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 July 3, 2004

¨ 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 July 23, 2004, 100,364,275 shares of the Registrant’s common stock were outstanding.

Pentair, Inc. and Subsidiaries


Part I Financial Information		Page(s)

Item 1.	Financial Statements

	Condensed Consolidated Statements of Income for the three and six months ended July 3, 2004 and June 28, 2003	3

	Condensed Consolidated Balance Sheets as of July 3, 2004, December 31, 2003, and June 28, 2003	4

	Condensed Consolidated Statements of Cash Flows for the six months ended July 3, 2004 and June 28, 2003	5

	Notes to Condensed Consolidated Financial Statements	6 – 13

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14 – 22

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23

Item 4.	Controls and Procedures	23

	Report of Independent Registered Public Accounting Firm	24

Part II Other Information

Item 1.	Legal Proceedings	25

Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	25

Item 4.	Submission of Matters to a Vote of Security Holders	26

Item 6.	Exhibits and Reports on Form 8-K	27

Signature		28

PART I FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)


	Three months ended				Six months ended
In thousands, except per-share data	July 3 2004		June 28 2003		July 3 2004		June 28 2003
Net sales	$	813,873	$	718,989	$	1,581,014	$	1,356,505
Cost of goods sold		590,412		535,501		1,155,895		1,017,726
Gross profit		223,461		183,488		425,119		338,779
Selling, general and administrative		115,086		95,932		231,780		188,914
Research and development		11,829		11,224		23,756		21,345
Operating income		96,546		76,332		169,583		128,520
Net interest expense		11,233		9,837		22,407		19,830
Income before income taxes		85,313		66,495		147,176		108,690
Provision for income taxes		29,853		22,608		51,504		36,954
Net income	$	55,460	$	43,887	$	95,672	$	71,736

Earnings per common share
Basic	$	0.56	$	0.44	$	0.97	$	0.73
Diluted	$	0.55	$	0.44	$	0.95	$	0.72

Weighted average common shares outstanding
Basic		99,320		98,762		98,874		98,729
Diluted		101,694		99,624		101,112		99,430

Cash dividends declared per common share	$	0.105	$	0.105	$	0.21	$	0.20

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	July 3 2004			December 31 2003			June 28 2003
Assets
Current assets
Cash and cash equivalents	$	58,247		$	47,989		$	45,465
Accounts and notes receivable, net		459,710			420,403			442,366
Inventories		373,350			285,577			333,370
Deferred tax assets		50,126			50,989			57,524
Prepaid expenses and other current assets		33,266			24,493			22,861
Total current assets		974,699			829,451			901,586

Property, plant and equipment, net		345,912			343,550			342,784

Other assets
Goodwill		1,405,748			1,373,549			1,245,812
Intangibles, net		105,453			108,118			18,065
Other		99,148			126,009			119,274
Total other assets		1,610,349			1,607,676			1,383,151
Total assets	$	2,930,960		$	2,780,677		$	2,627,521

Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings	$	1,587		$	—		$	329
Current maturities of long-term debt		5,333			73,631			58,516
Accounts payable		253,447			170,077			214,213
Employee compensation and benefits		89,077			84,587			76,884
Accrued product claims and warranties		41,278			37,148			38,920
Income taxes		27,781			13,198			17,086
Other current liabilities		124,243			118,810			109,186
Total current liabilities		542,746			497,451			515,134

Long-term debt		747,319			732,862			669,687
Pension and other retirement compensation		102,351			101,704			132,622
Post-retirement medical and other benefits		41,970			42,134			42,293
Deferred tax liabilities		78,573			78,532			33,745
Other noncurrent liabilities		73,233			66,516			62,497
Total liabilities		1,586,192			1,519,199			1,455,978

Commitments and contingencies

Shareholders’ equity
Common shares par value $0.16 ^2/3; 100,354,287, 99,005,084, and 98,702,718 shares issued and outstanding, respectively		16,726			8,250			8,232
Additional paid-in capital		500,915			492,619			488,846
Retained earnings		835,637			760,966			712,106
Unearned restricted stock compensation		(9,898	)		(6,189	)		(8,831	)
Accumulated other comprehensive income (loss)		1,388			5,832			(28,810	)
Total shareholders’ equity		1,344,768			1,261,478			1,171,543
Total liabilities and shareholders’ equity	$	2,930,960		$	2,780,677		$	2,627,521

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Six months ended
In thousands	July 3 2004			June 28 2003
Operating activities
Net income	$	95,672		$	71,736
Depreciation		31,655			32,031
Other amortization		6,629			2,566
Deferred income taxes		1,977			(614	)
Stock compensation		—			306
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable		(28,957	)		(31,013	)
Inventories		(72,237	)		(33,148	)
Prepaid expenses and other current assets		(20,526	)		(3,899	)
Accounts payable		53,996			38,753
Employee compensation and benefits		3,025			(8,783	)
Accrued product claims and warranties		4,215			1,125
Income taxes		14,450			3,816
Other current liabilities		12,650			(3,515	)
Pension and post-retirement benefits		1,257			4,795
Other assets and liabilities		2,732			3,863
Net cash provided by continuing operations		106,538			78,019
Net cash provided by (used for) discontinued operations		1,533			(367	)
Net cash provided by operating activities		108,071			77,652

Investing activities
Capital expenditures		(13,340	)		(18,935	)
Payments related to sale of businesses		—			(2,400	)
Acquisitions, net of cash acquired		(15,288	)		(15,150	)
Equity investments		(200	)		(5,461	)
Net cash used for investing activities		(28,828	)		(41,946	)

Financing activities
Short-term repayments		(2,603	)		(549	)
Proceeds from long-term debt		164,816			291,691
Repayment of long-term debt		(220,526	)		(301,300	)
Proceeds from exercise of stock options		10,178			699
Dividends paid		(21,001	)		(19,738	)
Net cash used for financing activities		(69,136	)		(29,197	)

Effect of exchange rate changes on cash and cash equivalents		151			(739	)
Change in cash and cash equivalents		10,258			5,770
Cash and cash equivalents, beginning of period		47,989			39,648
Cash and cash equivalents, end of period	$	58,247		$	45,418

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

1.	Basis of Presentation and Responsibility for Interim Financial Statements

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

We 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 half 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 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).

2.	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, we do not expect adoption of FSP No. 106-2 to 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. 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 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. The new standard, as proposed, would be effective January 1, 2005, for calendar year companies. 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.

3.	Stock-based Compensation

Pursuant to Statement of Financial Accounting Standards (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.

Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

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:


	Three months ended						Six months ended
In thousands, except per-share data	July 3 2004			June 28 2003			July 3 2004			June 28 2003
Net income — as reported	$	55,460		$	43,887		$	95,672		$	71,736
Less estimated stock-based employee compensation determined under fair value based method, net of tax		(2,772	)		(1,443	)		(5,209	)		(2,926	)
Net income — pro forma	$	52,688		$	42,444		$	90,463		$	68,810

Earnings per common share — continuing operations
Basic — as reported	$	0.56		$	0.44		$	0.97		$	0.73
Less estimated stock-based employee compensation determined under fair value based method, net of tax		(0.03	)		(0.01	)		(0.06	)		(0.03	)
Basic — pro forma	$	0.53		$	0.43		$	0.91		$	0.70

Diluted — as reported	$	0.55		$	0.44		$	0.95		$	0.72
Less estimated stock-based employee compensation determined under fair value based method, net of tax		(0.03	)		(0.01	)		(0.06	)		(0.03	)
Diluted — pro forma	$	0.52		$	0.43		$	0.89		$	0.69

Weighted average common shares outstanding
Basic		99,320			98,762			98,874			98,729
Diluted		101,694			99,624			101,112			99,430

The weighted-average fair value of options granted was $8.07 and $5.64 in the first half of 2004 and 2003, respectively. We estimated the fair values using the Black-Scholes option pricing model, modified for dividends using the following assumptions:


Percentages	July 3 2004		June 28 2003
Risk-free interest rate	3.85	%	2.86	%
Dividend yield	1.40	%	2.00	%
Expected stock price volatility	39.00	%	40.00	%
Expected lives	5.2 yrs.		5.0 yrs.

4.	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 were calculated using the following:


	Three months ended				Six months ended
In thousands, except per-share data	July 3 2004		June 28 2003		July 3 2004		June 28 2003
Net income	$	55,460	$	43,887	$	95,672	$	71,736

Weighted average common shares outstanding — basic		99,320		98,762		98,874		98,729
Dilutive impact of stock options and restricted stock		2,374		862		2,238		701
Weighted average common shares outstanding — diluted		101,694		99,624		101,112		99,430

Earnings per common share - basic	$	0.56	$	0.44	$	0.97	$	0.73

Earnings per common share - diluted	$	0.55	$	0.44	$	0.95	$	0.72
Stock options excluded from the calculation of diluted earnings per share because the effect was anti-dilutive		47		967		55		2,233

Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

5.	Acquisitions

On April 5, 2004, we acquired all of the remaining stock of Pentair’s Tools Group’s Asian joint venture business for $21.1 million in cash, $6.4 million of which is to be paid at the earlier of December 31, 2005 or 15 days following a sale of the Pentair Tools Group, plus contingent payments based on future sales and return on sales. The acquisition included cash acquired of $6.2 million and debt assumed of $9.0 million, of which $4.2 million is classified as short-term borrowings in current liabilities. Pentair acquired an initial 40 percent ownership stake in the joint venture in 2001 and subsequently increased its ownership to 49 percent in 2003. We believe our completion of the purchase enhances both our overall cost position and our ability to provide customers with quality, innovative products and improved service.

The initial allocation of purchase price for the Asian joint venture business acquisition was based on preliminary estimates and may be revised as better information becomes available in 2004.

The purchase price, including the initial 49 percent ownership stake, for the Asian joint venture business has been allocated based on management’s estimates as follows:


In thousands	Estimated Fair Value
Current assets	$	39,357
Property, plant, and equipment		25,055
Goodwill		32,071
Other noncurrent assets		3,318
Total assets acquired	$	99,801

Current liabilities	$	43,306
Long-term debt		4,787
Other noncurrent liabilities		334
Total liabilities assumed		48,427
Net assets acquired	$	51,374

Pursuant to a maximum $5.0 million earn-out provision, the purchase price could increase depending primarily on whether the Asian joint venture business achieves quarterly return-on-sales targets from the second quarter of 2004 through the fourth quarter of 2005. The level of return on sales targets achieved in the second quarter will require a payment of $0.9 million, which has been recorded as an adjustment to goodwill. The maximum total contingent payments remaining based on the earn-out are $4.1 million.

There were no intangible assets recognized as an asset apart from goodwill as the Tools Group is the primary customer of the Asian supplier and the Tools Group already held the legal right to the patents, proprietary technologies and trade names used by the Asian joint venture business.

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 $109.0 million, an increase of $3.7 million, due to a final purchase price adjustment. We continue to evaluate the purchase price allocation of Everpure and we expect it to be revised as better information becomes available in 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.

Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

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.


	Three months ended				Six months ended
In thousands, except per-share data	July 3 2004		June 28 2003		July 3 2004		June 28 2003
Pro forma net sales	$	813,873	$	743,857	$	1,592,573	$	1,443,207
Pro forma net income		55,460		45,099		97,181		75,412

Pro forma earnings per common share
Basic	$	0.56	$	0.46	$	0.98	$	0.76
Diluted	$	0.55	$	0.45	$	0.96	$	0.76

Weighted average common shares outstanding
Basic		99,320		98,762		98,874		98,729
Diluted		101,694		99,624		101,112		99,430

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 on January 1 of each quarter presented, or of future results of the consolidated entities.

6.	Inventories

Inventories were comprised of:


In thousands	July 3 2004		December 31 2003		June 28 2003
Raw materials and supplies	$	103,399	$	73,187	$	84,650
Work-in-process		38,882		34,251		41,988
Finished goods		231,069		178,139		206,732
Total inventories	$	373,350	$	285,577	$	333,370

Inventories increased to support organic sales growth. Days inventory on hand (13-month moving average) improved as compared to both the second quarter and year-end of 2003. Tools inventory increased at the end of the quarter due to softening sales in June which returned to more normal levels in July.

7.	Comprehensive Income

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


	Three months ended						Six months ended
In thousands	July 3 2004			June 28 2003			July 3 2004			June 28 2003
Net income	$	55,460		$	43,887		$	95,672		$	71,736
Changes in cumulative foreign currency translation adjustment		(3,724	)		14,396			(5,823	)		16,572
Changes in market value of derivative financial instruments classified as cash flow hedges		985			(4,186	)		1,379			(5,236	)
Comprehensive income	$	52,721		$	54,097		$	91,228		$	83,072

The net foreign currency translation loss for the three months and six months ended July 3, 2004 resulted from the weakening of the Euro and Canadian dollar currencies against the U.S. dollar. The net foreign currency gain for the three months and six months ended June 28, 2003 resulted from the strengthening of the Euro and Canadian dollar currencies against the U.S. dollar.

The change in market value of derivative financial instruments for the three months and six months ended July 3, 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 six months ended June 28, 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.

Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

8.	Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the six months ended July 3, 2004 by segment is as follows:


In thousands	Water			Enclosures			Tools			Consolidated
Balance December 31, 2003	$	803,573		$	193,610		$	376,366		$	1,373,549
Acquired		3,747			—			32,067			35,814
Purchase accounting adjustments		715			—			—			715
Foreign currency translation		(2,181	)		(2,023	)		(126	)		(4,330	)
Balance July 3, 2004	$	805,854		$	191,587		$	408,307		$	1,405,748

The purchase accounting adjustment in the Water segment is primarily related to our third quarter 2003 acquisition of K&M Plastics.

Intangible assets are comprised of:


	July 3, 2004							December 31, 2003
In thousands	Gross carrying amount		Accumulated amortization			Net		Gross carrying amount		Accumulated amortization			Net

Finite-life intangible assets
Patents	$	16,647	$	(1,984	)	$	14,663	$	16,647	$	(1,096	)	$	15,551
Non-compete agreements		6,527		(3,721	)		2,806		6,199		(3,111	)		3,088
Proprietary technology		14,500		(710	)		13,790		14,500		(200	)		14,300
Customer relationships		26,100		(1,150	)		24,950		26,350		(491	)		25,859
Other		873		(668	)		205		873		(592	)		281
Total finite-life intangible assets	$	64,647	$	(8,233	)	$	56,414	$	64,569	$	(5,490	)	$	59,079

Indefinite-life intangible assets
Trademarks	$	49,039	$	—		$	49,039	$	49,039	$	—		$	49,039

Total intangibles, net						$	105,453						$	108,118

Amortization expense in the first half of 2004 was $3.0 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 (second half)		2005		2006		2007		2008
Estimated amortization expense	$	2,830	$	5,397	$	4,967	$	4,637	$	4,010

Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Debt

Long-term debt and the average interest rate on debt outstanding is summarized as follows:


In thousands	Average interest rate July 3, 2004		Maturity (Year)	July 3 2004			December 31 2003			June 28 2003
Commercial paper, maturing within 35 days	1.92	%		$	136,585		$	64,806		$	140,454
Revolving credit facilities	2.36	%	2004-2006		116,200			184,200			180,100
Private placement - fixed rate	5.50	%	2007-2013		135,000			183,910			133,768
Private placement - floating rate	2.32	%	2013		100,000			100,000			—
Senior notes	7.85	%	2009		250,000			250,000			250,000
Other	3.10	%	2004-2009		11,971			17,859			12,858
Total contractual debt obligations					749,756			800,775			717,180
Interest rate swap monetization deferred income					6,122			6,705			7,288
Fair value adjustment of hedged debt					(3,226	)		(987	)		3,735
Total long-term debt, including current portion per balance sheet					752,652			806,493			728,203
Less current maturities					(5,333	)		(73,631	)		(58,516	)
Long-term debt				$	747,319		$	732,862		$	669,687

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. On July 30, 2004, we prepaid our $20 million credit facility that was scheduled to expire on August 8, 2004.

We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. The Credit Facility is used as back-up liquidity to support 100% of commercial paper outstanding. As of July 3, 2004, we have $136.6 million of commercial paper outstanding that matures within 35 days. All of the commercial paper and $20 million of other maturing debt is 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 July 3, 2004, including outstanding commercial paper, was approximately $247 million.

On July 16, 2004, we signed a definitive agreement to sell our Tools Group to The Black & Decker Corporation for approximately $775 million. This transaction is expected to close in 2004, subject to customary closing conditions, including the completion of regulatory clearances. Proceeds from the Tools Group sale are required to be used to repay the Bridge Facility. We expect to pay the remainder of the Bridge Facility with availability under the Credit Facility. If we are unable to close the sale of our Tools Group in 2004, we will need to negotiate an extension to the Bridge Facility or repay it through a debt or equity issuance.

We were in compliance with all debt covenants as of July 3, 2004. We have obtained an amendment to the Credit Facility to allow an increase to the ratio of total debt to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for the period that debt under the Bridge Facility is outstanding. In addition, during the period that debt under the Bridge Facility is outstanding, we are subject to additional limitations on share repurchases, dividends, acquisitions and sales of assets.

In addition to the Credit Facility, we have $40 million of uncommitted credit facilities, under which we had no borrowings as of July 3, 2004.

Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Long-term debt outstanding at July 3, 2004, matures on a calendar year basis by contractual debt maturity as follows (excluding anticipated effects of the Bridge Facility):


In thousands	2004		2005		2006		2007		2008		Thereafter			Total
Contractual debt obligation maturities	$	24,166	$	4,832	$	233,002	$	37,756	$	—	$	450,000		$	749,756
Other maturities		584		1,166		1,166		1,166		1,166		(2,352	)		2,896
Total maturities	$	24,750	$	5,998	$	234,168	$	38,922	$	1,166	$	447,648		$	752,652

10.

Benefit Plans

Components of net periodic benefit cost for the three months and six months ended July 3, 2004 and June 28, 2003 are as follows:


	Three months ended												Six months ended
	Pension Benefits						Post-retirement						Pension Benefits						Post-retirement
In thousands	July 3 2004			June 28 2003			July 3 2004			June 28 2003			July 3 2004			June 28 2003			July 3 2004			June 28 2003
Service cost	$	3,899		$	3,816		$	132		$	140		$	7,798		$	7,631		$	265		$	279
Interest cost		6,290			5,973			555			568			12,580			11,945			1,111			1,137
Expected return on plan assets		(6,463	)		(6,187	)		—			—			(12,926	)		(12,374	)		—			—
Amortization of transition obligation		32			5			—			—			64			10			—			—
Amortization of prior year service cost (benefit)		116			163			(145	)		(231	)		233			325			(291	)		(461	)
Recognized net actuarial loss		258			168			—			—			516			336			—			—
Net periodic benefit cost	$	4,132		$	3,938		$	542		$	477		$	8,265		$	7,873		$	1,085		$	955

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.

11.

Business Segments

Segment information is presented consistent with the basis described in the 2003 Annual Report on Form 10-K. Segment results for the three months and six months ended July 3, 2004 and June 28, 2003 are shown below:


	Three months ended						Six months ended
In thousands	July 3 2004			June 28 2003			July 3 2004			June 28 2003
*Net sales to external customers*
Water	$	353,316		$	290,650		$	667,297		$	537,090
Enclosures		177,117			144,923			351,588			284,234
Tools		283,440			283,416			562,129			535,181
Consolidated	$	813,873		$	718,989		$	1,581,014		$	1,356,505
*Intersegment sales*
Water	$	29		$	42		$	50		$	42
Enclosures		986			313			1,318			455
Tools		—			—			—			—
Other		(1,015	)		(355	)		(1,368	)		(497	)
Consolidated	$	—		$	—		$	—		$	—
*Operating income (loss)*
Water	$	59,253		$	46,002		$	100,800		$	75,506
Enclosures		21,590			11,703			40,944			21,568
Tools		23,165			23,148			43,928			40,834
Other		(7,462	)		(4,521	)		(16,090	)		(9,388	)
Consolidated	$	96,546		$	76,332		$	169,582		$	128,520

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

Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

12.

Warranty

The changes in the carrying amount of service and product warranties for the six months ended July 3, 2004 and June 28, 2003 are as follows:


In thousands	July 3 2004			June 28 2003
Balance at beginning of the period	$	27,148		$	26,855
Service and product warranty provision		27,249			21,481
Payments		(23,350	)		(20,470	)
Purchase accounting adjustment		226			672
Translation		5			382
Balance at end of the period	$	31,278		$	28,920

13.

Subsequent Events

On July 6, 2004, we received clearance from the Federal Trade Commission for our acquisition of WICOR Industries, a unit of Wisconsin Energy Corporation. In addition, the Public Service Commission of Wisconsin approved the corporate restructuring of WICOR required to facilitate the transaction. We expect to complete the transaction effective the close of business, July 31, 2004.

On July 16, 2004, we signed a definitive agreement to sell the Tools Group to The Black & Decker Corporation for approximately $775 million. Black & Decker is a global manufacturer and marketer of quality power tools and accessories, hardware and home improvement products, and technology-based fastening systems. The transaction is expected to close in 2004, subject to customary closing conditions including the completion of regulatory clearances.

The carrying value of the major assets and liabilities of the Tools Group as of July 3, 2004 are as follows:


In thousands	Carrying Value
Current assets	$	388,568
Property, plant, and equipment		126,569
Goodwill		408,307
Other noncurrent assets		27,512
Total assets	$	950,956

Current liabilities	$	208,610
Long-term debt		4,626
Other noncurrent liabilities		47,322
Total liabilities		260,558
Net assets	$	690,398

The final determination of the gain or loss on the disposition of the Tools Group requires further consideration including the evaluation of our indemnification obligations under the sale agreement, transaction costs and the timing of the close of the transaction.

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.

•

risks relating to our proposed acquisition of WICOR, including our ability to integrate WICOR successfully, to fully realize synergies on our anticipated timetable and to timely repay any debt incurred under the Bridge Facility in connection with such acquisition on desired terms;

•

risks relating to our proposed disposition of the Tools Group, including our ability to complete such disposition on our expected time table and obtain regulatory approvals on anticipated terms;

•

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; and

•

no material declines in the fair market value of, or cash flows from, our cost method investments.

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 three segments: Water, Enclosures, and Tools. Our Water segment manufactures and markets essential products and systems used in the movement, treatment, storage and enjoyment of water and generated 43 percent of total revenues in the first half 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 22 percent of total revenues in the first half of 2004. Our Tools segment designs, manufactures and markets a wide range of power tools under several well established trade names and generated 35 percent of total revenues in the first half 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 half of 2004. In February 2004, we announced our agreement to acquire WICOR, the completion of which would mark a dramatic increase in sales in our water segment. In July 2004, we received clearance from the Federal Trade Commission for our acquisition of WICOR Industries and we expect to complete the transaction effective the close of business, July 31, 2004. We anticipate that the assimilation of these acquisitions into our water business operations will create a $2 billion business in the water industry.

Our Enclosures segment operates in a large global market with significant headroom 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. However, this segment experienced growth in 2003 and the first half 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 the tenth consecutive quarter.

Our Tools segment has been operating in a very competitive marketplace during the past few years. Pricing pressures and higher raw material costs have challenged our operating margins. On July 16, 2004, we signed a definitive agreement to sell the Tools Group to The Black & Decker Corporation for approximately $775 million. The transaction is expected to close in 2004, subject to customary closing conditions including the completion of regulatory clearances. The opportunities we expect in the expansion of our Water and Enclosure Groups, especially following the acquisition of WICOR, have led us to undertake the sale of the Tools Group as a significant step to build greater value for Pentair shareholders. We will continue to operate the Tools segment in the near-term and provide all appropriate management support and resources.

Key Trends and Uncertainties

The following trends and uncertainties affected our financial performance in the first half of 2004 and will likely impact our results in the future:

•

In the first half of 2004, we experienced year-over-year sales growth, exclusive of acquisitions and favorable currency translation, in all three of our segments.

•

We expect all three segments to continue to benefit from our key initiatives, including supply management and PIMS.

•

We have experienced a decrease in average selling prices in our Tools segment in some channels due to competitive market place pricing. We expect these competitive pressures to lessen somewhat, but still persist during the second half of 2004.

•

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.

•

In the first half 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.

•

Based on our current knowledge of the WICOR effective tax rate, we will likely experience a 50 basis point increase in our consolidated blended tax rate in 2004 to 35.5 percent, due to five months of consolidated WICOR operations, and another 50 basis point increase in 2005 to 36.0 percent, due to twelve months of consolidated WICOR operations. We will continue to pursue tax rate reduction opportunities.

•

Following the close of the WICOR acquisition, we expect our water operating income margins for the last half of 2004 to be lower by roughly 200 basis points compared to the prior year comparable period. The forecasted lower operating income margins will be due to the lower WICOR margins versus the Pentair Water margins and the anticipation of one-time integration costs.

•

If we are unable to close the Tools Group disposition in 2004, we will need to negotiate an extension to the Bridge Facility or repay it through a debt or equity issuance.

•

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, ocean freight and fuel, health care and insurance.

Outlook

In the last half of 2004, our operating objectives include the following:

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

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

•	Complete the WICOR acquisition and begin integration; and

•	Complete the Tools Group disposition.

RESULTS OF OPERATIONS

Net sales

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


	Three months ended								Six months ended
In thousands	July 3 2004		June 28 2003		$ change		% change		July 3 2004		June 28 2003		$ change		% change
Net sales as reported	$	813,873	$	718,989	$	94,884	13.2	%	$	1,581,014	$	1,356,505	$	224,509	16.6	%

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


	% Change from 2003
Percentages	Second quarter	Six months
Volume	12.3	15.4
Price	0.1	(0.3)
Currency	0.8	1.5
Total	13.2	16.6

Consolidated net sales

The 13.2 percent and 16.6 percent increase in consolidated net sales in the second quarter and first half of 2004 from 2003 was primarily driven by:

•	higher organic sales growth, principally in our Water and Enclosure segments;

•	our December 31, 2003 acquisition of Everpure;

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

•	four more additional business days in the first half 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.

These increases were partially offset by:

•	a decline in average selling prices in some channels of our Tools segment due to competitive pricing.

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


	Three months ended								Six months ended
In thousands	July 3 2004		June 28 2003		$ change		% change		July 3 2004		June 28 2003		$ change		% change
Water	$	353,316	$	290,650	$	62,666	21.6	%	$	667,297	$	537,090	$	130,207	24.2	%
Enclosures		177,117		144,923		32,194	22.2	%		351,588		284,234		67,354	23.7	%
Tools		283,440		283,416		24	0.0	%		562,129		535,181		26,948	5.0	%
Total	$	813,873	$	718,989	$	94,884	13.2	%	$	1,581,014	$	1,356,505	$	224,509	16.6	%

Water

The 21.6 percent and 24.2 percent increase in Water segment net sales in the second quarter and first half of 2004 from 2003 was primarily driven by:

•	higher organic growth for pool and spa equipment, due to in-ground pool-building in the Sunbelt and replacement sales nationally;

•	our December 31, 2003 acquisition of Everpure;

•	an increase in water treatment sales, particularly residential valves, commercial valves and the addition of our new brine tank line;

•	strong sales of pumps for residential water systems, sump pumps and effluent pumps;

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

•	an increase in European sales, largely from increased valve sales and positive results from our pool equipment initiative;

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

•	favorable foreign currency effects.

Enclosures

The 22.2 percent and 23.7 percent increase in Enclosures segment net sales in the second quarter and first half of 2004 from 2003 was 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 increase in selling prices to mitigate inflationary cost increases;

•	favorable foreign currency effects; and

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

Tools

The unchanged Tools segment net sales in the second quarter and 5.0 percent increase in Tools segment net sales in the first half of 2004 from 2003 was primarily driven by:

•	stronger sales of portable power tools and stationary/bench-top tools in industrial channels;

•	increased pressure washer sales at a major home center;

•	stronger international sales;

•	sales of new private label power tools;

•	favorable foreign currency effects; and

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

These increases were partially offset by:

•	a decline in average selling prices in some channels due to competitive pricing;

•	the change-out of accessories at a major home center in advance of a re-launch;

•	our removal of a couple of pressure washer SKUs in the club channel; and

•	loss of 2004 revenues following the bankruptcy of a major woodworking customer in late 2003.

Gross profit


	Three months ended								Six months ended
In thousands	July 3 2004		% of sales		June 28 2003		% of sales		July 3 2004		% of sales		June 28 2003		% of sales
Gross profit	$	223,461	27.5	%	$	183,488	25.5	%	$	425,119	26.9	%	$	338,779	25.0	%
Percentage point change			2.0	pts							1.9	pts

The 2.0 percentage point and 1.9 percentage point increases in gross profit as a percent of sales in the second quarter and first half of 2004 from 2003 was 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 downsizing and productivity improvements throughout Pentair; and

•	our December 31, 2003 acquisition of Everpure.

These increases were partially offset by:

•	price declines in some channels of our Tools segment due to competitive pricing.

Selling, general and administrative (SG&A)


	Three months ended								Six months ended
In thousands	July 3 2004		% of sales		June 28 2003		% of sales		July 3 2004		% of sales		June 28 2003		% of sales
SG&A	$	115,086	14.1	%	$	95,932	13.3	%	$	231,780	14.7	%	$	188,914	13.9	%
Percentage point change			0.8	pts							0.8	pts

The 0.8 percentage point increase in SG&A expense as a percent of sales in the second quarter and first half of 2004 from 2003 was primarily due to:

•	our December 31, 2003 acquisition of Everpure;

•	outside support of integration planning for the WICOR acquisition;

•	M&A expenses related to the WICOR acquisition and Tools disposition;

•	expenses related to downsizing; and

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

Research and development (R&D)


	Three months ended								Six months ended
In thousands	July 3 2004		% of sales		June 28 2003		% of sales		July 3 2004		% of sales		June 28 2003		% of sales
R&D	$	11,829	1.5	%	$	11,224	1.6	%	$	23,756	1.5	%	$	21,345	1.6	%
Percentage point change			(0.1	) pts							(0.1	) pts

The 0.1 percentage point decrease in R&D expense as a percent of sales in the second quarter and first half of 2004 from 2003 was primarily due to:

•	increased spending related to new product development initiatives across all three segments was at a pace slightly below the sales increase resulting in a slightly lower percent of sales.

Operating income

Water


	Three months ended								Six months ended
In thousands	July 3 2004		% of sales		June 28 2003		% of sales		July 3 2004		% of sales		June 28 2003		% of sales
Operating income	$	59,253	16.8	%	$	46,002	15.8	%	$	100,800	15.1	%	$	75,506	14.1	%
Percentage point change			1.0	pts							1.0	pts

The 1.0 percentage point increase in Water segment operating income as a percent of sales in the second quarter and first half of 2004 from 2003 was primarily the result of:

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

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

•	our December 31, 2003 acquisition of Everpure.

These increases were partially offset by:

•	increase in selling expenses;

•	inflationary cost increases;

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

•	higher warranty, outbound freight and distribution costs.

Enclosures


	Three months ended								Six months ended
In thousands	July 3 2004		% of sales		June 28 2003		% of sales		July 3 2004		% of sales		June 28 2003		% of sales
Operating income	$	21,590	12.2	%	$	11,703	8.1	%	$	40,944	11.6	%	$	21,568	7.6	%
Percentage point change			4.1	pts							4.0	pts

The 4.1 percentage point and 4.0 percentage point increase in Enclosures segment operating income as a percent of sales in the second quarter and first half of 2004 from 2003 was 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;

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

•	the absence of expenses associated with the closure of our Scottish operations included in the comparable prior period.

These increases were partially offset by:

•	material cost inflation, primarily steel.

Tools


	Three months ended								Six months ended
In thousands	July 3 2004		% of sales		June 28 2003		% of sales		July 3 2004		% of sales		June 28 2003		% of sales
Operating income	$	23,165	8.2	%	$	23,148	8.2	%	$	43,928	7.8	%	$	40,834	7.6	%
Percentage point change			0.0	pts							0.2	pts

The unchanged percentage point and 0.2 percentage point increase in Tools segment operating income as a percent of sales in the second quarter and first half of 2004 from 2003 was primarily the result of:

•	productivity gains and cost savings from PIMS and supply management activities; and

•	higher sales volume.

These increases were partially offset by:

•	a decline in average selling prices in some channels due to competitive pricing;

•	higher ocean transportation costs and material cost inflation, primarily steel;

•	costs associated with the Tools disposition; and

•	expenses related to downsizing.

Net interest expense


	Three months ended								Six months ended
In thousands	July 3 2004		June 28 2003		Difference		% change		July 3 2004		June 28 2003		Difference		% change
Net interest expense	$	11,233	$	9,837	$	1,396	14.2	%	$	22,407	$	19,830	$	2,577	13.0	%

The 14.2 percent and 13.0 percent increase in interest expense in the second quarter and first half of 2004 from 2003 was primarily the result of:

•	an increase in fees related to our Bridge Facility; and

•	an increase in debt for the Everpure acquisition which was offset by lower outstanding debt due to cash flows from existing businesses.

Provision for income taxes


	Three months ended						Six months ended
In thousands	July 3 2004			June 28 2003			July 3 2004			June 28 2003
Income before income taxes	$	85,313		$	66,495		$	147,176		$	108,690
Provision for income taxes		29,853			22,608			51,504			36,954
Effective tax rate		35.0	%		34.0	%		35.0	%		34.0	%

The 1.0 percent increase in the tax rate in the second quarter and first half of 2004 from 2003 was primarily the result of:

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

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

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:

Operating activities

Cash provided by operating activities was $108.1 million in the first half of 2004, or $30.4 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 16.6 percent increase in net sales.

Investing activities

Capital expenditures in the first half of 2004 were $13.3 million compared with $18.9 million in the prior year period. We anticipate capital expenditures for fiscal 2004 to be approximately $40 to 50 million, primarily for new product development, selective increases in equipment capacity and general maintenance capital.

On April 5, 2004, we acquired all of the remaining stock of Pentair’s Tools Group’s Asian joint venture for $21.1 million in cash, $6.4 million of which is to be paid at the earlier of December 31, 2005 or 15 days following a sale of the Pentair Tools Group, plus contingent payments based on future sales and return on sales. The acquisition included cash acquired of $6.2 million and debt assumed of $9.0 million. We believe our completion of the purchase enhances both our overall cost position and our ability to provide customers with quality, innovative products and improved service. Pursuant to a maximum $5.0 million earn-out provision, the purchase price could increase depending primarily on whether the Asian joint venture business achieves quarterly return-on-sales targets from the second quarter of 2004 through the fourth quarter of 2005. The level of return on sales targets achieved in the second quarter will require a payment of $0.9 million. The maximum total contingent payments remaining based on the earn-out are $4.1 million.

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

In May 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.

During the first quarter of 2003, we completed two product line acquisitions for total consideration of approximately $16.5 million in cash including transaction costs.

•	HydroTemp Manufacturing Co., Inc. designs and manufactures heat pumps for swimming pool applications.

•	Letro Products, Inc. designs and manufactures swimming pool accessories including cleaners.

We acquired HydroTemp and Letro Products to complement the existing pool and spa equipment business of our Water segment. The aggregated annual revenue of the acquired businesses was approximately $17 million.

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 used for financing activities was $69.1 million in the first half of 2004 compared with $29.2 million in the first half of 2003. Financing activities included 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 expect to complete the WICOR acquisition effective the close of business, July 31, 2004. We expect to fund the payment of the purchase price and related fees and expenses of the WICOR acquisition with our $850 million Bridge Facility and through availability under the 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, will be the LIBOR rate plus 1.375%. The balance due under the Bridge Facility is repayable in full, with accrued interest, no later than December 31, 2004. On July 16, 2004, we signed a definitive agreement to sell our Tools Group to The Black & Decker Corporation for approximately $775 million. This transaction is expected to close in 2004, subject to customary closing conditions, including the completion of regulatory clearances. Proceeds from the Tools Group sale are required to be used to repay the Bridge Facility. We expect to pay the remainder of the Bridge Facility with availability under the Credit Facility. If we are unable to close the sale of our Tools Group in 2004, we will need to negotiate an extension to the Bridge Facility or repay it through a debt or equity issuance.

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. The change in rating outlook to negative from stable is a reflection of the increased financial and integration risks associated with the planned acquisition of WICOR. In addition, the timing of the sale of the Tools Group, while expected to occur in 2004, remains uncertain and subject to execution risk. We expect our ratings outlook to remain unchanged until the closing of the sale of the Tools Group.

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 do not benefit from such guarantees. In connection with the closing of the WICOR acquisition, we expect to execute a similar guarantee for the benefit of the $250 million senior note holders to avoid the downgrade due to the structural subordination.

In addition to the Credit Facility, we have $40 million of uncommitted credit facilities, under which we had no borrowings as of July 3, 2004.

As of July 3, 2004, our capital structure consisted of $752.7 million in total indebtedness and $1,344.8 million in shareholders’ equity. The ratio of debt-to-total capital at July 3, 2004 was 35.9 percent, compared with 39.0 percent at December 31, 2003 and 38.3 percent at June 28, 2003. Our targeted debt-to-total capital ratio is approximately 40 percent. We will exceed this target from time to time as needed for operational purposes and/or acquisitions.

For the remainder of 2004, interest expense will be primarily driven by the timing of the closing of the Tools Group disposition.

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 half of 2004 were $21.0 million or $0.21 per common share compared with $19.7 million or $0.20 per common share in the prior year period. We anticipate the continuation of the practice of paying dividends on a quarterly basis.

There have been no material changes with respect to the contractual obligations as described in our Annual Report on Form 10-K for the year ended December 31, 2003.

Pension

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 our ability to convert net income into free cash flow gives us opportunities to invest in new growth initiatives to create shareholder value. 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 fund acquisitions and repay debt. In addition, free cash flow is 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 operating activities:


	Six months ended
In thousands	July 3 2004			June 28 2003
Cash flow provided by operating activities	$	108,071		$	77,652
Capital expenditures		(13,340	)		(18,935	)
Free Cash Flow	$	94,731		$	58,717

We expect 2004 free cash flow to exceed $200 million.

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

There have been no material changes in our market risk during the quarter ended July 3, 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 July 3, 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 July 3, 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 July 3, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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 July 3, 2004 and June 28, 2003, the related condensed consolidated statements of income for the three-month and six-month periods ended July 3, 2004 and June 28, 2003, and cash flows for the six-month periods ended July 3, 2004 and June 28, 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

July 30, 2004

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.

Changes in 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
Apr 4 – May 1, 2004	190,532	$	29.78	—	500,000
May 2 – May 29, 2004	4,092	$	29.94	—	500,000
May 30 – July 3, 2004	20,706	$	32.23	—	500,000

(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 500,000 shares of our common stock 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 six months ended July 3, 2004 and accordingly still have the authority to repurchase 500,000 shares.

ITEM 4.

Submission of Matters to a Vote of Security Holders

The Company’s annual meeting of shareholders was held on April 30, 2004. There were 49,898,708 shares of Common Stock entitled to vote at the meeting and a total of 44,291,562 shares (88.76%) were represented at the meeting.

Proposal 1. – Election of Directors

To elect four directors of the Company to terms expiring in 2006 and 2007. Each nominee for director was elected by a vote of the shareholders as follows:


Nominees	Votes For	Votes Withheld
Glynis A. Bryan	43,249,611	1,041,951
David A. Jones	43,159,362	1,132,200
William T. Monahan	42,963,594	1,327,968
Karen E. Welke	42,441,389	1,850,173

The Company’s other directors that were in office prior to the Annual Meeting of Stockholders and with terms of office that continue after the Annual Meeting of Stockholders are Barbara B. Grogan, Stuart Maitland, Augusto Meozzi, Charles A. Haggerty and Randall J. Hogan.

Proposal 2. – Approval of the Compensation Plan for Non-Employee Directors

To approve the Compensation Plan for Non-Employee Directors. The proposal was approved by a vote of the shareholders as follows:


Votes For	Votes Against	Abstain	Broker Non-Vote
32,617,810	7,027,400	326,780	4,319,572

Proposal 3. – Approval of the Omnibus Stock Incentive Plan

To approve the Omnibus Stock Incentive Plan. The proposal was approved by a vote of the shareholders as follows:


Votes For	Votes Against	Abstain	Broker Non-Vote
32,745,466	6,977,733	248,591	4,319,572

Proposal 4. – Approval of the Employee Stock Purchase and Bonus Plan

To approve the Employee Stock Purchase and Bonus Plan. The proposal was approved by a vote of the shareholders as follows:


Votes For	Votes Against	Abstain	Broker Non-Vote
32,138,202	6,622,867	210,921	4,319,572

Proposal 5. – Approval of the International Stock Purchase and Bonus Plan

To approve the International Stock Purchase and Bonus Plan. The proposal was approved by a vote of the shareholders as follows:


Votes For	Votes Against	Abstain	Broker Non-Vote
32,818,920	6,879,712	273,598	4,319,572

Proposal 6. – Ratification of Appointment of Deloitte & Touche LLP as independent auditors for the company for 2004

To approve the selection of Deloitte & Touche LLP as the Company’s independent auditor for the year ending December 31, 2004. The proposal was approved by a vote of the shareholders as follows:


Votes For	Votes Against	Abstain	Broker Non-Vote
41,848,438	2,276,615	166,509	—

ITEM 6.

Exhibits and Reports on Form 8-K


(a)	Exhibits
	2.1	Purchase Agreement between The Black & Decker Corporation and Pentair, Inc. dated as of July 16, 2004. (Incorporated by reference to Exhibit 99.2 contained in Pentair’s Current Report on Form 8-K dated July 16, 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.

(b)	Reports on Form 8-K
	The Registrant filed the following Current Report on Form 8-K during the quarter ended July 3, 2004:

	On April 23, 2004, the Company filed a Report on Form 8-K, under Item 5, to report it will not purchase on the open market shares of Pentair common stock in excess of 250,000 under the Outside Directors Plan, 1,000,000 under the ESPP and 250,000 under the ISPP without first obtaining further approval from Pentair Shareholders.
	On April 26, 2004, the Company furnished a Report on Form 8-K, under Item 12, to report a press release announcing financial results for its first quarter ended April 3, 2004.
	On May 4, 2004, the Company filed a Report on Form 8-K, under Item 5, to announce its Board of Directors had appointed Michael G. Meyer, 45, vice president of treasury and tax and an executive officer of the company. The Report also announced the appointment of Ronald L. Merriman, 59, to the Pentair, Inc. Board of Directors.
	On May 17, 2004, the Company filed a Report on Form 8-K, under Item 5, to announce its Board of Directors had approved a two-for-one stock split of the Company’s outstanding stock. The Report also announced that the Board of Directors approved an increase in the Company’s regular quarterly cash dividend.
	On June 9, 2004, the Company filed a Report on Form 8-K, under Item 5, to announce the recognition of the operation of Rule 416(a) under the Securities Act of 1933, as amended (the “Securities Act”) on, and undertaking to meet the requirements of Rule 416(b) under the Securities Act with respect to, the shares of our common stock registered on our Registration Statement Nos. 333-115429, 333-115430, 333-115432, 33-38534, 33-45012, 333-12561and 333-75166.

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 July 30, 2004.


PENTAIR, INC.
Registrant

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



		Exhibit Index to Form 10-Q for the Period Ended July 3, 2004

2.1		Purchase Agreement between The Black & Decker Corporation and Pentair, Inc. dated as of July 16, 2004. (Incorporated by reference to Exhibit 99.2 contained in Pentair’s Current Report on Form 8-K dated July 16, 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.

July 3
2004

December 31
2003

June 28
2003

Days of sales in accounts receivable

Days inventory on hand

Days in accounts payable