PENTAIR plc — Interim / Quarterly Report 2004

Nov 12, 2004

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

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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 October 2, 2004

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 October 29, 2004, 100,721,468 shares of the Registrant’s common stock were outstanding.

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Pentair, Inc. and Subsidiaries

Part I Financial Information		Page(s)
Item 1.	Financial Statements
	Condensed Consolidated Statements of Income for the three and nine months ended October 2, 2004 and September 27, 2003	3
	Condensed Consolidated Balance Sheets as of October 2, 2004, December 31, 2003, and September 27, 2003	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended October 2, 2004 and September 27, 2003	5
	Notes to Condensed Consolidated Financial Statements	6 – 23
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24 – 32
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33
Item 4.	Controls and Procedures	33
	Report of Independent Registered Public Accounting Firm	34
Part II Other Information
Item 1.	Legal Proceedings	35
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	35
Item 6.	Exhibits	36
Signature		37

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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 — October 2 2004	September 27 2003	Nine months ended — October 2 2004	September 27 2003
Net sales	$ 607,767	$ 416,986	$ 1,626,653	$ 1,238,310
Cost of goods sold	437,983	306,571	1,155,145	905,573
Gross profit	169,784	110,415	471,508	332,737
Selling, general and administrative	96,882	59,471	264,794	187,998
Research and development	8,803	5,752	21,521	16,705
Operating income	64,099	45,192	185,193	128,034
Net interest expense	11,172	5,530	26,317	18,571
Income before income taxes	52,927	39,662	158,876	109,463
Provision for income taxes	19,835	12,687	55,548	34,739
Income from continuing operations	33,092	26,975	103,328	74,724
Income from discontinued operations, net of tax	14,810	11,400	40,247	35,387
Net income	$ 47,902	$ 38,375	$ 143,575	$ 110,111
Earnings per common share
Basic
Continuing operations	$ 0.33	$ 0.27	$ 1.04	$ 0.76
Discontinued operations	0.15	0.12	0.41	0.35
Basic earnings per common share	$ 0.48	$ 0.39	$ 1.45	$ 1.11
Diluted
Continuing operations	$ 0.32	$ 0.27	$ 1.02	$ 0.75
Discontinued operations	0.15	0.11	0.40	0.35
Basic earnings per common share	$ 0.47	$ 0.38	$ 1.42	$ 1.10
Weighted average common shares outstanding
Basic	99,502	98,868	99,083	98,809
Diluted	102,059	100,086	101,428	99,649
Cash dividends declared per common share	$ 0.110	$ 0.105	$ 0.320	$ 0.305

See accompanying notes to condensed consolidated financial statements.

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Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

In thousands, except share and per-share data	October 2 2004
Assets
Current assets
Cash and cash equivalents	$ 78,794	$	47,989	$	50,381
Accounts and notes receivable, net	397,098		251,475		232,018
Inventories	315,414		166,862		161,415
Current assets of discontinued operations	394,937		313,399		360,606
Deferred tax assets	45,304		30,871		38,367
Prepaid expenses and other current assets	30,967		18,854		17,330
Total current assets	1,262,514		829,450		860,117
Property, plant and equipment, net	335,976		233,106		228,314
Other assets
Assets of discontinued operations	565,071		539,892		540,398
Goodwill	1,619,635		997,183		875,197
Intangibles, net	259,770		98,490		7,545
Other	83,839		82,556		75,918
Total other assets	2,528,315		1,718,121		1,499,058
Total assets	$ 4,126,805	$	2,780,677	$	2,587,489
Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings	$ 850,000	$	—	$	102
Current maturities of long-term debt	9,865		73,631		104,020
Accounts payable	184,741		93,043		95,721
Employee compensation and benefits	88,779		61,213		59,888
Accrued product claims and warranties	35,200		24,427		24,865
Current liabilities of discontinued operations	209,339		155,898		166,303
Income taxes	49,697		14,912		12,876
Other current liabilities	136,873		74,327		81,136
Total current liabilities	1,564,494		497,451		544,911
Long-term debt	737,719		732,862		558,610
Pension and other retirement compensation	129,779		100,234		133,935
Post-retirement medical and other benefits	58,007		26,227		26,387
Deferred tax liabilities	140,656		60,636		30,446
Other noncurrent liabilities	61,861		62,208		62,863
Liabilities of discontinued operations	41,598		39,581		34,033
Total liabilities	2,734,114		1,519,199		1,391,185
Minority interest	2,672		—		—
Commitments and contingencies
Shareholders’ equity
Common shares par value $0.16 2/3 ; 100,626,064, 99,005,084, and 98,775,464 shares issued and outstanding, respectively	16,771		8,250		8,235
Additional paid-in capital	500,887		492,619		488,630
Retained earnings	872,499		760,966		740,113
Unearned restricted stock compensation	(7,768	)	(6,189	)	(7,898	)
Accumulated other comprehensive income (loss)	7,630		5,832		(32,776	)
Total shareholders’ equity	1,390,019		1,261,478		1,196,304
Total liabilities and shareholders’ equity	$ 4,126,805	$	2,780,677	$	2,587,489

See accompanying notes to condensed consolidated financial statements.

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Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

In thousands	Nine months ended — October 2 2004	September 27 2003
Operating activities
Net income	$ 143,575	$	110,111
Adjustments to reconcile net income to net cash provided by operating activities:
Net income from discontinued operations	(40,247	)	(35,387	)
Depreciation	34,946		32,132
Amortization	10,310		3,578
Deferred income taxes	(449	)	10,766
Stock compensation	—		306
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable	13,611		(1,601	)
Inventories	(46,043	)	9,016
Prepaid expenses and other current assets	(13,835	)	(4,690	)
Accounts payable	14,090		(1,205	)
Employee compensation and benefits	6,127		7,724
Accrued product claims and warranties	2,009		(1,073	)
Income taxes	24,602		902
Other current liabilities	28,914		4,467
Pension and post-retirement benefits	7,121		7,514
Other assets and liabilities	(1,059	)	1,878
Net cash provided by continuing operations	183,672		144,438
Net cash provided by discontinued operations	14,031		33,891
Net cash provided by operating activities	197,703		178,329
Investing activities
Capital expenditures	(28,553	)	(29,720	)
Acquisitions, net of cash acquired	(877,717	)	(19,409	)
Payments from sale of businesses	—		(2,400	)
Equity investments	—		(5,426	)
Other	—		48
Net cash used for investing activities	(906,270	)	(56,907	)
Financing activities
Net short-term borrowings (repayments)	845,838		(771	)
Proceeds from long-term debt	231,516		486,657
Repayment of long-term debt	(317,152	)	(558,816	)
Proceeds from exercise of stock options	10,225		510
Dividends paid	(32,042	)	(30,106	)
Net cash provided by (used for) financing activities	738,385		(102,526	)
Effect of exchange rate changes on cash and cash equivalents	987		(8,163	)
Change in cash and cash equivalents	30,805		10,733
Cash and cash equivalents, beginning of period	47,989		39,648
Cash and cash equivalents, end of period	$ 78,794	$	50,381

See accompanying notes to condensed consolidated financial statements.

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Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

1. Basis of Presentation and Responsibility for Interim Financial Statements

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

We are responsible for the unaudited financial statements included in this document. The financial statements include all normal recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. As these are condensed financial statements, one should also read our consolidated financial statements and notes thereto which are included in our 2003 Annual Report on Form 10-K for the year ended December 31, 2003.

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

Our fiscal year ends on December 31. We report our interim quarterly periods on a 13-week basis ending on a Saturday. As a result, the first nine months of 2004 had four additional business days when compared with the comparable 2003 period. The impact of these extra days will reverse in the fourth quarter of 2004 which will be shorter by three days than the comparable 2003 quarter.

All share and per share amounts have been restated to give retroactive effect to the June 2004 stock split (see Note 4).

On July 16, 2004, we signed a definitive agreement to sell our Tools Group to The Black and Decker Corporation (“BDK”). The Tools Group comprises the Porter-Cable, Delta, DeVilbiss Air Power, Oldham Saw, and FLEX brands, among others. Tools Group products include woodworking machinery, portable power tools, power tool accessories, metal and stoneworking tools, pneumatic tools, compressors, generators, and pressure washers. The Tools Group employed approximately 4,200 people at facilities in North America, Europe and Asia.

Effective after the close of business October 2, 2004, we completed the sale of our Tools Group to BDK for approximately $796.8 million in cash, including a $21.8 million interim net asset value increase, subject to post closing adjustments. These financial statements have been restated to reflect our Tools Group as a discontinued operation (see Note 6).

1. New Accounting Standards

In May 2004, the Financial Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 , which supercedes FSP 106-1 of the same title issued in January 2004. FSP 106-2 becomes effective for the first interim or annual period beginning after June 15, 2004. FSP 106-2 provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) for employers that sponsor postretirement health care plans that provide prescription drug benefits. FSP 106-2 also requires those employers to provide certain disclosures regarding the effect of the federal subsidy provided by the Act. Since our postretirement health care plan is a fully insured plan and is not eligible to receive the federal subsidy, the adoption of FSP 106-2 did not have any effect on our financial condition or results of operations.

In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on the remaining portions of EITF 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments , with an effective date of June 15, 2004. EITF 03-01 provides new disclosure requirements for other-than-temporary impairments on debt and equity investments. Investors are required to disclose quantitative information about: (i) the aggregate amount of unrealized losses, and (ii) the aggregate related fair values of investments with unrealized losses, segregated into time periods during which the investment has been in an unrealized loss position of less than 12 months and greater than 12 months. In addition, investors are required to disclose the qualitative information that supports their conclusion that the impairments noted in the qualitative disclosure are not other-than temporary. In September 2004, the FASB approved FSP EITF 03-1, which defers the effective date for recognition and measurement guidance contained in EITF 03-1 until certain issues are resolved. The adoption of this EITF is not expected to have a material impact on our results of operations or financial condition.

During March 2004, the FASB issued an exposure draft of a new standard entitled Share Based Payment , which would amend Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-based Compensation , and SFAS No. 95, Statement of Cash Flows . Among other items, the new standard would require the expensing of stock options issued by the Company in the financial statements. See Note 3 for pro forma disclosures regarding the effect on income from continuing operations and earnings per share if we had applied the fair value recognition provisions of the exposure draft and SFAS No. 123. Depending on the model used to calculate stock-based compensation expense in the future, the pro forma disclosure in Note 3 may not be indicative of the stock-based compensation expense to be recognized in future financial statements. While the final statement is subject to change, it is currently anticipated it will become effective for periods beginning after June 15, 2005. We are currently in the process of evaluating this proposal.

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Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

1. Stock-based Compensation

Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation , we apply the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees , to our stock options and other stock-based compensation plans.

In accordance with APB Opinion No. 25, cost for stock-based compensation is recognized in income based on the excess, if any, of the quoted market price of the stock at the grant date of the award or other measurement date over the amount an employee must pay to acquire the stock. The exercise price for stock options granted to employees equals the fair market value of Pentair’s common stock at the date of grant, thereby resulting in no recognition of compensation expense by Pentair. Restricted stock awards are recorded as compensation cost over the requisite vesting periods based on the market value on the date of grant. Unearned compensation cost on restricted stock awards is shown as a reduction to shareholders’ equity.

The following table illustrates the effect on income from continuing operations and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. The estimated fair value of each Pentair option is calculated using the Black-Scholes option-pricing model:

In thousands, except per-share data	Three months ended — October 2 2004	September 27 2003		October 2 2004		September 27 2003
Income from continuing operations — as reported	$ 33,092	$	26,975	$	103,328	$	74,724
Less estimated stock-based employee compensation determined under fair value based method, net of
tax	(3,085	)	(1,705	)	(8,294	)	(3,864	)
Income from continuing operations — pro forma	$ 30,007	$	25,270	$	95,034	$	70,860
Earnings per common share — continuing operations
Basic — as reported	$ 0.33	$	0.27	$	1.04	$	0.76
Less estimated stock-based employee compensation determined under fair value based method, net of
tax	(0.03	)	(0.02	)	(0.08	)	(0.04	)
Basic — pro forma	$ 0.30	$	0.25	$	0.96	$	0.72
Diluted — as reported	$ 0.32	$	0.27	$	1.02	$	0.75
Less estimated stock-based employee compensation determined under fair value based method, net of
tax	(0.03	)	(0.02	)	(0.08	)	(0.04	)
Diluted — pro forma	$ 0.29	$	0.25	$	0.94	$	0.71
Weighted average common shares outstanding
Basic	99,502		98,868		99,083		98,809
Diluted	102,059		100,086		101,428		99,649

The weighted-average fair value of options granted was $8.32 and $5.74 for the nine months ended October 2, 2004 and September 27, 2003, respectively. We estimated the fair values using the Black-Scholes option pricing model, modified for dividends, using the following assumptions:

Percentages	October 2 2004	September 27 2003
Risk-free interest rate	3.31 %	2.86 %
Dividend yield	1.30 %	2.00 %
Expected stock price volatility	38.00 %	40.00 %
Expected lives	4.5 yrs.	5.0 yrs.

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Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

1. Earnings Per Common Share

On May 17, 2004, our Board of Directors approved a 2-for-1 stock split in the form of a 100 percent stock dividend payable on June 8, 2004, to shareholders of record as of June 1, 2004. All share and per share information presented in this Form 10-Q has been retroactively restated to reflect the effect of this stock split.

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

In thousands, except per-share data	Three months ended — October 2 2004	September 27 2003	Nine months ended — October 2 2004	September 27 2003
Income from continuing operations	$ 33,092	$ 26,975	$ 103,328	$ 74,724
Weighted average common shares outstanding — basic	99,502	98,868	99,083	98,809
Dilutive impact of stock options and restricted stock	2,557	1,218	2,345	840
Weighted average common shares outstanding — diluted	102,059	100,086	101,428	99,649
Earnings per common share — basic	$ 0.33	$ 0.27	$ 1.04	$ 0.76
Earnings per common share — diluted	$ 0.32	$ 0.27	$ 1.02	$ 0.75
Stock options excluded from the calculation of diluted earnings per share because the effect was anti-dilutive	37	49	125	1,530

1. Acquisitions

Effective July 31, 2004, we completed the acquisition of all of the capital stock of WICOR, Inc. (“WICOR”) from Wisconsin Energy Corporation (“WEC”) for $876.9 million in cash, including cash acquired and debt assumed of $15.5 million and $21.6 million, respectively. The acquisition was effected pursuant to a Stock Purchase Agreement, dated February 3, 2004, among the Company, WICOR and WEC. Our acquisition of WICOR, which manufactures water system, filtration and pool equipment products under the Sta-Rite, SHURflo and Hypro brands, has created a $2 billion water technology business with approximately 8,200 employees worldwide that will now be known as Pentair Water. We funded the payment of the purchase price and related fees and expenses of the WICOR acquisition with an $850 million committed line of credit (the “Bridge Facility”) and through additional borrowings available under our existing Credit Facility.

The initial allocation of purchase price for the WICOR acquisition was based on preliminary estimates and will be revised as asset valuations are finalized and further information is obtained on the fair value of liabilities.

The initial purchase price for WICOR has been allocated based on management’s estimates and independent appraisals as follows:

In thousands	Estimated Fair Value
Current assets	$ 299,998
Property, plant, and equipment	118,385
Goodwill	600,474
Intangibles	182,000
Other noncurrent assets	3,760
Total assets acquired	$ 1,204,617
Current maturities of long-term debt	$ 18,459
Current liabilities	163,390
Long-term debt	3,162
Pension and other retirement compensation	27,336
Post-retirement medical and other benefits	32,189
Deferred tax liabilities	79,008
Other noncurrent liabilities	1,533
Total liabilities assumed	325,077
Minority interest	2,674
Net assets acquired	$ 876,866

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Notes to condensed consolidated financial statements (unaudited)

The minority interest represents joint venture interests in which we are the majority shareholder and have a third party ownership interest.

A preliminary valuation of the acquired intangible assets was performed by a third party valuation specialist to assist us in determining the fair value of each identifiable intangible. Standard valuation procedures were utilized in determining the fair value of the acquired intangibles. The following table summarizes the identified intangible asset categories and their weighted average amortization period:

In thousands	Amortization Period	Fair Value
Finite-life intangible assets
Patented and proprietary technology	14.2 Years	$ 39,600
Customer relationships	18.0 Years	62,900
Weighted average amortization period	16.5 Years	$ 102,500
Indefinite-life intangible assets
Trade marks and trade names	n/a	$ 79,500
Goodwill	n/a	600,474	*
		$ 679,974
* Approximately
$70.6 million of goodwill is tax deductible.

On December 31, 2003, we acquired all of the common stock of Everpure, Inc. (“Everpure”) from United States Filter Corporation, a unit of Veolia Environnement, for $217.3 million in cash, including cash acquired of $5.5 million. Everpure is a leading global provider of water filtration products and services for the commercial and consumer sectors. Everpure products include a wide array of filtration systems and cartridges for various applications. Preliminary valuations of identifiable intangible assets acquired as part of the acquisition were $91.1 million, including $49.3 million of definite-lived intangible assets with a weighted average amortization period of 16 years. Goodwill recorded as part of the initial purchase price allocation was $105.3 million, of which approximately $104.0 million is tax deductible. During the quarter ended July 3, 2004, goodwill recorded as part of the initial purchase price allocation was adjusted to $107.7 million, an increase of $2.4 million, primarily due to a final purchase price adjustment. During the quarter ended October 2, 2004, goodwill was increased approximately $19.3 million offset mainly by a decrease in amortizable intangible assets following the determination of the final allocation of goodwill and intangible assets based on a third party valuation. We continue to evaluate the purchase price allocation of Everpure and we expect to revise it as better information becomes available in the fourth quarter of 2004.

During the year ended December 31, 2003, we also completed four product line acquisitions in our Water segment for total consideration of approximately $21.4 million in cash: Hydrotemp Manufacturing Co., Inc., Letro Products, Inc. and certain assets of TwinPumps, Inc. and K&M Plastics, Inc. The allocation of the purchase price of these four product line acquisitions resulted in goodwill of $17.3 million, all of which is tax deductible. The purchase price allocations for the four product line acquisitions have been completed with no material effect on previously recorded estimates.

The following pro forma condensed consolidated financial results of operations are presented as if the acquisitions described above had been completed at the beginning of each period presented.

In thousands, except per-share data	Three months ended — October 2 2004	September 27 2003	Nine months ended — October 2 2004	September 27 2003
Pro forma net sales	$ 671,381	$ 619,004	$ 2,107,610	$ 1,849,339
Pro forma income from continuing operations	35,966	34,377	116,831	97,368
Pro forma net income	50,776	45,777	157,078	132,755
Pro forma earnings per common share - continuing operations
Basic	$ 0.36	$ 0.35	$ 1.18	$ 0.99
Diluted	$ 0.35	$ 0.34	$ 1.15	$ 0.98
Weighted average common shares outstanding
Basic	99,502	98,868	99,083	98,809
Diluted	102,059	100,086	101,428	99,649

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Notes to condensed consolidated financial statements (unaudited)

These pro forma condensed consolidated financial results have been prepared for comparative purposes only and include certain adjustments, such as increased interest expense on acquisition debt. They do not reflect the effect of synergies that would have been expected to result from the integration of these acquisitions. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the combination occurred at the beginning of each period presented, or of future results of the consolidated entities.

1. Discontinued Operations

On July 16, 2004, we signed a definitive agreement to sell our Tools Group to BDK. The Tools Group comprised the Porter-Cable, Delta, DeVilbiss Air Power, Oldham Saw, and FLEX brands, among others. Tools Group products include woodworking machinery, portable power tools, power tool accessories, metal and stoneworking tools, pneumatic tools, compressors, generators, and pressure washers. The Tools Group employed approximately 4,200 people at facilities in North America, Europe and Asia.

Effective after the close of business October 2, 2004, we completed the sale of our Tools Group to BDK for approximately $796.8 million in cash, including a $21.8 million interim net asset value increase, subject to post-closing adjustments.

Our financial statements have been restated to reflect the Tools Group as a discontinued operation for all periods presented. Operating results of the discontinued Tools Group are summarized below. The amounts exclude general corporate overhead previously allocated to the Tools Group. The amounts include an allocation of interest based on a ratio of the net assets of the discontinued operations to the total net assets of Pentair.

In thousands, except per-share data	Three months ended — October 2 2004	September 27 2003		October 2 2004		September 27 2003
Net sales	$ 279,982	$	268,028	$	842,110	$	803,209
Earnings before income taxes	24,003		18,483		65,231		57,372
Income tax expense	(9,193	)	(7,083	)	(24,984	)	(21,985	)
Earnings from operations, net of income taxes	14,810		11,400		40,247		35,387
Net income	$ 14,810	$	11,400	$	40,247	$	35,387

Net assets of the discontinued Tools Group consisted of the following;

In thousands	October 2 2004	December 31 2003	September 27 2003
Current assets	$ 394,937	$ 313,399	$ 360,606
Property, plant, and equipment	128,050	110,444	111,817
Goodwill	409,661	376,366	375,424
Other noncurrent assets	27,360	53,082	53,157
Total assets	$ 960,008	$ 853,291	$ 901,004
Current liabilities	$ 209,339	$ 155,898	$ 166,303
Other noncurrent liabilities	41,598	39,581	34,033
Total liabilities	250,937	195,479	200,336
Net assets	$ 709,071	$ 657,812	$ 700,668

1. Inventories

Inventories from continuing operations were comprised of:

In thousands	October 2 2004	December 31 2003	September 27 2003
Raw materials and supplies	$ 112,126	$ 54,957	$ 56,337
Work-in-process	34,351	17,331	17,193
Finished goods	168,937	94,574	87,885
Total inventories	$ 315,414	$ 166,862	$ 161,415

The net increase in inventories is primarily the result of our acquired WICOR inventories.

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Notes to condensed consolidated financial statements (unaudited)

1. Comprehensive Income

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

In thousands	Three months ended — October 2 2004	September 27 2003	October 2 2004		September 27 2003
Net income	$ 47,902	$ 38,375	$	143,575	$ 110,111
Changes in cumulative foreign currency translation adjustment	6,122	(4,158	)	299	12,414
Changes in market value of derivative financial instruments classified as cash flow
hedges	119	192		1,499	(5,045	)
Comprehensive income	$ 54,143	$ 34,409	$	145,373	$ 117,480

The net foreign currency translation gain for the three months and nine months ended October 2, 2004 resulted from the strengthening of the Euro against the U.S. dollar. The net foreign currency translation loss for the three months ended September 27, 2003 resulted primarily from the weakening Euro against the U.S. dollar. The net foreign currency translation gain for the nine months ended September 27, 2003 resulted primarily from the strengthening of the Euro against the U.S. dollar.

The change in market value of derivative financial instruments for the three months and nine months ended October 2, 2004 resulted from increasing interest rates and the passage of time toward maturity of the underlying derivative instruments. The change in market value of derivative financial instruments for the three months and nine months ended September 27, 2003 resulted from changes in the value of outstanding hedging instruments, primarily related to the Euro. Fluctuations in the value of hedging instruments are offset by changes in the cash flows of the underlying exposures being hedged.

1. Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the nine months ended October 2, 2004 by segment were as follows:

In thousands — Balance December 31, 2003	Water — $ 803,573	$	193,610	$	997,183
Acquired	600,563		—		600,563
Purchase accounting adjustments	23,505		—		23,505
Foreign currency translation	(880	)	(736	)	(1,616	)
Balance October 2, 2004	$ 1,426,761	$	192,874	$	1,619,635

The purchase accounting adjustment in the Water segment was primarily related to a $19.3 million increase to goodwill offset mainly by a decrease in amortizable intangible assets related to the acquisition of Everpure. The adjustment was driven by the determination of the final allocation of goodwill and intangible assets based on a third party valuation.

Intangible assets, other than goodwill, are comprised of:

In thousands	October 2, 2004 — Gross carrying amount	Accumulated amortization		Net	December 31, 2003 — Gross carrying amount	Accumulated amortization		Net
Finite-life intangible assets
Patents	$ 47,248	$ (2,114	)	$ 45,134	$ 14,629	$ (914	)	$ 13,715
Non-compete agreements	7,445	(3,889	)	3,556	5,818	(2,871	)	2,947
Proprietary technology	12,323	(856	)	11,467	12,900	—		12,900
Customer relationships	83,523	(1,915	)	81,608	25,000	—		25,000
Other	—	—		—	2,700	(576	)	2,124
Total finite-life intangible assets	$ 150,539	$ (8,774	)	$ 141,765	$ 61,047	$ (4,361	)	$ 56,686
Indefinite-life intangible assets
Trademarks	$ 118,005	$ —		$ 118,005	$ 41,804	$ —		$ 41,804
Total intangibles, net				$ 259,770				$ 98,490

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Notes to condensed consolidated financial statements (unaudited)

Amortization expense for the nine months ended October 2, 2004 was approximately $4.4 million. On a calendar year basis, the estimated future amortization expense for identifiable intangible assets during the next five years is as follows:

In thousands	2004 Q4	2005	2006	2007	2008	2009
Estimated amortization expense	$ 2,724	$ 10,829	$ 10,461	$ 10,177	$ 9,273	$ 9,104

1. Debt

Debt and the average interest rate on debt outstanding is summarized as follows:

In thousands — Commercial paper, maturing within 41 days	Average interest rate October 2, 2004 — 2.42 %	Maturity (Year) — $	169,638	$	64,806	$	73,379
Revolving credit facilities	3.19 %	2006	72,100		184,200		23,800
Private placement - fixed rate	5.50 %	2007-2013	135,000		183,910		181,521
Private placement - floating rate	2.80 %	2013	100,000		100,000		100,000
Senior notes	7.85 %	2009	250,000		250,000		250,000
Other	3.10 %	2004-2009	15,035		17,859		26,192
Total contractual debt obligations			741,773		800,775		654,892
Interest rate swap monetization deferred income			5,831		6,705		6,997
Fair value adjustment of hedged debt			(20	)	(987	)	741
Total long-term debt, including current portion per balance sheet			747,584		806,493		662,630
Less current maturities			(9,865	)	(73,631	)	(104,020	)
Long-term debt			737,719		732,862		558,610
Short-term borrowings	3.04 %	2004	850,000		—		102
Total debt		$	1,587,719	$	732,862	$	558,712

We currently have a $500 million multi-currency revolving credit facility (the “Credit Facility”) with various banks that expires on July 25, 2006. Interest rates and fees on the Credit Facility vary based on our credit ratings.

We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We use the Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. As of October 2, 2004, we had $169.6 million of commercial paper outstanding that matured within 41 days. All of the commercial paper was classified as long-term as we have the intent and the ability to refinance such obligations on a long-term basis under the Credit Facility. Availability under our Credit Facility at October 2, 2004, including outstanding commercial paper, was approximately $258 million.

Effective following the close of business on July 31, 2004, we completed the acquisition of WICOR. We funded the payment of the purchase price and related fees and expenses of the WICOR acquisition with the $850 million Bridge Facility and through additional borrowings available under our existing Credit Facility. The interest rate and facility fee on the Bridge Facility varies based on our credit rating. Based on our existing credit rating, the interest rate on the Bridge Facility and loans under the Credit Facility during the period of the Bridge Facility is LIBOR plus 1.375%. Upon the settlement of the Bridge Facility, the interest rate on loans under the Credit Facility is LIBOR plus 1.125%.

On October 4, 2004, we received approximately $796.8 million of proceeds from the sale of our Tools Group to BDK. As required under the terms of the Bridge Facility, we used the proceeds from the Tools Group sale to pay down the Bridge Facility. We repaid the remainder of the Bridge Facility with availability under the Credit Facility.

We were in compliance with all debt covenants as of October 2, 2004.

In addition to the Credit Facility, we have $40 million of uncommitted credit facilities, under which we had no borrowings as of October 2, 2004.

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Notes to condensed consolidated financial statements (unaudited)

Long-term debt outstanding at October 2, 2004, matures on a calendar year basis by contractual debt maturity as follows (excluding effects of the Bridge Facility):

In thousands	2004 Q4	2005	2006	2007	2008	2009	Thereafter	Total
Contractual long-term debt obligation maturities	$ 8,698	$ 3,363	$ 241,955	$ 37,757	$ —	$ 250,000	$ 200,000	$ 741,773
Other maturities	292	1,166	1,166	1,166	1,166	855	—	5,811
Total maturities	$ 8,990	$ 4,529	$ 243,121	$ 38,923	$ 1,166	$ 250,855	$ 200,000	$ 747,584

1. Benefit Plans

Components of net periodic benefit cost for the three months and nine months ended October 2, 2004 and September 27, 2003 are as follows:

	Three months ended
	Pension Benefits			Post-retirement
In thousands	October 2 2004	September 27 2003		October 2 2004		September 27 2003
Service cost	$ 4,367	$	3,816	$	224	$	140
Interest cost	7,216		5,973		897		568
Expected return on plan assets	(7,417	)	(6,187	)	—		—
Amortization of transition obligation	32		5		—		—
Amortization of prior year service cost (benefit)	116		163		(145	)	(231	)
Recognized net actuarial loss	258		168		—		—
Net periodic benefit cost	$ 4,572	$	3,938	$	976	$	477
Continuing operations	$ 3,696	$	3,102	$	790	$	236
Discontinued operations	876		836		186		242
Net periodic benefit cost	$ 4,572	$	3,938	$	976	$	478
	Nine months ended
	Pension Benefits			Post-retirement
In thousands	October 2 2004	September 27 2003		October 2 2004		September 27 2003
Service cost	$ 12,165	$	11,447	$	483	$	419
Interest cost	19,795		17,918		2,008		1,705
Expected return on plan assets	(20,342	)	(18,561	)	—		—
Amortization of transition obligation	95		15		—		—
Amortization of prior year service cost (benefit)	349		488		(436	)	(692	)
Recognized net actuarial loss	773		504		—		—
Net periodic benefit cost	$ 12,835	$	11,811	$	2,055	$	1,432
Continuing operations	$ 10,207	$	9,304	$	1,498	$	707
Discontinued operations	2,628		2,507		557		725
Net periodic benefit cost	$ 12,835	$	11,811	$	2,055	$	1,432

Employer Contributions

We previously disclosed in our financial statements for the year ended December 31, 2003, that we expected to make contributions in the range of $10 million to $15 million to our pension plans in 2004 and we believe the expected contribution range continues to be appropriate.

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Notes to condensed consolidated financial statements (unaudited)

1. Business Segments

Financial information by reportable segment for the three months and nine months ended October 2, 2004 and September 27, 2003 are shown below:

In thousands	Three months ended — October 2 2004	September 27 2003			Nine months ended — October 2 2004	September 27 2003
Net sales to external customers
Water	$ 426,670	$	270,903		$ 1,093,967	$	807,993
Enclosures	181,097		146,083		532,686		430,317
Consolidated	$ 607,767	$	416,986		$ 1,626,653	$	1,238,310
Intersegment sales
Water	$ 26	$	(2	)	$ 76	$	40
Enclosures	3		150		1,321		605
Other	(29	)	(148	)	(1,397	)	(645	)
Consolidated	$ —	$	—		$ —	$	—
Operating income (loss)
Water	$ 47,410	$	36,197		$ 148,210	$	111,703
Enclosures	23,211		13,555		64,155		35,123
Other	(6,522	)	(4,560	)	(27,172	)	(18,792	)
Consolidated	$ 64,099	$	45,192		$ 185,193	$	128,034
Depreciation
Water	$ 8,885	$	5,457		$ 19,728	$	16,501
Enclosures	4,859		4,952		14,493		15,271
Other	275		120		725		360
Consolidated	$ 14,019	$	10,529		$ 34,946	$	32,132
Amortization
Water	$ 2,215	$	386		$ 4,855	$	1,153
Enclosures	—		—		—		—
Other	1,818		808		5,455		2,425
Consolidated	$ 4,033	$	1,194		$ 10,310	$	3,578
Capital Expenditures
Water	$ 5,679	$	4,316		$ 11,988	$	11,401
Enclosures	6,128		1,320		9,983		3,682
Other	3,406		5,148		6,582		14,637
Consolidated	$ 15,213	$	10,784		$ 28,553	$	29,720
Continuing operations	$ 12,381	$	6,269		$ 22,793	$	18,369
Discontinued operations	2,832		4,515		5,760		11,351
Consolidated	$ 15,213	$	10,784		$ 28,553	$	29,720

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

Identifiable assets by reportable segment are shown below:

In thousands	October 2 2004	December 31 2003	September 27 2003
Water	$ 2,507,323	$ 1,321,128	$ 1,084,737
Enclosures	489,949	462,837	464,928
Other	169,525	143,421	136,820
Continuing operations	$ 3,166,797	$ 1,927,386	$ 1,686,485
Discontinued operations	960,008	853,291	901,004
Consolidated	$ 4,126,805	$ 2,780,677	$ 2,587,489

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Notes to condensed consolidated financial statements (unaudited)

The following table presents certain net sales geographic information:

In thousands	Three months ended — October 2 2004	September 27 2003	Nine months ended — October 2 2004	September 27 2003
North America	$ 501,223	$ 346,081	$ 1,326,066	$ 1,026,606
Europe	77,521	57,141	235,728	177,953
Asia and Other	29,023	13,764	64,859	33,751
Consolidated	$ 607,767	$ 416,986	$ 1,626,653	$ 1,238,310

Net sales are based on the location in which the sale originated. No foreign country’s net sales to unaffiliated customers were material.

1. Commitments and Contingencies

Operating lease commitments

Net rental expense under operating leases for the nine months ended October 2, 2004 and September 27, 2003 is as follows:

In thousands	Three months ended — October 2 2004	September 27 2003		Nine months ended — October 2 2004	September 27 2003
Gross rental expense	$ 6,497	$	6,182	$ 19,470	$	18,013
Sublease rental expense	(72	)	—	(215	)	—
Net rental expense	$ 6,425	$	6,182	$ 19,255	$	18,013

Future minimum lease commitments under non-cancelable operating leases, principally related to facilities, vehicles, and machinery and equipment, is as follows:

In thousands — Minimum lease payments	2004 Q4 — $ 7,523	$	23,705	$	20,914	$	14,437	$	11,326	$	11,149	$	23,314	$	112,368
Minimum sublease rentals	(287	)	(1,012	)	(904	)	(723	)	(723	)	(700	)	(663	)	(5,012	)
Net future minimum lease commitments	$ 7,236	$	22,693	$	20,010	$	13,714	$	10,603	$	10,449	$	22,651	$	107,356

Environmental

We have been named as defendants, targets, or potentially responsible parties (PRPs) in a small number of environmental cleanups, in which our current or former business units have generally been given de minimis status. To date, none of these claims have resulted in cleanup costs, fines, penalties, or damages in an amount material to our financial position or results of operations. We have disposed of a number of businesses over the past 10 years and in certain cases, such as the disposition of the Cross Pointe Paper Corporation uncoated paper business in 1995, the Federal Cartridge Company ammunition business in 1997, and Lincoln Industrial in 2001, we have retained responsibility and potential liability for certain environmental obligations. We have received claims for indemnification from purchasers both of the paper business and the ammunition business and have established what we believe to be adequate accruals for potential liabilities arising out of retained responsibilities. We have recently settled one such claim in 2003 and our recorded accrual was adequate.

In addition, there are pending environmental issues concerning a limited number of sites, including one site acquired in the acquisition of Essef Corporation in 1999 that relates to operations no longer carried out at that site. We have established what we believe to be adequate accruals for remediation costs at this and other sites. We do not believe that projected response costs will result in a material liability.

We may be named as a PRP at other sites in the future, for both divested and acquired businesses. When it has been possible to provide reasonable estimates of our liability with respect to environmental sites, provisions have been made in accordance with accounting principles generally accepted in the United States of America. As of October 2, 2004, our reserve for such environmental liabilities was approximately $9.5 million, measured on an undiscounted basis. We cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmental cleanup costs and liabilities will not exceed the amount of our current reserves.

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Notes to condensed consolidated financial statements (unaudited)

Litigation

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.

Warranties and guarantees

From time to time in connection with the disposition of businesses or product lines, Pentair may agree to indemnify purchasers for various potential liabilities relating to the sold business, such as pre-closing tax, product liability, warranty, environmental, or other obligations. The subject matter, amounts, and duration of any such indemnification obligations vary for each type of liability indemnified and may vary widely from transaction to transaction.

We accrue for costs associated with guarantees when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts, and where no amount within a range of estimates is more likely, the minimum is accrued.

We have guaranteed the indebtedness of a customer, whose outstanding debt at October 2, 2004 and December 31, 2003 was $1.7 million and $2.0 million, respectively. The debt amount is a declining balance and scheduled to be paid in full by June 2007. The liability relating to the guarantee is not material.

We provide service and warranty policies on our products. Liability under service and warranty policies is based upon a review of historical warranty and service claim experience. Adjustments are made to accruals as claim data and historical experience warrant. In addition, we incur discretionary costs to service our products in connection with product performance issues.

The changes in the carrying amount of service and product warranties from continuing operations for the nine months ended October 2, 2004 and September 27, 2003 are as follows:

In thousands — Balance at beginning of the period	October 2 2004 — $ 14,427	$	15,158
Service and product warranty provision	24,640		16,647
Payments	(22,399	)	(17,842	)
Warranty liabilities acquired	8,531		672
Translation	1		230
Balance at end of the period	$ 25,200	$	14,865

1. Financial Statements of Subsidiary Guarantors

The $250 million Senior Notes due 2009 are jointly and severally guaranteed by domestic subsidiaries (the “Guarantor Subsidiaries”), each of which is directly or indirectly wholly-owned by Pentair (the “Parent Company”). The following supplemental financial information sets forth the condensed consolidated balance sheets as of October 4, 2004 and December 31, 2003, the related condensed consolidated statements of income for the three-month and nine-month periods ended October 2, 2004 and September 27, 2003, and statements of cash flows for the nine-month periods ended October 2, 2004 and September 27, 2003, for the Parent Company, the Guarantor Subsidiaries, the non-guarantor subsidiaries and total consolidated Pentair and subsidiaries.

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Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Income

For the three months ended October 2, 2004

In thousands	Parent Company			Non-Guarantor Subsidiaries	Eliminations		Consolidated
Net sales	$ —	$	505,023	$ 123,626	$ (20,882	)	$ 607,767
Cost of goods sold	368		371,146	86,890	(20,421	)	437,983
Gross profit	(368	)	133,877	36,736	(461	)	169,784
Selling, general and administrative	2,202		71,818	23,323	(461	)	96,882
Research and development	—		6,945	1,858	—		8,803
Operating (loss) income	(2,570	)	55,114	11,555	—		64,099
Net interest (income) expense	(5,843	)	16,679	336	—		11,172
Income before income taxes	3,273		38,435	11,219	—		52,927
Provision for income taxes	753		14,818	4,264	—		19,835
Income from continuing operations	2,520		23,617	6,955	—		33,092
Income from discontinued operations, net of tax	—		10,455	4,355	—		14,810
Net income	$ 2,520	$	34,072	$ 11,310	$ —		$ 47,902

Pentair, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Income

For the nine months ended October 2, 2004

In thousands	Parent Company			Non-Guarantor Subsidiaries	Eliminations		Consolidated
Net sales	$ —	$	1,342,114	$ 341,077	$ (56,538	)	$ 1,626,653
Cost of goods sold	1,245		972,409	237,086	(55,595	)	1,155,145
Gross profit	(1,245	)	369,705	103,991	(943	)	471,508
Selling, general and administrative	7,292		194,881	63,564	(943	)	264,794
Research and development	—		16,178	5,343	—		21,521
Operating (loss) income	(8,537	)	158,646	35,084	—		185,193
Net interest (income) expense	(25,699	)	50,593	1,423	—		26,317
Income before income taxes	17,162		108,053	33,661	—		158,876
Provision for income taxes	3,947		39,718	11,883	—		55,548
Income from continuing operations	13,215		68,335	21,778	—		103,328
Income from discontinued operations, net of tax	—		31,458	8,789	—		40,247
Net income	$ 13,215	$	99,793	$ 30,567	$ —		$ 143,575

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Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

October 2, 2004

In thousands	Parent Company			Non-Guarantor Subsidiaries	Eliminations		Consolidated
Assets
Current assets
Cash and cash equivalents	$ 6,973	$	20,928	$ 50,893	$ —		$ 78,794
Accounts and notes receivable, net	915		308,959	105,894	(18,670	)	397,098
Inventories	—		229,768	85,646	—		315,414
Current assets of discontinued operations	278		309,501	85,158	—		394,937
Deferred tax assets	58,844		31,792	2,748	(48,080	)	45,304
Prepaid expenses and other current assets	8,277		14,121	12,086	(3,517	)	30,967
Total current assets	75,287		915,069	342,425	(70,267	)	1,262,514
Property, plant and equipment, net	7,627		247,210	81,139	—		335,976
Other assets
Assets of discontinued operations	—		480,225	84,846	—		565,071
Investments in subsidiaries	1,766,381		62,343	45,996	(1,874,720	)	—
Goodwill	—		1,436,532	183,103	—		1,619,635
Intangibles, net	—		257,832	1,938	—		259,770
Other	69,647		9,767	4,425	—		83,839
Total other assets	1,836,028		2,246,699	320,308	(1,874,720	)	2,528,315
Total assets	$ 1,918,942	$	3,408,978	$ 743,872	$ (1,944,987	)	$ 4,126,805
Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings	$ 850,000	$	—	$ —	$ —		850,000
Current maturities of long-term debt	1,166		343	12,150	(3,794	)	9,865
Accounts payable	3,590		141,743	56,195	(16,787	)	184,741
Employee compensation and benefits	8,540		52,510	27,729	—		88,779
Accrued product claims and warranties	10,000		21,375	3,825	—		35,200
Current liabilities of discontinued operations	685		137,654	71,000	—		209,339
Income taxes	36,894		7,538	5,265	—		49,697
Other current liabilities	22,291		96,520	21,562	(3,500	)	136,873
Total current liabilities	933,166		457,683	197,726	(24,081	)	1,564,494
Long-term debt	731,383		1,439,778	17,929	(1,451,371	)	737,719
Pension and other retirement compensation	57,439		26,570	45,770	—		129,779
Post-retirement medical and other benefits	13,874		44,133	—	—		58,007
Deferred tax liabilities	—		160,536	28,200	(48,080	)	140,656
Due to / (from) affiliates	(1,267,097	)	1,155,577	334,953	(223,433	)	—
Other noncurrent liabilities	57,216		2,807	1,838	—		61,861
Liabilities of discontinued operations	2,942		9,496	29,160	—		41,598
Total liabilities	528,923		3,296,580	655,576	(1,746,965	)	2,734,114
Minority interest	—		—	2,672	—		2,672
Shareholders’ equity	1,390,019		112,398	85,624	(198,022	)	1,390,019
Total liabilities and shareholders’ equity	$ 1,918,942	$	3,408,978	$ 743,872	$ (1,944,987	)	$ 4,126,805

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Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

For the nine months ended October 2, 2004

In thousands	Parent Company
Operating activities
Net income	$ 13,215	$	99,792	$	30,568	$	—	$	143,575
Adjustments to reconcile net income to net cash provided by operating activities:
Net income from discontinued operations	—		(31,458	)	(8,789	)	—		(40,247	)
Depreciation	724		27,033		7,189		—		34,946
Other amortization	5,455		4,709		146		—		10,310
Deferred income taxes	(23	)	116		(542	)	—		(449	)
Stock compensation	—		—
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable	782		6,932		588		5,309		13,611
Inventories	—		(37,757	)	(8,286	)	—		(46,043	)
Prepaid expenses and other current assets	(1,569	)	(635	)	(7,216	)	(4,415	)	(13,835	)
Accounts payable	1,588		14,330		1,595		(3,423	)	14,090
Employee compensation and benefits	(534	)	2,296		4,365		—		6,127
Accrued product claims and warranties	—		1,690		319		—		2,009
Income taxes	2,302		10,700		11,600		—		24,602
Other current liabilities	7,742		7,511		9,233		4,428		28,914
Pension and post-retirement benefits	4,697		209		2,215		—		7,121
Other assets and liabilities	(570	)	(2,016	)	1,527		—		(1,059	)
Net cash provided by continuing operations	33,809		103,452		44,512		1,899		183,672
Net cash provided by discontinued operations	1,359		6,918		5,754.00		—		14,031
Net cash provided by operating activities	35,168		110,370		50,266		1,899		197,703
Investing activities
Capital expenditures	(823	)	(22,626	)	(5,104	)	—		(28,553	)
Acquisitions, net of cash acquired	(867,336	)	(10,069	)	(312	)	—		(877,717	)
Investment in subsidiaries	95,460		(64,169	)	(29,392	)	(1,899	)	—
Net cash used for investing activities	(772,699	)	(96,864	)	(34,808	)	(1,899	)	(906,270	)
Financing activities
Net short-term borrowings (repayments)	845,838		—		—		—		845,838
Proceeds from long-term debt	231,516		—		—		—		231,516
Repayment of long-term debt	(317,152	)	—		—		—		(317,152	)
Proceeds from exercise of stock options	10,225		—		—		—		10,225
Dividends paid	(32,042	)	—		—		—		(32,042	)
Net cash provided by (used for) financing activities	738,385		—		—		—		738,385
Effect of exchange rate changes on cash	2,464		(315	)	(1,162	)	—		987
Change in cash and cash equivalents	3,318		13,191		14,296		—		30,805
Cash and cash equivalents, beginning of period	3,655		7,737		36,597		—		47,989
Cash and cash equivalents, end of period	$ 6,973	$	20,928	$	50,893	$	—	$	78,794

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Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Income

For the three months ended September 27, 2003

In thousands	Parent Company			Non-Guarantor Subsidiaries	Eliminations		Consolidated
Net sales	$ —	$	346,836	$ 80,138	$ (9,988	)	$ 416,986
Cost of goods sold	258		258,543	58,296	(10,526	)	306,571
Gross profit	(258	)	88,293	21,842	538		110,415
Selling, general and administrative	(271	)	47,863	11,341	538		59,471
Research and development	—		4,405	1,347	—		5,752
Operating income	13		36,025	9,154	—		45,192
Net interest (income) expense	(5,179	)	9,502	1,207	—		5,530
Income before income taxes	5,192		26,523	7,947	—		39,662
Provision for income taxes	1,194		8,314	3,179	—		12,687
Income from continuing operations	3,998		18,209	4,768	—		26,975
Income from discontinued operations, net of tax	—		10,211	1,189	—		11,400
Net income	$ 3,998	$	28,420	$ 5,957	$ —		$ 38,375

Pentair, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Income

For the nine months ended September 27, 2003

In thousands	Parent Company			Non-Guarantor Subsidiaries	Eliminations		Consolidated
Net sales	$ —	$	1,031,625	$ 237,702	$ (31,017	)	$ 1,238,310
Cost of goods sold	966		766,117	171,063	(32,573	)	905,573
Gross profit	(966	)	265,508	66,639	1,556		332,737
Selling, general and administrative	958		145,654	39,830	1,556		187,998
Research and development	—		12,642	4,063	—		16,705
Operating (loss) income	(1,924	)	107,212	22,746	—		128,034
Net interest (income) expense	(14,569	)	29,841	3,299	—		18,571
Income before income taxes	12,645		77,371	19,447	—		109,463
Provision for income taxes	2,908		24,052	7,779	—		34,739
Income from continuing operations	9,737		53,319	11,668	—		74,724
Income from discontinued operations, net of tax	—		32,980	2,407	—		35,387
Net income	$ 9,737	$	86,299	$ 14,075	$ —		$ 110,111

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Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

December 31, 2003

In thousands	Parent Company								Consolidated
Assets
Current assets
Cash and cash equivalents	$ 3,655	$	7,737	$	36,597	$	—		$ 47,989
Accounts and notes receivable, net	1,697		194,664		68,475		(13,361	)	251,475
Inventories	—		123,178		43,684		—		166,862
Current assets of discontinued operations	2,088		273,611		37,700		—		313,399
Deferred tax assets	58,894		19,739		392		(48,154	)	30,871
Prepaid expenses and other current assets	6,628		5,979		14,179		(7,932	)	18,854
Total current assets	72,962		624,908		201,027		(69,447	)	829,450
Property, plant and equipment, net	7,875		167,317		57,914		—		233,106
Other assets
Assets of discontinued operations	—		486,398		53,494		—		539,892
Investments in subsidiaries	1,601,177		5,496		48,085		(1,654,758	)	—
Goodwill	—		815,212		181,971		—		997,183
Intangibles, net	—		98,484		6		—		98,490
Other	74,544		4,721		3,291		—		82,556
Total other assets	1,675,721		1,410,311		286,847		(1,654,758	)	1,718,121
Total assets	$ 1,756,558	$	2,202,536	$	545,788	$	(1,724,205	)	$ 2,780,677
Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings	$ —	$	—	$	—	$	—		—
Current maturities of long-term debt	36,166		396		40,384		(3,315	)	73,631
Accounts payable	2,001		73,706		30,699		(13,363	)	93,043
Employee compensation and benefits	7,725		35,360		18,128		—		61,213
Accrued product claims and warranties	10,000		11,587		2,840		—		24,427
Current liabilities of discontinued operations	685		132,714		22,499		—		155,898
Income taxes	35,362		(20,119	)	(331	)	—		14,912
Other current liabilities	16,494		48,577		17,185		(7,929	)	74,327
Total current liabilities	108,433		282,221		131,404		(24,607	)	497,451
Long-term debt	728,558		1,322,649		13,345		(1,331,690	)	732,862
Pension and other retirement compensation	57,207		3,209		39,818		—		100,234
Post-retirement medical and other benefits	14,583		11,644		—		—		26,227
Deferred tax liabilities	—		82,329		26,461		(48,154	)	60,636
Due to / (from) affiliates	(477,557	)	282,310		235,011		(39,764	)	—
Other noncurrent liabilities	60,463		1,510		235		—		62,208
Liabilities of discontinued operations	3,393		2,449		33,739		—		39,581
Total liabilities	495,080		1,988,321		480,013		(1,444,215	)	1,519,199
Minority interest	—		—		—		—		—
Shareholders’ equity	1,261,478		214,215		65,775		(279,990	)	1,261,478
Total liabilities and shareholders’ equity	$ 1,756,558	$	2,202,536	$	545,788	$	(1,724,205	)	$ 2,780,677

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Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

For the nine months ended September 27, 2003

In thousands	Parent Company
Operating activities
Net income	$ 9,737	$	86,299	$	14,075	$	—	$	110,111
Adjustments to reconcile net income to net cash provided by operating activities:
Net income from discontinued operations	—		(32,980	)	(2,407	)	—		(35,387	)
Depreciation	360		25,727		6,045		—		32,132
Other amortization	2,425		1,157		(4	)	—		3,578
Deferred income taxes	10,092		2,027		(1,353	)	—		10,766
Stock compensation	306		—		—		—		306
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable	2,385		(2,074	)	(1,411	)	(501	)	(1,601	)
Inventories	—		8,271		745		—		9,016
Prepaid expenses and other current assets	(2,079	)	(2,030	)	1,956		(2,537	)	(4,690	)
Accounts payable	3,527		(4,242	)	(877	)	387		(1,205	)
Employee compensation and benefits	37		5,854		1,833		—		7,724
Accrued product claims and warranties	—		(1,261	)	188		—		(1,073	)
Income taxes	(5,748	)	4,935		1,715		—		902
Other current liabilities	1,011		1,220		(324	)	2,560		4,467
Pension and post-retirement benefits	5,409		52		2,053		—		7,514
Other assets and liabilities	(545	)	1,272		1,152		(1	)	1,878
Net cash provided by continuing operations	26,917		94,227		23,386		(92	)	144,438
Net cash provided by discontinued operations	(581	)	30,661		3,811		—		33,891
Net cash provided by operating activities	26,336		124,888		27,197		(92	)	178,329
Investing activities
Capital expenditures	(3,285	)	(23,073	)	(3,362	)	—		(29,720	)
Acquisitions, net of cash acquired	(19,409	)	—		—		—		(19,409	)
Investment in subsidiaries	89,805		(91,217	)	1,320		92		—
Payments from sale of businesses	(2,400	)	—		—		—		(2,400	)
Equity investments	—		(5,426	)	—		—		(5,426	)
Other	48		—		—		—		48
Net cash used for investing activities	64,759		(119,716	)	(2,042	)	92		(56,907	)
Financing activities
Net short-term borrowings (repayments)	(771	)	—		—		—		(771	)
Proceeds from long-term debt	486,657		—		—		—		486,657
Repayment of long-term debt	(558,816	)	—		—		—		(558,816	)
Proceeds from exercise of stock options	510		—		—		—		510
Dividends paid	(30,106	)	—		—		—		(30,106	)
Net cash provided by (used for) financing activities	(102,526	)	—		—		—		(102,526	)
Effect of exchange rate changes on cash	11,737		(926	)	(18,974	)	—		(8,163	)
Change in cash and cash equivalents	306		4,246		6,181		—		10,733
Cash and cash equivalents, beginning of period	6,470		18,003		15,175		—		39,648
Cash and cash equivalents, end of period	$ 6,776	$	22,249	$	21,356	$	—	$	50,381

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Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

1. Subsequent Event

Effective after the close of business October 2, 2004, we completed the sale of our Tools Group to BDK for approximately $796.8 million in cash, including a $21.8 million interim net asset value increase, subject to post-closing adjustments. The disposition was effected pursuant to a Purchase Agreement between BDK and Pentair dated July 16, 2004. We used the proceeds from the Tools Group sale to repay the $850 million Bridge Facility used to acquire WICOR. We repaid the remainder of the Bridge Facility through borrowings under our Credit Facility on October 4, 2004. We retained certain insurance liabilities, employee compensation and benefit liabilities, environmental liabilities, long-term debt, pension obligations and post-retirement obligations of the Tools Group.

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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, including foreign competitors;

§ 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 raw material commodities from our suppliers without interruption and at reasonable prices;

§ 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.

• our ability to integrate WICOR successfully and to fully realize synergies on our anticipated timetable;

• 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 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 and costs associated with moving production overseas;

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

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

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

• our ability to access capital markets and obtain anticipated financing under favorable terms.

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.

Overview

We are a focused diversified industrial manufacturer operating in two segments: Water and Enclosures. Our Water segment manufactures and markets essential products and systems used in the movement, treatment, storage and enjoyment of water and generated 67 percent of total revenues in the first nine months of 2004. Our Enclosures segment 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. Our Enclosures segment accounted for 33 percent of total revenues in the first nine months of 2004.

Our Water segment has progressively become a more important part of our business portfolio with sales increasing from $100 million in 1995 to approximately $1.1 billion in 2003. We have identified a target market totaling $50 billion, representing a portion of the $350 billion global water market. We continue to capitalize on growth opportunities in the water industry as evidenced by four product line acquisitions in our Water segment in 2003 as well as the acquisition of Everpure on December 31, 2003 and year-over-year sales growth, exclusive of acquisitions and favorable currency translation, in the first nine months of 2004. Effective July 31, 2004, we completed the acquisition of all of the shares of capital stock of WICOR, Inc. (“WICOR”) from Wisconsin Energy Corporation (“WEC”), for $876.9 million in cash, including cash acquired and debt assumed of $15.5 million and $21.6 million, respectively. Our acquisition of WICOR, which manufactures water system, filtration and pool equipment products under the Sta-Rite, SHURflo and Hypro brands, has helped create a $2 billion water technology business with approximately 8,200 employees worldwide that will now be known as Pentair Water.

Our Enclosures segment operates in a large global market with significant room for growth in industry niches such as defense, security, medical, and networking. We believe we have the largest industrial and commercial distribution network in North America and highest brand recognition in the industry. During 2001 and 2002, the Enclosures segment experienced significantly lower sales volumes as a result of severely reduced capital spending in the industrial market and over-capacity and weak demand in the datacom and telecom markets.

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However, this segment experienced growth in 2003 and the first nine months of 2004 across the electrical and electronic markets and we believe it is well positioned to continue to improve performance. In addition, through the success of our Pentair Integrated Management System (PIMS) and supply management initiatives, we have increased Enclosures segment sequential margins for eleven consecutive quarters.

On May 17, 2004, our Board of Directors approved a 2-for-1 stock split in the form of a 100 percent stock dividend payable on June 8, 2004, to shareholders of record as of June 1, 2004. All share and per share information presented in this Form 10-Q has been retroactively restated to reflect the effect of this stock split.

Effective after the close of business October 2, 2004, we completed the sale of our Tools Group to The Black & Decker Corporation (“BDK”) for approximately $796.8 million in cash, including a $21.8 million interim net asset value increase, subject to post-closing adjustments. The disposition was effected pursuant to a Purchase Agreement between BDK and Pentair dated July 16, 2004. We used the proceeds from the Tools Group sale to repay the $850 million committed line of credit (the “Bridge Facility”) used to acquire WICOR. We repaid the remainder of the Bridge Facility through borrowings under our Credit Facility on October 4, 2004. We retained certain insurance liabilities, employee compensation and benefit liabilities, environmental liabilities, long-term debt, pension obligations and post-retirement obligations of the Tools Group.

Key Trends and Uncertainties

The following trends and uncertainties affected our financial performance in the first nine months of 2004:

Ÿ In the first nine months of 2004, we experienced approximately 13 percent organic sales growth, net sales excluding the effects of acquisitions, foreign currency translation, and four additional business days in the first nine months of 2004 compared to the prior year period.

Ÿ We expect our Water and Enclosures segments to continue to benefit from our key initiatives, including supply management and our Pentair Integrated Management System (“PIMS”).

Ÿ Free cash flow, defined as cash flow from operating activities less capital expenditures, including both continuing and discontinued operations, exceeded $200 million for the second straight year in 2003 and is expected to exceed $200 million in 2004. See our discussion of Other financial measures under the caption “Liquidity and Capital Resources” in this report.

Ÿ In the first nine months of 2004, we experienced favorable foreign currency effects, primarily for the U.S. dollar against the Euro, which may not trend favorably in the future.

Ÿ Based on our current knowledge of the WICOR effective tax rate, we expect our overall blended rate in 2004 to be 35 percent and a 100 basis point increase in 2005 to 36 percent. We continue to pursue tax rate reduction opportunities.

Ÿ We expect our Water operating income margins for next few quarters to be lower by roughly 200 basis points compared to the prior year comparable period. We expect the forecasted operating income margins will be impacted by the lower WICOR margins versus Pentair Water margins, anticipated one-time integration costs and fair market inventory valuation adjustments. In the future, we intend to drive margins in the expanded Water Group toward a goal of 15 percent, while capturing growth opportunities in Water and Enclosures.

Ÿ We are experiencing material cost inflation in a number of our businesses. We are striving for greater productivity improvements and implementing selective increases in selling prices to help mitigate cost increases in base materials such as steel, resins, ocean freight and fuel, health care and insurance. In addition, the WICOR acquisition has increased our purchasing power, and consolidating the Water Group’s spending on materials is expected to deliver savings, further cushioning the impact of material cost inflation.

Ÿ Costs associated with facility rationalizations are expected to impact the statement of income by approximately $5 million in the fourth quarter of 2004.

Outlook

In the fourth quarter of 2004 and beyond, our operating objectives include the following:

Ÿ Continue to drive our five strategic initiatives: cash flow, supply management, PIMS, talent management, and organic sales growth;

Ÿ Complete the integration of the December 31, 2003 Everpure acquisition;

Ÿ Continue the integration of the July 31, 2004 WICOR acquisition and begin to obtain synergy savings;

Ÿ Continue to capitalize on growth opportunities, expand product lines and create new ones by targeting new areas for development; and

Ÿ Aggressively pursue new channels and markets, new geographic areas and new business platforms.

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RESULTS OF OPERATIONS

Net sales

Consolidated net sales and the change from the prior year period were as follows:

In thousands	Three months ended — October 2 2004	September 27 2003	$ change	% change	Nine months ended — October 2 2004	September 27 2003	$ change	% change
Net sales as reported	$ 607,767	$ 416,986	$ 190,781	45.8 %	$ 1,626,653	$ 1,238,310	$ 388,343	31.4 %

The components of the net sales change in 2004 from 2003 were as follows

Percentages	% Change from 2003 — Third quarter	Nine months
Volume	42.9	28.2
Price	1.6	1.5
Currency	1.3	1.7
Total	45.8	31.4

Consolidated net sales

The 45.8 percent and 31.4 percent increases in consolidated net sales in the third quarter and first nine months of 2004 from 2003 were primarily driven by:

• increase in sales volume driven by our July 31, 2004 acquisition of WICOR and our December 31, 2003 acquisition of Everpure;

• organic sales growth from continuing operations of approximately 13 percent for the first nine months;

• selective increases in selling prices in our Water and Enclosure segments to mitigate inflationary cost increases;

• four additional business days in the first nine months of 2004 compared to the prior year period; and

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

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

In thousands	Three months ended — October 2 2004	September 27 2003	$ change	% change	Nine months ended — October 2 2004	September 27 2003	$ change	% change
Water	$ 426,670	$ 270,903	$ 155,767	57.5 %	$ 1,093,967	$ 807,993	$ 285,974	35.4 %
Enclosures	181,097	146,083	35,014	24.0 %	532,686	430,317	102,369	23.8 %
Total	$ 607,767	$ 416,986	$ 190,781	45.8 %	$ 1,626,653	$ 1,238,310	$ 388,343	31.4 %

Water

The 57.5 percent and 35.4 percent increases in Water segment net sales in the third quarter and first nine months of 2004 from 2003 were primarily driven by:

• increase in sales volume driven by our July 31, 2004 acquisition of WICOR and our December 31, 2003 acquisition of Everpure;

• strong sales of pumps for residential water systems and sump pumps, which were further strengthened in the third quarter by hurricane activity in the Southeast;

• higher organic growth for pool and spa equipment, by capturing a share of the increasing spend on the backyard environment, particularly as it relates to in-ground pool building in the Sunbelt regions combined with a growing replacement market;

• significant growth in new markets;

• an increase in the sales of water treatment products including residential and industrial tanks and valves in the U.S. and European markets;

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• selective increases in selling prices to mitigate inflationary cost increases;

• four additional business days in the first nine months of fiscal 2004 compared to the prior year period; and

• favorable foreign currency effects.

Enclosures

The 24.0 percent and 23.8 percent increases in Enclosures segment net sales in the third quarter and first nine months of 2004 from 2003 were primarily driven by:

• higher organic sales due to new distribution, new products, and higher demand from established industrial markets, as well as security, medical, networking, and commercial markets;

• recovery in North American telecom and datacom sales;

• an increase in European sales volume due to improved business activity at large OEMs, particularly in the test and measurement, automation and control, and telecom segments;

• selective increases in selling prices to mitigate inflationary cost increases;

• favorable foreign currency effects; and

• four additional business days in the first nine months of 2004 compared to the prior year period.

Gross profit

In thousands	Three months ended — October 2 2004	% of Sales		September 27 2003	% of sales	Nine months ended — October 2 2004	% of sales		September 27 2003	% of sales
Gross profit	$ 169,784	27.9	%	$ 110,415	26.5 %	$ 471,508	29.0	%	$ 332,737	26.9 %
Percentage point change		1.4	pts				2.1	pts

The 1.4 percentage point and 2.1 percentage point increases in gross profit as a percent of sales in the third quarter and first nine months of 2004 from 2003 were primarily the result of:

• cost leverage from our increase in sales volume;

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

• lower costs as a result of engineered cost reductions and productivity improvements throughout Pentair; and

• our December 31, 2003 acquisition of Everpure.

These increases were partially offset by:

• our July 31, 2004 acquisition of WICOR; and

• the expensing of fair market value inventory adjustments related to inventory acquired in the Everpure and WICOR transactions.

Selling, general and administrative (SG&A)

In thousands	Three months ended — October 2 2004	% of sales		September 27 2003	% of sales	Nine months ended — October 2 2004	% of sales		September 27 2003	% of sales
SG&A	$ 96,882	15.9	%	$ 59,471	14.3 %	$ 264,795	16.3	%	$ 187,998	15.2 %
Percentage point change		1.6	pts				1.1	pts

The 1.6 percentage point and 1.1 percentage point increases in SG&A expense as a percent of sales in the third quarter and first nine months of 2004 from 2003 were primarily due to:

• our July 31, 2004 acquisition of WICOR and our December 31, 2003 acquisition of Everpure;

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• cost of outside support for integration planning for the WICOR acquisition;

• expenses related to the consolidation of facilities in our Water businesses; and

• higher corporate governance costs, including Sarbanes-Oxley compliance and external audit fees, and increased general insurance costs.

Research and development (R&D)

In thousands	Three months ended — October 2 2004	% of sales		September 27 2003	% of sales	Nine months ended — October 2 2004	% of sales		September 27 2003	% of sales
R&D	$ 8,803	1.4	%	$ 5,752	1.4 %	$ 21,521	1.3	%	$ 16,705	1.3 %
Percentage point change		0.0	pts				0.0	pts

The unchanged R&D expense as a percent of sales in the third quarter and first nine months of 2004 from 2003 was primarily due to:

• increased spending for new product development initiatives that paced with the increase in sales.

Operating income

Water

In thousands	Three months ended — October 2 2004	% of sales		September 27 2003	% of sales	Nine months ended — October 2 2004	% of sales		September 27 2003	% of sales
Operating income	$ 47,410	11.1	%	$ 36,197	13.4 %	$ 148,210	13.5	%	$ 111,703	13.8 %
Percentage point change		(2.3	)pts				(0.3	)pts

The 2.3 percentage point and 0.3 percentage point decreases in Water segment operating income as a percent of sales in the third quarter and first nine months of 2004 from 2003 were primarily the result of:

• our July 31, 2004 acquisition of WICOR;

• inflationary cost increases;

• cost of outside support for integration planning for the WICOR acquisition; and

• the expensing of fair market value inventory adjustments related to inventory acquired in the Everpure and WICOR transactions.

These decreases were partially offset by:

• favorable operating leverage provided by supply management savings and productivity gains from higher sales volume;

• selective increases in selling prices to mitigate inflationary cost increases; and

• our December 31, 2003 acquisition of Everpure.

Enclosures

In thousands	Three months ended — October 2 2004	% of sales		September 27 2003	% of sales	Nine months ended — October 2 2004	% of sales		September 27 2003	% of sales
Operating income	$ 23,211	12.8	%	$ 13,555	9.3 %	$ 64,155	12.0	%	$ 35,123	8.2 %
Percentage point change		3.5	pts				3.8	pts

The 3.5 percentage point and 3.8 percentage point increases in Enclosures segment operating income as a percent of sales in the third quarter and first nine months of 2004 from 2003 were primarily the result of:

• leverage gained on volume expansion and as the result of savings realized from the continued success of PIMS and supply management activities;

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• selective increases in selling prices to mitigate inflationary cost increases; and

• the absence of expenses associated with downsizing included in the comparable prior period.

These increases were partially offset by:

• material cost inflation, primarily steel.

Net interest expense

In thousands	Three months ended — October 2 2004	September 27 2003	Difference	% change	Nine months ended — October 2 2004	September 27 2003	Difference	% change
Net interest expense	$ 11,172	$ 5,530	$ 5,642	102.0 %	$ 26,317	$ 18,571	$ 7,746	41.7 %

The 102.0 percent and 41.7 percent increases in interest expense in the third quarter and first nine months of 2004 from 2003 were primarily the result of:

• increase of $5.6 million in interest expense and fees due to $850 million of borrowings under the Bridge Facility.

Provision for income taxes from continuing operations

In thousands	Three months ended — October 2 2004	September 27 2003	Nine months ended — October 2 2004	September 27 2003
Income before income taxes	$ 52,927	$ 39,662	$ 158,875	$ 109,463
Provision for income taxes	19,835	12,687	55,549	34,739
Effective tax rate	37.5 %	32.0 %	35.0 %	31.7 %

The 5.5 percent and 3.3 percent increases in the tax rate in the third quarter and first nine months of 2004 from 2003 were primarily the result of:

• our July 31, 2004 acquisition of WICOR which results in a higher effective tax rate;

• the anticipated mix of our 2004 U.S. and foreign earnings; and

• increased operating income combined with the relatively fixed nature of many of our tax savings programs.

We expect our full year effective tax rate in 2004 to be 35 percent and we expect a 100 basis point increase in our effective tax rate in 2005 to 36 percent. We will continue to pursue tax rate reduction opportunities.

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, public and private debt and equity offerings.

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	October 2 2004	December 31 2003	September 27 2003
Days of sales in accounts receivable	52	54	54
Days inventory on hand	58	59	60
Days in accounts payable	56	54	53

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Operating activities

Cash provided by operating activities was $197.7 million in the first nine months of 2004, or $19.4 million higher compared with the same period in 2003. The increase was primarily attributable to an increase in net income. Working capital productivity improved, even with a 13 percent increase in organic sales growth and higher initial levels of working capital within WICOR. In the future, we expect WICOR to increase our working capital ratios until our post-acquisition integration activities are farther along and our PIMS initiatives are established.

Investing activities

Capital expenditures in the first nine months of 2004 were $28.6 million compared with $29.7 million in the prior year period. We anticipate capital expenditures for fiscal 2004 to be approximately $40 to $45 million, primarily for new product development, selective increases in equipment capacity and general maintenance capital.

Effective July 31, 2004, we completed the acquisition of all of the shares of capital stock of WICOR from WEC, for $876.9 million in cash, including cash acquired and debt assumed of $15.5 million and $21.6 million, respectively.

On April 5, 2004, we acquired all of the remaining stock of the Tools Group’s Asian joint venture for $21.8 million in cash, $6.4 million of which is to be paid 15 days following the sale of the Tools Group, plus contingent payments based on future sales and return on sales. The level of return on sales targets achieved in the second quarter required a payment of $0.9 million, which has been recorded as an increase to goodwill. The acquisition included cash acquired of $6.2 million and debt assumed of $9.0 million. The investment in the Tools Group’s Asian joint venture business is currently recorded as part of discontinued operations.

In the second quarter of 2004, we paid $3.9 million in purchase price adjustments related to the December 31, 2003 acquisition of Everpure. The adjustment primarily related to the final determination of closing date net assets.

In the first quarter of 2004, we paid $2.3 million for acquisition fees primarily related to the December 31, 2003 acquisition of Everpure.

During the first nine months of 2003, we completed four product line acquisitions for total consideration of approximately $21.4 million in cash including transaction costs.

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

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

Financing activities

Net cash provided by financing activities was $738.4 million in the first nine months of 2004 compared with net cash used by financing activities of $102.5 million in the first nine months of 2003. Financing activities included the utilization of the $850 million committed line of credit (the “Bridge Facility”) to fund the WICOR acquisition, draw downs and repayments on our revolving credit facilities to fund our operations in the normal course of business, dividends paid and cash received from stock option exercises.

We currently have a $500 million multi-currency revolving credit facility (the “Credit Facility”) with various banks that expires on July 25, 2006. Interest rates and fees on the Credit Facility vary based on our credit ratings.

We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We use the Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. As of October 2, 2004, we had $169.6 million of commercial paper outstanding that matured within 41 days. All of the commercial paper was classified as long-term as we have the intent and the ability to refinance such obligations on a long-term basis under the Credit Facility. Availability under our Credit Facility at October 2, 2004, including outstanding commercial paper, was approximately $258 million.

Effective following the close of business on July 31, 2004, we completed the acquisition of WICOR. We funded the payment of the purchase price and related fees and expenses of the WICOR acquisition with the Bridge Facility and through additional borrowings available under our existing Credit Facility. The interest rate on the Bridge Facility and loans under the Credit Facility during the period of the Bridge Facility was LIBOR plus 1.375%.

On October 4, 2004, we received approximately $796.8 million of proceeds from the sale of our Tools Group to BDK. As required under the terms of the Bridge Facility, we used the proceeds from the Tools Group sale to pay down the Bridge Facility. We repaid the remainder of the Bridge Facility with availability under the Credit Facility. Upon the pay off of the Bridge Facility and based on our existing credit rating, the interest rate on loans under the Credit Facility is LIBOR plus 1.125%.

As a result of our announcement of an agreement to acquire WICOR in February 2004, Moody’s Investor Services confirmed the long-term rating for our Credit Facilities of Baa3 and changed our outlook to negative from stable. At the same time, Standard and Poor’s Rating Services placed our BBB corporate credit and other ratings on CreditWatch with negative implications. Following the completion of the

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sale of our Tools Group to BDK, Standard and Poor’s Rating Services affirmed our BBB corporate credit and other ratings, removed the CreditWatch and changed our outlook to negative. The change in rating outlook to negative from stable was a reflection of Standard and Poor’s concern over integration risks associated with the acquisition of WICOR and an acquisitive growth strategy.

Also in February 2004, Moody’s Investor Services placed the Baa3 senior unsecured rating on our $250 million notes and the Baa3 rating on our senior notes under our $225 million shelf registration under review for possible downgrade, due to structural subordination thereof. Existing lenders under our Credit Facility and private placement notes benefit from guarantees from our domestic subsidiaries, while the $250 million senior note holders historically did not benefit from such guarantees. In connection with the closing of the WICOR acquisition, our domestic subsidiaries executed a similar guarantee for the benefit of the $250 million senior note holders to avoid the downgrade due to the structural subordination.

We were in compliance with all debt covenants as of October 2, 2004.

In addition to the Credit Facility, we have $40 million of uncommitted credit facilities, under which we had no borrowings as of October 2, 2004.

As of October 2, 2004, our capital structure consisted of $1,597.6 million in total indebtedness and $1,390.0 million in shareholders’ equity. The ratio of debt-to-total capital at October 2, 2004 was 53.5 percent, compared with 39.0 percent at December 31, 2003 and 35.6 percent at September 27, 2003. Our targeted debt-to-total capital ratio is approximately 40 percent. As of October 2, 2004, we exceeded this targeted ratio due to the timing difference between the acquisition of WICOR and our disposition of the Tools Group. On October 4, 2004, we received approximately $796.8 million of proceeds from the sale of our Tools Group to BDK. As required under the terms of the Bridge Facility, we used the proceeds from the Tools Group sale to pay down the $850 million Bridge Facility. We repaid the remainder of the Bridge Facility with availability under the Credit Facility. Adjusting for the $796.8 million of proceeds received from the October 4, 2004 sale of our Tools Group, our pro forma debt-to-capital ratio would be approximately 37.0 percent, below our targeted debt-to-capital ratio of 40.0 percent.

We expect to 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.

Dividends paid in the first nine months of 2004 were $32.0 million or $0.320 per common share compared with $30.1 million or $0.305 per common share in the prior year period. We anticipate the continuation of the practice of paying dividends on a quarterly basis.

The following summarizes our significant contractual obligations that impact our liquidity:

In thousands	Payments Due by Period — 2004 Q4	2005	2006	2007	2008	2009	Thereafter	Total
Long-term debt obligations	$ 8,609	$ 3,185	$ 241,863	$ 37,599	$ —	$ 250,000	$ 200,000	$ 741,256
Capital lease obligations	89	178	92	158	—	—	—	517
Operating lease obligations, net of sublease rentals	7,236	22,693	20,010	13,714	10,603	10,449	22,651	107,356
Purchase obligations	—	—	—	—	—	—	—	—
Other long-term liabilities	292	1,166	1,166	1,166	1,166	855	—	5,811
Total contractual cash obligations, net	$ 16,226	$ 27,222	$ 263,131	$ 52,637	$ 11,769	$ 261,304	$ 222,651	$ 854,940

A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on us that specifies all significant terms. The purchase obligation amounts do not represent our total anticipated future purchases, but represent those purchases for which we are contractually obligated. As of October 2, 2004, we did not have any purchase obligations requiring cash outflows of $1 million or greater per year.

Pension

We previously disclosed in our financial statements for the year ended December 31, 2003, that we expected to make contributions in the range of $10 million to $15 million to our pension plans in 2004 and we believe the expected contribution range continues to be appropriate.

Other financial measures

In addition to measuring our cash flow generation or usage based upon operating, investing, and financing classifications included in the consolidated statements of cash flows, we also measure our free cash flow. Free cash flow is a non-GAAP financial measure that we use to assess our cash flow performance and have a long-term goal to consistently generate free cash flow that equals or exceeds 100 percent conversion of net income. We believe free cash flow is an important measure of operating performance because it provides us and our investors a measurement of cash generated from operations that is available to pay dividends and repay debt. In addition, free cash flow is

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used as one criterion to measure and pay compensation-based incentives. The following table is a reconciliation of free cash flow with cash flows from continuing and discontinued operating activities:

In thousands	Nine months ended — October 2 2004	September 27 2003
Cash flow provided by operating activities	$ 197,703	$	178,329
Capital expenditures continuing operations	(22,793	)	(18,369	)
Capital expenditures discontinued operations	(5,760	)	(11,351	)
Free Cash Flow	$ 169,150	$	148,609

We expect 2004 free cash flow to be approximately $200 million.

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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, 2003, 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

Interest rate risk

Effective following the close of business on July 31, 2004, we completed the acquisition of WICOR. We funded the payment of the purchase price and related fees and expenses of the WICOR acquisition with the Bridge Facility and through additional borrowings available under our existing Credit Facility. The interest rate on the Bridge Facility and loans under the Credit Facility during the period of the Bridge Facility, was LIBOR plus 1.375%.

On October 4, 2004, we received approximately $796.8 million of proceeds from the sale of our Tools Group to BDK. As required under the terms of the Bridge Facility, we used the proceeds from the Tools Group sale to pay down the Bridge Facility. We repaid the remainder of the Bridge Facility with availability under the Credit Facility. Upon the settlement of the Bridge Facility and based on our existing credit rating, the interest rate on loans under the Credit Facility is LIBOR plus 1.125%.

There have been no other material changes in our market risk during the quarter ended October 2, 2004. For additional information, refer to Item 7A of our 2003 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 October 2, 2004 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 October 2, 2004 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 October 2, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders of Pentair, Inc.

We have reviewed the accompanying condensed consolidated balance sheets of Pentair, Inc. and Subsidiaries (the “Company”) as of October 2, 2004 and September 27, 2003, the related condensed consolidated statements of income for the three-month and nine-month periods ended October 2, 2004 and September 27, 2003, and cash flows for the nine-month periods ended October 2, 2004 and September 27, 2003. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2003, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 4, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

DELOITTE & TOUCHE LLP

Minneapolis, Minnesota

November 11, 2004

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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 2003 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 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

| Period | (a) Total Number of Shares Purchased | Average Price Paid per Share (or Unit) | (b) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (b) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or
Programs |
| --- | --- | --- | --- | --- |
| July 4 – July 31, 2004 | 1,629 | $ 32.04 | — | 1,000,000 |
| August 1 – August 28, 2004 | 175,405 | $ 32.02 | — | 1,000,000 |
| August 29 – October 2, 2004 | 107,415 | $ 34.52 | — | 1,000,000 |

(a) The purchases in this column consist of the deemed surrender to the company by plan participants of shares of common stock to satisfy the exercise price related to the exercise of employee stock options, in each case to the extent applicable during the period indicated.

(b) In December 2003, the Board of Directors authorized the repurchase of up to 1,000,000 shares of our common stock, on a post stock-split basis, in open market or privately negotiated transactions to partially offset dilution due to normal grants of restricted shares and options to employees. The authorization expires on December 31, 2004. We did not repurchase any shares under the authorization during the quarter and nine months ended October 2, 2004 and accordingly still have the authority to repurchase 1,000,000 shares.

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ITEM 6.	Exhibits
(a)	Exhibits
	4.1	Supplemental Indenture between Pentair, Inc. and U.S. Bank National Association dated, as Trustee, as of August 2, 2004.
	15	Letter Regarding Unaudited Interim Financial Information
	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.

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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 November 11, 2004.

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

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	Exhibit Index to Form 10-Q for the Period Ended October 2, 2004
4.1	Supplemental Indenture between Pentair, Inc. and U.S. Bank National Association dated, as Trustee, as of August 2, 2004.
15	Letter Regarding Unaudited Interim Financial Information
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.