000. | | | | | | | | | | | | | | | |

Water
The
14 percent and 11.6 percent declines in Water segment operating income in the
second quarter and first half of 2001 from 2000 was primarily due to:
Ø	lower
volume as a weaker economy slowed demand for our industrial pumps and sales
of pool equipment;
Ø	unfavorable
product mix; and
Ø	higher
energy costs resulting from an increase in oil and gas prices.
These
decreases were partially offset by:
Ø	slight
increases in average selling prices.
Enclosures
The
59.9 percent and 36.6 percent decreases in Enclosures segment operating
income in the second quarter and first half of 2001 from 2000 was primarily
due to:
Ø	lower
sales volume resulting from reduced capital spending in the industrial
market, coupled with the downturn in the datacom and telecom markets;
Ø	unfavorable
product mix;
Ø	higher
energy and higher pension costs;
Ø	unfavorable
foreign currency translation resulting from the stronger U.S. dollar; and
Ø	restructuring
charge income recorded in the first quarter of 2000 (only affects first half
comparison).
These
decreases were partially offset by:
Ø	increases
in average selling prices.

Net interest expense Net interest expense decreased 12.6 percent and 9.5 percent in the second quarter and first half of 2001, compared with the same periods last year. The decline primarily reflects lower average borrowings driven by our strong cash flow performance in the first half of 2001 and lower interest rates on our variable debt.

Other expense In the first quarter of 2001, we incurred a non-cash charge of $2.5 million for the write-off of our business-to-business e-commerce equity investment that we made in early 2000.

Discontinued operations In December 2000, we adopted a plan to sell our Equipment segment businesses, Century/Lincoln Automotive and Lincoln Industrial. In June 2001, we signed a letter of intent with K&K Jump Start-Chargers and a Kansas City, Missouri equity investment group to sell our wholly owned Century Mfg. Co. automotive service equipment business. In July 2001, we signed a definitive purchase agreement to sell our wholly owned Lincoln Industrial automated lubrication and materials dispensing business to a company newly formed by The Jordan Company LLC of New York, NY. We expect to complete these transactions in the third quarter of this year, subject to completion of financing arrangements. The proceeds from these sales will be used to reduce our debt.

We have accounted for the Equipment segment as discontinued operations in these financial statements. The disposition, net of estimated operating losses during the disposal period, are expected to result in a net gain. Accordingly, recognition of such gain will be deferred until the disposition is completed. In the second quarter and first half of 2001, we had a net loss from discontinued operations of $1.8 million and $2.2, respectively, which was deferred and is included as part of the net assets of discontinued operations in the condensed consolidated balance sheets. The loss from discontinued operations includes an allocation of Pentair’s interest expense. Net assets of discontinued operations at June 30, 2001, consisted of net current assets of $63.3 million, net property, plant and equipment of $26.1 million, and net noncurrent assets of $19.7 million.

LIQUIDITY AND CAPITAL RESOURCES To fund investing and financing activities, committed revolving credit facilities are used to complement operating cash flows. In maintaining this financial flexibility, levels of debt will vary depending on operating results. Because of the seasonality of some of our businesses, particularly the pool and spa equipment business and a portion of the tools business, we generally experience negative cash flows from operations in the first half of any given year. However, due to our emphasis on working capital management in 2001, we generated $78.5 million of cash from operating activities in the first half of the year, which net of $25.1 million of capital expenditures, resulted in a positive free cash flow of $ 53.4 million.

The following table presents selected quarterly measures of our liquidity calculated from our monthly operating results:

	June 30	July 1
	2001	2000
Days
of sales in accounts receivable	64	70
Days
inventory on hand	70	75
Days
in accounts payable	56	55
Cash
conversion cycle	78	90

Operating activities Operating activities provided $78.5 million in the first half of 2001, compared with a use of $6.9 million for the same period in 2000. The $85.4 million increase in the first half of 2001 over 2000 was primarily due to better management of accounts receivable and inventories. We reduced days of sales in accounts receivable and days inventory on hand by 6 days and 5 days, respectively.

Investing activities Capital expenditures in the first half of 2001 were $25.1 million, compared with $28.4 million for the same period in 2000. We anticipate capital expenditures in 2001 to be between $75 million and $80 million. The anticipated expenditures are expected to be in the areas of tooling for new product development, factory expansion, and additional machinery and equipment for cost reductions and capacity expansion. We are reviewing all capital projects in light of current economic conditions and are making adjustments to plans as appropriate.

In the first quarter of 2001, we acquired Taunus, a Brazilian enclosures manufacturer for $6.9 million cash plus debt assumed of $1.7 million. The acquisition was financed through borrowings under our credit facilities. In the second quarter of 2001, we received $5.0 million for the settlement of a purchase price dispute related to an earlier acquisition.

In the second quarter of 2001, we invested $3.0 million to take a minority equity interest in a privately-held developer and manufacturer of laser leveling and measuring devices. We are investing approximately $23.0 million to take a 40 percent interest in certain joint venture operations of an Asian supplier for bench and portable tools, of which $13.7 million has been paid. We hold an option to increase our ownership interest in these joint ventures to as much as 100 percent.

Financing activities As of the end of the second quarter of 2001, our capital structure was comprised of $98.8 million in short-term borrowings, $785.4 million in long-term debt (including current maturities), and $1,041.9 million in shareholders’ equity. The ratio of debt-to-total capital as of the end of the second quarter of 2001 was 45.9 percent, compared with 47.5 percent as of the end of 2000 and 50.5 percent as of the end of the second quarter of 2000. Our targeted debt-to-total capital ratio is 40 percent. The 1.6 percentage point decrease from the end of 2000, reflects a decrease in our total debt resulting from strong cash flow from operations.

Dividends paid in the first half of 2001 were $16.7 million, or $0.34 per common share, compared with $15.5 million, or $0.32 per common share for the same period in 2000.

In addition to measuring our cash flow generation or usage based upon operating, investing, and financing classifications included in the condensed consolidated statements of cash flows, we also measure our free cash flow. We define free cash flow as cash flow from operating activities less capital expenditures, including both continuing and discontinued operations. We had positive free cash flow of $53.4 million in the first half of 2001, compared with a negative $35.4 million for the same period in 2000. We intend to increase our free cash flow by continuing to reduce inventories and improve collection of accounts receivable. We also have changed our management incentive targets to include more emphasis on improving free cash flow.

We believe cash generated from operating activities, together with credit available under committed credit facilities and our current cash position, will provide adequate short-term and long-term liquidity.

ITEM 3 . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk during the six months ended June 30, 2001. For additional information, refer to Item 7A on page 19 of our 2000 Annual Report on Form 10-K.

PART II OTHER INFORMATION

| ITEM
1. | Legal Proceedings | |
| --- | --- | --- |
| | Horizon
Litigation | |
| | There
have been no further material developments regarding the Horizon litigation
from that contained in our 2000 Annual Report on Form 10-K. | |
| | Other | |
| | We are occasionally a party to litigation
arising in the normal course of business.
We regularly analyze current information and, as necessary, provide
accruals for probable liabilities based on the expected eventual disposition
of these matters. We believe the
effect on our consolidated results of operations and financial position, if
any, for the disposition of all currently pending matters will not be
material. | |
| ITEM
6. | Exhibits and Reports on Form 8-K | |
| (a) | Exhibits | |
| | 10.30 | Form
of Pentair, Inc. Omnibus Stock Incentive Plan as Amended and Restated, dated
February 14, 2001 as approved by shareholders on April 25, 2001. |
| (b) | Reports
on Form 8-K | |
| | None. | |

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 14, 2001.

PENTAIR, INC.
Registrant
By /s/ David D. Harrison
David D. Harrison
Executive Vice President
and Chief Financial Officer
(Chief Accounting
Officer)