UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Pentair, Inc.

(Exact name of Registrant as specified in its charter)

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 ý  No  o

On October 26, 2001, 49,057,615 shares of the Registrant's common stock were outstanding.

PART I FINANCIAL INFORMATION

ITEM 1.      FINANCIAL STATEMENTS

Notes to condensed consolidated financial statements (unaudited)

1.     Basis of Presentation and Responsibility for Interim Financial Statements

We prepared the unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting.  As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States can be condensed or omitted.  We made certain reclassifications to the 2000 condensed consolidated financial statements to conform to the 2001 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 2000 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.     Cumulative Effects of Changes in Accounting Principles

Effective January 1, 2001, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended.  These standards require us 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 in 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, changes in the fair value of the derivative is recorded in other comprehensive income (OCI) and is recognized in the consolidated statements 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.

The adoption of SFAS 133 on January 1, 2001, resulted in an increase to other assets and other noncurrent liabilities of $7.5 million and $0.8 million, respectively, and a cumulative transition adjustment 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 to 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 included in the first quarter of 2000 pursuant 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 2000 were restated pursuant to the adoption of SAB 101.

3.     Comprehensive Income

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

4.     Earnings Per Common Share

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

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:

6.     Restructuring Charge

In the fourth quarter of 2000, we initiated a restructuring program to decentralize certain corporate service functions and reorganize our Tools segment infrastructure.  As a result, we recorded a restructuring charge of $26.8 million.  Cash outlays associated with the charge were $13.2 million in the first nine months of 2001.

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

Included in other current liabilities in the September 29, 2001 condensed consolidated balance sheet is the unused portion of the restructuring charge of $3.0 million.  We expect to complete restructuring activities in the fourth quarter of 2001.

Workforce reductions related to the restructuring charge was for approximately 225 employees, all of which have been terminated as of the end of the third quarter of 2001.  Employee termination benefits are primarily for severance related costs and outplacement counseling fees.  Non-cash asset disposals related to the restructuring charge consisted 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:

⁽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 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.

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

8.     Acquisitions

In February 2001, we acquired Taunus, a Brazilian enclosures manufacturer, for 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 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.  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 in cost of goods sold.

10.  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.

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'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.  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.

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

RESULTS OF OPERATIONS

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

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 were as follows:

Net sales in the third quarter and first nine months of 2001 totaled $646.6 million and $2,020.0 million, compared with $691.8 million and $2,073.2 million for the same periods in 2000.  The third quarter decrease of $45.2 million or 6.5 percent was primarily due to volume declines in our Tools and Enclosures segments due to weaker economic conditions, partially offset by 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 from 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 the 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.