UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý

x

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

For the Quarterly Period Ended September 29, 2001

OR

o

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

Commission file number 1-11625

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

SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 30, 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  xý     No  o¨

On OctoberApril 26, 2001, 49,057,6152002, 49,231,674 shares of the Registrant'sRegistrant’s common stock were outstanding.

Pentair, Inc. and Subsidiaries


Pentair, Inc. and SubsidiariesPage

Part I  Financial Information

Item 1.

Condensed Consolidated Statements of Income for the three and nine months ended September 29,March 30, 2002 and March 31, 2001 andSeptember 30, 2000

3

Condensed Consolidated Balance Sheets as of September 29, 2001,March 30, 2002, December 31, 2000,2001, and September 30, 2000March 31, 2001

4

Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 29,March 30, 2002 and March 31, 2001 and September 30, 2000

5

Notes to Condensed Consolidated Financial Statements

6

Item 2.

9

Item 3.

14

Part II  Other Information

Item 1.

15

Item 4.

15
Item 6.

15

Signatures

16

PART I     FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS
Pentair, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 29

 

September 30

 

September 29

 

September 30

 

In thousands, except per-share data

 

2001

 

2000

 

2001

 

2000

 

Net sales

 

$

646,559

 

$

691,784

 

$

2,020,018

 

$

2,073,236

 

Cost of goods sold

 

487,033

 

518,925

 

1,525,723

 

1,528,328

 

Gross profit

 

159,526

 

172,859

 

494,295

 

544,908

 

Selling, general and administrative

 

100,537

 

104,295

 

307,112

 

310,477

 

Research and development

 

7,805

 

7,214

 

22,794

 

23,360

 

Restructuring charge (income)

 

—

 

—

 

—

 

(2,468

)

Operating income

 

51,184

 

61,350

 

164,389

 

213,539

 

Net interest expense

 

14,409

 

18,753

 

48,366

 

56,280

 

Other expense

 

—

 

—

 

2,500

 

—

 

Income from continuing operations before income taxes

 

36,775

 

42,597

 

113,523

 

157,259

 

Provision for income taxes

 

12,104

 

14,576

 

39,733

 

56,924

 

Income from continuing operations

 

24,671

 

28,021

 

73,790

 

100,335

 

Loss from discontinued operations, net of tax

 

—

 

(14,382

)

—

 

(16,797

)

Cumulative effect of accounting change, net of tax

 

—

 

—

 

—

 

(1,222

)

Net income

 

$

24,671

 

$

13,639

 

$

73,790

 

$

82,316

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.50

 

$

0.58

 

$

1.50

 

$

2.07

 

Loss from discontinued operations

 

—

 

(0.30

)

—

 

(0.35

)

Cumulative effect of accounting change

 

—

 

—

 

—

 

(0.02

)

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.50

 

$

0.28

 

$

1.50

 

$

1.70

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.50

 

$

0.58

 

$

1.50

 

$

2.06

 

Loss from discontinued operations

 

—

 

(0.30

)

—

 

(0.35

)

Cumulative effect of accounting change

 

—

 

—

 

—

 

(0.02

)

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.50

 

$

0.28

 

$

1.50

 

$

1.69

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

49,082

 

48,521

 

49,040

 

48,497

 

Diluted

 

49,410

 

48,568

 

49,270

 

48,628

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.18

 

$

0.17

 

$

0.52

 

$

0.49

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

   
Three months ended
   
March 30
  
March 31
In thousands, except per-share data
  
2002
  
2001
Net sales  $613,435  $671,383
Cost of goods sold   466,052   507,396
   
  
Gross profit   147,383   163,987
Selling, general and administrative   93,292   103,392
Research and development   8,364   7,739
   
  
Operating income   45,727   52,856
Net interest expense   13,730   17,716
Other expense, write-off of investment   —   2,500
   
  
Income before income taxes   31,997   32,640
Provision for income taxes   10,559   12,077
   
  
Net income  $21,438  $20,563
   
  
Earnings per common share
        
Basic  $0.44  $0.42
Diluted  $0.43  $0.42
Weighted average common shares outstanding
        
Basic   49,173   49,006
Diluted   49,584   49,127
Cash dividends declared per common share
  $0.18  $0.17
See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
In thousands, except share and per-share data
  
March 30
2002 (Unaudited)
   
December 31
2001
   
March 31 2001
(Unaudited)
 
Assets
               
Current assets
               
Cash and cash equivalents  $20,946   $39,844   $33,003 
Accounts and notes receivable, net   447,483    398,579    508,344 
Inventories   295,391    300,923    383,194 
Deferred income taxes   67,871    69,953    73,252 
Prepaid expenses and other current assets   19,340    20,979    21,295 
Net assets of discontinued operations   3,613    5,325    106,633 
   
  
  
Total current assets   854,644    835,603    1,125,721 
Property, plant and equipment, net
   318,758    329,500    346,820 
Other assets
               
Goodwill, net   1,085,463    1,088,206    1,132,070 
Other assets   116,833    118,889    66,373 
   
  
  
Total assets  $2,375,698   $2,372,198   $2,670,984 
   
  
  
Liabilities and Shareholders’ Equity
               
Current liabilities
               
Short-term borrowings  $—   $—   $170,111 
Current maturities of long-term debt   5,972    8,729    24,569 
Accounts and notes payable   197,407    179,149    224,293 
Employee compensation and benefits   59,930    74,888    66,330 
Accrued product claims and warranties   37,825    37,590    41,483 
Income taxes   15,501    6,252    11,888 
Other current liabilities   127,511    121,825    124,281 
   
  
  
Total current liabilities   444,146    428,433    662,955 
Long-term debt   689,136    714,977    782,173 
Pension and other retirement compensation   75,858    74,263    61,141 
Post-retirement medical and other benefits   43,367    43,583    34,103 
Deferred income taxes   34,040    34,128    36,702 
Other noncurrent liabilities   61,664    61,812    70,475 
   
  
  
Total liabilities   1,348,211    1,357,196    1,647,549 
Shareholders’ equity
               
Common shares par value $0.16 2/3; 49,211,099, 49,110,859,
               
and 49,020,742 shares issued and outstanding, respectively   8,201    8,193    8,170 
Additional paid-in capital   481,690    478,541    475,520 
Retained earnings   579,213    566,626    580,318 
Unearned restricted stock compensation   (10,244)   (9,440)   (13,310)
Accumulated other comprehensive loss   (31,373)   (28,918)   (27,263)
   
  
  
Total shareholders’ equity   1,027,487    1,015,002    1,023,435 
   
  
  
Total liabilities and shareholders’ equity  $2,375,698   $2,372,198   $2,670,984 
   
  
  
See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)
   
Three months ended
 
In thousands
  
March 30
2002
   
March 31
2001
 
Operating activities
          
Net income  $21,438   $20,563 
Depreciation   15,035    16,854 
Amortization of intangibles and unearned compensation   864    9,884 
Deferred income taxes   2,089    (880)
Other expense, write-off of investment   —    2,500 
Changes in assets and liabilities, net of effects of business acquisitions
          
Accounts and notes receivable   (48,583)   (45,438)
Inventories   3,255    6,615 
Prepaid expenses and other current assets   1,146    (3,969)
Accounts payable   21,318    (22,866)
Employee compensation and benefits   (13,768)   (16,832)
Accrued product claims and warranties   287    (552)
Income taxes   9,295    6,791 
Other current liabilities   8,051    (3,425)
Pension and post-retirement benefits   2,506    2,930 
Other assets and liabilities   (2,879)   (2,378)
   
  
Net cash provided by (used for) continuing operations   20,054    (30,203)
Net cash provided by (used for) discontinued operations   1,712    (9,894)
   
  
Net cash provided by (used for) operating activities   21,766    (40,097)
Investing activities
          
Capital expenditures   (6,980)   (12,859)
Proceeds from sale of businesses   1,138    — 
Acquisitions, net of cash acquired   —    (6,937)
Equity investments   (2,081)   — 
Other   (165)   — 
   
  
Net cash used for investing activities   (8,088)   (19,796)
Financing activities
          
Net short-term borrowings   —    62,016 
Proceeds from long-term debt   45    2,413 
Repayment of long-term debt   (27,736)   (1,189)
Proceeds from exercise of stock options   1,490    251 
Dividends paid   (8,851)   (8,331)
   
  
Net cash provided by (used for) financing activities   (35,052)   55,160 
Effect of exchange rate changes on cash
   2,476    2,792 
   
  
Change in cash and cash equivalents
   (18,898)   (1,941)
Cash and cash equivalents, beginning of period
   39,844    34,944 
   
  
Cash and cash equivalents, end of period
  $20,946   $33,003 
   
  
See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

September 29

 

December 31

 

September 30

 

 

 

2001

 

2000

 

2000

 

In thousands, except share and per-share data

 

(Unaudited)

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

32,816

 

$

34,944

 

$

54,387

 

Accounts and notes receivable, net

 

460,732

 

468,081

 

524,631

 

Inventories

 

343,127

 

392,495

 

422,909

 

Deferred income taxes

 

73,675

 

72,577

 

51,349

 

Prepaid expenses and other current assets

 

28,551

 

22,442

 

31,245

 

Net assets of discontinued operations

 

106,683

 

101,263

 

130,335

 

Total current assets

 

1,045,584

 

1,091,802

 

1,214,856

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

340,187

 

352,984

 

351,203

 

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

 

Goodwill, net

 

1,111,992

 

1,141,102

 

1,142,047

 

Other

 

93,814

 

58,137

 

59,838

 

Total other assets

 

1,205,806

 

1,199,239

 

1,201,885

 

Total assets

 

$

2,591,577

 

$

2,644,025

 

$

2,767,944

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Short-term borrowings

 

$

61,890

 

$

108,141

 

$

198,351

 

Current maturities of long-term debt

 

4,371

 

23,999

 

22,584

 

Accounts and notes payable

 

207,721

 

250,088

 

243,436

 

Employee compensation and benefits

 

75,645

 

84,197

 

90,622

 

Accrued product claims and warranties

 

40,221

 

42,189

 

42,991

 

Income taxes

 

16,066

 

5,487

 

30,997

 

Other current liabilities

 

125,333

 

134,691

 

110,881

 

Total current liabilities

 

531,247

 

648,792

 

739,862

 

 

 

 

 

 

 

 

 

Long-term debt

 

781,885

 

781,834

 

827,891

 

Pension and other retirement compensation

 

69,733

 

61,715

 

58,161

 

Postretirement medical and other benefits

 

33,317

 

34,213

 

33,636

 

Deferred income taxes

 

41,956

 

37,133

 

4,296

 

Other noncurrent liabilities

 

66,643

 

69,747

 

75,470

 

Total liabilities

 

1,524,781

 

1,633,434

 

1,739,316

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

 

Common shares — par value $0.16 2/3; 49,041,646, 48,711,955 and 48,522,688 shares issued and outstanding, respectively

 

8,174

   

8,119

   

8,087

   

Additional paid-in capital

 

475,774

 

468,425

 

462,019

 

Retained earnings

 

616,377

 

568,084

 

602,785

 

Unearned restricted stock compensation

 

(10,898

)

(7,285

)

(4,758

)

Accumulated other comprehensive loss

 

(22,631

)

(26,752

)

(39,505

)

Total shareholders' equity

 

1,066,796

 

1,010,591

 

1,028,628

 

Total liabilities and shareholders' equity

 

$

2,591,577

 

$

2,644,025

 

$

2,767,944

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.


Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

 

 

 

 

Nine months ended

 

September 29

 

September 30

 

In thousands

 

2001

 

2000

 

Operating activities

 

 

 

 

 

Net income

 

$

73,790

 

$

82,316

 

Depreciation

 

48,662

 

45,471

 

Amortization

 

30,966

 

29,281

 

Deferred income taxes

 

3,843

 

(1,669

)

Restructuring charge (income)

 

—

 

(2,468

)

Other expense, write-off of investment

 

2,500

 

—

 

Cumulative effect of accounting change

 

—

 

1,222

 

Changes in assets and liabilities, net of effects of business acquisitions

 

 

 

 

 

Accounts and notes receivable

 

5,416

 

(43,911

)

Inventories

 

47,978

 

(78,297

)

Prepaid expenses and other current assets

 

(11,963

)

(19,933

)

Accounts payable

 

(40,418

)

28,662

 

Employee compensation and benefits

 

(8,353

)

(3,471

)

Accrued product claims and warranties

 

(1,887

)

(5,422

)

Income taxes

 

10,922

 

16,405

 

Other current liabilities

 

(8,018

)

(17,224

)

Pension and post-retirement benefits

 

7,614

 

4,399

 

Other assets and liabilities

 

(4,851

)

(15,643

)

Net cash provided by continuing operations

 

156,201

 

19,718

 

Net cash provided by (used for) discontinued operations

 

(8,944

)

13,177

 

Net cash provided by operating activities

 

147,257

 

32,895

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Capital expenditures

 

(37,639

)

(43,556

)

Acquisitions, net of cash acquired

 

(1,937

)

—

 

Equity investments

 

(20,564

)

—

 

Other

 

—

 

(371

)

Net cash used for investing activities

 

(60,140

)

(43,927

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Net short-term borrowings (repayments)

 

(46,937

)

47,739

 

Proceeds from long-term debt

 

2,676

 

6,030

 

Repayment of long-term debt

 

(22,582

)

(35,135

)

Proceeds from exercise of stock options

 

1,492

 

1,619

 

Repurchases of common stock

 

(1,458

)

(410

)

Dividends paid

 

(25,499

)

(23,767

)

Net cash used for financing activities

 

(92,308

)

(3,924

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

3,063

 

6,328

 

Change in cash and cash equivalents

 

(2,128

)

(8,628

)

Cash and cash equivalents, beginning of period

 

34,944

 

63,015

 

Cash and cash equivalents, end of period

 

$

32,816

 

$

54,387

 

 

 

 

 

 

 

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

1.
Basis of Presentation and Responsibility for Interim Financial Statements
We prepared the unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States can be condensed or omitted. We made certain reclassifications to the 20002001 condensed consolidated financial statements to conform to the 20012002 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 20002001 Annual Report on Form 10-K.

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

2.
New Accounting Standards
2.     Cumulative Effects of Changes inIn June 2001, the Financial Accounting Principles

Effective January 1, 2001, we adopted the provisions ofStandards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, 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, will no longer record goodwill amortization (2001 goodwill amortization was $36.1 million, or $32.0 million after tax or $0.65 per diluted share). We are currently in the process of completing the first step of the initial goodwill impairment test required by SFAS 142 and will complete this assessment in the second quarter of 2002.

The following table provides the comparable effects of the adoption of SFAS No. 142 for the quarters ended March 30, 2002 and March 31, 2001.
   
Three months ended
In thousands, except per-share data
  
March 30 2002
  
March 31 2001
Reported net income  $21,438  $20,563
Add back goodwill amortization, net of tax   —   8,000
   
  
Adjusted net income  $21,438  $28,563
   
  
Reported earnings per share—basic  $0.44  $0.42
Goodwill amortization   —   0.16
   
  
Adjusted net earnings per share—basic  $0.44  $0.58
   
  
Reported earnings per share—diluted  $0.43  $0.42
Goodwill amortization   —   0.16
   
  
Adjusted net earnings per share—diluted  $0.43  $0.58
   
  
The changes in the carrying amount of goodwill for the quarter ended March 30, 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   (79)   (1,262)   (1,402)   (2,743)
   
  
  
  
Balance March 30, 2002  $344,628   $575,495   $165,340   $1,085,463 
   
  
  
  
In August 2001, the FASB issued SFAS No. 143 (SFAS 143),Accounting for Derivative Instruments and Hedging ActivitiesAsset Retirement Obligations (SFAS 133), as amended.  These standards require uswhich is effective January 1, 2003. SFAS 143 requires entities to recognize all derivatives as either assets or liabilities at fair value in our balance sheet.  If the derivative is designated as a fair-value hedge, the changes inrecord the fair value of the derivative and the hedged item is recognized in earnings.  If the derivative is designated and is effective as a cash-flow hedge, changesliability for an asset retirement obligation in the fair valueperiod 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.
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 derivative is recorded in other comprehensive income (OCI) and is recognized in the consolidated statementsfundamental provisions of income when the hedged item affects earnings.  SFAS 133 defines new requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting.  For a derivative that is not designated as or does not qualify as a hedge, changes in fair value are reported in earnings immediately.

statement. The adoption of SFAS 133this standard on January 1, 2001, resulted in2002 did not have an increaseeffect on our historical consolidated results of operations, financial position and cash flows.

Pentair, Inc. and subsidiaries
Notes to other assetscondensed consolidated financial statements (unaudited)
3.
Earnings Per Common Share
Basic and other noncurrent liabilities of $7.5diluted earnings per share were calculated using the following:
   
Three months ended
In thousands, except per-share data
  
March 30
2002
  
March 31
2001
Net income
  $21,438  $20,563
Weighted average common shares outstanding—basic
   49,173   49,006
Dilutive impact of stock options and restricted stock   411   121
   
  
Weighted average common shares outstanding—diluted
   49,584   49,127
   
  
Earnings per common share—basic
  $0.44  $0.42
Earnings per common share—diluted
  $0.43  $0.42
There were 1.1 million and $0.81.7 million respectively, and a cumulative transition adjustmentstock options excluded from the computation of $6.7 million in OCI.  The transition adjustment relates to our hedging activities through December 31, 2000.  Prior to the adoption of SFAS 133, financial instruments designated as cash-flow hedges were not recorded in the financial statements, but cash flows from such contracts were recorded as adjustments todiluted earnings as the hedged items effected earnings.

In December 1999, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which among other guidance, clarified the Staff’s views on various revenue recognition and reporting matters.

In the fourth quarter of 2000, we changed our method of accounting for certain sales transactions to comply with SAB 101.  As a result of this change, we reported a change in accounting principle in accordance with APB Opinion No. 20 (APB 20), Accounting Changes, by a cumulative effect adjustment.  Because we are a calendar year entity that adopted SAB 101 in the fourth quarter of 2000, the cumulative effect of the change was includedper share in the first quarter of 2000 pursuant2002 and 2001, respectively, due to APB 20, which requires that the change be made as of the beginning of the year (January 1, 2000) and that the financial information for pre-change interim periods be restated by applying SAB 101 to those periods.  Accordingly, the quarterly results for 2000their anti-dilutive effect.

4.
Inventories
Inventories were restated pursuant to the adoption of SAB 101.comprised of:

In thousands
  
March 30
2002
(Unaudited)
  
December 31
2001
  
March 31
2001
(Unaudited)
Raw materials and supplies  $91,847  $94,404  $114,545
Work-in-process   36,973   38,760   47,485
Finished goods   166,571   167,759   221,164
   
  
  
Total inventories  $295,391  $300,923  $383,194
   
  
  
5.
Comprehensive Income
3.     Comprehensive Income

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

 

 

Three months ended

 

Nine months ended

 

 

 

September 29

 

September 30

 

September 29

 

September 30

 

In thousands

 

2001

 

2000

 

2001

 

2000

 

Net income

 

$

24,671

 

$

13,639

 

$

73,790

 

$

82,316

 

Changes in cumulative translation adjustment

 

13,300

 

(13,702

)

(1,912

)

(23,906

)

Changes in market value of derivative financial instruments classified as cash flow hedges

 

(4,008

)

—

   

(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)

 

$

33,924

 

$

(63

)

$

77,911

 

$

58,410

 

 

 

 

 

 

 

 

 

 

 


4.     Earnings Per Common Share

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

 

 

Three months ended

 

Nine months ended

 

 

 

September 29

 

September 30

 

September 29

 

September 30

 

In thousands, except per-share data

 

2001

 

2000

 

2001

 

2000

 

Earnings per common share — basic

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

24,671

 

$

28,021

 

$

73,790

 

$

100,335

 

Loss from discontinued operations

 

—

 

(14,382

)

—

 

(16,797

)

Cumulative effect of accounting change

 

—

 

—

 

—

 

(1,222

)

Income available to common shareholders

 

$

24,671

 

$

13,639

 

$

73,790

 

$

82,316

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.50

 

$

0.58

 

$

1.50

 

$

2.07

 

Loss from discontinued operations

 

—

 

(0.30

)

—

 

(0.35

)

Cumulative effect of accounting change

 

—

 

—

 

—

 

(0.02

)

Earnings per common share

 

$

0.50

 

$

0.28

 

$

1.50

 

$

1.70

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share — diluted

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

24,671

 

$

28,021

 

$

73,790

 

$

100,335

 

Loss from discontinued operations

 

—

 

(14,382

)

—

 

(16,797

)

Cumulative effect of accounting change

 

—

 

—

 

—

 

(1,222

)

Income available to common shareholders

 

$

24,671

 

$

13,639

 

$

73,790

 

$

82,316

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.50

 

$

0.58

 

$

1.50

 

$

2.06

 

Loss from discontinued operations

 

—

 

(0.30

)

—

 

(0.35

)

Cumulative effect of accounting change

 

—

 

—

 

—

 

(0.02

)

Earnings per common share

 

$

0.50

 

$

0.28

 

$

1.50

 

$

1.69

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — basic

 

49,082

 

48,521

 

49,040

 

48,497

 

Dilutive impact of stock options and restricted stock

 

328

 

47

 

230

 

131

 

Weighted average common shares outstanding — diluted

 

49,410

 

48,568

 

49,270

 

48,628

 

 

 

 

 

 

 

 

 

 

 

The computations of diluted earnings per share do not include 1.1 million and 1.5 million of anti-dilutive stock options with exercise prices greater than the average market price of our common stock in the third quarter of 2001 and 2000, respectively, and 1.4 million and 0.9 million for the year-to-date periods, respectively.

5.     Inventories

Inventories were comprised of:

 

 

September 29

 

December 31

 

September 30

 

 

 

2001

 

2000

 

2000

 

In thousands

 

(Unaudited)

 

 

 

(Unaudited)

 

Raw materials and supplies

 

$

103,096

 

$

110,935

 

$

102,649

 

Work-in-process

 

42,760

 

48,392

 

48,123

 

Finished goods

 

197,271

 

233,168

 

272,137

 

Total inventories

 

$

343,127

 

$

392,495

 

$

422,909

 

 

 

 

 

 

 

 

 


6.     Restructuring Charge

   
Three months ended
 
In thousands
  
March 30
2002
   
March 31
2001
 
Net income  $21,438   $20,563 
Changes in cumulative translation adjustment   (4,318)   (7,519)
Changes in market value of derivative financial instruments classified as cash flow hedges   1,863    717 
Unrealized loss from marketable securities classified as available for sale   —    (449)
Cumulative effect of accounting change—SFAS 133   —    6,739 
   
  
Comprehensive income (loss)  $18,983   $20,051 
   
  
6.
Restructuring Charge
In the fourth quarter of 2000,2001, we initiated a restructuring program designed to decentralize certainconsolidate manufacturing operations and eliminate non-critical support facilities in our Enclosures segment. We also wrote off internal-use software development costs at corporate service functions and reorganize our Tools segment infrastructure.  Asfor the abandonment of a result,company-wide human resource system. Consequently, we recorded a restructuring charge of $26.8$42.8 million. Cash outlays associated with the charge were $13.2$2.0 million in the first nine monthsquarter of 2001.

2002.

The components of the restructuring charge and utilization are as follows:
      
Utilization
    
In thousands
  
2001
restructuring
charge (fourth quarter)
  
Year
2001
   
Three months
2002
   
Balance March 30
2002
Employee termination benefits  $16,696  $(2,464)  $(1,522)  $12,710
Non-cash asset disposals   11,050   (11,050)   —    —
Impaired goodwill   7,362   (7,362)        —
Exit costs   7,649   (769)   (501)   6,379
   
  
  
  
Total   42,757   (21,645)   (2,023)   19,089
   
  
  
  

Pentair, Inc. and subsidiaries

 

 

 

 

Utilization

 

 

 

 

 

 

 

 

 

 

 

Balance

 

 

 

Initial

 

Year

 

Nine months

 

September 29

 

In thousands

 

accrual

 

2000

 

2001

 

2001

 

Employee termination benefits

 

$

7,888

 

$

—

 

$

(7,706

)

$

182

 

Non-cash asset disposals

 

10,518

 

(10,518

)

—

 

—

 

Exit costs

 

8,394

 

(87

)

(5,475

)

2,832

 

 

 

$

26,800

 

$

(10,605

)

$

(13,181

)

$

3,014

 

 

 

 

 

 

 

 

 

 

 

Notes to condensed consolidated financial statements (unaudited)
Included inother current liabilities in on the September 29, 2001March 30, 2002 condensed consolidated balance sheet is the unused portion of the restructuring charge liability of $3.0$19.1 million. We expect to complete the remaining restructuring activities in the fourth quartersecond half of 2001.

2002.

Workforce reductions related to the 2001 restructuring charge wasis for approximately 225720 employees, all of which have beenwhom 586 were terminated as of the end of the thirdfirst quarter of 2001.2002. Employee termination benefits areconsist primarily forof severance related costs and outplacement counseling fees. Non-cash asset disposals relatedExit costs relate to the restructuring charge consistedshutdown of the abandonment of leasehold improvements and the abandonment of internal use software under development.  Exit costs are primarily related to contract and lease termination costs.

7.     Business Segments

Financial information by reportable business segment is included in the following summary:

 

 

Three months ended

 

Nine months ended (1)

 

 

 

September 29

 

September 30

 

September 29

 

September 30

 

In thousands

 

2001

 

2000

 

2001

 

2000

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers

 

 

 

 

 

 

 

 

 

Tools

 

$

250,677

 

$

280,203

 

$

776,974

 

$

787,188

 

Water

 

231,565

 

214,119

 

693,434

 

707,813

 

Enclosures

 

164,317

 

197,462

 

549,610

 

578,235

 

Consolidated

 

$

646,559

 

$

691,784

 

$

2,020,018

 

$

2,073,236

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

 

 

 

 

 

 

 

Tools

 

$

17,524

 

$

10,772

 

$

43,605

 

$

51,183

 

Water

 

28,427

 

28,512

 

92,270

 

100,709

 

Enclosures

 

8,740

 

24,786

 

39,811

 

73,774

 

Corporate/other

 

(3,507

)

(2,720

)

(11,297

)

(12,127

)

Consolidated

 

$

51,184

 

$

61,350

 

$

164,389

 

$

213,539

 

(1)      Tools segment operating income reflects a one-time pre-tax cost to establish an additional $5.0 million in accounts receivable reserves in the second quarter of 2000.  Tools andsix Enclosures segment operating income includes restructuring charge incomefacilities, of $1,171which two are owned and $1,297, respectively, recorded in the first quarter of 2000 due to a change in estimate of 1999 restructuring liabilities.

Corporate/other operating income (loss) is primarily composed of unallocated corporate expenses,currently held for resale and expenses of our insurance subsidiary, intermediate finance companies, as well as intercompany eliminations.

four are leased.
7.
Equity Method Investments

8.     Acquisitions

In February 2001, we acquired Taunus, a Brazilian enclosures manufacturer, forWe have invested approximately $6.9 million cash including debt assumed of $1.7 million.  Goodwill recorded as part of the purchase was $5.4 million and is being amortized over 20 years.

In the second quarter of 2001, we received $5.0 million for the settlement of a purchase price dispute related to an earlier acquisition.  The amount received was accounted for as a reduction in goodwill.

9.     Equity Investments

In the second quarter of 2001, we invested $3.0 million to take a minority equity interest in a privately-held developer and manufacturer of laser leveling and measuring devices.  This investment is accounted for under the cost method and is included in Other assets in the condensed consolidated balance sheet.

We are investing approximately $24.6$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 $17.6$22.5 million has been paid.paid ($2.1 million was paid in the first quarter of 2002) and $2.4 million is included inother current liabilities. We hold an option to increase our ownership interest in these joint ventures to as much as 100 percent. These investments are accounted for under the equity method and are included in Other assets in the condensed consolidated balance sheet.  Our portion of the earnings of these joint ventures is included incostof goods sold.sold, however, it was not material.

8.
Business Segments
10.  Discontinued Operations

In December 2000, we adopted a plan to sell our EquipmentFinancial information by reportable business segment businesses, Century/Lincoln Automotive and Lincoln Industrial.  In July 2001, we signed a definitive purchase agreement to sell our wholly owned Lincoln Industrial automated lubrication and materials dispensing business to a company newly formed by The Jordan Company LLC of New York, NY.  The sale of our wholly-owned automotive service equipment business occurred on October 15, 2001.  We expect to complete the sale of our automated lubrication business lateris included in the fourth quarterfollowing summary:

   
Three months ended
 
In thousands
  
March 30
2002
   
March 31
2001
 
Net sales to external customers
          
Tools  $261,069   $240,392 
Water   212,806    220,852 
Enclosures   139,560    210,139 
   
  
Consolidated
  $613,435   $671,383 
   
  
Operating income (loss) as reported
          
Tools  $16,686   $7,863 
Water   29,747    28,193 
Enclosures   4,608    21,237 
Other   (5,314)   (4,437)
   
  
Consolidated
  $45,727   $52,856 
   
  
Goodwill amortization
          
Tools  $—   $2,319 
Water   —    4,549 
Enclosures   —    2,146 
   
  
Total goodwill amortization
   —    9,014 
Amortization of unearned compensation   864    870 
   
  
Total amortization
  $864   $9,884 
   
  
Operating income (loss) excluding goodwill amortization
          
Tools  $16,686   $10,182 
Water   29,747    32,742 
Enclosures   4,608    23,383 
Other   (5,314)   (4,437)
   
  
Consolidated
  $45,727   $61,870 
   
  
Other operating income (loss) is primarily composed of this year, subject to completion of the buyer’s financing arrangements.  Cash from these sales will be used to reducecorporate expenses, our debt.

We have accounted for the Equipment segment asinsurance subsidiary, intermediate finance companies, divested operations, discontinued operations, in these financial statements.  In the third quarter and first nine months of 2001, we had a net loss from discontinued operations of $3.4 million and $5.7 million, respectively, which was deferred because an immaterial net gain or loss is expected upon disposal.  The net loss is included as part of the net assets of discontinued operations in the condensed consolidated balance sheets.  The loss from discontinued operations includes an allocation of Pentair’s interest expense.  Net assets of discontinued operations at September 29, 2001, consisted of net current assets of $67.9 million, net property, plant and equipment of $26.4 million, and net noncurrent assets of $12.4 million.intercompany eliminations.

11.  New Accounting Standards

In June 2001, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142).  SFAS 141 requires that all

Business combinations subsequent to June 30, 2001 be accounted for under the purchase method of accounting.  SFAS 142 eliminates the amortization of goodwill and requires periodic evaluation of the goodwill carrying value.  The provisions of SFAS

142 are effective for fiscal years beginning after December 15, 2001.  Our goodwill amortization for the first nine months of 2001 was $27.2 million and $36.4 million for the year ended December 31, 2000.  We are currently in the process of assessing the impact of adopting these new standards.


ITEM 2.    MANAGEMENT'SMANAGEMENT’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. Actual results may vary materially.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:

Ÿ      changes in industry conditions, such as:

Ÿ      the strength of product demand;

Ÿ      the intensity of competition;

Ÿ      pricing pressures;

Ÿ      market acceptance of new product introductions;

Ÿ      the introduction of new products by competitors;

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

Ÿ      the financial condition of our customers.

Ÿ      changes in our business strategies;

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

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

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

·
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;
·
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 continued improvement in manufacturing activities and the achievement of related efficiencies;
·
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.
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:
·
the collectibility of accounts receivable;
·
the valuation of inventories and reserves to adjust inventory to the lower of cost or market;
·
estimating sales returns and warranty costs;
·
self-insurance reserves for product liability, workers’ compensation, and employee medical liabilities;
·
assumptions used in the valuation of environmental remediation costs and pending litigation;
·
the resolution of matters related to open tax years;
·
the evaluation of long-lived assets, including goodwill, 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.


RESULTS OF OPERATIONS

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

 

Three months ended

 

Nine months ended

 

September 29

 

September 30

 

Percentage

 

September 29

 

September 30

 

Percentage

In thousands

2001

 

2000

 

point change

 

2001

 

2000

 

point change

Net sales

$

646,559

 

$

691,784

 

 

 

 

 

$

2,020,018

 

$

2,073,236

 

 

 

 

Cost of goods sold

487,033

 

518,925

 

 

 

 

 

1,525,723

 

1,528,328

 

 

 

 

Gross profit

159,526

 

172,859

 

 

 

 

 

494,295

 

544,908

 

 

 

 

% of net sales

24.7

%

25.0

%

(0.3

)

pts

 

24.5

%

26.3

%

(1.8

)

pts

SG&A and R&D

108,342

 

111,509

 

 

 

 

 

329,906

 

333,837

 

 

 

 

% of net sales

16.8

%

16.1

%

0.7

 

pts

 

16.3

%

16.1

%

0.2

 

pts

Restructuring charge (income)

—

 

—

 

 

 

 

 

—

 

(2,468

)

 

 

 

% of net sales

nm

 

nm

 

 

 

 

 

nm

 

(0.1%

)

 

 

 

Operating income

51,184

 

61,350

 

 

 

 

 

164,389

 

213,539

 

 

 

 

% of net sales

7.9

%

8.9

%

(1.0

)

pts

 

8.1

%

10.3

%

(2.2

)

pts

Net interest expense

14,409

 

18,753

 

 

 

 

 

48,366

 

56,280

 

 

 

 

% of net sales

2.2

%

2.7

%

(0.5

)

pts

 

2.4

%

2.7

%

(0.3

)

pts

Other expense

—

 

—

 

 

 

 

 

2,500

 

—

 

 

 

 

% of net sales

nm

 

nm

 

 

 

 

 

0.1

%

nm

 

 

 

 

Income from continuing operationsbefore income taxes

36,775

   

42,597

   

 

   

 

   

113,523

   

157,259

   

 

   

 

% of net sales

5.7

%

6.2

%

(0.5

)

pts

 

5.6

%

7.6

%

(2.0

)

pts

Provision for income taxes

12,104

 

14,576

 

 

 

 

 

39,733

 

56,924

 

 

 

 

Effective tax rate

32.9

%

34.2

%

(1.3

)

pts

 

35.0

%

36.2

%

(1.2

)

pts

Income from continuing operations

24,671

 

28,021

 

 

 

 

 

73,790

 

100,335

 

 

 

 

% of net sales

3.8

%

4.1

%

(0.3

)

pts

 

3.7

%

4.8

%

(1.1

)

pts

Loss from discontinued operations, net of tax

—

 

(14,382

)

 

 

 

 

—

 

(16,797

)

 

 

 

Cumulative effect of accounting change, net of tax

—

 

—

 

 

 

 

 

—

 

(1,222

)

 

 

 

Net income

$

24,671

 

$

13,639

 

 

 

 

 

$

73,790

 

$

82,316

 

 

 

 

Percentages may reflect rounding adjustments.

SG&A and R&D — Selling, general and administrative; and Research and development.

nm — not measured

Net sales

The components of the net sales decreases weredecrease was as follows:

 

 

% change from 2000

 

 

Third quarter

 

 

Nine months

 

Volume

 

(6.1

%)

 

(1.8

%)

Price

 

0.2

%

 

0.0

%

Currency

 

(0.6

%)

 

(0.8

%)

Total net sales decrease

 

(6.5

%)

 

(2.6

%)

% change from 2001
Percentages
First quarter
Volume(8.3)
Price0.2
Currency(0.5)
Total(8.6)
Net sales in the thirdfirst quarter and first nine months of 20012002 totaled $646.6 million and $2,020.0$613.4 million, compared with $691.8$671.4 million and $2,073.2 million forin the same periods in 2000.first quarter of 2001. The third quarter decrease of $45.2$58.0 million or 6.58.6 percent decline was primarily due to volume declines in our ToolsEnclosures and EnclosuresWater segments, due to weaker economic conditions, partially offset by a volume growth in our Water segment.  The increase in third quarter Water segment sales reflects late season sales of pool and spa equipment products, partially offset by weaker demand for industrial pumps.  The decrease of $53.2 million or 2.6 percent in the first nine months was primarily due to volume declines in our Water and Enclosures segments and lower selling prices in our Tools segment stemming fromsegment. The stronger U.S. dollar also reduced the mid-2000 price discounting activities.  The volume declines in our Water and Enclosures segments reflect weaker economic conditions and decreased customer capital spending for industrial pumps and enclosure products.  The negative currency impact on third quarter and year-to-date 2001 sales reflects the year-over-year decline primarily in thedollar value of certain European currencies relative to the U.S. dollar.

Given the prevailing economic conditions, we expect fourth quarter earnings to be comparable to those of the third quarter, at best.

foreign sales by about 0.5 percent.

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

 

 

Three months ended

 

Nine months ended

 

 

 

September 29

 

September 30

 

Favorable (Unfavorable)

 

September 29

 

September 30

 

Favorable (Unfavorable)

 

In thousands

 

2001

 

2000

 

$ change

 

% change

 

2001

 

2000

 

$ change

 

% change

 

Tools

 

$

250,677

 

$

280,203

 

$

(29,526

)

(10.5%

)

$

776,974

 

$

787,188

 

$

(10,214

)

(1.3%

)

Water

 

231,565

 

214,119

 

17,446

 

8.1%

 

693,434

 

707,813

 

(14,379

)

(2.0%

)

Enclosures

 

164,317

 

197,462

 

(33,145

)

(16.8%

)

549,610

 

578,235

 

(28,625

)

(5.0%

)

Total

 

$

646,559

 

$

691,784

 

$

(45,225

)

(6.5%

)

$

2,020,018

 

$

2,073,236

 

$

(53,218

)

(2.6%

)

In thousands
  
Three months ended
       
  
March 30 2002
  
March 31 2001
  
$ change
   
% change
Tools  $261,069  $240,392  $20,677   8.6%
Water   212,806   220,852   (8,046)  (3.6%)
Enclosures   139,560   210,139   (70,579)  (33.6%)
   
  
  
  
Total  $613,435  $671,383  $(57,948)  (8.6%)
   
  
  
  
Tools

The 10.58.6 percent and 1.3 percent declinesincrease in Tools segment sales in the thirdfirst quarter and first nine months of 20012002 from 20002001 was primarily driven by:

·
higher sales volume in our DeVilbiss Air Power Company (DAPC) business, particularly for pressure washers and incremental sales of generators due to a January 2002 ice storm in the Midwest.
•      lower sales volume in the third quarter of 2001 for generators and Delta products due to the weaker economy; and

•      lower selling prices in 2001, stemming from the mid-2000 price discounting activities, which was done to recover market share in our Porter-Cable/Delta business, and has subsequently resulted in challenges in reestablishing previous price levels.

These decreases were partially offset by:

•      increased pressure washer sales in the third quarter and first nine months of 2001; and

•      higher sales volume for Porter-Cable products in the third quarter and first nine months of 2001.

We are successfully implementing our turnaround strategies to return the Tools segment to more historical profitability levels.  Some of the initiatives we are undertaking include:

•cost reduction through supply chain management and the introduction of lean manufacturing processes;

•      overhauling our pricing practices by creating a more-robust pricing process and reducing price discounting activities;

•      intensifying our focus on addressing the needs of previously under-served channels and geographies and aggressively positioning the businesses to regain brand preference in the markets we serve through channel management;

•      increasing innovation through new product development; and

•      improved leadership that is now driving productivity change throughout the organization.

Water

The 8.1 percent increase in Water segment sales in the third quarter of 2001 from 2000 was primarily due to:

•      higher sales of pool and spa equipment products due to late season sales; and

•      slight increases in average selling prices.

These increases were partially offset by:

•      lower sales volume for our industrial pumps as a weaker economy slowed demand; and

•      unfavorable foreign currency translation resulting from the stronger U.S. dollar.

The 2.03.6 percent decline in Water segment sales in the first nine monthsquarter of 20012002 from 20002001 was primarily due to:

·
lower sales of pool and spa equipment products due to timing of orders;
·
lower sales of pressure vessels for large water treatment systems; and
·
unfavorable impacts of foreign currency translation.
•      lower volume for our industrial pumps as a weaker economy slowed demand; and

•      unfavorable foreign currency translation resulting from the stronger U.S. dollar.

These increasesdeclines were partially offset by:

•

·
higher sales volume for our municipal and residential pumps; and
·
slight increases in average selling prices.
While we experienced lower Water segment sales volume in the first quarter of 2002 compared with 2001, backlog was up about 6 percent from prior year levels going into the second quarter, primarily driven by strong orders in our pool and spa equipment productsbusiness.
Enclosures
The 33.6 percent decline in Enclosures segment sales in the first quarter of 2002 from 2001 was primarily due to increased market share; and

to:

·
lower sales volume due to significant industry-wide sales declines, reflecting severely reduced capital spending in the industrial market and over-capacity and lack of demand in the datacom and telecom markets; and
•·      slight increases in average selling prices.

Because     unfavorable impacts of foreign currency translation.

Although we experienced a late start and later-than-typical finishsignificantly lower Enclosures sales volume from first quarter 2001 levels, sales in the 2001 pool equipment sales season,North American industrial market increased about 5 percent from the fourth quarter of 2001. In addition, we remain cautious about the potential impact that a softer economy may have on these businesses going intoalso experienced an increase in automotive quote activity over the fourth quarter of 2001 and there may be early partsigns of 2002.

Enclosures

The 16.8 percent and 5.0 percent declines in Enclosures segment salesrecovery in the third quarter and first nine months of 2001 from 2000 was primarily due to:

•      lower sales volume, especially in Europe where sales in that region are off approximately 35 percent in the third quarter from year-earlier levels, reflecting reduced capital spending in the industrialNorth American base electronics market coupled with the downturn in theas well. The worldwide datacom and telecom markets;markets, however, continue to suffer from over-capacity and a lack of demand.

We are pursuing several strategies aimed at improving our Enclosures segment performance by continuing to expand our distribution network, principally in the commercial market. In the first quarter of 2002, we added 99 new distributors and we expect to add another 300 distribution locations in the near future.

•Supplemental Financial Information      unfavorable foreign currency translation resulting from
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 stronger U.S. dollar.

quarter ended March 31, 2001.
   
Three months ended March 31, 2001
In thousands, except per-share data
  
As
reported
  
Goodwill
amortization
   
As
adjusted
SG&A  $103,392  $(9,014)  $94,378
Operating income   52,856   9,014    61,870
Provision for income taxes   12,077   1,014    13,091
Net income   20,563   8,000    28,563
Earnings per share—diluted  $0.42  $0.16   $0.58
Supplemental Condensed Consolidated Statements of Income
  
Three months ended
     
In thousands
  
March 30
2002
   
March 31
2001
As adjusted (1)
   
Percentage
point change
 
Net sales  $613,435   $671,383     
Cost of goods sold   466,052    507,396     
Gross profit   147,383    163,987     
        % of net sales
  
 
24.0%
 
  
 
24.4%
 
  
(0.4) pts
 
Selling, general and administrative (SG&A)(1)
   93,292    94,378     
        % of net sales
  
 
15.2%
 
  
 
14.1%
 
  
1.1 pts
 
Research and development (R&D)   8,364    7,739     
        % of net sales
  
 
1.4%
 
  
 
1.2%
 
  
0.2 pts
 
   
  
  
Operating income   45,727    61,870     
        % of net sales
  
 
7.5%
 
  
 
9.2%
 
  
(1.7) pts
 
Net interest expense   13,730    17,716     
        % of net sales
  
 
2.2%
 
  
 
2.6%
 
  
(0.4) pts
 
Other expense, write-off of investment   —    2,500     
        % of net sales
  
 
n/a
 
  
 
0.4%
 
    
   
  
  
Income before income taxes   31,997    41,654     
        % of net sales
  
 
5.2%
 
  
 
6.2%
 
  
(1.0) pts
 
Provision for income taxes(1)
   10,559    13,091     
Effective tax rate
  
 
33.0%
 
  
 
31.4%
 
  
1.6 pts
 
   
  
  
Net income  $21,438   $28,563     
   
  
  
% of net sales
  
 
3.5
%
  
 
4.3
%
  (0.8) pts
Percentages may reflect rounding adjustments.

n/a—not applicable.

These decreases were partially offset by:

•      slight increases in average selling prices; and

•      the February 2001 acquisition of Taunus, a Brazilian enclosures manufacturer.

(1)
First quarter 2001 numbers have been adjusted to exclude goodwill amortization as noted above.
Gross profit

Gross profit margin was 24.7 percent and 24.524.0 percent of net sales in the thirdfirst quarter and first nine months of 2001,2002, compared with 25.0 percent and 26.324.4 percent of net sales for the same periodsperiod last year.

The 0.30.4 percentage point decline in the thirdfirst quarter of 20012002 from 20002001 was primarily the result of:

•·     lower sales volume, primarily in our Enclosures segment resulting in unabsorbed overhead.

This decrease wasoverhead, partially offset by:

•      slight increases in average selling prices;

•by savings resulting from our supply chain management and lean enterprise initiatives;

•initiatives.      income generated from our joint venture operations; and

•      the February 2001 acquisition of Taunus, a Brazilian enclosures manufacturer.

The 1.8 percentage point decline in the first nine months of 2001 from 2000 was primarily the result of:

•      lower sales volume resulting in unabsorbed overhead;

•      unfavorable product mix on pass through equipment, primarily in our enclosures business;

•      higher pension expense due to lower returns on pension assets; and

•      higher energy costs resulting from an increase in oil and gas prices.

These decreases were partially offset by:

•      savings resulting from our supply chain management and lean enterprise initiatives;

•      income generated from our joint venture operations; and

•      the February 2001 acquisition of Taunus.

SG&A and R&D

SG&A expense in the first quarter of 2002 was $93.3 million, compared with $94.4 million (excluding goodwill amortization of $9.0 million) in the first quarter of 2001, or 15.2 and R&D expenses were 16.8 percent and 16.314.1 percent of net sales, in the third quarter and first nine months of 2001, up 0.7 and 0.2 percentage points from the same periods in 2000.respectively. The 0.71.1 percentage point increase is largely the result of Enclosures segment sales declining at a much faster rate than the decline in SG&A spending, and higher spending on selling expense in our Tools segment, primarily for advertising.

R&D expense was $8.4 million in the thirdfirst quarter of 2002, compared with $7.7 million in the first quarter of 2001, stems fromor 1.4 and 1.2 percent of sales, respectively. The year-over-year increase is primarily the 35 percent sales decline in our European enclosures business with more restrictive opportunities to decrease costs at the same rate, and higherresult of additional investments related to new product development initiatives in our Tools segment.
Operating income
Tools
The 0.2following 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
In thousands
  
March 30 2002
     
March 31 2001
Tools
           
Operating income as reported  $16,686     $7,863
Add back goodwill amortization   —      2,319
   
    
Adjusted operating income  $16,686     $10,182
   
    
% of net sales
  
 
6.4%
 
    
 
4.2%
Percentage point change
  
 
2.2
pts
      
The 2.2 percentage point increase in the first nine months of 2001 primarily reflects the previously mentioned European enclosures sales decline and additional spending to redefine and streamline company-wide business processes primarily in the areas of supply chain management and lean enterprise to improve our overall cost structure.  We have been able to take out costs in our North American enclosures operations at a faster rate than the overall sales decline.  We have new management in place within the European enclosures business and its focus is to make significant cost reductions and position the business to compete in this challenging economy.

Operating income

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

 

 

Three months ended

 

Nine months ended (1) (2)

 

 

 

September 29

 

September 30

 

Percentage

 

September 29

 

September 30

 

Percentage

 

In thousands

 

2001

 

2000

 

point change

 

2001

 

2000

 

point change

 

Tools

 

$

17,524

 

$

10,772

 

 

 

 

$

43,605

 

$

51,183

 

 

 

% of net sales

 

7.0

%

3.8

%

3.2 pts

 

5.6

%

6.5

%

(0.9) pts

 

Water

 

28,427

 

28,512

 

 

 

92,270

 

100,709

 

 

 

% of net sales

 

12.3

%

13.3

%

(1.0) pts

 

13.3

%

14.2

%

(0.9) pts

 

Enclosures

 

8,740

 

24,786

 

 

 

39,811

 

73,774

 

 

 

% of net sales

 

5.3

%

12.6

%

(7.3) pts

 

7.2

%

12.8

%

(5.6) pts

 

Corporate/other

 

(3,507

)

(2,720

)

 

 

(11,297

)

(12,127

) 

 

 

Total

 

$

51,184

 

$

61,350

 

 

 

 

$

164,389

 

$

213,539

 

 

 

% of net sales

 

7.9

%

8.9

%

(1.0) pts

 

8.1

%

10.3

%

(2.2) pts

 

(1)

Tools segment operating income reflects a one-time pre-tax cost to establish an additional $5.0 million in accounts receivable reserves in the second quarter of 2000.

(2)

Tools and Enclosures segment operating income includes restructuring charge income of $1,171 and $1,297, respectively, recorded in the first quarter of 2000 due to a change in estimate of 1999 restructuring liabilities.


Tools

Tools segmentquarter 2002 operating income was 7.0 percent and 5.6 percent of sales in the third quarter and first nine months ofmargin excluding 2001 compared with 3.8 percent and 6.5 percent of sales in the prior year periods.

The 3.2 percentage point increase in the third quarter of 2001 from 2000goodwill amortization for our Tools segment was primarily the result of:

·
cost savings as a result of our supply management and lean enterprise initiatives; and
·
higher sales volume, particularly for pressure washers.
•      savings resulting from our supply chain management initiatives;

•      favorable product mix;

•      lower advertising costs; and

•      income generated from our joint venture operations.

These increases were partially offset by:

·
higher selling expense, primarily for advertising; and
·
higher R&D expense related to new product development initiatives.
Water

•      lower sales volume, primarily

The following table provides a comparison of Water segment operating income as reported, and those results as if we had accounted for generators and Delta products due to the weaker economy;

•      lower selling prices in 2001, stemming from the mid-2000 price discounting activities;

•      additional spending in 2001goodwill under SFAS 142 for new product development and to redefine and streamline business processes; and

all prior periods presented:

   
Three months ended
In thousands
  
March 31 2001
     
March 31 2001
Water
           
Operating income as reported  $29,747     $28,193
Add back goodwill amortization   —      4,549
   
    
Adjusted operating income  $29,747     $32,742
   
    
% of net sales
  
 
14.0%
 
    
 
14.8%
Percentage point change
  
 
(0.8
) pts
      
•      higher pension costs due to lower return on pension assets.

The 0.90.8 percentage point decline in Toolsfirst quarter 2002 operating income margin excluding 2001 goodwill amortization for our Water segment was primarily the result of:

·
lower sales of pool and spa equipment products due to timing of orders;
·
temporary declines in productivity at our pool business associated with production line rationalization between our factories in California and North Carolina; and
·
lower sales of pressure vessels for large water treatment systems.
These decreases were partially offset by:
·
cost improvements as a result of our lean enterprise initiatives; and
·
slight increases in average selling prices.

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
In thousands
  
March 30 2002
     
March 31 2001
Enclosures
           
Operating income as reported  $4,608     $21,237
Add back goodwill amortization   —      2,146
   
    
Adjusted operating income  $4,608     $23,383
   
    
% of net sales
  
 
3.3%
 
    
 
11.1%
Percentage point change
  
 
(7.8
) pts
      
The 7.8 percentage point decline in the first nine months ofquarter 2002 operating income margin excluding 2001 from 2000goodwill amortization for our Enclosures segment was primarily due to:

•      lower selling prices in 2001, stemming from the mid-2000 price discounting activities;

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.
•These decreases were partially offset by:      additional spending in 2001 for new product development
·
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 $13.7 million and to redefine and streamline business processes;

•      higher warranty costs;

•      higher pension costs due to lower return on pension assets; and

•      restructuring charge income recorded$17.7 million in the first quarter of 2000.

These decreases were partially offset by:

•      savings in2002 and 2001, resulting from our supply chain management initiatives; and

•      lower 2001 bad debt expense, due to the establishment of $5.0 million in accounts receivable reservesrespectively. Included in the second quarter$13.7 million, is a write-off of 2000.

Water

Water segment operating income was 12.3 percent and 13.3 percent$1.8 million of sales infinancing costs related to excess capacity on certain credit facilities that we do not expect to utilize. Excluding the third quarter and first nine months of 2001, compared with 13.3 percent and 14.2 percent of sales in the prior year periods.

The 1.0 percentage point and 0.9 percentage point declines in Water segment operating income in the third quarter and first nine months of 2001 from 2000 was primarily due to:

•      lower sales volume in our higher margin pump and water treatment businesses which have been more directly affected by the economic slowdown’s impact on capital spending; and

•      unfavorable foreign currency effects.

These decreases were partially offset by:

•      higher sales of pool and spa equipment products due to late season sales in the third quarter and increased market share; and

•      slight increases in average selling prices.

Enclosures

Enclosures segment operating income was 5.3 percent and 7.2 percent of sales in the third quarter and first nine months of 2001, compared with 12.6 percent and 12.8 percent of sales in the prior year periods.

The 7.3 percentage point and 5.6 percentage point declines in Enclosures segment operating income in the third quarter and first nine months of 2001 from 2000 was primarily due to:

•      lower sales volume, especially in our European operations in the third quarter of 2001, reflecting reduced capital spending in the industrial market, coupled with the downturn in the datacom and telecom markets;

•      unfavorable product mix;

•      higher energy and higher pension costs; and

•      restructuring charge income recorded in the first quarter of 2000 (only affects first nine months comparison).

These decreases were partially offset by:

•      increases in average selling prices.


Net interest expense

Net$1.8 million write-off, net interest expense was $14.4declined $5.8 million and $48.4 million in the third quarter and first nine months of 2001, compared with $18.8 million and $56.3 million for the same periods last year.  The $4.4 million and $7.9 million declines primarily reflectreflecting lower average borrowings driven by our strong cash flow performance in the first nine months of 2001 and lower interest rates on our variable debt.

Net interest expense in the fourth quarter of 2001 was $13.1 million.
Provision for income taxes

Our effective tax rate on continuing operations was 35.033.0 percent forin the first nine monthsquarter of 2001,2002, compared with 36.231.4 percent, as if we had accounted for goodwill under SFAS 142 (37.0 percent as reported), for the comparable period in 2000.2001. The decrease of 1.21.6 percentage pointspoint increase reflects a change in U.S. versus foreign earnings mix in 20012002 compared to 2000 and implementation of additional2001. We expect our effective tax planning strategies.

rate to be around 33.0 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.

Discontinued operations

In December 2000, we adopted a plan to sell our Equipment segment businesses, Century/Lincoln Automotive and Lincoln Industrial.  In July 2001, we signed a definitive purchase agreement to sell our wholly owned Lincoln Industrial automated lubrication and materials dispensing business to a company newly formed by The Jordan Company LLC of New York, NY.  The sale of our wholly-owned automotive service equipment business occurred on October 15, 2001.  We expect to complete the sale of our automated lubrication business later in the fourth quarter of this year, subject to completion of the buyer’s financing arrangements.  Cash from these sales will be used to reduce our debt.

We have accounted for the Equipment segment as discontinued operations in these financial statements.  In the third quarter and first nine months of 2001, we had a net loss from discontinued operations of $3.4 million and $5.7 million, respectively, which was deferred because an immaterial net gain or loss is expected upon disposal.  The net loss is included as part of the net assets of discontinued operations in the condensed consolidated balance sheets.  The loss from discontinued operations includes an allocation of Pentair’s interest expense.  Net assets of discontinued operations at September 29, 2001, consisted of net current assets of $67.9 million, net property, plant and equipment of $26.4 million, and net noncurrent assets of $12.4 million.

LIQUIDITY AND CAPITAL RESOURCES

To fund investingcapital expenditures, acquisitions, repurchase shares, and financing activities,pay dividends, committed revolving credit facilities are used to complement operating cash flows.  In maintaining this financial flexibility, levels of debt will vary depending on operating results. Because of the seasonality of some of our businesses, particularly the pool and spa equipment business and the tools business, we generally experience negative cash flows from operations in the first half of any given year. However, due to our emphasis on working capital management, in 2001, we generated $147.2$21.8 million of cash from operating activities in the first nine monthsquarter of the year,2002, which net(net of $37.6$7.0 million of capital expenditures,expenditures) resulted in a positive free cash flow of $109.6$14.8 million.

The following table presents selected quarterly measures of our liquidity calculated from our monthly operating results:results based on a 13-month moving average:

 

 

September 29

 

September 30

 

 

 

2001

 

2000

 

Days of sales in accounts receivable

 

64

 

69

 

Days inventory on hand

 

73

 

82

 

Days in accounts payable

 

61

 

63

 

Cash conversion cycle

 

76

 

88

 

Days
    
March 30 2002
    
March 31 2001
Days of sales in accounts receivable    64    69
Days inventory on hand    72    80
Days in accounts payable    58    60
Cash conversion cycle    78    89
Operating activities

Operating activities provided $147.2$21.8 million in the first nine monthsquarter of 2001,2002, compared with $32.9a use of $40.1 million for the same period in 2000.2001 for a year-over-year improvement of $61.9 million. The $114.3 million increase inwas primarily the result of higher accounts payable balances at the end of the first nine monthsquarter of 2002 compared with the end of 2001, over 2000 was primarily due to better managementdriven by increased material purchases, higher inventory turnover, and improved sell through of accounts receivable and inventories, offset by accounts payable resulting fromproducts in our Tools segment. In addition, the timingdisposition of payments.  We reduced daysour Equipment segment businesses at the end of sales in accounts receivable and days inventory on hand by 5 days and 9 days, respectively.2001 provided a year-over-year improvement of $11.6 million.

Investing activities

Capital expenditures in the first nine monthsquarter of 2002 and 2001 were $37.6$7.0 million compared with $43.6and $12.9 million, for the same period in 2000.respectively. We anticipate capital expenditures in 20012002 to be approximately $70$50 million. The anticipatedAnticipated expenditures in 2002 are expected to be in the areas of tooling for new product development factory expansion in low cost areas, and additional machinery and equipment for cost reductions.  We are reviewing all capital projects in light of current economic conditions and are making adjustments to plans as appropriate.

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

In the second quarter of 2001, we invested $3.0 million to take a minority equity interest in a privately-held developer and manufacturer of laser leveling and measuring devices.  We are investing approximately $24.6 million to take a 40 percent interest in certain joint venture operations of an Asian supplier for bench and portable tools, of which $17.6 million has been paid.  We hold an option to increase our ownership interest in these joint ventures to as much as 100 percent.

general maintenance capital.

Financing activities

As of the end of the thirdfirst quarter of 2001,2002, our capital structure was comprised of $61.9 million in short-term borrowings, $786.3$695.1 million in long-term debt (including current maturities), and $1,066.8$1,027.5 million in shareholders’ equity. The ratio of debt-to-total capital as of the end of the thirdfirst quarter of 20012002 was 44.340.4 percent, compared with 47.541.6 percent as of the end of 20002001 and 50.548.8 percent as of the end of the thirdfirst quarter of 2000.2001. The 3.21.2 percentage point decline from the end of 2000,2001 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 29, 2001,March 30, 2002, we had $705.0 million in committed revolving credit facilities with various banks, of which $266.7$403.4 million was unused.

In March 2002, we entered into an interest rate swap agreement for senior notes having a notional principal amount of $100 million and maturing in 2009. Under the terms of the interest rate swap agreement, we will pay interest semi-annually at the six month LIBOR rate plus 2.49 percent and we will receive interest semi-annually at the annual rate of 7.85 percent. This swap agreement has been accounted for as a fair value hedge in accordance with SFAS No. 133 (SFAS 133),Accounting for Derivative Instruments and Hedging Activities, as amended. Since this swap qualifies as an “effective” hedge under SFAS 133, there is no impact on net income or shareholders’ equity.
Dividends paid in the first nine monthsquarter of 20012002 were $25.5$8.9 million or $0.52$0.18 per common share, compared with $23.8$8.3 million or $0.49$0.17 per common share for the same period in 2000.

2001.

In addition to measuring our cash flow generation or usage based upon operating, investing, and financing classifications included in the condensed consolidated statements of cash flows, we also measure our free cash flow. We define free cash flow as cash flow from operating activities less capital expenditures, including both continuing and discontinued operations. We had positive free cash flow of $109.6$14.8 million in the first nine monthsquarter of 2001,2002, compared with a negative $10.7$53.0 million for the same period in 2000.2001. Our free cash flow goal for 2002 is $200 million, compared with $178.7 million realized in 2001. We intend to increase ourachieve this goal through higher earnings and further reductions in working capital. Our management incentive plans include a component that emphasizes free cash flow by continuing to reduce inventories and improve collection of accounts receivable.  We also have changed our management incentive targets to include more emphasis on improving free cash flow.

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

NEW ACCOUNTING STANDARDS — SEE NOTE 2 OF ITEM 1

In June 2001, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142).  SFAS 141 requires that all

Business combinations subsequent to June 30, 2001 be accounted for under the purchase method of accounting.  SFAS 142 eliminates the amortization of goodwill and requires periodic evaluation of the goodwill carrying value.  The provisions of SFAS

142 are effective for fiscal years beginning after December 15, 2001.  Our goodwill amortization for the first nine months of 2001 was $27.2 million and $36.4 million for the year ended December 31, 2000.  We are currently in the process of assessing the impact of adopting these new standards.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk during the nine monthsquarter ended September 29, 2001.March 30, 2002. For additional information, refer to Item 7A on page 1924 of our 20002001 Annual Report on Form 10-K.


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
ITEM 4.     Submission of Matters to a Vote of Security Holders

At Pentair’s Annual Meeting of Shareholders held on May 1, 2002, the shareholders voted on the following items:
Proposal 1. — Election of Directors
Nominees
    
Votes For
    
Votes Withheld
Barbara B. Grogan    42,320,765    1,313,964
Stuart Maitland    42,019,456    1,615,273
Augusto Meozzi    41,976,660    1,658,069
William H. Hernandez    41,748,445    1,886,284
Proposal 2. — Approval of amendments to the Articles of Incorporation and By-Laws to fix the number of the directors at ten.
Votes For
    
Votes Against
    
Votes Abstain
43,087,817    392,347    154,565
Proposal 3. — Approval of the Omnibus Stock Incentive Plan for Section 162(m) purposes.
Votes For
    
Votes Against
    
Votes Abstain
40,463,447    2,898,214    273,068
Proposal 4. — Approval of an amendment to the Executive Officer Performance Plan.
Votes For
    
Votes Against
    
Votes Abstain
39,850,853    3,472,260    311,616
Proposal 5. — Proposal to ratify the selection of Deloitte & Touche LLP as independent auditors of Pentair for 2002.
Votes For
    
Votes Against
    
Votes Abstain
41,470,882    2,010,788    153,059
ITEM 6.     Exhibits and Reports on Form 8-K

ITEM 1.

Legal Proceedings(a)

  Exhibits
3.1
Second Restated Articles of Incorporation of Pentair, Inc. as amended through May 1, 2002 (Filed herewith).

3.2

Third Amended and Superseding By-Laws of Pentair, Inc. adopted on August 23, 2000 as amended May 1, 2002 (Filed herewith).
Horizon Litigation10.15

There have been no further material developments regarding the Horizon litigation from that

Pentair, Inc. Executive Officer Performance Plan as amended and restated, dated February 27, 2002 and approved by shareholders on May 1, 2002 (Incorporated by reference to Exhibit 10.15 contained in our 2000Pentair’s Annual Report on Form 10-K.

Discontinued Paper

We have received claims for indemnification from purchasers of the paper businesses divested in 1995.  These claims relate to a variety of environmental issues.  We believe we have adequate accruals for potential liabilities arising from these claims.

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,10-K for the disposition of all currently pending matters will not be material.

year ended December 31, 2001).

Exhibits and  Reports on Form 8-K

(a) 

Exhibits

3.2

Amended and Restated By-Laws as amended effective October 24, 2001.

10.26

Amended and Restated 364-Day Credit Agreement dated as of August 30, 2001, between Pentair and Various Financial Institutions and Bank One, NA, as Syndication Agent.

10.31

Employment Agreement dated October 17, 2001, between Pentair, Inc. and Richard J. Cathcart.

10.32

Retirement Agreement and Release dated August 6, 2001, between Pentair, Inc. and Joseph R. Collins.

(b) 

Reports on Form 8-K

None.


SIGNATURES

None.

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 5, 2001.

May 9, 2002.

PENTAIR, INC.

PENTAIR, INC.

Registrant

By /s/

By:
/s/    DAVID D. HARRISON
David D. Harrison

David D. Harrison

Executive Vice President and Chief Financial Officer

(Chief Accounting Officer)

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