PENTAIR plc — Interim / Quarterly Report 2003

Aug 12, 2003

10-Q 1 d10q.htm FORM 10-Q Form 10-Q

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 28, 2003

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

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)
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 x No ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

On June 28, 2003, 49,362,760 shares of the Registrant’s common stock were outstanding.

Table of Contents

Pentair, Inc. and Subsidiaries

Part I Financial Information		Page(s)
Item 1.	Financial Statements
	Condensed Consolidated Statements of Income for the three and six months ended June 28, 2003 and June 29, 2002	3
	Condensed Consolidated Balance Sheets as of June 28, 2003, December 31, 2002, and June 29, 2002	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 28, 2003 and June 29, 2002	5
	Notes to Condensed Consolidated Financial Statements	6-10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11-17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	17
Item 4.	Controls and Procedures	17
Part II Other
Information
Item 1.	Legal Proceedings	18
Item 4.	Submission of Matters to a Vote of Security Holders	18
Item 6.	Exhibits and Reports on Form 8-K	18-19
Signature		20

Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

In thousands, except per-share data	Three months ended — June 28 2003	June 29 2002	Six months ended — June 28 2003	June 29 2002
Net sales	$ 718,989	$ 708,116	$ 1,356,505	$ 1,311,179
Cost of goods sold	535,501	532,136	1,017,726	998,188
Gross profit	183,488	175,980	338,779	312,991
Selling, general and administrative	95,932	92,367	188,914	175,287
Research and development	11,224	9,021	21,345	17,385
Operating income	76,332	74,592	128,520	120,319
Net interest expense	9,837	10,476	19,830	24,206
Income before income taxes	66,495	64,116	108,690	96,113
Provision for income taxes	22,608	21,140	36,954	31,699
Net income	$ 43,887	$ 42,976	$ 71,736	$ 64,414
Earnings per common share
Basic	$ 0.89	$ 0.87	$ 1.45	$ 1.31
Diluted	$ 0.88	$ 0.86	$ 1.44	$ 1.29
Weighted average common shares outstanding
Basic	49,381	49,228	49,364	49,201
Diluted	49,812	50,039	49,715	49,812
Cash dividends declared per common share	$ 0.21	$ 0.18	$ 0.40	$ 0.36

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

In thousands, except share and per-share data	June 28 2003
Assets
Current assets
Cash and cash equivalents	$ 45,465	$	39,648	$	29,289
Accounts and notes receivable, net	442,366		403,793		450,701
Inventories	333,370		293,202		305,663
Deferred tax assets	57,524		55,234		67,087
Prepaid expenses and other current assets	20,695		17,132		21,189
Net assets of discontinued operations	2,166		1,799		2,399
Total current assets	901,586		810,808		876,328
Property, plant and equipment, net	342,784		351,316		314,655
Other assets
Goodwill	1,245,812		1,218,341		1,098,952
Other	137,339		133,985		110,894
Total assets	$ 2,627,521	$	2,514,450	$	2,400,829
Liabilities and Shareholders’
Equity
Current liabilities
Short-term borrowings	$ 329	$	686	$	—
Current maturities of long-term debt	58,516		60,488		6,089
Accounts payable	214,213		171,709		206,159
Employee compensation and benefits	76,884		84,965		76,548
Accrued product claims and warranties	38,920		36,855		39,678
Income taxes	17,086		12,071		15,234
Other current liabilities	109,186		109,426		118,775
Total current liabilities	515,134		476,200		462,483
Long-term debt	669,687		673,911		638,554
Pension and other retirement compensation	132,622		124,301		80,405
Post-retirement medical and other benefits	42,293		42,815		43,102
Deferred tax liabilities	33,745		31,728		35,143
Other noncurrent liabilities	62,497		59,771		63,005
Total liabilities	1,455,978		1,408,726		1,322,692
Shareholders’ equity
Common shares par value $0.16 2/3 ; 49,362,760, 49,222,450, and 49,234,764 shares issued and outstanding, respectively	8,232		8,204		8,206
Additional paid-in capital	488,846		482,695		482,061
Retained earnings	712,106		660,108		613,327
Unearned restricted stock compensation	(8,831	)	(5,138	)	(9,138	)
Accumulated other comprehensive loss	(28,810	)	(40,145	)	(16,319	)
Total shareholders’ equity	1,171,543		1,105,724		1,078,137
Total liabilities and shareholders’ equity	$ 2,627,521	$	2,514,450	$	2,400,829

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

In thousands	Six months ended — June 28 2003	June 29 2002
Operating activities
Net income	$ 71,736	$	64,414
Depreciation	32,031		30,376
Other amortization	2,566		1,728
Deferred income taxes	(614	)	3,485
Stock compensation	306		—
Changes in assets and liabilities, net of effects of business acquisitions
Accounts and notes receivable	(31,013	)	(43,461	)
Inventories	(33,148	)	(1,620	)
Prepaid expenses and other current assets	(3,899	)	(5,087	)
Accounts payable	38,753		25,407
Employee compensation and benefits	(8,783	)	1,099
Accrued product claims and warranties	1,125		1,894
Income taxes	3,816		8,496
Other current liabilities	(3,515	)	8,077
Pension and post-retirement benefits	4,795		3,508
Other assets and liabilities	3,863		1,217
Net cash provided by continuing operations	78,019		99,533
Net cash provided by (used for) discontinued operations	(367	)	2,926
Net cash provided by operating activities	77,652		102,459
Investing activities
Capital expenditures	(18,935	)	(15,275	)
Proceeds (payments) from sale of businesses	(2,400	)	1,547
Acquisitions, net of cash acquired	(15,150	)	—
Equity investments	(5,461	)	(4,169	)
Other	47		(165	)
Net cash used for investing activities	(41,899	)	(18,062	)
Financing activities
Net short-term borrowings	(549	)	665
Proceeds from long-term debt	291,691		119,689
Repayment of long-term debt	(301,300	)	(201,388	)
Proceeds from exercise of stock options	699		2,107
Dividends paid	(19,738	)	(17,713	)
Net cash used for financing activities	(29,197	)	(96,640	)
Effect of exchange rate changes on cash	(739	)	1,688
Change in cash and cash equivalents	5,817		(10,555	)
Cash and cash equivalents, beginning of period	39,648		39,844
Cash and cash equivalents, end of period	$ 45,465	$	29,289

See accompanying notes to condensed consolidated financial statements.

5

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 made certain reclassifications to the 2002 condensed consolidated financial statements to conform to the 2003 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 2002 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.

1. New Accounting Standards

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This new standard nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144, be recognized when the liability is incurred, rather than the date of an entity’s commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 on January 1, 2003 did not have a material effect on our consolidated financial position or results of operations.

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. Interpretation No. 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that at the time an entity issues a guarantee, the issuing entity must recognize an initial liability for the fair value of the obligations it assumes under that guarantee. However, the provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations does not apply to product warranties, guarantees accounted for as derivatives, or other guarantees of an entity’s own future performance. We adopted the disclosure requirements of this interpretation as of December 31, 2002. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of this new standard did not have an effect on our consolidated financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (VIE), an Interpretation of ARB No. 51, which requires all VIEs to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the VIE. In addition, the interpretation expands disclosure requirements for both VIEs that are consolidated as well as VIEs from which the entity is the holder of a significant amount of the beneficial interests, but not the majority. The disclosure requirements of this interpretation are effective for all financial statements issued after January 31, 2003. The consolidation requirements of this interpretation are effective for all periods beginning after June 15, 2003. Because we have no variable interest entities, we do not expect that the adoption of this new standard will have an effect on our consolidated financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FASB Statement No. 123 . SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance of SFAS No. 148 is effective for our financial statements issued in 2003. As allowed by SFAS No. 123, we will continue to account for stock-based compensation in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees , which results in no charge to earnings when options are issued at fair market value. The adoption of this new standard did not have a material impact on our consolidated financial position or results of operations.

6

Table of Contents

Pentair, Inc. and subsidiaries

Notes to condensed financial statements (unaudited) — (continued)

1. Stock Based Compensation

The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested stock compensation awards in each period:

In thousands, except per-share data	Three months ended — June 28 2003	June 29 2002		June 28 2003		June 29 2002
As reported — net income	$ 43,887	$	42,976	$	71,736	$	64,414
Less estimated stock-based employee compensation determined under fair value based method, net of tax	(1,443	)	(923	)	(2,926	)	(1,834	)
Pro forma — net income	$ 42,444	$	42,053	$	68,810	$	62,580
Earnings per common share — basic
As reported	$ 0.89	$	0.87	$	1.45	$	1.31
Pro forma	$ 0.86	$	0.85	$	1.39	$	1.27
Earnings per common share — diluted
As reported	$ 0.88	$	0.86	$	1.44	$	1.29
Pro forma	$ 0.85	$	0.84	$	1.38	$	1.26
Weighted average common shares outstanding
Basic	49,381		49,228		49,364		49,201
Diluted	49,812		50,039		49,715		49,812

1. Earnings Per Common Share

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

In thousands, except per-share data	Three months ended — June 28 2003	June 29 2002	Six months ended — June 28 2003	June 29 2002
Net income	$ 43,887	$ 42,976	$ 71,736	$ 64,414
Weighted average common shares outstanding — basic	49,381	49,228	49,364	49,201
Dilutive impact of stock options	431	811	351	611
Weighted average common shares outstanding — diluted	49,812	50,039	49,715	49,812
Earnings per common share — basic	$ 0.89	$ 0.87	$ 1.45	$ 1.31
Earnings per common share — diluted	$ 0.88	$ 0.86	$ 1.44	$ 1.29
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	483	1	1,116	551

1. Inventories

Inventories were comprised of:

In thousands	June 28 2003	December 31 2002	June 29 2002
Raw materials and supplies	$ 84,650	$ 83,670	$ 88,508
Work-in-process	41,988	39,840	38,374
Finished goods	206,732	169,692	178,781
Total inventories	$ 333,370	$ 293,202	$ 305,663

7

Table of Contents

Pentair, Inc. and subsidiaries

Notes to condensed financial statements (unaudited) — (continued)

1. Comprehensive Income

Comprehensive income and its components, net of tax, are as follows:

In thousands	Three months ended — June 28 2003	June 29 2002		June 28 2003		June 29 2002
Net income	$ 43,887	$	42,976	$	71,736	$	64,414
Changes in cumulative translation adjustment	14,396		21,447		16,572		17,129
Changes in market value of derivative financial instruments classified as cash flow hedges	(4,186	)	(6,393	)	(5,236	)	(4,530	)
Comprehensive income	$ 54,097	$	58,030	$	83,072	$	77,013

1. Goodwill

Changes in the carrying amount of goodwill for the six months ended June 28, 2003 by segment is as follows:

In thousands	Tools	Water	Enclosures	Consolidated
Balance December 31, 2002	$ 375,098	$ 663,940	$ 179,303	$ 1,218,341
Acquired, net of purchase price adjustments	—	15,559	—	15,559
Foreign currency translation	309	5,340	6,263	11,912
Balance June 28, 2003	$ 375,407	$ 684,839	$ 185,566	$ 1,245,812

1. Business Segments

Segment information is presented consistent with the basis described in the 2002 Annual Report on Form 10-K. Segment results for the three and six months ended June 28, 2003 and June 29, 2002 are shown below:

In thousands	Three months ended — June 28 2003	June 29 2002		June 28 2003		June 29 2002
Net sales to external customers
Tools	$ 283,416	$	303,771	$	535,181	$	555,863
Water	290,692		265,531		537,132		476,942
Enclosures	144,881		138,814		284,192		278,374
Corporate/other	—		—		—		—
Consolidated	$ 718,989	$	708,116	$	1,356,505	$	1,311,179
Intersegment sales
Tools	$ —	$	—	$	—	$	—
Water	—		—		—		—
Enclosures	355		—		497		—
Other	(355	)	—		(497	)	—
Consolidated	$ —	$	—	$	—	$	—
Operating income (loss)
Tools	$ 23,148	$	30,837	$	40,834	$	47,523
Water	46,002		43,708		75,506		73,455
Enclosures	11,703		6,995		21,568		11,603
Other	(4,521	)	(6,948	)	(9,388	)	(12,262	)
Consolidated	$ 76,332	$	74,592	$	128,520	$	120,319

Other operating income (loss) is primarily composed of unallocated corporate expenses, our captive insurance subsidiary, intermediate finance companies, divested operations, and intercompany eliminations.

1. Acquisitions/Divestitures

We completed two acquisitions during the six months ended June 28, 2003 in our Water segment. In addition, we acquired two businesses during the year ended December 31, 2002 in our Tools and Water segments. All of the acquisitions during this time period

8

Table of Contents

Pentair, Inc. and subsidiaries

Notes to condensed financial statements (unaudited) — (continued)

have been accounted for as purchases, and have resulted in the recognition of goodwill and other intangibles in our financial statements. Goodwill arises because the purchase prices for these targets reflect a number of factors, the greatest of which includes the future earnings and cash flow potential of these companies.

We make an initial allocation of the purchase price at the date of acquisition based upon our understanding of the fair market value of the acquired assets and liabilities. We obtain this information during due diligence and through various other sources. As we obtain additional information about these assets and liabilities and learn more about the newly acquired business, we are able to refine the estimates of fair market value and more accurately allocate the purchase price during the first 12 months of ownership.

The following briefly describes our acquisition activity for the six months ended June 28, 2003. For a description of our acquisition activity for the year-ended December 31, 2002, refer to our notes to consolidated financial statements included in our 2002 Annual Report on Form 10-K.

During the six-month period ended June 28, 2003, we completed two product line acquisitions for total consideration of approximately $17.1 million in cash including transaction costs. HydroTemp Manufacturing Co., Inc. designs and manufactures heat pumps for swimming pool applications and Letro Products, Inc. designs and manufactures swimming pool accessories including cleaners. We acquired these companies to complement our existing pool and spa equipment business unit of our Water segment. The aggregated annual revenue of the acquired businesses is approximately $17 million. We are continuing to evaluate the initial purchase accounting allocations for acquisitions completed during the six months ended June 28, 2003 and will adjust the allocations as additional information relative to the fair market values of the assets and liabilities of the businesses become known. Pro forma information on these acquisitions and other related disclosures have not been provided as these acquisitions are not considered material to our operations.

In the first quarter of 2003, we made purchase price adjustments relative to our fourth quarter 2002 acquisition of Plymouth Products in which we received $1.9 million. The adjustment primarily related to final determination of closing date net assets.

In January 2003, we completed a final adjustment to the selling price related to the disposition of Lincoln Industrial in which we paid $2.4 million. This had no effect on earnings for the six months ended June 28, 2003 as the amount was offset by previously established reserves.

1. Equity Method Investment

In April 2003, we invested an additional $5.6 million in certain joint venture operations of an Asian supplier for bench top power tools. This additional investment increased our ownership percentage to 49 percent from 40 percent. We hold options to increase our ownership interest in these joint ventures to 100 percent. Our portion of the earnings of these joint ventures is included in cost of goods sold; however, it is not material.

1. Warranty

The changes in the carrying amount of service and product warranties for the quarter ended June 28, 2003 are as follows:

In thousands	Accrued warranties
Balance December 31, 2002	$ 26,855
Service and product warranty provision	21,481
Payments	(20,470	)
Acquired	672
Translation	382
Balance June 28, 2003	$ 28,920

1. Subsequent Events

In July 2003, we acquired certain assets of two privately held companies to augment existing Water segment businesses for approximately $4.3 million. TwinPumps, Inc., of Oldwick, New Jersey, designs and manufactures vortex and chopper pumps for municipal wastewater applications. K&M Plastics, Incorporated, of Elk Grove, Illinois, designs and manufactures blow-molded brine tanks and pressure vessels for residential and commercial water conditioning and filtration applications.

On July 25, 2003, we completed financing arrangements totaling $700 million, comprised of a $200 million private placement of senior notes with a 10-year maturity and a new committed $500 million revolving credit facility with maturity in three years. The $500 million credit facility replaced two existing revolving credit facilities totaling $632 million. The $200 million private placement includes $100 million of variable rate senior notes with an interest rate equal to the three-month LIBOR rate plus 1.15 percent and $100 million of fixed rate senior notes (of which $50 million will be funded on October 15, 2003) with an average interest rate of 4.98

9

Table of Contents

Pentair, Inc. and subsidiaries

Notes to condensed financial statements (unaudited) — (continued)

percent. The $150 million proceeds received in the third quarter of 2003 from the private placement were used to pay down debt under the revolving credit facility.

The following table contains information about our revolving credit facility and our private placements at June 28, 2003 and July 25, 2003.

In millions	June 28 2003	July 25 2003	Net Change
Credit available under revolving credit facility	$652	$520	$(132	)
Less debt outstanding under revolving credit facility	306	149	(157	)
Credit available	$346	$371	$ 25
Private placements	$134	$281	$ 147

In addition, we have $65 million of uncommitted credit facilities of which $25 million was outstanding at July 25, 2003.

10

Table of Contents

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

FORWARD-LOOKING STATEMENTS

This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “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, we cannot guarantee any forward-looking statements. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties.

The following factors may impact the achievement of forward-looking statements:

• 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 maintain and expand relationships with large retail stores;

§ our ability to source components from third parties, in particular foreign manufacturers, without interruption and at reasonable prices; and

§ the financial condition of our customers;

• changes in our business strategies, including acquisition, divestiture, and restructuring activities;

• governmental and regulatory policies;

• general economic and political conditions, such as political instability, the rate of economic growth in our principal geographic or product markets, or fluctuations in foreign currency exchange rates;

• changes in operating factors, such as continued improvement in manufacturing activities and the achievement of related efficiencies, cost reductions, and inventory risks due to shifts in market demand;

• our ability to continue to successfully generate savings from our supply chain management and lean enterprise initiatives;

• our ability to successfully identify, complete, and integrate future acquisitions; and

• our ability to accurately evaluate the effects of contingent liabilities such as taxes, product liability, environmental, and other claims.

The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. We assume no obligation, and disclaim any duty, to update the forward-looking statements in this report.

BUSINESS OVERVIEW

We are a diversified industrial manufacturer operating in three segments: Tools, Water, and Enclosures. Our Tools segment manufactures and markets a wide range of power tools under several brand names — Porter-Cable ™ , Delta ® , Delta Shopmaster ™ , Delta Industrial ™ , Biesemeyer ® , FLEX ™ , Ex-Cell ™ , Air America ® , Charge Air Pro ® , 2 x 4 ™ , Oldham ® , Contractor SuperDuty ™ , Viper ® , Hickory Woodworking ® , The Woodworker’s Choice ® , and United States Saw ® — generating approximately 40 percent of 2002 total revenues. Our Water segment manufactures and markets essential products for the transport, storage, and treatment of water and wastewater and generates approximately 35 percent of 2002 total revenues. Brand names within the Water segment include Myers ® , Fairbanks Morse ® , Hydromatic ® , Aurora ® , Water Ace ® , Shur-Dri ® , Fleck ® , SIATA ™ , CodeLine ™ , Structural ™ , WellMate ™ , Verti-line ™ , Layne & Bowler ™ , American Plumber ™ , Armor ™ , National Pool Tile ™ , Rainbow Lifegard ™ , Paragon Aquatics ™ , Kreepy Krauly ™ , and Pentair Pool Products ™ . Our Enclosures segment accounts for approximately 25 percent of 2002 total revenues, and designs, manufactures, and markets standard, modified and custom enclosures that protect sensitive controls and components for markets that include industrial machinery, data communications, networking, telecommunications, test and measurement, automotive, medical, security, defense, and general electronics. The segment goes to market under four primary brands: Hoffman ® , Schroff ® , Pentair Electronic Packaging ™ , and Taunus ™ .

Our diversification has enabled us to provide shareholders with relatively consistent operating results despite difficult markets that may occur in one or another segment at times.

11

Table of Contents

RESULTS OF OPERATIONS

Net sales

The components of the net sales change in 2003 from 2002 were as follows:

Percentages	% Change from 2002 — Second quarter		Six months
Volume	(0.3	)	1.9
Price	(0.5	)	(0.7	)
Currency	2.3		2.3
Total	1.5		3.5

Net sales in the second quarter and first half of 2003 totaled $719.0 million and $1,356.5 million, compared with $708.1 million and $1,311.2 million for the same periods in 2002. The $10.9 million or 1.5 percent increase in second quarter 2003 net sales and the $45.3 million or 3.5 percent increase in first half 2003 net sales was primarily due to:

• favorable foreign currency effects as the weaker U.S. dollar increased the dollar value of foreign sales; and

• our fourth quarter 2002 acquisitions of Oldham Saw Co., Inc. (Oldham Saw) (Tools segment) and Plymouth Products, Inc. (Plymouth Products) (Water segment).

These increases were partially offset by:

• lower second quarter and first half organic sales volume, in our Tools segment due to unfavorable weather patterns and weak economic conditions; and

• a decline in average selling prices in our Tools segment due to increased promotional pricing.

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

In thousands	Three months ended — June 28 2003	June 29 2002	$ change		% change		Six months ended — June 28 2003	June 29 2002	$ change		% change
Tools	$ 283,416	$ 303,771	$ (20,355	)	(6.7	%)	$ 535,181	$ 555,863	$ (20,682	)	(3.7	%)
Water	290,692	265,531	25,161		9.5	%	537,132	476,942	60,190		12.6	%
Enclosures	144,881	138,814	6,067		4.4	%	284,192	278,374	5,818		2.1	%
Total	$ 718,989	$ 708,116	$ 10,873		1.5	%	$ 1,356,505	$ 1,311,179	$ 45,326		3.5	%

Tools

The 6.7 percent and 3.7 percent declines in Tools segment sales in the second quarter and first half of 2003 were primarily driven by:

• lower organic sales volume due to the effects of a slow economy, unfavorable weather conditions that hampered sell-in of pressure washers into the industrial and retail channels, and the impact of several compressor SKUs at one large home center customer that were lost in the first quarter of 2003; and

• a decline in average selling prices due to increased promotional pricing.

The decline in organic sales volume in the second quarter and first half of 2003 was offset in part by sales attributable to the fourth quarter 2002 acquisition of Oldham Saw.

Water

The 9.5 percent and 12.6 percent increases in Water segment sales in the second quarter and first half of 2003 were primarily driven by:

• higher sales for retail pumps and residential engineered systems;

• higher sales in the first half of 2003 for pool and spa equipment products, despite flat sales in the second quarter due to unfavorable weather conditions that resulted in a slow start to the pool season;

• sales attributable to the fourth quarter 2002 acquisition of Plymouth Products; and

• favorable foreign currency effects.

12

Table of Contents

Enclosures

The 4.4 percent and 2.1 percent increases in Enclosures segment sales in the second quarter and first half of 2003 were primarily driven by:

• favorable foreign currency effects and continued expansion into new markets.

Gross profit

In thousands	Three months ended — June 28 2003	% of sales		June 29 2002	% of sales	Six months ended — June 28 2003	% of sales		June 29 2002	% of sales
Gross profit	$ 183,488	25.5	%	$ 175,980	24.9%	$ 338,779	25.0	%	$ 312,991	23.9%
Percentage point change		0.6	pts				1.1	pts

The 0.6 percentage point and 1.1 percentage point increases in gross profit as a percent of sales in the second quarter and first half of 2003 from 2002 were primarily the result of:

• savings generated from our supply chain management and lean enterprise initiatives, which we call the Pentair Integrated Management System (PIMS);

• our fourth quarter 2002 acquisition of Plymouth Products;

• lower costs as a result of general downsizing throughout Pentair; and

• favorable foreign currency effects (primarily the second quarter only).

These increases were partially offset by:

• price declines, primarily in our Tools segment due to increased promotional pricing; and

• volume declines, in our Tools segment.

Selling, general and administrative (SG&A)

In thousands	Three months ended — June 28 2003	% of sales		June 29 2002	% of sales	Six months ended — June 28 2003	% of sales		June 29 2002	% of sales
SG&A	$ 95,932	13.3	%	$ 92,367	13.0%	$ 188,914	13.9	%	$ 175,287	13.4%
Percentage point change		0.3	pts				0.5	pts

The 0.3 percentage point and 0.5 percentage point increases in SG&A expense as a percent of sales in the second quarter and first half of 2003 from 2002 were primarily due to:

• higher spending for increased promotional costs primarily in our Tools segment;

• higher legal costs; and

• expenses related to downsizing and strategic growth initiatives.

Research and development (R&D)

In thousands	Three months ended — June 28 2003	% of sales		June 29 2002	% of sales	Six months ended — June 28 2003	% of sales		June 29 2002	% of sales
R&D	$ 11,224	1.6	%	$ 9,021	1.3%	$ 21,345	1.6	%	$ 17,385	1.3%
Percentage point change		0.3	pts				0.3	pts

The 0.3 percentage point increases in R&D expense as a percent of sales in the second quarter and first half of 2003 from 2002 were primarily due to additional investments related to new product development initiatives in our Tools and Water segments.

13

Table of Contents

Operating income

Tools

In thousands	Three months ended — June 28 2003	% of sales		June 29 2002	% of sales	Six months ended — June 28 2003	% of sales		June 29 2002	% of sales
Operating income	$ 23,148	8.2	%	$ 30,837	10.2 %	$ 40,834	7.6	%	$ 47,523	8.5 %
Percentage point change		(2.0	) pts				(0.9	) pts

The 2.0 percentage point and 0.9 percentage point declines in Tools segment operating income as a percent of sales in the second quarter and first half of 2003 from 2002 were primarily the result of:

• lower sales volumes;

• a decline in average selling prices related to increased promotional pricing; and

• expenses related to downsizing.

These decreases were partially offset by:

• cost savings as a result of our supply chain management and PIMS initiatives; and

• lower distribution and freight costs.

Water

In thousands	Three months ended — June 28 2003	% of sales		June 29 2002	% of sales	Six months ended — June 28 2003	% of sales		June 29 2002	% of sales
Operating income	$ 46,002	15.8	%	$ 43,708	16.5 %	$ 75,506	14.1	%	$ 73,455	15.4 %
Percentage point change		(0.7	) pts				(1.3	) pts

The 0.7 percentage point and 1.3 percentage point declines in Water segment operating income as a percent of sales in the second quarter and first half of 2003 from 2002 were primarily the result of:

• lower profitability in our pool and spa equipment business resulting from unfavorable product mix primarily, a slow start to the pool season, and strategic investments to drive organic growth;

• price and volume declines related to our reverse osmosis product line and costs associated with downsizing the Chardon, Ohio operation. We are now consolidating the manufacturing of all of this product line in our factory in Goa, India. In addition, we are streamlining and pruning the balance of the tank product line. We expect to realize benefits from these actions in the second half of 2003; and

• lower profitability in our pump business (year-to-date only) due to pricing pressures in commercial markets and one-time costs for workforce reductions. Profitability in our pump business improved in the second quarter compared with the first quarter of 2003 as we accelerated our PIMS initiatives and retail channel management programs.

Enclosures

In thousands	Three months ended — June 28 2003	% of sales		June 29 2002	% of sales	Six months ended — June 28 2003	% of sales		June 29 2002	% of sales
Operating income	$ 11,703	8.1	%	$ 6,995	5.0 %	$ 21,568	7.6	%	$ 11,603	4.2 %
Percentage point change		3.1	pts				3.4	pts

The 3.1 percentage point and 3.4 percentage point increases in Enclosures segment operating income as a percent of sales in the second quarter and first half of 2003 from 2002 were primarily the result of:

• efficiencies resulting from our continued implementation of PIMS, stronger sourcing discipline, and expense reduction programs. These savings were partially offset by expenses for the closure of our Scottish operations.

14

Table of Contents

Net interest expense

In thousands	Three months ended — June 28 2003	% of sales	June 29 2002	% of sales	Six months ended — June 28 2003	% of sales	June 29 2002	% of sales
Net interest expense	$ 9,837	1.4 %	$ 10,476	1.5 %	$ 19,830	1.5 %	$ 24,206	1.8 %

Net interest expense was $9.8 million and $19.8 million in the second quarter and first half of 2003 compared with $10.5 million and $24.2 million for the same periods in 2002. The $0.7 million and the $4.4 million declines primarily reflected lower interest rates on our variable rate debt and the write-off in March 2002 of $1.8 million of deferred financing costs related to excess capacity on certain credit facilities that we no longer used.

Provision for income taxes

In thousands	Three months ended — June 28 2003	June 29 2002	Six months ended — June 28 2003	June 29 2002
Income before income taxes	$ 66,495	$ 64,116	$ 108,690	$ 96,113
Provision for income taxes	$ 22,608	$ 21,140	$ 36,954	$ 31,699
Effective tax rate	34.0 %	33.0 %	34.0 %	33.0 %

Our effective tax rate in the second quarter and first half of 2003 was 34 percent compared with 33 percent for the same periods in 2002. The one percentage point increase was primarily due to the anticipated mix of our 2003 U.S. and foreign earnings and the fact that many of our tax savings programs have relatively fixed benefits so as profitability improves our effective tax rate trends higher.

LIQUIDITY AND CAPITAL RESOURCES

Cash requirements for working capital, capital expenditures, equity investments, acquisitions, debt repayments, and dividend payments are generally funded from cash generated from operations, availability under existing committed revolving credit facilities, and in certain instances, equity and public debt transactions.

The following table presents selected working capital measurements calculated from our monthly operating results based on a 13-month moving average and indicates our emphasis on working capital management:

Days	June 28 2003	December 31 2002	June 29 2002
Days of sales in accounts receivable	58	59	63
Days inventory on hand	65	63	68
Days in accounts payable	53	53	56
Cash conversion cycle	70	69	75

Operating activities

Cash provided by operating activities was $77.7 million in the first half of 2003, or $24.8 million lower compared with the same period in 2002. The decrease was primarily attributable to year-over-year variances in tax payments and increased working capital resulting from higher inventories in our Tools segment and our pool and spa equipment business.

Investing activities

Capital expenditures in the first half of 2003 were $18.9 million compared with $15.3 million in the prior year period. We anticipate capital expenditures in 2003 to be approximately $45 million primarily, in the areas of new product development and general maintenance capital.

During the six-month period ended June 28, 2003, we completed two product line acquisitions for total consideration of approximately $17.1 million in cash including transaction costs. HydroTemp Manufacturing Co., Inc. designs and manufactures heat pumps for swimming pool applications and Letro Products, Inc. designs and manufactures swimming accessories including pool cleaners. We acquired these companies to complement our existing pool and spa equipment business unit of our Water segment. The aggregated annual revenue of the acquired businesses is approximately $17 million.

In the first quarter of 2003, we made purchase price adjustments relative to our fourth quarter 2002 acquisition of Plymouth Products in which we received $1.9 million. The adjustment primarily related to final determination of closing date net assets.

15

Table of Contents

In January 2003, we completed a final adjustment to the selling price related to the disposition of Lincoln Industrial in which we paid $2.4 million. This had no effect on earnings for the six months ended June 28, 2003 as the amount was offset by previously established reserves.

In April 2003, we invested an additional $5.6 million in certain joint venture operations of an Asian supplier for bench top power tools. This additional investment increased our ownership percentage to 49 percent from 40 percent. We hold options to increase our ownership interest in these joint ventures to 100 percent.

Financing activities

At June 28, 2003, our capital structure consisted of $728.5 million in total indebtedness and $1,171.5 million in shareholders’ equity. The ratio of debt-to-total capital at June 28, 2003 was 38.3 percent, compared with 39.9 percent at December 31, 2002 and 37.4 percent at June 29, 2002. Our targeted debt-to-total capital ratio is approximately 40 percent. We will exceed this target from time to time as needed for operational purposes and/or acquisitions.

On July 25, 2003, we completed financing arrangements totaling $700 million, comprised of a $200 million private placement of senior notes with a 10-year maturity and a new committed $500 million revolving credit facility with maturity in three years. The $500 million credit facility replaced two existing revolving credit facilities totaling $632 million. The $200 million private placement includes $100 million of variable rate senior notes with an interest rate equal to the three-month LIBOR rate plus 1.15 percent and $100 million of fixed rate senior notes (of which $50 million will be funded on October 15, 2003) with an average interest rate of 4.98 percent. The $150 million proceeds received in the third quarter of 2003 from the private placement were used to pay down debt under the revolving credit facility.

Credit available under existing facilities, as limited by our most restrictive financial covenant, was approximately $234 million at July 25, 2003 and is based on a ratio of total debt to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). In addition, our debt agreements contain certain financial covenants that restrict the amount we pay for dividends and require us to maintain certain financial ratios and a minimum net worth. We were in compliance with all covenants at June 28 and July 25, 2003.

The following table contains information about our revolving credit facility and our private placements at June 28, 2003 and July 25, 2003.

In millions	June 28 2003	July 25 2003	Net Change
Credit available under revolving credit facility	$ 652	$ 520	$ (132	)
Less debt outstanding under revolving credit facility	306	149	(157	)
Credit available	$ 346	$ 371	$ 25
Private placements	$ 134	$ 281	$ 147

In addition, we have $65 million of uncommitted credit facilities of which $25 million was outstanding at July 25, 2003.

Our current credit ratings are as follows:

Rating Agency	Long-Term Debt Rating
Standard & Poor’s	BBB
Moody’s	Baa3

We will continue to have cash requirements to support working capital needs and capital expenditures, to pay interest and service debt and to pay dividends to shareholders. In order to meet these cash requirements, we intend to use available cash and internally generated funds and to borrow under our committed and uncommitted credit facilities. We believe that cash provided from these sources will be adequate to meet our cash requirements for the foreseeable future.

There have been no material changes with respect to the contractual obligations as described in our Annual Report on Form 10-K for the year ended December 31, 2002.

Dividends paid in the first half of 2003 were $19.7 million or $0.40 per common share compared with $17.7 million or $0.36 per common share in the prior year period.

Pension

Total net periodic pension benefits cost is expected to be approximately $15 million for 2003 compared with approximately $13 million in 2002. Our 2003 pension contributions are expected to be in the range of $20 million to $25 million compared to approximately $19 million in 2002.

16

Table of Contents

Subsequent Event

In July 2003, we acquired certain assets of two privately held companies to augment existing Water segment businesses for approximately $4.3 million. TwinPumps, Inc., of Oldwick, New Jersey, designs and manufactures vortex and chopper pumps for municipal wastewater applications. K&M Plastics, Incorporated, of Elk Grove, Illinois, designs and manufactures blow-molded brine tanks and pressure vessels for residential and commercial water conditioning and filtration applications.

NEW ACCOUNTING STANDARDS

See Note 2 (New Accounting Standards) of ITEM 1.

CRITICAL ACCOUNTING POLICIES

In our Annual Report on Form 10-K for the year ended December 31, 2002, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements. We have not changed these policies from those previously disclosed in our annual report.

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 28, 2003. For additional information, refer to Item 7A on page 30 of our 2002 Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter ended June 28, 2003 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the quarter ended June 28, 2003 in timely alerting them to material information relating to Pentair, Inc. (including its consolidated subsidiaries) required to be included in reports we file with the Securities and Exchange Commission.

(b) Changes in Internal Controls

There was no change in our internal control over financial reporting that occurred during the quarter ended June 28, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

17

Table of Contents

PART II OTHER INFORMATION

ITEM 1. Legal Proceedings

Environmental and Product Liability Claims

There have been no further material developments regarding the above from that contained in our 2002 Annual Report on Form 10-K.

The following supplements and amends the discussion set forth under Item 3. Legal Proceedings in our Annual Report on Form 10-K for the year ended December 31, 2002.

Horizon Litigation

On June 25, 2003, the United States Court of Appeals for the Second Circuit dismissed Essef’s appeal of the trial verdict. A motion for panel rehearing and rehearing en banc has been filed. We believe we have sufficient reserves to cover any uninsured awards or settlements for this matter.

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 4. Submission of Matters to a Vote of Security Holders

At Pentair’s Annual Meeting of Shareholders held on April 30, 2003, the shareholders voted on the following items:

Proposal 1. – Election of Directors

Nominees	Votes For	Votes Withheld
Charles A. Haggerty	42,546,853	964,886
Randall J. Hogan	42,248,368	1,263,371

The other directors whose terms of office continued after the Annual Meeting are as follows: terms expiring at the 2004 annual meeting – William H. Hernandez, William T. Monahan and Karen E. Welke; and terms expiring at the 2005 annual meeting – Barbara B. Grogan, Stuart Maitland and Augusto Meozzi.

Proposal 2. – Approval of amendment to the Executive Officer Performance Plan for Section 162(m) purposes

Votes For	Votes Against	Votes Abstain
39,634,542	3,613,130	264,066

Proposal 3. – Approval of amendment to the Omnibus Stock Incentive Plan for Section 162(m) purposes

Votes For	Votes Against	Votes Abstain
38,463,937	4,747,274	300,527

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits

| 10.21 | Amended and Restated Credit Agreement dated as of July 25, 2003 among Pentair, Inc., various subsidiaries of Pentair, Inc., and
various financial institutions listed therein, and Bank of America, N.A., as Administrative Agent. (Incorporated by reference to Exhibit 10.21 contained in Pentair’s Current Report on Form 8-K filed July 29, 2003). |
| --- | --- |
| 10.22 | Note Purchase Agreement dated as of July 25, 2003 for $50,000,000 4.93% Senior Notes, Series A, due July 25, 2013, $100,000,000
Floating Rate Senior Notes, Series B, due July 25, 2013, and $50,000,000 5.03% Senior Notes, Series C, due October 15, 2013. (Incorporated by reference to Exhibit 10.22 contained in Pentair’s Current Report on Form 8-K filed July 29,
2003). |
| 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14 of the Exchange Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14 of the Exchange Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |

18

Table of Contents

32.2 Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

The Registrant filed the following Current Report on Form 8-K during the quarter ended June 28, 2003:

On April 17, 2003, Pentair furnished under Items 7 and 9 a Current Report on Form 8-K dated April 17, 2003 announcing earnings for the quarter ended March 29, 2003.

19

Table of Contents

SIGNATURE

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 12, 2003.

David D. Harrison
David D. Harrison Executive
Vice President and Chief Financial Officer (Chief Accounting Officer)

20

Table of Contents

	Exhibit Index to Form 10-Q for the Period Ended June 28, 2003
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14 of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14 of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

1