PENTAIR INC - 10-Q Quarterly Report

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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 September 28, 2002

		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)

1500 County Road B2 West, Suite 400, St. Paul, Minnesota		55113
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (651) 636-7920

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

On October 25, 2002, 49,227,084 shares of the Registrant’s common stock were outstanding.

Pentair, Inc. and Subsidiaries

		Page(s)
Part I Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Statements of Income for the three and nine months ended September 28, 2002 and September 29, 2001	3

	Condensed Consolidated Balance Sheets as of September 28, 2002, December 31, 2001, and September 29, 2001	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 28, 2002 and September 29, 2001	5

	Notes to Condensed Consolidated Financial Statements	6 - 12

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13 - 20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21

Item 4.	Controls and Procedures	21

Part II Other Information

Item 1.	Legal Proceedings	22

Item 6.	Exhibits and Reports on Form 8-K	22

Signature		23

Certifications		24 - 27

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

	Three months ended				Nine months ended
In thousands, except per-share data	September 28 2002		September 29 2001		September 28 2002		September 29 2001
Net sales	$	629,301	$	636,174	$	1,940,480	$	1,989,770
Cost of goods sold		480,332		487,033		1,478,520		1,525,723

Gross profit		148,969		149,141		461,960		464,047
Selling, general and administrative		78,243		90,152		253,530		276,864
Research and development		8,904		7,805		26,289		22,794

Operating income		61,822		51,184		182,141		164,389
Net interest expense		8,205		14,409		32,411		48,366
Other expense, write-off of investment		—		—		—		2,500

Income before income taxes		53,617		36,775		149,730		113,523
Provision for income taxes		16,214		12,104		47,913		39,733

Net income	$	37,403	$	24,671	$	101,817	$	73,790


Earnings per common share
Basic	$	0.76	$	0.50	$	2.07	$	1.50
Diluted	$	0.75	$	0.50	$	2.04	$	1.50

Weighted average common shares outstanding
Basic		49,235		49,082		49,212		49,040
Diluted		49,804		49,410		49,809		49,270

Cash dividends declared per common share	$	0.19	$	0.18	$	0.55	$	0.52

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

In thousands, except share and per-share data	September 28 2002			December 31 2001			September 29 2001

Assets

Current assets
Cash and cash equivalents	$	39,591		$	39,844		$	32,816
Accounts and notes receivable, net		415,019			398,579			460,732
Inventories		291,308			300,923			343,127
Deferred income taxes		66,527			69,953			73,675
Prepaid expenses and other current assets		20,735			20,979			28,551
Net assets of discontinued operations		1,771			5,325			106,683

Total current assets		834,951			835,603			1,045,584

Property, plant and equipment, net		306,102			329,500			340,187

Other assets
Goodwill, net		1,098,141			1,088,206			1,111,992
Other assets		115,704			118,889			93,814

Total assets	$	2,354,898		$	2,372,198		$	2,591,577


Liabilities and Shareholders’ Equity

Current liabilities
Short-term borrowings	$	—		$	—		$	61,890
Current maturities of long-term debt		7,284			8,729			4,371
Accounts and notes payable		188,872			179,149			207,721
Employee compensation and benefits		81,530			74,888			75,645
Accrued product claims and warranties		37,632			37,590			40,221
Income taxes		30,790			6,252			16,066
Other current liabilities		124,039			121,825			125,333

Total current liabilities		470,147			428,433			531,247

Long-term debt		559,218			714,977			781,885
Pension and other retirement compensation		82,683			74,263			69,733
Post-retirement medical and other benefits		42,762			43,583			33,317
Deferred income taxes		35,390			34,128			41,956
Other noncurrent liabilities		64,423			61,812			66,643

Total liabilities		1,254,623			1,357,196			1,524,781

Shareholders’ equity
Common shares par value $0.16 ²/3; 49,238,050, 49,110,859, and 49,041,646 shares issued and outstanding, respectively		8,207			8,193			8,174
Additional paid-in capital		482,146			478,541			475,774
Retained earnings		641,376			566,626			616,377
Unearned restricted stock compensation		(8,291	)		(9,440	)		(10,898	)
Accumulated other comprehensive loss		(23,163	)		(28,918	)		(22,631	)

Total shareholders’ equity		1,100,275			1,015,002			1,066,796

Total liabilities and shareholders’ equity	$	2,354,898		$	2,372,198		$	2,591,577

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Nine months ended
In thousands	September 28 2002			September 29 2001
Operating activities
Net income	$	101,817		$	73,790
Depreciation		44,499			48,662
Amortization of intangibles and unearned compensation		2,592			30,966
Deferred income taxes		4,263			3,843
Other expense, write-off of investment		—			2,500
Changes in assets and liabilities, net of effects of business acquisitions
Accounts and notes receivable		(9,236	)		4,723
Inventories		11,777			47,976
Prepaid expenses and other current assets		2,103			(11,273	)
Accounts payable		8,813			(40,417	)
Employee compensation and benefits		6,230			(8,086	)
Accrued product claims and warranties		(601	)		(1,887	)
Income taxes		24,104			10,922
Other current liabilities		4,187			(8,281	)
Pension and post-retirement benefits		5,664			7,561
Other assets and liabilities		11,141			(4,798	)

Net cash provided by continuing operations		217,353			156,201
Net cash provided by (used for) discontinued operations		3,555			(8,944	)

Net cash provided by operating activities		220,908			147,257

Investing activities
Capital expenditures		(23,674	)		(37,639	)
Proceeds from sale of businesses		1,744			—
Acquisitions, net of cash acquired		—			(1,937	)
Equity investments		(9,448	)		(20,564	)
Other		(165	)		—

Net cash used for investing activities		(31,543	)		(60,140	)

Financing activities
Net short-term borrowings		—			(46,937	)
Proceeds from long-term debt		387			2,676
Repayment of long-term debt		(168,695	)		(22,582	)
Proceeds from exercise of stock options		2,683			1,492
Repurchases of common stock		—			(1,458	)
Dividends paid		(27,067	)		(25,499	)

Net cash used for financing activities		(192,692	)		(92,308	)

Effect of exchange rate changes on cash		3,074			3,063

Change in cash and cash equivalents		(253	)		(2,128	)
Cash and cash equivalents, beginning of period		39,844			34,944

Cash and cash equivalents, end of period	$	39,591		$	32,816

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Basis of Presentation and Responsibility for Interim Financial Statements

We prepared the unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States can be condensed or omitted. We made certain reclassifications to the 2001 condensed consolidated financial statements to conform to the 2002 presentation.

We are responsible for the unaudited financial statements included in this document. The financial statements include all normal recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. As these are condensed financial statements, one should also read our consolidated financial statements and notes thereto which are included in our 2001 Annual Report on Form 10-K.

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

New Accounting Standards

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. This statement requires that goodwill and intangible assets deemed to have an indefinite life not be amortized. Instead of amortizing goodwill and intangible assets deemed to have an indefinite life, the statement requires a test for impairment to be performed annually, or immediately if conditions indicate that such an impairment could exist. We adopted the provisions of SFAS 142 effective January 1, 2002, and as a result, no longer record goodwill amortization (2001 goodwill amortization was $36.1 million, or $32.0 million after tax or $0.65 per diluted share).

In the second quarter of 2002, we completed our initial goodwill impairment review as required by SFAS 142 and concluded that none of our goodwill was impaired as of December 31, 2001. The fair value of each of our reporting units was estimated by an independent third party using a combination of the discounted cash flow, market comparable, and market capitalization approaches. We will test goodwill of each of our reporting units for impairment annually in the fourth quarter.

Had we accounted for goodwill under SFAS 142 for all prior periods presented, our net income and earnings per share would have been as follows:

Supplemental Consolidated Statement of Income Information

(Continuing Operations)

In thousands, except per-share data	Year 2001		Fourth Qtr 2001			Third Qtr 2001		Second Qtr 2001		First Qtr 2001
Reported net income	$	57,516	$	(16,274	)	$	24,671	$	28,556	$	20,563
Add back goodwill amortization, net of tax		32,043		7,890			7,953		8,200		8,000

Adjusted net income	$	89,559	$	(8,384	)	$	32,624	$	36,756	$	28,563


Reported earnings per share – basic	$	1.17	$	(0.33	)	$	0.50	$	0.58	$	0.42
Goodwill amortization		0.65		0.16			0.16		0.17		0.16

Adjusted net earnings per share – basic	$	1.82	$	(0.17	)	$	0.66	$	0.75	$	0.58


Reported earnings per share – diluted	$	1.17	$	(0.33	)	$	0.50	$	0.58	$	0.42
Goodwill amortization		0.65		0.16			0.16		0.17		0.16

Adjusted net earnings per share – diluted	$	1.82	$	(0.17	)	$	0.66	$	0.75	$	0.58

The changes in the carrying amount of goodwill for the nine months ended September 28, 2002 by operating segment is as follows:

In thousands	Tools		Water		Enclosures		Consolidated
Balance December 31, 2001	$	344,707	$	576,757	$	166,742	$	1,088,206
Foreign currency translation		249		4,473		5,213		9,935

Balance September 28, 2002	$	344,956	$	581,230	$	171,955	$	1,098,141

In August 2001, the FASB issued SFAS No. 143 (SFAS 143), Accounting for Asset Retirement Obligations, which is effective January 1, 2003. SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. We are currently in the process of evaluating the effect the adoption of this standard will have on our consolidated results of operations, financial position and cash flows.

Pentair, Inc. and subsidiaries

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

In September 2001, the FASB issued SFAS No. 144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, it retains many of the fundamental provisions of that statement. The adoption of this standard on January 1, 2002 did not have an effect on our consolidated results of operations, financial position and cash flows.

In July 2002, the FASB issued SFAS No. 146 (SFAS 146), Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, rather than at the date of the entity’s commitment to an exit plan. This statement is effective for exit and disposal activities that are initiated after December 31, 2002. Since adoption of this SFAS is prospective, we do not believe that the implementation of this SFAS will have a material impact on our financial statements.

Effective January 1, 2002, we adopted EITF Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products. This new standard requires that certain payments to our customers for cooperative advertising and certain sales incentive offers that were historically classified in selling, general and administrative expense be reclassified and shown as a reduction in net sales. EITF 01-9 also requires the reclassification of previously reported results of operations for periods prior to the adoption to conform to the current presentation. Accordingly, previously reported net sales for the three and nine month periods ended September 29, 2001 were reduced by $10.4 million and $30.2 million (with an offsetting reduction in selling expense), respectively. The adoption of this new standard had no impact on previously reported operating income, net income, or earnings per share.

Earnings Per Common Share

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

	Three months ended				Nine months ended
In thousands, except per-share data	September 28 2002		September 29 2001		September 28 2002		September 29 2001
Net income	$	37,403	$	24,671	$	101,817	$	73,790

Weighted average common shares outstanding – basic		49,235		49,082		49,212		49,040
Dilutive impact of stock options and restricted stock		569		328		597		230

Weighted average common shares outstanding – diluted		49,804		49,410		49,809		49,270


Earnings per common share – basic	$	0.76	$	0.50	$	2.07	$	1.50
Earnings per common share – diluted	$	0.75	$	0.50	$	2.04	$	1.50

Stock options excluded from the calculation of diluted earnings per share because the exercise price was greater than the average market price of the common shares		41		1,060		381		1,405

Inventories

Inventories were comprised of:

In thousands	September 28 2002		December 31 2001		September 29 2001
Raw materials and supplies	$	85,409	$	94,404	$	103,096
Work-in-process		35,579		38,760		42,760
Finished goods		170,320		167,759		197,271

Total inventories	$	291,308	$	300,923	$	343,127

Pentair, Inc. and subsidiaries

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

Comprehensive Income

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

	Three months ended						Nine months ended
In thousands	September 28 2002			September 29 2001			September 28 2002			September 29 2001
Net income	$	37,403		$	24,671		$	101,817		$	73,790
Changes in cumulative translation adjustment		(6,189	)		13,300			10,940			(1,912	)
Changes in market value of derivative financial instruments classified as cash flow hedges		(655	)		(4,008	)		(5,185	)		(193	)
Unrealized loss from marketable securities classified as available for sale		—			(39	)		—			(513	)
Cumulative effect of accounting change – SFAS 133		—			—			—			6,739

Comprehensive income (loss)	$	30,559		$	33,924		$	107,572		$	77,911

Equity Method Investment

We have invested approximately $24.9 million to take a 40 percent interest in certain joint venture operations of an Asian supplier for bench and portable tools, of which $4.5 million was paid in the first nine months of 2002. We hold an option to increase our ownership interest in these joint ventures to 100 percent. Our portion of the earnings of these joint ventures is included in cost of goods sold; however, it is not material.

Cost Method Investment

In July 2002, we invested an additional $5.0 million for a total investment of $10.0 million in the preferred stock of a privately held developer and manufacturer of laser leveling and measuring devices accounted for under the cost method. In addition, we have other cost method investments as disclosed in our 2001 Annual Report on Form 10-K.

Debt

The following table presents the components of long-term debt:

In thousands	September 28 2002			December 31 2001
Revolving credit facilities	$	164,000		$	329,000
Private placement		131,763			131,787
Senior notes		250,000			250,000
Other		11,835			12,919
Fair value interest rate swap		741			—
Interest rate swap monetization deferred income		8,163			—

Long-term debt, including current portion		566,502			723,706
Less current portion		(7,284	)		(8,729	)

Long-term debt	$	559,218		$	714,977

In March 2002, we entered into an interest rate swap agreement to effectively convert interest rate expense on $100 million of Senior notes for the term of the notes (maturing October 2009) from a 7.85 percent fixed annual rate to a floating annual rate equal to the six month LIBOR rate plus 2.49 percent. This swap agreement was designated and accounted for as a fair value hedge in accordance with SFAS No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, as amended. In September 2002, we terminated this swap agreement and received $8.2 million. This amount is recorded as a premium to the carrying amount of the notes in the condensed consolidated balance sheet and will be amortized as a reduction of interest expense over the remaining term of the Senior notes. The $8.2 million is also shown in the condensed consolidated statement of cash flows as an increase in other assets and liabilities.

Concurrent with the sale of the interest rate swap, we entered into a new interest rate swap agreement to effectively convert $100 million of Senior notes for the term of the notes (maturing October 2009) from a 7.85 percent fixed annual rate to a floating annual rate equal to the six month LIBOR rate plus 3.91 percent. This swap agreement has been designated and accounted for as a fair value hedge in accordance with SFAS 133. Since this swap qualifies for the short-cut method under SFAS 133, changes in the fair value of the swap (included in other assets in the condensed consolidated balance sheet) are offset by changes in the fair value of the designated debt being hedged. Consequently, there is no impact on net income or shareholders’ equity.

Pentair, Inc. and subsidiaries

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

Restructuring Charge

In the fourth quarter of 2001, we recorded a restructuring charge of $42.8 million consisting of:

$39.4 million related to the consolidation of manufacturing operations and the elimination of non-critical support facilities within our Enclosures segment; and

$3.4 million for the write-off of internal-use software development costs at corporate for the abandonment of a company-wide human resource system.

Of the total $42.8 million, $16.7 million relates to employee termination benefits for approximately 900 employees, of which approximately 830 have been terminated as of September 28, 2002. Employee termination benefits primarily represent cash payments for severance and outplacement counseling fees. The termination of approximately 500 employees was the direct result of plant closures with the remaining reductions spread across a wide range of functions. Since the beginning of 2002, we have closed five manufacturing facilities: Houston, TX; Pensauken, NJ; Brooklyn Center, MN; Livingston, Scotland and Bonneuil, France. Also closed were a warehouse and training facility in the U.S. and four sales offices (two in the U.S. and two in Europe). Approximately $6.0 million of the remaining $9.5 million liability for employee termination benefits represents payments to employees terminated in connection with plant closures that have yet to be paid, awaiting the results of potential litigation proceedings. The remaining $3.5 million relates to ongoing payments to terminated employees and to funds that will be used for the remaining planned terminations.

Exit costs include the incremental costs and contractual obligations for items such as lease termination payments and other facility exit costs. Of the 11 closed facilities, five have been disposed of, two are owned and currently held for resale, and four are leased and currently held for sublease.

Included in other current liabilities on the September 28, 2002 condensed consolidated balance sheet is the unused portion of the restructuring charge liability of $11.7 million. We expect to complete the remaining restructuring activities in fourth quarter of 2002. The restructuring liability will be funded through cash provided by operations.

The components of the restructuring charge and utilization are as follows:

	2001 restructuring charge – fourth quarter		Utilization						Balance September 28 2002
In thousands	2001 restructuring charge – fourth quarter		Year 2001			Nine months 2002			Balance September 28 2002
Employee termination benefits	$	16,696	$	(2,464	)	$	(4,690	)	$	9,542
Non-cash asset disposals		11,050		(11,050	)		—			—
Impaired goodwill		7,362		(7,362	)					—
Exit costs		7,649		(769	)		(4,710	)		2,170

Total	$	42,757	$	(21,645	)	$	(9,400	)	$	11,712

Pentair, Inc. and subsidiaries

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

10.

Business Segments

Financial information by operating segment is included in the following summary. We adopted EITF 01-9 effective January 1, 2002 which resulted in the reclassification (reduction) of previously reported net sales for the three and nine month periods ended September 29, 2001 of $10.4 million and $30.2 million (with an offsetting reduction in selling expense), respectively. The adoption of this new standard had no impact on previously reported operating income, net income, or earnings per share.

	Three months ended						Nine months ended
In thousands	September 28 2002			September 29 2001			September 28 2002			September 29 2001
*Net sales to external customers*
Tools	$	265,732		$	241,487		$	821,595		$	750,310
Water		223,637			230,370			700,579			689,850
Enclosures		139,932			164,317			418,306			549,610

Consolidated	$	629,301		$	636,174		$	1,940,480		$	1,989,770


*Operating income (loss) as reported*
Tools	$	25,479		$	17,524		$	73,002		$	43,605
Water		29,969			28,427			103,424			92,270
Enclosures		8,884			8,740			20,487			39,811
Other		(2,510	)		(3,507	)		(14,772	)		(11,297	)

Consolidated	$	61,822		$	51,184		$	182,141		$	164,389


*Goodwill amortization*
Tools	$	—		$	2,318		$	—		$	6,956
Water		—			4,575			—			13,983
Enclosures		—			2,066			—			6,272

Total goodwill amortization		—			8,959			—			27,211
Amortization of unearned compensation		864			1,442			2,592			3,755

Total amortization	$	864		$	10,401		$	2,592		$	30,966


*Operating income (loss) excluding goodwill amortization*
Tools	$	25,479		$	19,842		$	73,002		$	50,561
Water		29,969			33,002			103,424			106,253
Enclosures		8,884			10,806			20,487			46,083
Other		(2,510	)		(3,507	)		(14,772	)		(11,297	)

Consolidated	$	61,822		$	60,143		$	182,141		$	191,600

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

Pentair, Inc. and subsidiaries

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

The reclassified prior period net sales and SG&A (due to the adoption of EITF 01-9) as well as goodwill amortization are summarized as follows:

In thousands	Year 2001		Fourth Qtr 2001		Third Qtr 2001		Second Qtr 2001		First Qtr 2001
*Net sales to external customers* *⁽¹⁾*
Tools	$	1,001,645	$	251,335	$	241,487	$	274,419	$	234,404
Water		882,615		192,765		230,370		239,854		219,626
Enclosures		689,820		140,210		164,317		175,154		210,139

Consolidated	$	2,574,080	$	584,310	$	636,174	$	689,427	$	664,169


*SG&A* ^(1) (2)	$	377,098	$	100,234	$	90,152	$	90,534	$	96,178

*Goodwill amortization*
Tools	$	9,274	$	2,318	$	2,318	$	2,319	$	2,319
Water		18,560		4,577		4,575		4,859		4,549
Enclosures		8,273		2,001		2,066		2,060		2,146

Total goodwill amortization		36,107		8,896		8,959		9,238		9,014
Amortization of unearned compensation		5,568		1,813		1,442		1,443		870

Total amortization	$	41,675	$	10,709	$	10,401	$	10,681	$	9,884


*SG&A excluding goodwill amortization*	$	340,991	$	91,338	$	81,193	$	81,296	$	87,164
Percent of net sales		13.2%		15.6%		12.8%		11.8%		13.1%

In thousands	Year 2000		Year 1999		Year 1998		Year 1997		Year 1996
*Net sales to external customers*
Tools	$	1,029,658	$	850,327	$	644,226	$	559,907	$	467,464
Water		898,247		579,236		438,810		304,647		216,769
Enclosures		777,725		657,500		586,829		600,491		566,919
Other		—		—		—		128,136		133,360

Consolidated	$	2,705,630	$	2,087,063	$	1,669,865	$	1,593,181	$	1,384,512


*SG&A*^(1) (2)	$	396,105	$	310,700	$	261,302	$	241,062	$	216,775

*Goodwill amortization*
Tools	$	9,285	$	3,282	$	287	$	214	$	306
Water		18,074		12,714		7,793		7,363		4,920
Enclosures		9,097		8,413		5,832		5,576		5,667
Other		—		—		—		418		502

Total goodwill amortization		36,456		24,409		13,912		13,571		11,395
Amortization of unearned compensation		2,675		1,578		1,571		1,669		1,400

Total amortization	$	39,131	$	25,987	$	15,483	$	15,240	$	12,795


*SG&A excluding goodwill amortization*	$	359,649	$	286,291	$	247,390	$	227,491	$	205,380
Percent of net sales		13.3%		13.7%		14.8%		14.3%		14.8%

⁽¹⁾

Adjusted to give effect to the adoption of EITF 01-9.

⁽²⁾

Includes goodwill amortization.

Pentair, Inc. and subsidiaries

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

11.

Discontinued Operations

In October 2001, we completed the sale of our Service Equipment businesses to Clore Automotive, LLC (Clore) and received short-term notes receivable of $18.2 million, of which $12.1 million was received as of December 31, 2001. On August 15, 2002, Clore notified us that they were in default of their loan agreements with their primary lender. As a result, they became in default with the note agreements owed to Pentair. As of September 28, 2002, $5.4 million of the short-term notes receivable with Clore remained unpaid. Clore continues to negotiate with their primary lender and Pentair on the restructuring of their outstanding debt obligations. Based on current negotiations, we believe the amounts owed to Pentair to be recoverable.

12.

Subsequent Events

Acquisitions

On September 30, 2002, we acquired 100 percent of the common stock of Plymouth Products, Inc. from USF Consumer & Commercial WaterGroup, a unit of Vivendi Environnement, for $120.1 million in cash, net of cash acquired, plus debt assumed of approximately $1.1 million. Plymouth Products, Inc. is a manufacturer of water filtration products used in residential, commercial, and industrial applications and had sales in 2001 in excess of $80.0 million.

On October 2, 2002, we acquired 100 percent of the common stock of privately held Oldham Saw Co., Inc. for $49.8 million cash, net of cash acquired plus debt assumed of approximately $1.5 million. Oldham Saw Co., Inc. designs and manufactures router bits, circular saw blades, and related accessories for the do-it-yourself and professional power tool markets and had net sales in the last 12 months of approximately $59.0 million.

These acquisitions were financed through available lines of credit and had no impact on our compliance with loan covenants.

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

OPERATIONS

FORWARD-LOOKING STATEMENTS

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

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

changes in industry conditions, such as:

the strength of product demand;

the intensity of competition;

pricing pressures;

market acceptance of new product introductions;

the introduction of new products by competitors;

our ability to source components from third parties without interruption and at reasonable prices; and

the financial condition of our customers.

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

legal, governmental, and regulatory policies;

general economic conditions, such as the rate of economic growth in our principal geographic or product markets or fluctuations in exchange rates;

changes in operating factors, such as improvement (or its opposite) in manufacturing activities and the recognition of related efficiencies or inefficiencies;

inventory risks due to shifts in market demand; and

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

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

OUR BUSINESS

We are a diversified industrial manufacturer operating in three segments: Tools, Water, and Enclosures. Our Tools segment manufactures and markets a wide range of power tools under several brand names — Porter-Cable^TM, Delta^®, Biesemeyer^®, Ex-Cell^TM, Air America^®, Charge Air Pro^®, and Water Driver^TM — generating approximately 40 percent of total revenues. Our Water segment manufactures and markets essential products for the transport and treatment of water, wastewater and fluids and generates approximately 35 percent of revenues. Brand names within the Water segment include Myers^®, Fairbanks Morse^®, Hydromatic^®, Aurora^®, Water Ace^®, Shur-Dri^®, Fleck^®, SIATA^TM, CodeLine^TM, Structural^TM, WellMate^TMand Pentair Pool Products^TM. Our Enclosures segment accounts for approximately 25 percent of revenues, and designs, manufactures, and markets customized and standard metal and composite enclosures that house and protect sensitive controls and components for markets that include, testing and measurement equipment, automotive, general electronics, data communications, networking, and telecommunications. The segment goes to market under three primary brands: Hoffman Enclosures^®, Schroff^®, and Pentair Electronic Packaging^®.

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in our 2001 Annual Report on Form 10-K. The accounting policies used in preparing our interim 2002 condensed consolidated financial statements are the same as those described in our annual report, except as described in Note 2 of this report “New Accounting Standards.”

In preparing the financial statements, we follow accounting principles generally accepted in the United States of America, which in many cases require us to make assumptions, estimates and judgments that affect the amounts reported. Many of these policies are relatively straightforward. There are, however, a few policies that are critical because they are important in determining the financial condition and results of operations and they can be difficult to apply. Our critical accounting policies include those related to:

self-insurance reserves for product liability, workers’ compensation and other claims;

the resolution of matters related to open tax years;

the evaluation of long-lived assets, including goodwill and investments, for impairment; and

accounting for pensions and other post-retirement benefits, because of the importance of management judgment in making the estimates necessary to apply these policies.

NEW ACCOUNTING STANDARDS – Also see Note 2 (New Accounting Standards) of ITEM 1

We adopted three new accounting standards in the first quarter of 2002:

SFAS No. 142, Goodwill and Other Intangible Assets;

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets; and

EITF Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.

SFAS No. 142 requires that goodwill and intangible assets deemed to have an indefinite life no longer be amortized effective January 1, 2002. Prior to adoption of this standard, goodwill amortization was included as a part of selling, general and administrative expense. This standard did not require restatement of prior period amounts to be consistent with the current year presentation. We have included supplemental financial tables in the following discussion that show the effect of excluding goodwill amortization for the prior year period to be comparable with the current year presentation.

SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets effective January 1, 2002. The adoption of this standard did not have an effect on our consolidated results of operations, financial position and cash flows.

SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, rather than at the date of the entity’s commitment to an exit plan. This statement is effective for exit and disposal activities that are initiated after December 31, 2002. Since adoption of this SFAS is prospective, we do not believe that the implementation of this SFAS will have a material impact on our financial statements.

EITF 01-9 requires that certain payments to our customers for cooperative advertising and certain sales incentive offers that were historically classified in selling, general and administrative expense be reclassified and shown as a reduction in net sales. EITF 01-9 is effective for periods beginning after December 15, 2001 and requires the reclassification of previously reported results of operations for periods prior to adoption to conform to the current presentation. Accordingly, previously reported net sales for the three and nine month periods ended September 29, 2001 were reduced by $10.4 million and $30.2 million (with an offsetting reduction in selling expense), respectively. The adoption of this new standard had no impact on previously reported operating income, net income, or earnings per share.

RESULTS OF OPERATIONS

Third quarter and first nine months of 2002 operating income for the Tools segment and Other segment (corporate) have been adjusted from our third quarter earnings release on October 15, 2002 due to final closing entries. These entries had no impact on revenue, decreased Tools segment operating income by approximately $490,000, increased total operating income by approximately $200,000, and increased net income by approximately $140,000. There was no change to previously announced earnings per share.

Net sales

The components of the net sales change in 2002 from 2001 were as follows:

	% change from 2001
Percentages	Third quarter		Nine months
Volume	(1.0	)	(2.2	)
Price	(1.0	)	(0.5	)
Currency	0.9		0.2

Total	(1.1	)	(2.5	)

Net sales in the third quarter and first nine months of 2002 totaled $629.3 million and $1,940.5 million, compared with $636.2 million and $1,989.8 million for the same periods in 2001. The $6.9 million or 1.1 percent decline in net sales for the third quarter of 2002 and $49.3 million or 2.5 percent decline in net sales for the first nine months of 2002 compared to the same periods in the prior year were primarily due to:

volume declines in our Enclosures segment, reflecting severely reduced capital spending in the industrial market and over-capacity and weak demand in the datacom and telecom markets;

reduced sales of pool and spa equipment in the third quarter and nine month periods of 2002 compared to the prior year periods, principally due to a shift in order patterns with a major customer. Overall Water segment sales for the first nine months of 2002 were up, driven by increases in the retail and municipal pump markets; and

declines in average selling prices due to the introduction of lower price point products for the Delta Shopmaster^™ brand and more aggressive promotional pricing and competition in the retail channel for tools. These declines were partially offset by volume increases, particularly for pressure washers and Delta products in both the third quarter and first nine months of 2002.

The continued weakening of the U.S. dollar in the third quarter of 2002 also increased the dollar value of foreign sales by about 0.9 percent for the quarter and 0.2 percent on a year-to-date basis.

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

	Three months ended								Nine months ended
In thousands	September 28 2002		September 29 2001		$ change			% change	September 28 2002		September 29 2001		$ change			% change
Tools	$	265,732	$	241,487	$	24,245		10.0%	$	821,595	$	750,310	$	71,285		9.5%
Water		223,637		230,370		(6,733	)	(2.9%)		700,579		689,850		10,729		1.6%
Enclosures		139,932		164,317		(24,385	)	(14.8%)		418,306		549,610		(131,304	)	(23.9%)

Total	$	629,301	$	636,174	$	(6,873	)	(1.1%)	$	1,940,480	$	1,989,770	$	(49,290	)	(2.5%)

Tools

The 10.0 percent and 9.5 percent increases in Tools segment sales in the third quarter and first nine months of 2002 from 2001 was primarily driven by:

higher sales volume in our DeVilbiss Air Power Company (DAPC) business, particularly for pressure washers; and

higher sales volume in our Delta business as a result of our new sub-branding strategy through the creation of Delta Shopmaster^™ and Delta Industrial^™. The Delta Shopmaster^™ brand is targeted toward the entry-level do-it-yourselfer and the Delta Industrial^™ brand is targeted toward the professional craftsman.

These increases were partially offset by:

Water

The 2.9 percent decline in Water segment sales in the third quarter of 2002 from 2001 was primarily due to:

lower sales volume for our pool and spa equipment products due to an anticipated seasonal fall-off in the market, combined with unfavorable timing of orders. Pool and spa equipment sales in 2001 were slow until June which resulted in a relatively strong third quarter, while sales in 2002 resulted in a strong second quarter and an expected weaker third quarter.

The decline in pool and spa equipment sales was partially offset by:

strong pump sales during the quarter. The higher pump sales were primarily the result of an increase in volume in the residential business sold through retail which generates lower margins than the commercial and industrial side of the business; and

favorable foreign currency effects.

The 1.6 percent increase in Water segment sales in the first nine months of 2002 from 2001 was primarily due to:

strong pump sales particularly in the residential retail and municipal markets.

These increases were partially offset by:

lower sales volume for our pool and spa equipment products due to expected seasonal fall-off in the market, combined with unfavorable timing of orders.

Enclosures

The 14.8 percent and 23.9 percent declines in Enclosures segment sales in the third quarter and first nine months of 2002 from 2001 was primarily due to:

lower sales volume reflecting severely reduced capital spending in the industrial market and over-capacity and weak demand in the datacom and telecom markets.

This decrease was partially offset by:

favorable foreign currency effects.

Sales in the Enclosures segment have remained flat since the fourth quarter of 2001, and we are uncertain when the markets will recover. Despite extremely unfavorable market conditions, our Enclosures segment management is focused on two areas:

reducing existing cost structure; and

executing our growth initiatives that target higher sales to identified OEM’s, greater product breadth, increased geographic coverage, and new target markets.

As a result of the above efforts, we have seen an improvement in sequential operating income margin each quarter since the fourth quarter of 2001.

Supplemental Financial Information

Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. This statement requires that goodwill and intangible assets deemed to have an indefinite life not be amortized. The following supplemental condensed consolidated statements of income are presented as if we had accounted for goodwill under SFAS 142 for all prior periods (i.e., no longer amortizing goodwill). The following table shows selected as reported and as adjusted numbers had we been accounting for goodwill under SFAS 142 for the three- and nine-month periods ended September 29, 2001.

	Three months ended September 29, 2001							Nine months ended September 29, 2001
In thousands, except per-share data	As reported		Goodwill amortization			As adjusted		As reported		Goodwill amortization			As adjusted
SG&A	$	90,152	$	(8,959	)	$	81,193	$	276,864	$	(27,211	)	$	249,653
Operating income		51,184		8,959			60,143		164,389		27,211			191,600
Provision for income taxes		12,104		1,006			13,110		39,733		3,058			42,791
Net income		24,671		7,953			32,624		73,790		24,153			97,943
Earnings per share – diluted	$	0.50	$	0.16		$	0.66	$	1.50	$	0.49		$	1.99

Supplemental Condensed Consolidated

Statements of Income

Three months ended

Nine months ended

In thousands

September 28

2002

September 29 2001

As adjusted ⁽¹⁾

Percentage

point change

September 28

2002

September 29

2001

As adjusted ⁽¹⁾

Percentage

point change

Net sales

629,301

636,174

1,940,480

1,989,770

Cost of goods sold

480,332

487,033

1,478,520

1,525,723

Gross profit

148,969

149,141

461,960

464,047

% of net sales

23.7%

23.4%

0.3 pts

23.8%

23.3%

0.5 pts

Selling, general and administrative (SG&A) ⁽¹⁾

78,243

81,193

253,530

249,653

% of net sales

12.4%

12.8%

(0.4) pts

13.1%

12.5%

0.6 pts

Research and development (R&D)

8,904

7,805

26,289

22,794

% of net sales

1.4%

1.2%

0.2 pts

1.4%

1.1%

0.3 pts

Operating income

61,822

60,143

182,141

191,600

% of net sales

9.8%

9.5%

0.3 pts

9.4%

9.6%

(0.2) pts

Net interest expense

8,205

14,409

32,411

48,366

% of net sales

1.3%

2.3%

(1.0) pts

1.7%

2.4%

(0.7) pts

Other expense, write-off of investment

—

2,500

% of net sales

n/a

0.1%

Income before income taxes

53,617

45,734

149,730

140,734

% of net sales

8.5%

7.2%

1.3 pts

7.7%

7.1%

0.6 pts

Provision for income taxes ⁽¹⁾

16,214

13,110

47,913

42,791

Effective tax rate

30.2%

28.7%

1.5 pts

32.0%

30.4%

1.6 pts

Net income

37,403

32,624

101,817

97,943

% of net sales

5.9%

5.1%

0.8 pts

5.2%

4.9%

0.3 pts

Percentages may reflect rounding adjustments.

n/a — not applicable

⁽¹⁾

The numbers for the three and nine month periods of 2001 have been adjusted to exclude goodwill amortization as noted above.

Gross profit

Gross profit margin was 23.7 percent of sales and 23.8 percent of sales in the third quarter and first nine months of 2002, compared with 23.4 percent and 23.3 percent of sales for the same periods last year.

The 0.3 percentage point and 0.5 percentage point increases in gross profit margin in the third quarter and first nine months of 2002 from 2001 was primarily the result of:

savings realized from our supply chain management and lean enterprise initiatives, primarily in our Tools segment;

higher sales volume in our Tools segment, particularly for pressure washers;

favorable product mix in both the Porter-Cable and Delta businesses (year-to-date period only) related to higher margin pneumatic products, accessories, planers, shapers and table saws as well as new products; and

slight increases in average selling prices in our Water segment (year-to-date period only).

These increases were somewhat offset by:

lower sales volume in our Enclosures segment resulting in unabsorbed overhead;

unfavorable product mix in our Water segment as a result of lower sales of higher margin pool and spa equipment due to timing of orders and higher sales of lower margin residential retail and municipal pumps and lower overhead absorption as we reduced inventory; and

decreases in average selling prices, primarily in our Tools segment due to the introduction of lower price point products for the Delta Shopmaster^™ brand and more aggressive promotional pricing and competition in the retail channel for tools.

SG&A and R&D

SG&A expense was 12.4 percent of sales in the third quarter of 2002, compared with 12.8 percent (calculation excludes goodwill amortization of $9.0 million) for the same period in 2001. SG&A expense was 13.1 percent of sales in the first nine months of 2002, compared with 12.5 percent (excludes goodwill amortization of $27.2 million) for the same period in 2001.

The 0.4 percentage point decline in SG&A in the third quarter of 2002 from 2001 reflects:

lower spending for process improvement investments; and

lower expense related to company bonus programs.

The 0.6 percentage point increase in SG&A in the first nine months of 2002 from 2001 reflects:

higher selling expense as we continue to fund brand awareness advertising in our Tools segment;

additional costs incurred in the second quarter of 2002 as we intentionally accelerated our outsourced internal audit work and, simultaneously, began to recruit and hire internal resources to bring the internal audit function back in-house;

higher bad debt expense; and

Enclosures segment sales declining at a much faster rate than the decline in SG&A spending.

R&D expense was $8.9 million and $26.3 million in the third quarter and first nine months of 2002, compared with $7.8 million and $22.8 million for the same periods last year. The year-over-year increases are primarily the result of additional investments related to new product development initiatives in our Tools and Water segments.

Operating income

Tools

The following table provides a comparison of Tools segment operating income as reported, and those results as if we had accounted for goodwill under SFAS 142 for all prior periods presented:

	Three months ended					Nine months ended
In thousands	September 28 2002			September 29 2001		September 28 2002			September 29 2001
Tools
Operating income as reported	$	25,479		$	17,524	$	73,002		$	43,605
Add back goodwill amortization		—			2,318		—			6,956

Adjusted operating income	$	25,479		$	19,842	$	73,002		$	50,561

% of net sales		9.6%			8.2%		8.9%			6.7%
Percentage point change		1.4	pts				2.2	pts

The 1.4 percentage point and 2.2 percentage point increases in our Tools segment operating income margin in the third quarter and first nine months of 2002 from 2001 (excluding goodwill amortization) was primarily the result of:

cost savings as a result of our supply management and lean enterprise initiatives;

higher sales volume in our DAPC business for pressure washers and improved profitability in our Delta business due to increased sourcing of product from China; and

These increases were partially offset by:

additional spending to improve our business processes through lean enterprise;

decreases in average selling prices due to the introduction of lower price point products for the Delta Shopmaster^™ brand and more aggressive promotional pricing and competition in the retail channel for tools;

higher selling expense to fund brand awareness advertising; and

higher R&D expense related to new product development initiatives.

Water

The following table provides a comparison of Water segment operating income as reported, and those results as if we had accounted for goodwill under SFAS 142 for all prior periods presented:

	Three months ended					Nine months ended
In thousands	September 28 2002			September 29 2001		September 28 2002			September 29 2001
Water
Operating income as reported	$	29,969		$	28,427	$	103,424		$	92,270
Add back goodwill amortization		—			4,575		—			13,983

Adjusted operating income	$	29,969		$	33,002	$	103,424		$	106,253

% of net sales		13.4%			14.3%		14.8%			15.4%
Percentage point change		(0.9	) pts				(0.6	) pts

The 0.9 percentage point and 0.6 percentage point declines in our Water segment operating income margin in the third quarter and first nine months of 2002 from 2001 (excluding goodwill amortization) was primarily the result of:

unfavorable product mix as a result of lower sales of higher margin pool and spa equipment due to timing of orders and higher sales of lower margin residential retail and municipal pumps;

lower overhead absorption as we reduced inventory; and

higher marketing costs targeted toward the industrial market.

These decreases were partially offset by:

cost improvements as a result of our lean enterprise initiatives; and

slight increases in average selling prices (year-to-date only).

Enclosures

The following table provides a comparison of Enclosures segment operating income as reported, and those results as if we had accounted for goodwill under SFAS 142 for all prior periods presented:

	Three months ended					Nine months ended
In thousands	September 28 2002			September 29 2001		September 28 2002			September 29 2001
Enclosures
Operating income as reported	$	8,884		$	8,740	$	20,487		$	39,811
Add back goodwill amortization		—			2,066		—			6,272

Adjusted operating income	$	8,884		$	10,806	$	20,487		$	46,083

% of net sales		6.3%			6.6%		4.9%			8.4%
Percentage point change		(0.3	) pts				(3.5	) pts

The 0.3 percentage point and 3.5 percentage point declines in our Enclosures segment operating income margin in the third quarter and first nine months of 2002 from 2001 (excluding goodwill amortization) was primarily the result of:

lower sales volume due to significant industry-wide sales declines, resulting in unabsorbed overhead despite reductions in overall cost structure; and

higher SG&A expense as a percent of sales, as the decline in sales was at a much faster rate than the reduction in costs, as well as higher bad debt expense (year-to-date only) as we increased reserves due to credit concerns related to a few specific customers.

These decreases were partially offset by:

savings realized as a part of our restructuring program, net of one-time nonrecurring costs; and

material cost savings and other cost reductions as a result of our lean enterprise initiatives.

Net interest expense

Net interest expense was $8.2 million and $32.4 million in the third quarter and first nine months of 2002, a decline of $6.2 million and $16.0 million from the comparable periods in 2001, respectively. Included in the $32.4 million, is a write-off of $1.8 million of financing costs (in the first quarter of 2002) related to excess capacity on certain credit facilities that we do not expect to utilize. Excluding the $1.8 million write-off, net interest expense for the nine-month period declined $17.8 million. The decline in net interest expense in 2002 from 2001 is the result of lower interest rates on our variable rate debt and lower average borrowings, driven by our strong cash flow performance.

Provision for income taxes

Our effective tax rate was 30.2 percent and 32.0 percent in the third quarter and first nine months of 2002, compared with 28.7 percent and 30.4 percent, as if we had accounted for goodwill under SFAS 142 (32.9 percent and 35.0 percent as reported, respectively), for the comparable periods in 2001. The 1.5 percentage point and 1.6 percentage point increases reflect a change in U.S. versus foreign earnings mix in 2002 compared to 2001. We expect our effective tax rate to be approximately 32.0 percent for 2002.

Other expense

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

LIQUIDITY AND CAPITAL RESOURCES

Cash requirements for working capital, capital expenditures, equity investments, smaller acquisitions, debt repayments, and dividend payments are generally funded from cash generated from operations, and availability under existing committed revolving credit facilities. Cash requirements for large acquisitions are generally funded through capital market transactions, which could include the issuance of new debt or the sale of common stock.

Some of our businesses are seasonal in nature due to the products they sell, particularly our tools business and our pool and spa equipment business. Consequently, in previous years, we have generally experienced negative free cash flow (defined as cash flow from operating activities less capital expenditures, including both continuing and discontinued operations) in the first half of any given year. Free cash flow for the first nine months of 2002 was $197.2 million compared with $109.6 million for the same period in 2001. Included in the $197.2 million is $8.2 million related to an interest rate swap agreement that was terminated in September 2002. Our free cash flow goal for the full year of 2002 is $200.0 million and we expect to exceed this goal by approximately $20.0 million. Our long-term goal is to consistently generate free cash flow that equals or exceeds a 100 percent conversion ratio of net income. Our ability to convert net income into free cash flow gives us the opportunity to repay indebtedness and invest in new growth initiatives to create shareholder value.

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

Operating activities

Cash provided by operating activities was $220.9 million in the first nine months of 2002. Cash was provided by net income and non-cash related adjustments to net income as well as cash provided from changes in working capital balances as a result of our lean enterprise initiatives and focus on free cash flow.

Investing activities

Capital expenditures in the first nine months of 2002 and 2001 were $23.7 million and $37.6 million, respectively. We anticipate capital expenditures in 2002 to be approximately $50 million. Anticipated expenditures in 2002 are expected to be in the areas of tooling for new product development and general maintenance capital.

In 2001, we invested approximately $24.9 million to take a 40 percent interest in certain joint venture operations of an Asian supplier for bench and portable tools, of which $20.4 million was paid for the year ended December 31, 2001 and an additional $4.5 million was paid in the first nine months of 2002. We hold an option to increase our ownership interest in these joint ventures to 100 percent.

Financing activities

Cash used in financing activities for the first nine months of 2002 was $192.7 million and reflected a $168.3 million reduction in debt and payment of dividends of $27.1 million, or $0.55 per common share.

Financing matters and credit ratings

As of the end of the third quarter of 2002, our capital structure was comprised of $566.5 million in long-term debt (including current maturities), and $1,100.3 million in shareholders’ equity. The ratio of debt-to-total capital as of the end of the third quarter of 2002 was 34.0 percent, compared with 41.6 percent as of the end of 2001 and 44.3 percent as of the end of the third quarter of 2001. The 7.6 percentage point decline from the end of 2001 reflects a decrease in our total debt and an increase in our equity resulting from our strong cash flow performance. Our targeted debt-to-total capital ratio is around 40 percent.

As of September 28, 2002, we had $652.0 million in committed revolving credit facilities with various banks, of which $488.0 million was unused. Credit available under existing facilities, as limited by our tightest financial covenant, was approximately $223.0 million as of the end of September 2002 and is based on a ratio of total debt (including off-balance sheet synthetic lease obligations of $23.0 million) to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Our debt agreements contain certain financial covenants that restrict the amount paid for dividends and require us to maintain certain financial ratios and a minimum net worth. We were in compliance with all covenants as of the end of the third quarter of 2002.

Our credit ratings affect our ability to access debt in the capital markets and the interest rate we pay. Our current credit ratings are as follows:

Rating Agency		Long-Term Debt Rating
Standard & Poor’s ⁽¹⁾		BBB
Moody’s		Baa3

⁽¹⁾

On July 23, 2002, Standard & Poor’s revised its outlook on Pentair from negative to stable.

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

Other Factors

We currently have a minimum required cash pension contribution coming due of approximately $9.0 million for 2002 for our U.S. qualified pensions plans with a maximum deductible cash contribution of approximately $16.0 million. The minimum contribution is not due until September 2003, however, we may choose to make a contribution in 2002.

Discontinued Operations

In October 2001, we completed the sale of our Service Equipment businesses to Clore Automotive, LLC (Clore) and received short-term notes receivable of $18.2 million, of which $12.1 million was received as of December 31, 2001. On August 15, 2002, Clore notified us that they were in default of their loan agreements with their primary lender. As a result, they became in default with the note agreements owed to Pentair. As of September 28, 2002, $5.4 million of the short-term notes receivable with Clore remained unpaid. Clore continues to negotiate with their primary lender and Pentair on the restructuring their outstanding debt obligations. Based on current negotiations, we believe the amounts owed to Pentair to be recoverable.

Subsequent Events

Acquisitions

These acquisitions were financed through available lines of credit and had no impact on our compliance with loan covenants.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk during the quarter ended September 28, 2002. For additional information, refer to Item 7A on page 24 of our 2001 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. Within the 90-day period prior to the date of this report, we evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 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 are effective 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 have been no significant changes in our internal controls or in other factors which could significantly affect internal controls subsequent to the date that we carried out our evaluation.

PART II OTHER INFORMATION

ITEM 1.		Legal Proceedings

		Environmental, Product Liability Claims, and Horizon Litigation
		There have been no further material developments regarding the above from that contained in our 2001 Annual Report on Form 10-K.

		Other
		We are occasionally a party to litigation arising in the normal course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities based on the expected eventual disposition of these matters. We believe the effect on our consolidated results of operations and financial position, if any, for the disposition of all currently pending matters will not be material.

ITEM 6.		Exhibits and Reports on Form 8-K

(a	)	Exhibits

		10.25 Second Amended and Restated 364-Day Credit Agreement dated as of August 29, 2002, between Pentair and Various Financial Institutions and Bank One, NA, as Syndication Agent (Filed herewith).

		10.26 Term Loan Agreement dated as of August 8, 2002, by and between Pentair and Credit Lyonnais New York Branch (Filed herewith).

		99.1 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.

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

(b	)	Reports on Form 8-K
		A Form 8-K dated and filed on August 13, 2002 with the SEC indicating that each of the Chief Executive Officer, Randall J. Hogan, and Chief Financial Officer, David D. Harrison, of Pentair, Inc. submitted to the SEC sworn statements pursuant to Securities and Exchange Commission Order No. 4-460. The officers executed such statements in the exact form required by such Order.

		A Form 8-K dated November 11, 2002 and filed on November 12, 2002 with the SEC announcing the resignation of Frank J. Feraco as the President and Chief Operating Officer of our Tools segment.

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 12, 2002.

PENTAIR, INC. Registrant

By:		/s/ DAVID D. HARRISON
		David D. Harrison Executive Vice President and Chief Financial Officer (Chief Accounting Officer)

Certification of Chief Executive Officer

Securities Exchange Act Rules 13a-14 and 15d-14

as Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, Randall J. Hogan, Chairman and Chief Executive Officer of Pentair, Inc., certify that:

I have reviewed this quarterly report on Form 10-Q of Pentair, Inc.;

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



Date: November 12, 2002				/s/ RANDALL J. HOGAN
				Randall J. Hogan Chairman and Chief Executive Officer

Certification of Chief Financial Officer

Securities Exchange Act Rules 13a-14 and 15d-14

as Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, David D. Harrison, Executive Vice President and Chief Financial Officer of Pentair, Inc., certify that:

I have reviewed this quarterly report on Form 10-Q of Pentair, Inc.;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and



Date: November 12, 2002				/s/ DAVID D. HARRISON
				David D. Harrison Executive Vice President and Chief Financial Officer (Chief Accounting Officer

September 28

2002

December 31

2001

December 31

2001

Days of sales in accounts receivable

Days inventory on hand

Days in accounts payable

Cash conversion cycle