Edgar Filing: PENTAIR INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2012

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

Commission file number 000-04689

Pentair, Inc.

(Exact name of Registrant as specified in its charter)


Minnesota		41-0907434
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification number)

5500 Wayzata Blvd, Suite 800, Golden Valley, Minnesota		55416
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (763) 545-1730

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§223.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨
		(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

On June 30, 2012, 99,204,048 shares of Registrant’s common stock were outstanding.

Pentair, Inc. and Subsidiaries


		Page (s)

PART I FINANCIAL INFORMATION

ITEM 1.	Financial Statements (unaudited)

	Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and July 2, 2011		3

	Condensed Consolidated Balance Sheets as of June 30, 2012, December 31, 2011 and July 2, 2011		4

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and July 2, 2011		5

	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2012 and July 2, 2011		6

	Notes to Condensed Consolidated Financial Statements		7 –28

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29 –39

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk		39

ITEM 4.	Controls and Procedures		39

PART II OTHER INFORMATION

ITEM 1.	Legal Proceedings		40

ITEM 1A.	Risk Factors		40

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		44

ITEM 5.	Other Information		45

ITEM 6.	Exhibits		47

	Signatures		48

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited)


	Three months ended						Six months ended

In thousands, except per-share data		June 30, 2012			July 2, 2011			June 30, 2012			July 2, 2011

Net sales	$	941,525		$	910,175		$	1,799,702		$	1,700,448
Cost of goods sold		629,397			622,439			1,206,855			1,163,653

Gross profit		312,128			287,736			592,847			536,795
Selling, general and administrative		173,445			158,432			348,455			303,192
Research and development		20,891			19,882			41,648			38,004

Operating income		117,792			109,422			202,744			195,599
Other (income) expense:
Equity income of unconsolidated subsidiaries		(636	)		(672	)		(1,685	)		(907)
Net interest expense		16,079			14,613			30,847			23,938

Income before income taxes and noncontrolling interest		102,349			95,481			173,582			172,568
Provision for income taxes		28,864			27,344			37,943			52,397

Net income before noncontrolling interest		73,485			68,137			135,639			120,171
Noncontrolling interest		1,655			1,425			2,995			2,918

Net income attributable to Pentair, Inc.	$	71,830		$	66,712		$	132,644		$	117,253


Comprehensive income (loss)	$	(10,430	)	$	92,306		$	93,808		$	187,119
Less: Comprehensive income (loss) attributable to noncontrolling interest		(223	)		2,216			2,020			5,621

Comprehensive income (loss) attributable to Pentair, Inc.	$	(10,207	)	$	90,090		$	91,788		$	181,498


Earnings per common share attributable to Pentair, Inc.
Basic	$	0.73		$	0.68		$	1.34		$	1.19
Diluted	$	0.71		$	0.67		$	1.32		$	1.17

Weighted average common shares outstanding
Basic		99,047			98,333			98,856			98,190
Diluted		101,165			100,065			100,785			99,825

Cash dividends declared per common share	$	0.22		$	0.20		$	0.44		$	0.40

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)


	June 30,			December 31,			July 2,
In thousands, except share and per-share data	2012			2011			2011

Assets
Current assets
Cash and cash equivalents	$	60,598		$	50,077		$	68,972
Accounts and notes receivable, net of allowances of $32,958, $39,111 and $41,120, respectively		572,144			569,204			595,407
Inventories		460,039			449,863			484,795
Deferred tax assets		58,899			60,899			60,833
Prepaid expenses and other current assets		124,345			107,792			124,632

Total current assets		1,276,025			1,237,835			1,334,639

Property, plant and equipment, net		381,063			387,525			410,547

Other assets
Goodwill		2,255,134			2,273,918			2,573,430
Intangibles, net		570,503			592,285			654,908
Other		103,544			94,750			78,788

Total other assets		2,929,181			2,960,953			3,307,126

Total assets	$	4,586,269		$	4,586,313		$	5,052,312

Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings	$	222		$	3,694		$	21,451
Current maturities of long-term debt		1,193			1,168			1,289
Accounts payable		288,265			294,858			315,403
Employee compensation and benefits		89,514			109,361			108,836
Current pension and post-retirement benefits		9,052			9,052			8,733
Accrued product claims and warranties		44,935			42,630			47,259
Income taxes		32,228			14,547			21,498
Accrued rebates and sales incentives		45,870			37,009			42,567
Other current liabilities		150,437			129,522			144,366

Total current liabilities		661,716			641,841			711,402

Other liabilities
Long-term debt		1,233,794			1,304,225			1,384,167
Pension and other retirement compensation		247,324			248,615			217,021
Post-retirement medical and other benefits		29,921			31,774			27,954
Long-term income taxes payable		13,294			26,470			23,832
Deferred tax liabilities		190,173			188,957			235,422
Other non-current liabilities		92,175			97,039			85,660

Total liabilities		2,468,397			2,538,921			2,685,458

Commitments and contingencies

Shareholders’ equity
Common shares par value $0.16 2/3; 99,204,048, 98,622,564 and 98,766,335 shares issued and outstanding, respectively		16,534			16,437			16,460
Additional paid-in capital		509,558			488,843			488,873
Retained earnings		1,667,794			1,579,290			1,702,119
Accumulated other comprehensive income (loss)		(192,097	)		(151,241	)		41,902
Noncontrolling interest		116,083			114,063			117,500

Total shareholders’ equity		2,117,872			2,047,392			2,366,854

Total liabilities and shareholders’ equity	$	4,586,269		$	4,586,313		$	5,052,312

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Six months ended
	June 30,			July 2,
In thousands	2012			2011

Operating activities
Net income before noncontrolling interest	$	135,639		$	120,171
Adjustments to reconcile net income to net cash provided by (used for) operating activities
Equity income of unconsolidated subsidiaries		(1,685	)		(907)
Depreciation		32,666			32,685
Amortization		19,677			17,180
Deferred income taxes		3,654			3,012
Stock compensation		10,075			10,527
Excess tax benefits from stock-based compensation		(1,740	)		(1,465)
Loss (gain) on sale of assets		(3,106	)		229
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable		(5,531	)		(1,111)
Inventories		(12,276	)		2,425
Prepaid expenses and other current assets		(983	)		(2,696)
Accounts payable		(4,271	)		(22,878)
Employee compensation and benefits		(18,686	)		(22,675)
Accrued product claims and warranties		2,466			2,901
Income taxes		17,709			12,780
Other current liabilities		10,209			25,481
Pension and post-retirement benefits		(553	)		(853)
Other assets and liabilities		(16,503	)		(22,195)

Net cash provided by (used for) operating activities		166,761			152,611

Investing activities
Capital expenditures		(31,312	)		(35,221)
Proceeds from sale of property and equipment		4,868			89
Acquisitions, net of cash acquired		(19,905	)		(733,105)
Other		(3,073	)		119

Net cash provided by (used for) investing activities		(49,422	)		(768,118)
Financing activities
Net short-term borrowings		(3,472	)		16,518
Proceeds from long-term debt		352,463			1,320,957
Repayment of long-term debt		(420,810	)		(661,422)
Debt issuance costs		—			(8,721)
Excess tax benefits from stock-based compensation		1,740			1,465
Stock issued to employees, net of shares withheld		16,163			9,551
Repurchases of common stock		—			(287)
Dividends paid		(44,140	)		(39,739)

Net cash provided by (used for) financing activities		(98,056	)		638,322
Effect of exchange rate changes on cash and cash equivalents		(8,762	)		101

Change in cash and cash equivalents		10,521			22,916
Cash and cash equivalents, beginning of period		50,077			46,056

Cash and cash equivalents, end of period	$	60,598		$	68,972

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)


In thousands, except share	Common shares						Additional paid-in			Retained			Accumulated other comprehensive			Total			Noncontrolling
and per-share data	Number			Amount			capital			earnings			income (loss)			Pentair, Inc.			interest			Total

Balance - December 31, 2011		98,622,564		$	16,437		$	488,843		$	1,579,290		$	(151,241	)	$	1,933,329		$	114,063		$	2,047,392
Net income											132,644						132,644			2,995			135,639
Change in cumulative translation adjustment														(44,006	)		(44,006	)		(975	)		(44,981)
Changes in market value of derivative financial instruments, net of $1,436 tax														3,150			3,150						3,150
Cash dividends - $0.44 per common share											(44,140	)					(44,140	)					(44,140)
Exercise of stock options, net of 35,570 shares tendered for payment		492,777			82			14,973									15,055						15,055
Issuance of restricted shares, net of cancellations		154,536			26			3,532									3,558						3,558
Amortization of restricted shares								352									352						352
Shares surrendered by employees to pay taxes		(65,829	)		(11	)		(2,439	)								(2,450	)					(2,450)
Stock compensation								4,297									4,297						4,297

Balance - June 30, 2012		99,204,048		$	16,534		$	509,558		$	1,667,794		$	(192,097	)	$	2,001,789		$	116,083		$	2,117,872


							Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total Pentair, Inc.			Noncontrolling interest			Total

In thousands, except share	Common shares
and per-share data	Number			Amount

Balance - December 31, 2010		98,409,192		$	16,401		$	474,489		$	1,624,605		$	(22,342	)	$	2,093,153		$	111,879		$	2,205,032
Net income											117,253						117,253			2,918			120,171
Change in cumulative translation adjustment														62,456			62,456			2,703			65,159
Changes in market value of derivative financial instruments, net of $1,249 tax														1,788			1,788						1,788
Cash dividends - $0.40 per common share											(39,739	)					(39,739	)					(39,739)
Share repurchase		(7,826	)		(1	)		(286	)								(287	)					(287)
Exercise of stock options, net of 3,266 shares tendered for payment		408,637			68			10,741									10,809						10,809
Issuance of restricted shares, net of cancellations		29,131			5			1,432									1,437						1,437
Amortization of restricted shares								480									480						480
Shares surrendered by employees to pay taxes		(72,799	)		(13	)		(2,683	)								(2,696	)					(2,696)
Stock compensation								4,700									4,700						4,700

Balance - July 2, 2011		98,766,335		$	16,460		$	488,873		$	1,702,119		$	41,902		$	2,249,354		$	117,500		$	2,366,854

See accompanying notes to condensed consolidated financial statements

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

1.	Basis of Presentation and Responsibility for Interim Financial Statements

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

We are responsible for the unaudited financial statements included in this document. The financial statements include all normal recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. As these are condensed financial statements, one should also read our consolidated financial statements and notes thereto for the year ended December 31, 2011, which are included in our 2011 Annual Report on Form 10-K for the year ended December 31, 2011.

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

Our fiscal year ends on December 31. We report our interim quarterly periods on a 13-week basis ending on a Saturday.

In connection with preparing the unaudited condensed consolidated financial statements for the six months ended June 30, 2012, we have evaluated subsequent events for potential recognition and disclosure through the date of this filing.

2.	New Accounting Standards

In May 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance to improve the consistency of fair value measurement and disclosure requirements between US Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards. The provisions of this guidance change certain of the fair value principles related to the highest and best use premise, the consideration of blockage factors and other premiums and discounts, and the measurement of financial instruments held in a portfolio and instruments classified within shareholders’ equity. Further, the guidance provides additional disclosure requirements surrounding Level 3 fair value measurements, the uses of nonfinancial assets in certain circumstances, and identification of the level in the fair value hierarchy used for assets and liabilities which are not recorded at fair value, but where fair value is disclosed. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on our financial condition or results of operations.

In June 2011, the FASB issued authoritative guidance surrounding the presentation of comprehensive income, with an objective of increasing the prominence of items reported in other comprehensive income (“OCI”). This guidance provides entities with the option to present the total of comprehensive income, the components of net income and the components of OCI in either a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, entities must present on the face of the financial statement, items reclassified from OCI to net income in the section of the financial statement where the components of net income and OCI are presented, regardless of the option selected to present comprehensive income. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The FASB subsequently deferred the effective date of certain provisions of this standard pertaining to the reclassification of items out of accumulated other comprehensive income, pending the issuance of further guidance on that matter. We have adopted this guidance as of January 1, 2012, and have presented total comprehensive income (loss) in our Condensed Consolidated Statements of Income and Comprehensive Income (Loss).

3.	Stock-based Compensation

Total stock-based compensation expense was $4.8 million for each of the three months ended June 30, 2012 and July 2, 2011, and was $10.1 million and $10.5 million for the six months ended June 30, 2012 and July 2, 2011, respectively.

During the first half of 2012, restricted shares and restricted stock units of our common stock were granted under the 2008 Omnibus Stock Incentive Plan to eligible employees with a vesting period of three to four years after issuance. Restricted share awards and restricted stock units are valued at market value on the date of grant and are typically expensed over the vesting period. Total compensation expense for restricted share awards and restricted stock units was $2.8 million and $2.5 million for the three months ended June 30, 2012 and July 2, 2011, respectively, and was $5.8 million for each of the six months ended June 30, 2012 and July 2, 2011.

During the first half of 2012, option awards were granted under the 2008 Omnibus Stock Incentive Plan with an exercise price equal to the market price of our common stock on the date of grant. Option awards are typically expensed over the vesting period. Total compensation expense for stock option awards was $2.0 million and $2.3 million for the three months ended June 30, 2012 and July 2, 2011, respectively, and $4.3 million and $4.7 million for the six months ended June 30, 2012 and July 2, 2011, respectively.

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

We estimated the fair value of each stock option award on the date of grant using a Black-Scholes option pricing model, modified for dividends and using the following assumptions:


	June 30, 2012		July 2, 2011

Expected stock price volatility		36.5%		35.5%
Expected life		5.7 yrs		5.5 yrs
Risk-free interest rate		0.90%		2.12%
Dividend yield		2.29%		2.16%

The weighted-average fair value of options granted during the second quarter of 2012 and 2011 were $11.74 and $10.89 per share, respectively.

These estimates require us to make assumptions based on historical results, observance of trends in our stock price, changes in option exercise behavior, future expectations and other relevant factors. If other assumptions had been used, stock-based compensation expense, as calculated and recorded under the accounting guidance, could have been affected.

We based the expected life assumption on historical experience as well as the terms and vesting periods of the options granted. For purposes of determining expected volatility, we considered a rolling average of historical volatility measured over a period approximately equal to the expected option term. The risk-free rate for periods that coincide with the expected life of the options is based on the U.S. Treasury Department yield curve in effect at the time of grant.

4.	Earnings Per Common Share

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


	Three months ended				Six months ended

In thousands	June 30, 2012		July 2, 2011		June 30, 2012		July 2, 2011

Weighted average common shares outstanding — basic		99,047		98,333		98,856		98,190
Dilutive impact of stock options and restricted stock		2,118		1,732		1,929		1,635

Weighted average common shares outstanding — diluted		101,165		100,065		100,785		99,825


Stock options excluded from the calculation of diluted earnings per share because the exercise price was greater than the average market price of the common shares		443		1,776		2,010		2,001

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

5.	Restructuring

During 2012 and 2011, we initiated certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business. The 2012 initiatives included the reduction in hourly and salaried headcount of approximately 140 employees, which included 85 in Water & Fluid Solutions and 55 in Technical Products. The 2011 initiatives included the reduction in hourly and salaried headcount of approximately 210 employees, which included 160 in Water & Fluid Solutions and 50 in Technical Products.

Restructuring related costs included in Selling, general and administrative expenses on the Condensed Consolidated Statements of Income and Comprehensive Income (Loss) include costs for severance and other restructuring costs as follows for the six months ended June 30, 2012, and July 2, 2011, and the year ended December 31, 2011:


In thousands	June 30, 2012		December 31, 2011		July 2, 2011

Severance and related costs	$	9,660	$	11,500	$	—
Asset impairment and other restructuring costs		710		1,500		—

Total restructuring costs	$	10,370	$	13,000	$	—

Restructuring accrual activity recorded in Other current liabilities and Employee compensation and benefits on the Condensed Consolidated Balance Sheets is summarized as follows for the six months ended June 30, 2012, and July 2, 2011, and the year ended December 31, 2011:


In thousands	June 30, 2012			December 31, 2011			July 2, 2011

Beginning balance	$	12,805		$	3,994		$	3,994
Costs incurred		9,660			11,500			—
Cash payments and other		(8,570	)		(2,689	)		(909)

Ending balance	$	13,895		$	12,805		$	3,085

6.	Acquisitions

On April 4, 2012, we acquired, as part of Water & Fluid Solutions, all of the outstanding shares of capital stock of Sibrape Indústria E Comércio de Artigos Para Lazer Ltda. and its subsidiary Hidrovachek Ltda. (collectively “Sibrape”) for $19.9 million, net of cash acquired. The Sibrape results have been included in our consolidated financial statements since the date of acquisition. Sibrape offers a complete line of pool products and is a market leader in pool liner sales throughout Brazil. Goodwill recorded as part of the purchase price allocation was $8.8 million, none of which is tax deductible. Identified intangible assets acquired as part of the acquisition were $4.8 million and were comprised entirely of customer lists, which have an estimated life of 11 years. The pro forma impact of this acquisition was not deemed material.

In May 2011, we acquired, as part of Water & Fluid Solutions, the Clean Process Technologies (“CPT”) division of privately held Norit Holding B.V. for $715.3 million (€502.7 million translated at the May 12, 2011 exchange rate). CPT’s results of operations have been included in our consolidated financial statements since the date of acquisition. CPT is a global leader in membrane solutions and clean process technologies in the high growth water and beverage filtration and separation segments. CPT provides sustainable purification systems and solutions for desalination, water reuse, industrial applications and beverage segments that effectively address the increasing challenges of clean water scarcity, rising energy costs and pollution. CPT’s product offerings include innovative ultrafiltration and nanofiltration membrane technologies, aseptic valves, CO₂ recovery and control systems and specialty pumping equipment. Based in the Netherlands, CPT has broad sales diversity with the majority of 2011 and 2010 revenues generated in European Union and Asia-Pacific countries.

The fair value of CPT was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value acquired over the identifiable assets acquired and liabilities assumed is reflected as goodwill. Goodwill recorded as part of the purchase price allocation was $451.8 million, none of which is tax deductible. Identifiable intangible assets acquired as part of the acquisition were $197.2 million, including definite-lived intangibles, such as customer relationships and proprietary technology with a weighted average amortization period of approximately 10 years.

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

The following pro forma consolidated condensed financial results of operations are presented as if the CPT acquisition described above had been completed at the beginning of the comparable period:


	Three months ended		Six months ended
In thousands, except share and per-share data	July 2, 2011		July 2, 2011

Pro forma net sales	$	953,375	$	1,822,224
Pro forma income before noncontrolling interest		66,075		115,517
Pro forma net income attributable to Pentair, Inc.		64,650		112,599

Pro forma earnings per common share
Basic	$	0.66	$	1.15
Diluted	$	0.65	$	1.13

Weighted average common shares outstanding
Basic		98,333		98,190
Diluted		100,065		99,825

The 2011 unaudited pro forma net income was adjusted to exclude the impact of approximately $5.5 million in non-recurring items related to acquisition date fair value adjustments to inventory and customer backlog. Acquisition-related transaction costs of approximately $6.1 million and $7.8 million associated with the CPT acquisition were excluded from the pro forma net income for the three and six month periods ended July 2, 2011, respectively.

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

In January 2011 we acquired as part of Water & Fluid Solutions all of the outstanding shares of capital stock of Hidro Filtros do Brasil (“Hidro Filtros”) for cash of $14.9 million and a note payable of $2.1 million. The Hidro Filtros results of operations have been included in our consolidated financial statements since the date of acquisition. Hidro Filtros is a leading manufacturer of water filters and filtering elements for residential and industrial applications operating in Brazil and neighboring countries. Goodwill recorded as part of the purchase price allocation was $10.1 million, none of which is tax deductible. Identified intangible assets acquired as part of the acquisition were $6.3 million including definite-lived intangibles, primarily customer relationships of $5.5 million, with an estimated life of 13 years. The pro forma impact of this acquisition was not material.

Additionally, during 2011, we completed other small acquisitions with purchase prices totaling $4.6 million, consisting of $2.9 million in cash and $1.7 million as a note payable, adding to Water & Fluid Solutions. Total goodwill recorded as part of the purchase price allocation was $4.3 million, none of which is tax deductible. The pro forma impact of these acquisitions was not material.

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

7.	Supplemental Balance Sheet Disclosures


In thousands Inventories	June 30, 2012		December 31, 2011		July 2, 2011

Raw materials and supplies	$	227,780	$	219,487	$	246,414
Work-in-process		50,860		47,707		49,515
Finished goods		181,399		182,669		188,866

Total inventories	$	460,039	$	449,863	$	484,795


Property, plant and equipment
Land and land improvements	$	40,519	$	41,111	$	43,322
Buildings and leasehold improvements		251,977		244,246		255,317
Machinery and equipment		713,819		692,930		697,802
Construction in progress		34,699		40,251		41,066

Total property, plant and equipment		1,041,014		1,018,538		1,037,507
Less accumulated depreciation and amortization		659,951		631,013		626,960

Property, plant and equipment, net	$	381,063	$	387,525	$	410,547

8.	Goodwill and Other Identifiable Intangible Assets

The changes in the carrying amount of goodwill by segment were as follows:


In thousands	December 31, 2011		Acquisitions/ divestitures		Foreign currency translation/other			June 30, 2012

Water & Fluid Solutions	$	1,994,781	$	8,768	$	(25,034	)	$	1,978,515
Technical Products		279,137		—		(2,518	)		276,619

Consolidated Total	$	2,273,918	$	8,768	$	(27,552	)	$	2,255,134


In thousands	December 31, 2010		Acquisitions/ divestitures		Foreign currency translation/other			July 2, 2011

Water & Fluid Solutions	$	1,784,100	$	466,182	$	35,686		$	2,285,968
Technical Products		281,944		—		5,518			287,462

Consolidated Total	$	2,066,044	$	466,182	$	41,204		$	2,573,430

Accumulated goodwill impairment losses were $200.5 million, $200.5 million and $0 as of June 30, 2012, December 31, 2011, and July 2, 2011, respectively.

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

The detail of acquired intangible assets consisted of the following:


	June 30, 2012							December 31, 2011							July 2, 2011
In thousands	Gross carrying amount		Accumulated amortization			Net		Gross carrying amount		Accumulated amortization			Net		Gross carrying amount		Accumulated amortization			Net


Finite-life intangibles
Patents	$	5,895	$	(4,298	)	$	1,597	$	5,896	$	(4,038	)	$	1,858	$	15,485	$	(13,306	)	$	2,179
Proprietary technology		129,748		(45,994	)		83,754		128,841		(39,956	)		88,885		136,737		(34,423	)		102,314
Customer relationships		356,814		(120,738	)		236,076		358,410		(109,887	)		248,523		380,263		(97,232	)		283,031
Trade names		1,501		(600	)		901		1,515		(530	)		985		1,569		(467	)		1,102

Total finite-life intangibles	$	493,958	$	(171,630	)	$	322,328	$	494,662	$	(154,411	)	$	340,251	$	534,054	$	(145,428	)	$	388,626

Indefinite-life intangibles
Trade names		248,175		—			248,175		252,034		—			252,034		266,282		—			266,282

Total intangibles, net	$	742,133	$	(171,630	)	$	570,503	$	746,696	$	(154,411	)	$	592,285	$	800,336	$	(145,428	)	$	654,908

Intangible asset amortization expense was approximately $9.9 million and $10.8 million for the three months ended June 30, 2012 and July 2, 2011, respectively, and was approximately $19.7 million and $17.2 million for the six months ended June 30, 2012 and July 2, 2011, respectively.

The estimated future amortization expense for identifiable intangible assets during the remainder of 2012 and the next five years is as follows:


	Q3-Q4
In thousands	2012		2013		2014		2015		2016		2017

Estimated amortization expense	$	19,253	$	38,685	$	38,331	$	38,047	$	37,137	$	35,542

Debt

Debt and the average interest rates on debt outstanding are summarized as follows:


In thousands	Average interest rate June 30, 2012	Maturity (Year)	June 30, 2012			December 31, 2011			July 2, 2011

Commercial paper	1.22%	2016	$	6,993		$	3,497		$	—
Revolving credit facilities	1.99%	2016		205,600			168,500			262,064
Private placement - fixed rate	5.65%	2013-2017		400,000			400,000			400,000
Private placement - floating rate	1.07%	2013		100,000			205,000			205,000
Public - fixed rate	5.00%	2021		500,000			500,000			500,000
Capital lease obligations	3.72%	2025		14,671			15,788			18,362
Other	3.10%	2012-2016		7,945			16,302			21,481

Total debt				1,235,209			1,309,087			1,406,907
Less: Current maturities				(1,193	)		(1,168	)		(1,289)
Short-term borrowings				(222	)		(3,694	)		(21,451)

Long-term debt			$	1,233,794		$	1,304,225		$	1,384,167

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

The fair value of total debt excluding the effect of the interest rate swaps was $1,299.2 million, $1,361.0 million and $1,440.1 million as of June 30, 2012, December 31, 2011 and July 2, 2011, respectively. This fair value measurement of debt is classified as Level 2 in the valuation hierarchy as defined in Note 10, “Derivatives and Financial Instruments”.

In May 2011, we completed a public offering of $500 million aggregate principal amount of our 5.00% Senior Notes due 2021 (the “Notes”). The Notes are guaranteed by certain of our wholly-owned domestic subsidiaries that are also guarantors under our primary bank credit facility. We used the net proceeds from the offering of the Notes to finance in part the CPT acquisition.

In April 2011, we entered into a Fourth Amended and Restated Credit Agreement (the “Credit Facility”). The Credit Facility replaced our previous $800 million revolving credit facility. The Credit Facility creates an unsecured, committed credit facility of up to $700 million, with multi-currency sub facilities to support investments outside the U.S. The Credit Facility expires on April 28, 2016. Borrowings under the Credit Facility currently bear interest at the rate of London Interbank Offered Rate (“LIBOR”) plus 1.75%. Interest rates and fees on the Credit Facility will vary based on our credit ratings. We used borrowings under the Credit Facility to fund a portion of the CPT acquisition and to fund ongoing operations.

We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We use the Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. Our use of commercial paper as a funding vehicle depends upon the relative interest rates for our commercial paper compared to the cost of borrowing under our Credit Facility. As of June 30, 2012, we had $7.0 million of commercial paper outstanding.

In May 2012, we repaid $105 million of matured private placement debt with borrowings under the Credit Facility.

All of the commercial paper and private placement – floating rate debt was classified as long-term as we have the intent and the ability to refinance such obligations on a long-term basis under the Credit Facility.

Total availability under our Credit Facility was $487.4 million as of June 30, 2012, which was not limited by the leverage ratio financial covenant in the credit agreement.

Our debt agreements contain certain financial covenants, the most restrictive of which is a leverage ratio in the Credit Facility (total consolidated indebtedness, as defined, over consolidated net income before interest, taxes, depreciation, amortization and non-cash compensation expense, as defined) that may not exceed 3.5 to 1.0 as of the last date of each of our fiscal quarters. As of June 30, 2012, we were in compliance with all financial covenants in our debt agreements.

Debt outstanding at June 30, 2012 matures on a calendar year basis as follows:


	Q3 -Q4
In thousands	2012		2013		2014		2015		2016		2017		Thereafter		Total

Contractual debt obligation maturities	$	246	$	200,057	$	17	$	—	$	220,218	$	300,000	$	500,000	$	1,220,538
Capital lease obligations		585		1,169		1,169		1,169		1,169		1,170		8,240		14,671

Total maturities	$	831	$	201,226	$	1,186	$	1,169	$	221,387	$	301,170	$	508,240	$	1,235,209

As part of the CPT acquisition, we assumed two capital lease obligations related to land and buildings. As of June 30, 2012, December 31, 2011 and July 2, 2011, we recorded cost of $22.0 million, $22.7 million and $25.6 million and accumulated amortization of $5.2 million, $5.1 million and $5.3 million, respectively, all of which are included in Property, plant and equipment on the Condensed Consolidated Balance Sheets.

Capital lease obligations consist of total future minimum lease payments of $17.4 million less the imputed interest of $2.7 million as of June 30, 2012.

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

10.

Derivatives and Financial Instruments

Fair value measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:


Level 1:		Valuation is based on observable inputs such as quoted market prices (unadjusted) for identical assets or liabilities in active markets.

Level 2:		Valuation is based on inputs such as quoted market prices for similar assets or liabilities in active markets or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3:		Valuation is based upon other unobservable inputs that are significant to the fair value measurement.

In making fair value measurements, observable market data must be used when available. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

Cash-flow Hedges

In August 2007, we entered into a $105 million interest rate swap agreement with a major financial institution to exchange variable rate interest payment obligations for a fixed rate obligation without the exchange of the underlying principal amounts in order to manage interest rate exposures. The effective date of the swap was August 30, 2007. The swap agreement had a fixed interest rate of 4.89% and expired in May 2012. The fixed interest rate of 4.89% plus the .50% interest rate spread over LIBOR resulted in an effective fixed interest rate of 5.39%. The fair value of the swap was a liability of $1.7 million and $4.2 million at December 31, 2011 and July 2, 2011, respectively, and was recorded in Accumulated other comprehensive income (loss) (“AOCI”) on the Condensed Consolidated Balance Sheets.

In September 2005, we entered into a $100 million interest rate swap agreement with several major financial institutions to exchange variable rate interest payment obligations for fixed rate obligations without the exchange of the underlying principal amounts in order to manage interest rate exposures. The effective date of the fixed rate swap was April 25, 2006. The swap agreement has a fixed interest rate of 4.68% and expires in July 2013. The fixed interest rate of 4.68% plus the .60% interest rate spread over LIBOR results in an effective fixed interest rate of 5.28%. The fair value of the swap was a liability of $4.5 million, $6.3 million and $8.3 million at June 30, 2012, December 31, 2011 and July 2, 2011, respectively, and was recorded in AOCI on the Condensed Consolidated Balance Sheets.

The variable to fixed interest rate swaps are designated as and are effective as cash-flow hedges. The fair values of these swaps are recorded as assets or liabilities on the Condensed Consolidated Balance Sheets, with changes in their fair value included in AOCI. Derivative gains and losses included in AOCI are reclassified into earnings at the time the related interest expense is recognized or the settlement of the related commitment occurs. Realized income/expense and amounts to/from swap counterparties are recorded in Net interest expense in our Condensed Consolidated Statements of Income and Comprehensive Income (Loss). We realized incremental expense resulting from the swaps of $1.7 million and $2.3 million for the three months ended and $3.9 million and $4.7 million for the six months ended June 30, 2012 and July 2, 2011, respectively.

Failure of one or more of our swap counterparties would result in the loss of any benefit to us of the swap agreement. In this case, we would continue to be obligated to pay the variable interest payments per the underlying debt agreements which are at a variable interest rate of 3 month LIBOR plus 0.60% for $100 million of debt. Additionally, failure of one or all of our swap counterparties would not eliminate our obligation to continue to make payments under our existing swap agreements if we continue to be in a net pay position.

Our interest rate swaps are carried at fair value measured on a recurring basis. Fair values are determined through the use of models that consider various assumptions, including time value, yield curves, as well as other relevant economic measures, which are inputs that are classified as Level 2 in the valuation hierarchy defined by the accounting guidance.

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

In April 2011, as part of our planned debt issuance to fund the CPT acquisition, we entered into interest rate swap contracts to hedge movement in interest rates through the expected date of closing for a portion of the expected fixed rate debt offering. The swaps had a notional amount of $400 million with an average interest rate of 3.65%. In May 2011, upon the sale of the Notes, the swaps were terminated at a cost of $11.0 million. Because we used the contracts to hedge future interest payments, the short term and long term portions are recorded in Prepaid expenses and other current assets and Other, respectively, within the Condensed Consolidated Balance Sheets and will be amortized as interest exposure over the 10 year life of the Notes.

Foreign currency contract

We manage our economic and transaction exposure to certain market-based risks through the use of foreign currency derivative instruments. Our objective in holding derivatives is to reduce the volatility of net earnings and cash flows associated with changes in foreign currency exchange rates.

In March 2011, we entered into a foreign currency option contract to reduce our exposure to fluctuations in the euro related to our €503 million acquisition of CPT. The contract had a notional amount of €286.0 million, a strike price of 1.4375 and matured May 13, 2011. The fair value of the contract was an asset of $2.8 million at April 2, 2011, and was recorded in Prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. In May 2011, we sold the foreign currency option contract for $1.0 million. The net cost of $2.1 million was recorded in Selling, general and administrative on the Condensed Consolidated Statements of Income and Comprehensive Income (Loss).

Fair value of financial information

Financial assets and liabilities measured at fair value on a recurring basis were as follows:


Recurring fair value measurements	As of June 30, 2012
In thousands	Fair value			(Level 1)		(Level 2)			(Level 3)

Cash-flow hedges	$	(4,519	)	$	—	$	(4,519	)	$	—
Foreign currency contract		(1,425	)		—		(1,425	)		—
Deferred compensation plan (1)		26,327			26,327		—			—

Total recurring fair value measurements	$	20,383		$	26,327	$	(5,944	)	$	—


Recurring fair value measurements	As of December 31, 2011
In thousands	Fair value			(Level 1)		(Level 2)			(Level 3)

Cash-flow hedges	$	(8,034	)	$	—	$	(8,034	)	$	—
Foreign currency contract		(99	)		—		(99	)		—
Deferred compensation plan (1)		22,987			22,987		—			—

Total recurring fair value measurements	$	14,854		$	22,987	$	(8,133	)	$	—


Nonrecurring fair value measurements

Goodwill (2)	$	242,800		$	—	$	—		$	242,800

Total nonrecurring fair value measurement	$	242,800		$	—	$	—		$	242,800


Recurring fair value measurements	As of July 2, 2011
In thousands	Fair value			(Level 1)		(Level 2)			(Level 3)

Cash-flow hedges	$	(12,486	)	$	—	$	(12,486	)	$	—
Foreign currency contract		—			—		—			—
Deferred compensation plan (1)		24,967			24,967		—			—

Total recurring fair value measurements	$	12,481		$	24,967	$	(12,486	)	$	—

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

(1)	Deferred compensation plan assets include mutual funds and cash equivalents for payment of certain non-qualified benefits for retired, terminated and active employees. The fair value of these assets was based on quoted market prices in active markets.

(2)

In the fourth quarter of 2011, we completed our annual goodwill impairment review. As a result, we recorded a pre-tax non-cash goodwill impairment charge of $200.5 million in our Residential Filtration reporting unit. The fair value of each reporting unit is determined using a discounted cash flow analysis and market approach. Projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital and the appropriate discount rate. Use of the market approach consists of comparisons to comparable publicly-traded companies that are similar in size and industry. Actual results may differ from those used in our valuations. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation.

11. Income Taxes

The provision for income taxes consists of provisions for federal, state and foreign income taxes. We operate in an international environment with operations in various locations outside the U.S. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates.

The effective income tax rate for the six months ended June 30, 2012 was 21.9% compared to 30.4% for the six months ended July 2, 2011. Our effective tax rate was lower due to the resolution of U.S. federal and state tax audits, the mix of global earnings and favorable benefits related to the May 2011 acquisition of CPT.

We continue to actively pursue initiatives to reduce our effective tax rate. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.

The total gross liability for uncertain tax positions was $13.3 million, $26.5 million and $24.8 million at June 30, 2012, December 31, 2011 and July 2, 2011, respectively. We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Net interest expense, respectively, on the Condensed Consolidated Statements of Income and Comprehensive Income (Loss), which is consistent with our past practices.

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

12. Benefit Plans

Components of net periodic benefit cost were as follows:


	Three months ended

	Pension benefits						Post-retirement

In thousands	June 30, 2012			July 2, 2011			June 30, 2012			July 2, 2011
In thousands	June 30, 2012			July 2, 2011			June 30, 2012			July 2, 2011

Service cost	$	3,761		$	3,131		$	55		$	45
Interest cost		8,087			8,225			422			472
Expected return on plan assets		(7,844	)		(7,964	)		—			—
Amortization of prior year service cost (benefit)		—			—			(6	)		(7)
Recognized net actuarial loss (gains)		2,577			972			(602	)		(827)

Net periodic benefit cost (income)	$	6,581		$	4,364		$	(131	)	$	(317)


	Six months ended

	Pension benefits						Post-retirement

In thousands	June 30, 2012			July 2, 2011			June 30, 2012			July 2, 2011

Service cost	$	7,522		$	6,261		$	110		$	90
Interest cost		16,174			16,450			844			944
Expected return on plan assets		(15,688	)		(15,927	)		—			—
Amortization of prior year service cost (benefit)		—			—			(12	)		(14)
Recognized net actuarial loss (gains)		5,154			1,943			(1,204	)		(1,653)

Net periodic benefit cost (income)	$	13,162		$	8,727		$	(262	)	$	(633)

13. Business Segments

Financial information by reportable segment is shown below:


	Three months ended						Six months ended

In thousands	June 30, 2012			July 2, 2011			June 30, 2012			July 2, 2011

*Net sales to external customers*
Water & Fluid Solutions	$	675,522		$	631,994		$	1,262,500		$	1,147,362
Technical Products		266,003			278,181			537,202			553,086

Consolidated	$	941,525		$	910,175		$	1,799,702		$	1,700,448


*Intersegment sales*
Water & Fluid Solutions	$	(116	)	$	316		$	(43	)	$	771
Technical Products		1,535			1,559			2,894			2,558
Other		(1,419	)		(1,875	)		(2,851	)		(3,329)

Consolidated	$	—		$	—		$	—		$	—


*Operating income (loss)*
Water & Fluid Solutions	$	91,989		$	84,521		$	155,666		$	141,049
Technical Products		50,624			48,261			101,083			96,348
Other		(24,821	)		(23,360	)		(54,005	)		(41,798)

Consolidated	$	117,792		$	109,422		$	202,744		$	195,599

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

14. Warranty

The changes in the carrying amount of service and product warranties for the six months ended June 30, 2012, and July 2, 2011, and the year ended December 31, 2011, were as follows:


In thousands	June 30, 2012			December 31, 2011			July 2, 2011
In thousands	June 30, 2012			December 31, 2011			July 2, 2011

Balance at beginning of the year	$	29,355		$	30,050		$	30,050
Service and product warranty provision		26,579			50,096			26,035
Payments		(24,025	)		(53,937	)		(25,040)
Acquired		156			3,575			3,623
Translation		(222	)		(429	)		343

Balance at end of the period	$	31,843		$	29,355		$	35,011

15. Commitments and Contingencies

There have been no further material developments from the disclosures contained in our 2011 Annual Report on Form 10-K.

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

16. Financial Statements of Subsidiary Guarantors

Certain of the domestic subsidiaries (the “Guarantor Subsidiaries”) of Pentair, Inc. (the “Parent Company”), each of which is directly or indirectly wholly-owned by the Parent Company, jointly and severally, and fully and unconditionally, guarantee the Parent Company’s indebtedness under the Notes and the Credit Facility. The following supplemental financial information sets forth the Condensed Consolidated Statements of Income and Comprehensive Income (Loss), the Condensed Consolidated Balance Sheets, and the Condensed Consolidated Statements of Cash Flows for the Parent Company, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries, and total consolidated Pentair and subsidiaries.

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

For the three months ended June 30, 2012


	Parent			Guarantor			Non-guarantor
In thousands	company			subsidiaries			subsidiaries			Eliminations			Consolidated

Net sales	$	—		$	628,860		$	392,347		$	(79,682	)	$	941,525
Cost of goods sold		—			421,655			287,437			(79,695	)		629,397

Gross profit		—			207,205			104,910			13			312,128
Selling, general and administrative		11,905			85,781			75,746			13			173,445
Research and development		245			10,958			9,688			—			20,891

Operating income (loss)		(12,150	)		110,466			19,476			—			117,792
Earnings from investment in subsidiaries		(62,199	)		(527	)		600			62,126			—
Other (income) expense:
Equity income of unconsolidated subsidiaries		—			(636	)		—			—			(636)
Net interest (income) expense		(27,676	)		38,301			5,454			—			16,079

Income before income taxes and noncontrolling interest		77,725			73,328			13,422			(62,126	)		102,349
Provision for income taxes		5,895			23,935			(966	)		—			28,864

Net income before noncontrolling interest		71,830			49,393			14,388			(62,126	)		73,485
Noncontrolling interest		—			—			1,655			—			1,655

Net income attributable to Pentair, Inc.	$	71,830		$	49,393		$	12,733		$	(62,126	)	$	71,830


Comprehensive income (loss)	$	(10,207	)	$	22,945		$	(42,332	)	$	19,164		$	(10,430)
Less: Comprehensive income attributable to noncontrolling interest		—			—			(223	)		—			(223)

Comprehensive income (loss) attributable to Pentair, Inc.	$	(10,207	)	$	22,945		$	(42,109	)	$	19,164		$	(10,207)

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

For the six months ended June 30, 2012


	Parent			Guarantor			Non-guarantor
In thousands	company			subsidiaries			subsidiaries			Eliminations			Consolidated

Net sales	$	—		$	1,186,928		$	778,524		$	(165,750	)	$	1,799,702
Cost of goods sold		—			807,713			564,599			(165,457	)		1,206,855

Gross profit		—			379,215			213,925			(293	)		592,847
Selling, general and administrative		28,789			174,144			145,815			(293	)		348,455
Research and development		468			21,568			19,612			—			41,648

Operating income (loss)		(29,257	)		183,503			48,498			—			202,744
Earnings from investment in subsidiaries		(115,592	)		(1,325	)		(364	)		117,281			—
Other (income) expense:
Equity income of unconsolidated subsidiaries		—			(1,544	)		(141	)		—			(1,685)
Net interest (income) expense		(56,710	)		76,484			11,073			—			30,847

Income before income taxes and noncontrolling interest		143,045			109,888			37,930			(117,281	)		173,582
Provision for income taxes		10,401			24,242			3,300			—			37,943

Net income before noncontrolling interest		132,644			85,646			34,630			(117,281	)		135,639
Noncontrolling interest		—			—			2,995			—			2,995

Net income attributable to Pentair, Inc.	$	132,644		$	85,646		$	31,635		$	(117,281	)	$	132,644


Comprehensive income (loss)	$	91,788		$	59,198		$	16,435		$	(73,613	)	$	93,808
Less: Comprehensive income attributable to noncontrolling interest		—			—			2,020			—			2,020

Comprehensive income (loss) attributable to Pentair, Inc.	$	91,788		$	59,198		$	14,415		$	(73,613	)	$	91,788

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

June 30, 2012


In thousands	Parent company			Guarantor subsidiaries			Non-guarantor subsidiaries			Eliminations			Consolidated

Assets
Current assets
Cash and cash equivalents	$	6,135		$	14,339		$	40,124		$	—		$	60,598
Accounts and notes receivable, net		736			348,556			281,087			(58,235	)		572,144
Inventories		—			241,629			218,410			—			460,039
Deferred tax assets		130,151			40,698			12,674			(124,624	)		58,899
Prepaid expenses and other current assets		44,061			12,282			107,023			(39,021	)		124,345

Total current assets		181,083			657,504			659,318			(221,880	)		1,276,025
Property, plant and equipment, net		17,953			132,314			230,796			—			381,063
Other assets
Investments in/advances to subsidiaries		2,911,498			1,414,260			85,952			(4,411,710	)		—
Goodwill		—			1,330,265			924,869			—			2,255,134
Intangibles, net		—			243,431			327,072			—			570,503
Other		65,638			8,931			48,115			(19,140	)		103,544

Total other assets		2,977,136			2,996,887			1,386,008			(4,430,850	)		2,929,181

Total assets	$	3,176,172		$	3,786,705		$	2,276,122		$	(4,652,730	)	$	4,586,269

Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings	$	—		$	—		$	222		$	—		$	222
Current maturities of long-term debt		—			—			1,193			—			1,193
Accounts payable		5,334			188,673			152,549			(58,291	)		288,265
Employee compensation and benefits		15,771			19,855			53,888			—			89,514
Current pension and post-retirement benefits		9,052			—			—			—			9,052
Accrued product claims and warranties		165			24,385			20,385			—			44,935
Income taxes		35,498			(1,801	)		(1,469	)		—			32,228
Accrued rebates and sales incentives		—			36,212			9,658			—			45,870
Other current liabilities		30,824			64,436			94,191			(39,014	)		150,437

Total current liabilities		96,644			331,760			330,617			(97,305	)		661,716
Other liabilities
Long-term debt		1,245,055			2,417,922			520,265			(2,949,448	)		1,233,794
Pension and other retirement compensation		185,513			(10,541	)		72,352			—			247,324
Post-retirement medical and other benefits		17,512			31,549			—			(19,140	)		29,921
Long-term income taxes payable		13,294			—			—			—			13,294
Deferred tax liabilities		—			229,962			84,835			(124,624	)		190,173
Due to (from) affiliates		(442,406	)		675,455			601,727			(834,776	)		—
Other non-current liabilities		58,771			1,323			32,081			—			92,175

Total liabilities		1,174,383			3,677,430			1,641,877			(4,025,293	)		2,468,397

Shareholders’ equity attributable to Pentair, Inc.		2,001,789			109,275			518,162			(627,437	)		2,001,789
Noncontrolling interest		—			—			116,083			—			116,083

Total shareholders’ equity		2,001,789			109,275			634,245			(627,437	)		2,117,872

Total liabilities and shareholders’ equity	$	3,176,172		$	3,786,705		$	2,276,122		$	(4,652,730	)	$	4,586,269

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the six months ended June 30, 2012


	Parent			Guarantor			Non-guarantor
In thousands	company			subsidiaries			subsidiaries			Eliminations		Consolidated

Net cash provided by (used for) operating activities	$	10,612		$	108,550		$	47,599		$	—	$	166,761
Investing activities
Capital expenditures		(1,980	)		(14,562	)		(14,770	)		—		(31,312)
Proceeds from sale of property and equipment		—			1,538			3,330			—		4,868
Acquisitions, net of cash acquired		—			—			(19,905	)		—		(19,905)
Other		—			—			(3,073	)		—		(3,073)

Net cash provided by (used for) investing activities		(1,980	)		(13,024	)		(34,418	)		—		(49,422)
Financing activities
Net short-term borrowings		(3,472	)		—			—			—		(3,472)
Proceeds from long-term debt		352,463			—			—			—		352,463
Repayment of long-term debt		(420,810	)		—			—			—		(420,810)
Net change in advances to subsidiaries		98,720			(84,519	)		(14,201	)		—		—
Excess tax benefits from stock-based compensation		1,740			—			—			—		1,740
Stock issued to employees, net of shares withheld		16,163			—			—			—		16,163
Dividends paid		(43,628	)		—			(512	)		—		(44,140)

Net cash provided by (used for) financing activities		1,176			(84,519	)		(14,713	)		—		(98,056)
Effect of exchange rate changes on cash and cash equivalents		(6,770	)		—			(1,992	)		—		(8,762)

Change in cash and cash equivalents		3,038			11,007			(3,524	)		—		10,521
Cash and cash equivalents, beginning of period		3,097			3,332			43,648			—		50,077

Cash and cash equivalents, end of period	$	6,135		$	14,339		$	40,124		$	—	$	60,598

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

For the three months ended July 2, 2011


	Parent			Guarantor		Non-guarantor
In thousands	company			subsidiaries		subsidiaries			Eliminations			Consolidated

Net sales	$	—		$	586,395	$	398,634		$	(74,854	)	$	910,175
Cost of goods sold		—			399,270		297,830			(74,661	)		622,439

Gross profit		—			187,125		100,804			(193	)		287,736
Selling, general and administrative		6,664			83,632		68,329			(193	)		158,432
Research and development		435			10,509		8,938			—			19,882

Operating (loss) income		(7,099	)		92,984		23,537			—			109,422
Earnings from investment in subsidiaries		(53,988	)		—		—			53,988			—
Other (income) expense:
Equity income of unconsolidated subsidiaries		(607	)		—		(65	)		—			(672)
Net interest (income) expense		(26,636	)		38,107		3,142			—			14,613

Income before income taxes and noncontrolling interest		74,132			54,877		20,460			(53,988	)		95,481
Provision for income taxes		7,420			18,301		1,623			—			27,344

Net income before noncontrolling interest		66,712			36,576		18,837			(53,988	)		68,137
Noncontrolling interest		—			—		1,425			—			1,425

Net income attributable to Pentair, Inc.	$	66,712		$	36,576	$	17,412		$	(53,988	)	$	66,712


Comprehensive income (loss)	$	90,090		$	41,534	$	29,491		$	(68,809	)	$	92,306
Less: Comprehensive income attributable to noncontrolling interest		—			—		2,216			—			2,216

Comprehensive income (loss) attributable to Pentair, Inc.	$	90,090		$	41,534	$	27,275		$	(68,809	)	$	90,090

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

For the six months ended July 2, 2011


In thousands	Parent company			Guarantor subsidiaries		Non-guarantor subsidiaries			Eliminations			Consolidated

Net sales	$	—		$	1,101,449	$	740,212		$	(141,213	)	$	1,700,448
Cost of goods sold		—			754,831		549,560			(140,738	)		1,163,653

Gross profit		—			346,618		190,652			(475	)		536,795
Selling, general and administrative		13,272			168,751		121,644			(475	)		303,192
Research and development		605			21,355		16,044			—			38,004

Operating (loss) income		(13,877	)		156,512		52,964			—			195,599
Earnings from investment in subsidiaries		(91,295	)		—		—			91,295			—
Other (income) expense:
Equity income of unconsolidated subsidiaries		(783	)		—		(124	)		—			(907)
Net interest (income) expense		(54,016	)		76,593		1,361			—			23,938

Income before income taxes and noncontrolling interest		132,217			79,919		51,727			(91,295	)		172,568
Provision for income taxes		14,964			26,782		10,651			—			52,397

Net income before noncontrolling interest		117,253			53,137		41,076			(91,295	)		120,171
Noncontrolling interest		—			—		2,918			—			2,918

Net income attributable to Pentair, Inc.	$	117,253		$	53,137	$	38,158		$	(91,295	)	$	117,253


Comprehensive income (loss)	$	181,498		$	63,306	$	67,508		$	(125,193	)	$	187,119
Less: Comprehensive income attributable to noncontrolling interest		—			—		5,621			—			5,621

Comprehensive income (loss) attributable to Pentair, Inc.	$	181,498		$	63,306	$	61,887			$ (125,193)		$	181,498

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

July 2, 2011


In thousands	Parent company			Guarantor subsidiaries			Non- guarantor subsidiaries		Eliminations			Consolidated

Assets
Current assets
Cash and cash equivalents	$	4,836		$	4,651		$	59,485	$	—		$	68,972
Accounts and notes receivable, net		796			317,365			375,242		(97,996	)		595,407
Inventories		—			203,998			280,797		—			484,795
Deferred tax assets		113,205			40,363			13,247		(105,982	)		60,833
Prepaid expenses and other current assets		8,958			14,973			118,638		(17,937	)		124,632

Total current assets		127,795			581,350			847,409		(221,915	)		1,334,639
Property, plant and equipment, net		20,172			110,551			279,824		—			410,547
Other assets
Investments in/advances to subsidiaries		2,856,562			599,056			686,070		(4,141,688	)		—
Goodwill		—			1,471,582			1,101,848		—			2,573,430
Intangibles, net		—			217,311			437,597		—			654,908
Other		75,538			4,821			23,477		(25,048	)		78,788

Total other assets		2,932,100			2,292,770			2,248,992		(4,166,736	)		3,307,126

Total assets	$	3,080,067		$	2,984,671		$	3,376,225	$	(4,388,651	)	$	5,052,312

Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings	$	—		$	—		$	21,451	$	—		$	21,451
Current maturities of long-term debt		2,905			—			29,220		(30,836	)		1,289
Accounts payable		5,781			160,537			247,182		(98,097	)		315,403
Employee compensation and benefits		32,294			22,791			53,751		—			108,836
Current pension and post-retirement benefits		8,733			—			—		—			8,733
Accrued product claims and warranties		12,248			22,574			12,437		—			47,259
Income taxes		9,106			5,720			6,672		—			21,498
Accrued rebates and sales incentives		—			32,219			10,348		—			42,567
Other current liabilities		14,874			37,558			110,149		(18,215	)		144,366

Total current liabilities		85,941			281,399			491,210		(147,148	)		711,402
Other liabilities
Long-term debt		1,265,400			2,417,890			1,033,600		(3,332,723	)		1,384,167
Pension and other retirement compensation		136,901			38			80,082		—			217,021
Post-retirement medical and other benefits		17,679			35,323			—		(25,048	)		27,954
Long-term income taxes payable		23,832			—			—		—			23,832
Deferred tax liabilities		10			213,201			128,192		(105,981	)		235,422
Due to (from) affiliates		(743,661	)		(261,361	)		1,024,935		(19,913	)		—
Other non-current liabilities		44,611			1,701			39,348		—			85,660

Total liabilities		830,713			2,688,191			2,797,367		(3,630,813	)		2,685,458

Shareholders’ equity attributable to Pentair, Inc.		2,249,354			296,480			461,358		(757,838	)		2,249,354
Noncontrolling interest		—			—			117,500		—			117,500

Total shareholders’ equity		2,249,354			296,480			578,858		(757,838	)		2,366,854

Total liabilities and shareholders’ equity	$	3,080,067		$	2,984,671		$	3,376,225		$ (4,388,651)		$	5,052,312

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the six months ended July 2, 2011


In thousands	Parent company			Guarantor subsidiaries			Non- guarantor subsidiaries			Eliminations		Consolidated

Net cash provided by (used for) operating activities	$	(12,254	)	$	190,161		$	(25,296	)	$	—	$	152,611
Investing activities
Capital expenditures		(5,368	)		(13,584	)		(16,269	)		—		(35,221)
Proceeds from sale of property and equipment		—			42			47			—		89
Acquisitions, net of cash acquired		—			—			(733,105	)		—		(733,105)
Other		902			(783	)		—			—		119

Net cash provided by (used for) investing activities		(4,466	)		(14,325	)		(749,327	)		—		(768,118)
Financing activities
Net short-term borrowings		16,518			(29	)		29			—		16,518
Proceeds from long-term debt		1,320,957			—			—			—		1,320,957
Repayment of long-term debt		(661,422	)		—			—			—		(661,422)
Debt issuance costs		(8,721	)		—			—			—		(8,721)
Net change in advances to subsidiaries		(670,522	)		(174,560	)		845,082			—		—
Excess tax benefits from stock-based compensation		1,465			—			—			—		1,465
Stock issued to employees, net of shares withheld		9,551			—			—			—		9,551
Repurchases of common stock		(287	)		—			—			—		(287)
Dividends paid		(39,730	)		—			(9	)		—		(39,739)

Net cash provided by (used for) financing activities		(32,191	)		(174,589	)		845,102			—		638,322
Effect of exchange rate changes on cash and cash equivalents		50,546			—			(50,445	)		—		101

Change in cash and cash equivalents		1,635			1,247			20,034			—		22,916
Cash and cash equivalents, beginning of period		3,201			3,404			39,451			—		46,056

Cash and cash equivalents, end of period	$	4,836		$	4,651		$	59,485		$	—	$	68,972

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

December 31, 2011


In thousands	Parent company			Guarantor subsidiaries			Non- guarantor subsidiaries		Eliminations			Consolidated

Assets
Current assets
Cash and cash equivalents	$	3,097		$	3,332		$	43,648	$	—		$	50,077
Accounts and notes receivable, net		828			360,027			263,201		(54,852	)		569,204
Inventories		—			227,472			222,391		—			449,863
Deferred tax assets		134,240			40,698			13,382		(127,421	)		60,899
Prepaid expenses and other current assets		28,937			(6,886	)		107,121		(21,380	)		107,792

Total current assets		167,102			624,643			649,743		(203,653	)		1,237,835
Property, plant and equipment, net		19,693			136,102			231,730		—			387,525
Other assets
Investments in/advances to subsidiaries		2,910,927			1,447,522			92,396		(4,450,845	)		—
Goodwill		—			1,330,265			943,653		—			2,273,918
Intangibles, net		—			250,792			341,493		—			592,285
Other		63,508			27,337			23,045		(19,140	)		94,750

Total other assets		2,974,435			3,055,916			1,400,587		(4,469,985	)		2,960,953

Total assets	$	3,161,230		$	3,816,661		$	2,282,060	$	(4,673,638	)	$	4,586,313

Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings	$	—		$	—		$	3,694	$	—		$	3,694
Current maturities of long-term debt		2,585			—			1,168		(2,585	)		1,168
Accounts payable		5,036			189,355			152,065		(51,598	)		294,858
Employee compensation and benefits		24,466			30,015			54,880		—			109,361
Current pension and post-retirement benefits		9,052			—			—		—			9,052
Accrued product claims and warranties		165			22,037			20,428		—			42,630
Income taxes		40,999			(28,717	)		2,265		—			14,547
Accrued rebates and sales incentives		—			25,612			11,397		—			37,009
Other current liabilities		25,050			53,960			71,890		(21,378	)		129,522

Total current liabilities		107,353			292,262			317,787		(75,561	)		641,841
Other liabilities
Long-term debt		1,312,053			2,417,922			542,411		(2,968,161	)		1,304,225
Pension and other retirement compensation		182,556			(7,701	)		73,760		—			248,615
Post-retirement medical and other benefits		17,024			33,890			—		(19,140	)		31,774
Long-term income taxes payable		26,470			—			—		—			26,470
Deferred tax liabilities		—			229,962			86,416		(127,421	)		188,957
Due to (from) affiliates		(479,943	)		751,145			711,705		(982,907	)		—
Other non-current liabilities		62,388			1,508			33,143		—			97,039

Total liabilities		1,227,901			3,718,988			1,765,222		(4,173,190	)		2,538,921

Shareholders’ equity attributable to Pentair, Inc.		1,933,329			97,673			402,775		(500,448	)		1,933,329
Noncontrolling interest		—			—			114,063		—			114,063

Total shareholders’ equity		1,933,329			97,673			516,838		(500,448	)		2,047,392

Total liabilities and shareholders’ equity	$	3,161,230		$	3,816,661		$	2,282,060		$ (4,673,638)		$	4,586,313

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

17.

Proposed Merger

On March 27, 2012, we entered into a definitive agreement to merge with the flow control business of Tyco International Ltd. (“Tyco”) in a tax-free, all-stock merger (the “Merger”). We expect the Merger will bring together complementary leaders in water and fluid solutions, valves and controls, and equipment protection products to create a premier industrial growth company. The Tyco flow control business had net revenue and operating income for its fiscal year ended September 30, 2011 of $3.6 billion and $296 million, respectively. The transaction values the Tyco flow control business at approximately $4.4 billion based on the June 13, 2012, Pentair stock price, including assumed net debt of $275 million and noncontrolling interest. If the Merger is not completed, depending on the reasons for the termination of the merger agreement, Pentair would be required to pay Tyco a termination fee of $145 million.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” or similar words or the negative thereof or variations thereon. 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 are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Consequently, we cannot guarantee any forward-looking statements. Investors are cautioned not to place undue reliance on any forward-looking statements. The risks and uncertainties that may impact achievement of forward-looking statements include, but are not limited to:

—

general economic and political conditions, such as political instability, credit market uncertainty, the rate of economic growth or decline in our principal geographic or product markets or fluctuations in exchange rates;

—

changes in general economic and industry conditions in markets in which we participate, such as:

—

magnitude, timing and scope of the global economic recovery or any potential future downturn;

—

stabilization or strength of the North American and Western European housing markets;

—

the strength of product demand and the markets we serve;

—

the intensity of competition, including that from foreign competitors;

—

pricing pressures;

—

the financial condition of our customers;

—

market acceptance of our new product introductions and enhancements;

—

the introduction of new products and enhancements by competitors;

—

our ability to maintain and expand relationships with large customers;

—

our ability to source raw material commodities from our suppliers without interruption and at reasonable prices; and

—

our ability to source components from third parties, in particular from foreign manufacturers, without interruption and at reasonable prices;

—

increased risks associated with operating foreign businesses;

—

risks associated with our level of indebtedness and leverage and the potential need for additional financing in the future;

—

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

—

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

—

our ability to identify, complete and integrate acquisitions successfully and to realize expected synergies on our anticipated timetable;

—

any impairment of goodwill and indefinite-lived intangible assets as a result of deterioration in our markets;

—

domestic and foreign governmental and regulatory policies;

—

changes in operating factors, such as continued improvement in manufacturing activities and the achievement of related efficiencies, cost reductions and inventory risks due to shifts in market demand and costs associated with moving production to lower-cost locations and faster growth;

—

our ability to generate savings from our excellence in operations initiatives consisting of lean enterprise, supply management and cash flow practices;

—

unanticipated developments that could occur with respect to contingencies such as litigation, intellectual property matters, product liability exposures and environmental matters;

—

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

—

those we identify under “Risk Factors” in Item 1A of this report and in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011.

The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. We assume no obligation, and disclaim any duty, to update the forward-looking statements in this report.

Overview

We are a focused diversified industrial manufacturing company comprised of two operating segments: Water & Fluid Solutions and Technical Products. Water & Fluid Solutions is a global leader in providing innovative products and systems used worldwide in the movement, storage, treatment and enjoyment of water. Technical Products is a leader in the global enclosures and thermal management markets, designing and manufacturing standard, modified and custom enclosures that house and protect sensitive electronics and electrical components and protect the people that use them. In 2011, Water & Fluid Solutions and Technical Products accounted for approximately 2/3 and 1/3 of total revenues, respectively.

Water & Fluid Solutions has progressively become a more important part of our business portfolio with sales increasing from approximately $125 million in 1995 to approximately $2.4 billion in 2011. We believe the water industry is structurally attractive as a result of a growing demand for clean water and the large global market size. Our vision is to be a leading global provider of innovative products and systems used in the movement, storage, treatment and enjoyment of water.

Technical Products operates in a large global market with significant potential for growth in industry segments such as industrial, energy, infrastructure and communications. We believe we have the largest industrial and commercial distribution network in North America for enclosures and the highest brand recognition in the industry in North America.

On March 27, 2012, we entered into a definitive agreement to merge with the flow control business of Tyco International Ltd. (“Tyco”) in a tax-free, all-stock merger (the “Merger”). We expect the Merger will bring together complementary leaders in water and fluid solutions, valves and controls, and equipment protection products to create a premier industrial growth company. The Tyco flow control business had net revenue and operating income for its fiscal year ended September 30, 2011 of $3.6 billion and $296 million, respectively. The transaction values the Tyco flow control business at approximately $4.4 billion based on the June 13, 2012 Pentair stock price, including assumed net debt of $275 million and noncontrolling interest.

The Merger is expected to occur immediately after Tyco distributes all of the shares of Tyco Flow Control International Ltd. (“Tyco Flow Control”), the entity that will hold the Tyco flow control business prior to the distribution, to its shareholders in a tax-free pro rata dividend (the “Distribution”). In connection with the Merger, Tyco Flow Control will be renamed Pentair Ltd. (“New Pentair”). In the Merger, a wholly-owned subsidiary of New Pentair will merge with and into us, with our company surviving as a wholly-owned subsidiary of New Pentair. At the effective time of the Merger, each of our outstanding common shares will be converted into the right to receive one New Pentair common share. Upon completion of the Distribution and the Merger, New Pentair common shares will be listed on the New York Stock Exchange with our shareholders owning approximately 47.5% of New Pentair and Tyco shareholders owning approximately 52.5% of New Pentair. Completion of the Distribution and the Merger is expected to occur at the end of September 2012, subject to the approval of the Distribution by Tyco shareholders, the approval of the Merger by our shareholders, regulatory approvals and customary closing conditions. Our executive officers will become the executive officers of New Pentair and our board of directors, together with up to two new directors selected by Tyco and reasonably acceptable to us, will be the board of directors of New Pentair. We will be treated as the accounting acquirer under generally accepted accounting principles in the United States. See ITEM 1A – Risk Factors of this Quarterly Report on Form 10-Q regarding risks posed to our shareholders as a result of the proposed Distribution and Merger.

In May 2011, we acquired as part of Water & Fluid Solutions, the Clean Process Technologies (“CPT”) division of privately held Norit Holding B.V. for $715.3 million (€502.7 million translated at the May 12, 2011 exchange rate). CPT’s results of operations have been included in our consolidated financial statements since the date of acquisition. CPT is a global leader in membrane solutions and clean process technologies in the high growth water and beverage filtration and separation segments. CPT provides sustainable purification systems and solutions for desalination, water reuse, industrial applications and beverage segments that effectively address the increasing challenges of clean water scarcity, rising energy costs and pollution. CPT’s product offerings include innovative ultrafiltration and nanofiltration membrane technologies, aseptic valves, CO₂ recovery and control systems and specialty pumping equipment. Based in the Netherlands, CPT has broad sales diversity with the majority of 2011 and 2010 revenues generated in European Union and Asia-Pacific countries.

The fair value of CPT was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value acquired over the identifiable assets acquired and liabilities assumed is reflected as goodwill. Goodwill recorded as part of the purchase price allocation was $451.8 million, none of which is tax deductible. Identifiable intangible assets acquired as part of the acquisition were $197.2 million, including definite-lived intangibles, such as customer relationships, proprietary technology and trade names with a weighted average amortization period of approximately 10 years.

In January 2011 we acquired as part of Water & Fluid Solutions, all of the outstanding shares of capital stock of Hidro Filtros do Brasil (“Hidro Filtros”) for cash of $14.9 million and a note payable of $2.1 million. The Hidro Filtros results of operations have been included in our consolidated financial statements since the date of acquisition. Hidro Filtros is a leading manufacturer of water filters and filtering elements for residential and industrial applications operating in Brazil and neighboring countries. Goodwill recorded as part of the purchase price allocation was $10.1 million, none of which is tax deductible. Identified intangible assets acquired as part of the acquisition were $6.3 million including definite-lived intangibles, primarily customer relationships, of $5.5 million with an estimated life of 13 years.

In the fourth quarter of 2011, we completed our annual goodwill impairment review. As a result, we recorded a pre-tax non-cash impairment charge of $200.5 million in the fourth quarter of 2011. This represents impairment of goodwill in our Residential Filtration reporting unit, part of Water & Fluid Solutions. The impairment charge resulted from changes in our forecasts in light of economic conditions prevailing in these markets and due to continued softness in the end-markets served by residential water treatment components.

Key Trends and Uncertainties Regarding Our Existing Business

The following trends and uncertainties affected our financial performance in 2011 and the first six months of 2012 and will likely impact our results in the future:

•

Since 2010, most markets we serve have shown signs of improvement since the global recession in 2008 and 2009. Because our businesses are significantly affected by general economic trends, a lack of continued improvement in our most important markets addressed below would likely have an adverse impact on our results of operations for 2012 and beyond.

•

We have also identified specific market opportunities that we continue to pursue that we find attractive, both within and outside the United States. We are reinforcing our businesses to more effectively address these opportunities through research and development and additional sales and marketing resources. Unless we successfully penetrate these product and geographic markets, our organic growth would likely be limited.

•

After four years of new home building and new pool start contraction in the United States, these end markets stabilized in 2010. Although stabilized, these end markets have not shown significant signs of improvement and continue at historically low levels. In the fourth quarter of 2011, as a result of these current economic conditions and end market softness, we recorded a goodwill impairment charge of $200.5 million. While new product introductions, expanded distribution and channel penetration have resulted in volume increases for the first half of 2012, continued stagnation in new housing construction and new pool starts could negatively impact our ability to grow sales in the future and could have a material adverse effect on our results of operations. Overall, we believe approximately 35% of Pentair sales are used in global residential applications for replacement, refurbishment, remodeling, repair and new construction.

•

Order rates and sales improved in our industrial business in 2010 and 2011 after slowing significantly in 2009. During the first half of 2012, order rates have remained stable while sales have declined. We believe that the outlook for industrial markets in the second half of 2012 is mixed. Any significant reduction in global capital spending could adversely impact our results in the future.

•

Through 2011 and the first six months of 2012, we experienced material and other cost inflation. We strive for productivity improvements, and we implement increases in selling prices to help mitigate this inflation. We expect the current economic environment will result in continuing price volatility for many of our raw materials. Commodity prices have begun to moderate, but we are uncertain as to the timing and impact of these market changes.

•

Primarily due to lower discount rates, our unfunded pension liabilities increased by $41 million to approximately $242 million as of the end of 2011. In 2012, our pension expense continues to increase over 2011 levels.

•

We have a long-term goal to consistently generate free cash flow that equals or exceeds 100 percent of our net income. We define free cash flow as cash flow from continuing operating activities less capital expenditures plus proceeds from sale of property and

equipment. Free cash flow for the full year 2011 was approximately $248 million, exceeding our goal of 100% net income conversion. We continue to expect to generate free cash flow in excess of net income before noncontrolling interest in 2012. We are continuing to target reductions in working capital and particularly inventory, as a percentage of sales. See our discussion of Other financial measures under the caption “Liquidity and Capital Resources” in this report for a reconciliation of our free cash flow.

In 2012, our operating objectives include the following:

•

Increasing our presence in fast growth regions and vertical market focus to grow in those markets in which we have competitive advantages;

•

Optimizing our technological capabilities to increasingly generate innovative new products;

•

Driving operating excellence through lean enterprise initiatives, with specific focus on sourcing and supply management, cash flow management and lean operations; and

•

Focusing on developing global talent in light of our increased global presence (39% of our 2011 net sales were generated outside the United States).

We may seek to meet our objectives of expanding our geographic reach internationally, expanding our presence in our various channels to market and acquiring technologies and products to broaden our businesses’ capabilities to serve additional markets through acquisitions. We may also consider the divestiture of discrete business units to further focus our businesses on their most attractive markets.

RESULTS OF OPERATIONS

Net Sales

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


	Three months ended									Six months ended
In *thousands*	June 30, 2012		July 2, 2011		$ change		% change			June 30, 2012		July 2, 2011		$ change		% change

Net sales	$	941,525	$	910,175	$	31,350		3.4	%	$	1,799,702	$	1,700,448	$	99,254		5.8	%

The components of the change in net sales from the prior year period were as follows:


	Three months ended June 30, 2012 over the prior year period									Six months ended June 30, 2012 over the prior year period
*Percentage change in net sales*	Water & Fluid Solutions			Technical Products			Total			Water & Fluid Solutions			Technical Products			Total

Volume		1.1			(3.9	)		(0.4	)		0.5			(2.6	)		(0.5	)
Acquisition		6.4			—			4.4			9.4			—			6.3
Price		2.4			2.4			2.4			2.1			1.7			2.0
Currency		(3.0	)		(2.9	)		(3.0	)		(2.0	)		(2.0	)		(2.0	)

Total		6.9			(4.4	)		3.4			10.0			(2.9	)		5.8

Consolidated net sales

The 3.4 and 5.8 percentage point increases in consolidated net sales in the second quarter and first half, respectively, of 2012 from 2011 were primarily driven by:

•

higher sales volume related to the May 2011 acquisition of CPT;

•

organic Water & Fluid Solutions sales growth related to higher sales of certain pool products primarily serving the North American residential housing market and filtration products in other global markets; and

•

selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•

unfavorable foreign currency effects; and

•

decreases in Technical Products sales volume in Western Europe and in the communications vertical market.

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


	Three months ended										Six months ended
In *thousands*	June 30, 2012		July 2, 2011		$ change			% change			June 30, 2012		July 2, 2011		$ change			% change

Water & Fluid Solutions	$	675,522	$	631,994	$	43,528			6.9	%	$	1,262,500	$	1,147,362	$	115,138			10.0	%
Technical Products		266,003		278,181		(12,178	)		(4.4	%)		537,202		553,086		(15,884	)		(2.9	%)

Net sales	$	941,525	$	910,175	$	31,350			3.4	%	$	1,799,702	$	1,700,448	$	99,254			5.8	%

Water & Fluid Solutions

The 6.9 and 10.0 percentage point increases in Water & Fluid Solutions net sales in the second quarter and first half, respectively, of 2012 from 2011 were primarily driven by:

•

higher sales volume related to the May 2011 acquisition of CPT;

•

organic sales growth related to higher sales of certain pool products primarily serving the North American residential housing market and filtration products in other global markets;

•

continued sales growth in fast growth regions led by strength in Latin America; and

•

selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•

unfavorable foreign currency effects.

Technical Products

The 4.4 and 2.9 percentage point decreases in Technical Products net sales in the second quarter and first half, respectively, of 2012 from 2011 were primarily driven by:

•

decreases in sales volume in Western Europe and in the communications vertical market; and

•

unfavorable foreign currency effects

These decreases were partially offset by:

•

selective increases in selling prices to mitigate inflationary cost increases.

Gross Profit


	Three months ended								Six months ended

*In thousands*	June 30, 2012		%of sales		July 2, 2011		%of sales		June 30, 2012		%of sales		July 2, 2011		%of sales

Gross Profit	$	312,128		33.2%	$	287,736		31.6%	$	592,847		32.9%	$	536,795		31.6%

Percentage point change				1.6 pts								1.3 pts

The 1.6 and 1.3 percentage point increases in gross profit as a percentage of sales in the second quarter and first half, respectively, of 2012 from 2011 were primarily the result of:

—

cost savings generated from our Pentair Integrated Management System (“PIMS”) initiatives including lean and supply management practices;

—

selective increases in selling prices in Water & Fluid Solutions and Technical Products to mitigate inflationary cost increases; and

—

higher cost of goods sold in 2011 as a result of the inventory fair market value step-up and customer backlog recorded as part of the CPT purchase accounting.

These increases were partially offset by:

—

inflationary increases related to raw materials and labor costs.

Selling, general and administrative (SG&A)


	Three months ended								Six months ended

*In thousands*	June 30, 2012		%of sales		July 2, 2011		%of sales		June 30, 2012		%of sales		July 2, 2011		%of sales

SG&A	$	173,445		18.4%	$	158,432		17.4%	$	348,455		19.4%	$	303,192		17.8%

Percentage point change				1.0 pts								1.6 pts

The 1.0 and 1.6 percentage point increases in SG&A expense as a percentage of sales in the second quarter and first half, respectively, of 2012 from 2011 were primarily due to:

—

costs associated with the proposed transaction with Tyco Flow Control;

—

higher costs associated with the integration and intangible amortization related to the May 2011 acquisition of CPT;

—

restructuring actions taken in 2012; and

—

certain increases in labor and related costs.

Research and development (R&D)


	Three months ended								Six months ended

*In thousands*	June 30, 2012		%of sales		July 2, 2011		%of sales		June 30, 2012		%of sales		July 2, 2011		%of sales

R&D	$	20,891		2.3%	$	19,882		2.2%	$	41,648		2.2%	$	38,004		2.3%

Percentage point change				0.1 pts								(0.1)pts

R&D expense as a percentage of sales increased 0.1 percentage points and decreased 0.1 percentage points in the second quarter and first half, respectively, of 2012 from 2011.

Increases were primarily due to:

—

higher costs associated with the May 2011 acquisition of CPT; and

—

continued investments in the development of new products to generate growth.

Decreases were primarily due to:

—

higher sales volume in Water & Fluid Solutions, which resulted in increased leverage on the fixed operating expenses.

Operating income

Water & Fluid Solutions


	Three months ended								Six months ended

*In thousands*	June 30, 2012		%of sales		July 2, 2011		%of sales		June 30, 2012		%of sales		July 2, 2011		%of sales

Operating Income	$	91,989		13.6%	$	84,521		13.4%	$	155,666		12.3%	$	141,049		12.3%

Percentage point change				0.2 pts								— pts

Operating income in the Water & Fluid Solutions as a percentage of net sales in the first half of 2012 was unchanged from 2011. The 0.2 percentage point increase in Water & Fluid Solutions segment operating income as a percentage of net sales in the second quarter of 2012 from 2011 was primarily the result of:

—

savings generated from our PIMS initiatives including lean and supply management practices; and

—

selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

—

restructuring actions taken in 2012.

Technical Products


	Three months ended								Six months ended

*In thousands*	June 30, 2012		%of sales		July 2, 2011		%of sales		June 30, 2012		%of sales		July 2, 2011		%of sales

Operating Income	$	50,624		19.0%	$	48,261		17.3%	$	101,083		18.8%	$	96,348		17.4%

Percentage point change				1.7 pts								1.4 pts

The 1.7 and 1.4 percentage point increases in Technical Products operating income as a percentage of sales in the second quarter and first half, respectively, of 2012 from 2011 were primarily the result of:

—

savings generated from our PIMS initiatives including lean and supply management practices; and

—

selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

—

restructuring actions taken in 2012.

Net interest expense


	Three months ended									Six months ended

In thousands	June 30, 2012		July 2, 2011		$change		%change			June 30, 2012		July 2, 2011		$change		%change

Net interest expense	$	16,079	$	14,613	$	1,466		10.0	%	$	30,847	$	23,938	$	6,909		28.9	%

The 10.0 and 28.9 percentage point increases in interest expense in the second quarter and first half, respectively, of 2012 from 2011 were primarily the result of:

•

higher debt levels in the second quarter of 2012 following the May 2011 acquisition of CPT.

These increases were partially offset by:

•

interest benefits related to tax adjustments in 2012.

Provision for income taxes


	Three months ended				Six months ended

In thousands	June 30, 2012		July 2, 2011		June 30, 2012		July 2, 2011

Income before income taxes and noncontrolling interest	$	102,349	$	95,481	$	173,582	$	172,568
Provision for income taxes		28,864		27,344		37,943		52,397
Effective tax rate		28.2%		28.6%		21.9%		30.4%

The 0.4 and 8.5 percentage point decreases in the effective tax rate in the second quarter and first half, respectively, of 2012 from 2011 were primarily the result of:

•

the resolution of U.S. federal and state tax audits in the first half of 2012 that did not occur in 2011; and

•

the mix of global earnings, including the impact of the CPT acquisition.

LIQUIDITY AND CAPITAL RESOURCES

We generally fund cash requirements for working capital, capital expenditures, equity investments, acquisitions, debt repayments, dividend payments and share repurchases from cash generated from operations, availability under existing committed revolving credit facilities and in certain instances, public and private debt and equity offerings. We have grown our businesses in significant part in the past through acquisitions financed by credit provided under our revolving credit facilities and from time to time, by private or public debt issuance. Our primary revolving credit facilities have generally been adequate for these purposes, although we have negotiated additional credit facilities as needed to allow us to complete acquisitions.

We are focusing on increasing our cash flow and repaying existing debt, while continuing to fund our research and development, marketing and capital investment initiatives. Our intent is to maintain investment grade ratings and a solid liquidity position.

We experience seasonal cash flows primarily due to seasonal demand in a number of markets within Water & Fluid Solutions. We generally borrow in the first quarter of our fiscal year for operational purposes, which usage reverses in the second quarter as the seasonality of our businesses peaks. End-user demand for pool and certain pumping equipment follows warm weather trends and is at seasonal highs from April to August. The magnitude of the sales spike is partially mitigated by employing some advance sale “early buy” programs (generally including extended payment terms and/or additional discounts). Demand for residential and agricultural water systems is also impacted by weather patterns, particularly by heavy flooding and droughts.

Operating activities

Cash provided by operating activities was $166.8 million in the first six months of 2012 compared with $152.6 million in the prior year period. The increase in cash provided from operating activities was due primarily to an increase in net income before noncontrolling interest, partially offset by an increase in working capital and other long-term assets and a decrease in long-term liabilities.

Investing activities

Cash used for investing activities was $49.4 million for the first six months of 2012 compared to $768.1 million in the prior year period. The current period activity relates mainly to cash used in acquisitions and capital expenditures. The decrease from the comparable prior year period was primarily due to a decrease in cash used in acquisitions.

Cash used in acquisitions, net of cash acquired, for the first six months of 2012 was $19.9 million compared with $733.1 million in the prior year period. In April 2012, we acquired, as part of Water & Fluid Solutions, all of the outstanding shares of capital stock of Sibrape for $19.9 million, net of cash acquired. In May 2011, we acquired as part of Water & Fluid Solutions, the CPT division of privately held Norit Holdings B.V. for $715.3 million. In January 2011, we acquired as part of Water & Fluid Solutions, all of the outstanding shares of capital stock of Hidro Filtros for cash of $14.9 million and a note payable of $2.1 million.

Capital expenditures in the first six months of 2012 were $31.3 million compared with $35.2 million in the prior year period. We currently anticipate capital expenditures for fiscal 2012 will be approximately $75 million to $85 million, primarily for capacity expansions in our key growth markets, new product development, and replacement equipment.

Financing activities

Net cash used for financing activities was $98.1 million in the first six months of 2012 compared with cash provided by financing activities of $638.3 million in the prior year period. The decrease primarily relates to borrowing utilized to fund the CPT acquisition in May 2011. Additionally, financing activities included draw downs and repayments on our revolving credit facilities to fund our operations in the normal course of business, payments of dividends, cash received/used for stock issued to employees and tax benefits related to stock-based compensation.

In May 2012, we repaid $105 million of matured private placement debt with borrowings under the Credit Facility.

Total availability under our Credit Facility was $487.4 million as of June 30, 2012, which was not limited by the leverage ratio financial covenant in the credit agreement.

In addition to the Credit Facility, we have various other credit facilities with an aggregate availability of $73.1 million, of which $7.6 million was outstanding at June 30, 2012. Borrowings under these credit facilities bear interest at variable rates. Additionally, as part of the CPT acquisition we assumed certain capital leases with an outstanding balance of $14.7 million at June 30, 2012.

Our cost of and ability to obtain debt financing may be impacted by our credit ratings. Our long-term debt is rated at BBB- by Standard & Poor’s (“S&P”) with stable outlook and Baa3 by Moody’s with stable outlook.

We issue short-term commercial paper notes that are currently not rated by S&P or Moody’s. Even though our short-term commercial paper is unrated, we believe a downgrade in our credit rating could have a negative impact on our ability to continue to issue unrated commercial paper.

We do not expect that a one rating downgrade of our credit rating by either S&P or Moody’s would substantially affect our ability to access the long-term debt capital markets. However, depending upon market conditions, the amount, timing and pricing of new borrowings and interest rates under our Credit Facility could be adversely affected. If both of our credit ratings were downgraded to below BBB-/Baa3, our flexibility to access the term debt capital markets would be reduced.

A credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations or a specific financial program. The credit rating takes into consideration the creditworthiness of guarantors, insurers or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The ratings outlook also highlights the potential direction of a short or long-term rating. It focuses on identifiable events and short-term trends that cause ratings to be placed under observation by the respective rating agencies. A change in rating outlook does not mean a rating change is inevitable.

We expect to continue to have cash requirements to support working capital needs and capital expenditures, to pay interest and service debt and to pay dividends to shareholders annually. We believe we have the ability and sufficient capacity to meet these cash requirements by using available cash and internally generated funds and to borrow under our committed and uncommitted credit facilities.

Dividends paid in the first six months of 2012 were $44.1 million, or $0.44 per common share, compared with $39.7 million, or $0.40 per common share, in the prior year period. We have increased dividends every year for the last 36 years and expect to continue paying dividends on a quarterly basis.

The total gross liability for uncertain tax positions was $13.3 million, $26.5 million and $24.8 million at June 30, 2012, December 31, 2011 and, July 2, 2011, respectively. We are not able to reasonably estimate the amount by which the estimate will increase or decrease over time; however, at this time, we do not expect a significant payment related to these obligations within the next twelve months.

Impact of Tyco Flow Control merger

In connection with the consummation of the Merger, we may refinance some or all of the indebtedness described above, subject to the terms of the merger agreement, which provides that we may not repay, incur or refinance any indebtedness to the extent such action would cause us not to be rated investment grade by any rating agency.

Prior to the Distribution, New Pentair will incur indebtedness in an amount not to exceed $500 million upon terms negotiated by us. A portion of the proceeds of the indebtedness will be transferred to Tyco. After accounting for the transfer of proceeds to Tyco, the payment of transaction expenses and transfer of excess cash to Tyco, New Pentair will have an additional net indebtedness upon consummation of the Distribution and the Merger of $275 million.

Other financial measures

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 have a long-term goal to consistently generate free cash flow that equals or exceeds 100% conversion of net income before noncontrolling interest. Free cash flow is a non-Generally Accepted Accounting Principles financial measure that we use to assess our cash flow performance. We believe free cash flow is an important measure of operating performance because it provides us and our investors a measurement of cash generated from operations that is available to pay dividends, make acquisitions, repay debt and repurchase shares. In addition, free cash flow is used as a criterion to measure and pay compensation-based incentives. Our measure of free cash flow may not be comparable to similarly titled measures reported by other companies. The following table is a reconciliation of free cash flow:


	Six months ended
In thousands	June 30, 2012			July 2, 2011

Net cash provided by (used for) operating activities	$	166,761		$	152,611
Capital expenditures		(31,312	)		(35,221	)
Proceeds from sale of property and equipment		4,868			89

Free cash flow	$	140,317		$	117,479

NEW ACCOUNTING STANDARDS

See Note 2 (New Accounting Standards) of ITEM 1.

CRITICAL ACCOUNTING POLICIES

In our 2011 Annual Report on Form 10-K, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements. We have not changed these policies from those previously disclosed in our Annual Report.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk during the quarter ended June 30, 2012. For additional information, refer to Item 7A of our 2011 Annual Report on Form 10-K.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter ended June 30, 2012 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon their evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the quarter ended June 30, 2012 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Controls

There was no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. Legal Proceedings

There have been no further material developments from the disclosures contained in our 2011 Annual Report on Form 10-K.

ITEM 1A.

Risk Factors

There have been no material changes from the risk factors previously disclosed in ITEM 1A. of our 2011 Annual Report on Form 10-K, except for the addition of the risk factors set forth below.

On March 27, 2012, Pentair, Inc. (“Pentair”) entered into a definitive agreement to merge with the flow control business (the “Tyco Flow Control Business”) of Tyco International Ltd. (“Tyco”) in a tax-free, all-stock merger (the “Merger”). The Merger is expected to occur immediately after Tyco distributes all of the shares of Tyco Flow Control International Ltd. (“Tyco Flow Control”), the entity that will hold the Tyco Flow Control Business prior to the distribution, to its shareholders in a tax-free pro rata dividend (the “Distribution,”) as part of a series of transactions necessary to consummate the separation of Tyco Flow Control from Tyco (the “Spin-off” and together with the Merger, the “Transactions”). In connection with the Merger, Tyco Flow Control will be renamed Pentair Ltd. (“New Pentair”) and a wholly-owned subsidiary of New Pentair will merge with and into Pentair, with Pentair surviving as a wholly-owned subsidiary of New Pentair. Upon completion of the Spin-off and the Merger, Pentair shareholders will own approximately 47.5% of New Pentair and Tyco shareholders will own approximately 52.5% of New Pentair. Completion of the Spin-off and the Merger is subject to the approval of the Distribution by Tyco shareholders, the approval of the Merger by Pentair shareholders, regulatory approvals and customary closing conditions. The following risk factors relate to risks posed to Pentair shareholders from the proposed Transactions. Additional risks exist that are related to the ownership of the combined flow control and Pentair businesses following the Transactions. These risks are detailed in the documents filed by Pentair, Tyco and Tyco Flow Control with the Securities and Exchange Commission related to the Transactions.

The calculation of the consideration payable pursuant to the Merger will not be adjusted based on the performance of Pentair or the Tyco Flow Control Business. Accordingly, the relative market value of the New Pentair common shares that Pentair shareholders receive in the Merger may not reflect the performance of Pentair and the Tyco Flow Control Business.

In the Merger, holders of Pentair common shares will receive one common share of New Pentair for every Pentair common share they hold at the time of the Merger with the result that former Pentair shareholders will own approximately 47.5% of New Pentair common shares and Tyco shareholders will own approximately 52.5% of New Pentair common shares, on a fully-diluted basis after giving effect to the Merger. Tyco shareholders who receive New Pentair common shares in the Distribution will not receive any new shares in the Merger and will continue to hold their existing shares of Tyco and New Pentair. The one-to-one exchange ratio and overall allocation of New Pentair common shares will not be adjusted for changes in the economic performance of the Tyco Flow Control Business and Pentair or the market price of Pentair common shares. If the economic performance of the Tyco Flow Control Business relative to Pentair declines (or the economic performance of Pentair relative to the Tyco Flow Control Business improves) prior to completion of the Merger, Pentair shareholders will not receive any additional compensation or adjustment to account for the effective diminishment in the value of their New Pentair common shares received in the Merger.

New Pentair may not realize the anticipated growth opportunities and cost synergies from the Merger.

The success of the Transactions will depend, in part, on the ability of New Pentair to realize the anticipated growth opportunities and cost synergies as a result of the Merger. New Pentair’s success in realizing these growth opportunities and cost synergies, and the timing of this realization, depends on the successful integration of Pentair and the Tyco Flow Control Business. Even if New Pentair is able to integrate Pentair and the Tyco Flow Control Business successfully, this integration may not result in the realization of the full benefits of the growth opportunities and cost synergies that Pentair and New Pentair currently expect from this integration or that these benefits will be achieved within the anticipated time frame or at all. For example, New Pentair may not be able to eliminate duplicative costs. Moreover, New Pentair may incur substantial expenses in connection with the integration of Pentair and the Tyco Flow Control Business. While it is anticipated that certain expenses will be incurred, such expenses are difficult to estimate accurately, and may exceed current estimates. Accordingly, the benefits from the Merger may be offset by costs incurred or delays in integrating the businesses.

The integration of Pentair and the Tyco Flow Control Business following the Merger may present significant challenges.

There is a significant degree of difficulty and management distraction inherent in the process of establishing New Pentair as an independent public company and integrating Pentair and the Tyco Flow Control Business. These difficulties include:

•

the challenge of establishing New Pentair as a separately traded independent public company while integrating Pentair and the Tyco Flow Control Business and carrying on the ongoing operations of each entity;

•

the necessity of coordinating geographically separate organizations;

•

the challenge of integrating the business cultures of Pentair and the Tyco Flow Control Business, which may prove to be incompatible;

•

the challenge and cost of integrating the information technology systems of Pentair and the Tyco Flow Control Business; and

•

the potential difficulty in retaining key officers and personnel of Pentair and the Tyco Flow Control Business.

The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of Pentair and the Tyco Flow Control Business. Members of New Pentair senior management may be required to devote considerable amounts of time to this integration process, which will decrease the time they will have to manage the combined company, service existing customers, attract new customers and develop new products or strategies. If senior management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, Pentair and the Tyco Flow Control Business could suffer. There can be no assurance that New Pentair will successfully or cost-effectively integrate Pentair and the Tyco Flow Control Business. The failure to do so could have a material adverse effect on New Pentair’s business, financial condition and results of operations.

There is currently no public market for New Pentair common shares and New Pentair cannot be certain that an active trading market will develop or be sustained after the Spin-off and the Merger, and following the Spin-off and the Merger New Pentair’s share price may fluctuate significantly.

Although Pentair’s common shares trade on the New York Stock Exchange (the “NYSE”), there is currently no public market for New Pentair common shares. New Pentair intends to list its common shares on the NYSE under the symbol “PNR,” which is currently the trading symbol for Pentair. It is anticipated that on or shortly before the record date for the Distribution, trading of the New Pentair common shares will begin on a “when-issued” basis and such trading will continue up to and including the distribution date. However, there can be no assurance that an active trading market for New Pentair common shares will develop as a result of the Spin-off and the Merger or be sustained in the future. The lack of an active market may make it more difficult for New Pentair shareholders to sell their common shares and could lead to the price of New Pentair common shares being depressed or more volatile.

Pentair, Tyco and New Pentair cannot predict the prices at which New Pentair common shares may trade after the Spin-off and the Merger. The market price of New Pentair common shares may fluctuate widely, depending on many factors, some of which may be beyond New Pentair’s control, including:

•

New Pentair’s business profile and market capitalization may not fit the investment objectives of some Pentair and Tyco shareholders and, as a result, these shareholders may sell New Pentair’s shares after the Transactions are completed;

•

actual or anticipated fluctuations in the operating results of New Pentair due to factors related to New Pentair’s business;

•

success or failure of New Pentair’s combined business strategy;

•

New Pentair’s quarterly or annual earnings, or those of other companies in New Pentair’s industry;

•

New Pentair’s ability to obtain third-party financing as needed;

•

announcements by New Pentair or New Pentair’s competitors of significant acquisitions or dispositions;

•

changes in accounting standards, policies, guidance, interpretations or principles;

•

the failure of securities analysts to cover New Pentair’s common shares after the Transactions are completed;

•

changes in earnings estimates by securities analysts or New Pentair’s ability to meet those estimates;

•

the operating and stock price performance of other comparable companies;

•

investor perception of New Pentair;

•

natural or other environmental disasters that investors believe may affect New Pentair;

•

overall market fluctuations;

•

results from any material litigation, including asbestos claims, government investigations or environmental liabilities;

•

changes in laws and regulations affecting New Pentair’s business; and

•

general economic conditions and other external factors.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of New Pentair common shares. Until an orderly market develops, the trading prices for New Pentair common shares may fluctuate significantly. New Pentair common shares will be freely transferable, except for those shares received or held by affiliates of New Pentair as the term “affiliates” is defined under the Securities Act of 1933.

Substantial sales of New Pentair common shares may occur in connection with the Spin-off and the Merger, which could cause New Pentair stock price to decline.

The New Pentair common shares that Tyco distributes to its shareholders in the Distribution and that are issued to Pentair shareholders in the Merger generally may be sold immediately in the public market. Although Pentair and Tyco have no actual knowledge of any plan or intention on the part of any significant shareholder to sell New Pentair common shares following the Spin-off and the Merger, it is likely that some Tyco shareholders and some Pentair shareholders, including some large shareholders, will sell New Pentair common shares received in the Distribution and the Merger, respectively, for various reasons such as if New Pentair’s business profile or market capitalization as a combined company following the Transactions does not fit their investment objectives. In particular, Tyco is a member of the S&P 500 Index, while New Pentair may not be in the future. Accordingly, certain Tyco and Pentair shareholders may elect or be required to sell New Pentair shares following the Spin-off and the Merger due to investment guidelines or other reasons. The sales of significant amounts of New Pentair common shares or the perception in the market that this will occur may result in the lowering of the market price of New Pentair common shares.

Regulatory agencies may delay or impose conditions on approval of the Spin-off and the Merger, which may diminish the anticipated benefits of the Transactions.

Completion of the Spin-off and the Merger is conditioned upon the receipt of required government consents and approvals, including required approvals from foreign regulatory agencies. While Pentair and Tyco intend to pursue vigorously all required governmental approvals and do not know of any reason why they would not be able to obtain the necessary approvals in a timely manner, the requirement to receive these approvals before the Spin-off and the Merger could delay the completion of the Distribution and the Merger, possibly for a significant period of time after Tyco shareholders have approved the Distribution and after Pentair shareholders have approved the Merger. In addition, these governmental agencies may attempt to condition their approval of the Merger on the imposition of conditions that could have a material adverse effect on New Pentair’s operating results or the value of New Pentair common shares after the Spin-off and Merger are completed. Any delay in the completion of the Spin-off and the Merger could diminish anticipated benefits of the Transactions or result in additional transaction costs, loss of revenue or other effects associated with uncertainty about the Transactions. Any uncertainty over the ability of Tyco and Pentair to complete the Spin-off and the Merger could make it more difficult for Tyco and Pentair to retain key employees or to pursue business strategies. In addition, until the Distribution and the Merger are completed, the attention of Pentair and Tyco management may be diverted from ongoing business concerns and regular business responsibilities to the extent management is focused on matters relating to the Transactions, such as obtaining regulatory approvals.

The pendency of the Merger could potentially adversely affect the business and operations of Pentair and the Tyco Flow Control Business.

In connection with the pending Merger, some customers of each of Pentair and the Tyco Flow Control Business may delay or defer decisions or may end their relationships with Pentair and the Tyco Flow Control Business, which could negatively affect the revenues, earnings and cash flows of Pentair and the Tyco Flow Control Business, regardless of whether the Merger is completed. Similarly, it is possible that current and prospective employees of Pentair and the Tyco Flow Control Business could experience uncertainty about their future roles with the combined company following the Merger, which could materially adversely affect the ability of each of Pentair and the Tyco Flow Control Business to attract and retain key personnel during the pendency of the Merger.

Failure to complete the Merger could adversely impact the market price of Pentair as well as Pentair’s business and operating results.

If the Merger is not completed for any reason, the price of Pentair common shares may decline to the extent that the market price of Pentair common shares reflects positive market assumptions that the Distribution and the Merger will be completed and the related benefits will be realized. Pentair may also be subject to additional risks if the Merger is not completed, including:

•

depending on the reasons for termination of the Merger Agreement, the requirement that Pentair pay Tyco a termination fee of $145 million;

•

substantial costs related to the Merger, such as legal, accounting, filing, financial advisory and financial printing fees, must be paid regardless of whether the Merger is completed; and

•

potential disruption to Pentair’s business and distraction of its workforce and management team.

As a result of the Transactions, current Pentair shareholder’s ownership interest in Pentair will be diluted from 100% of Pentair to less than a majority of New Pentair.

Pentair shareholders immediately prior to the Merger will, in the aggregate, own a significantly smaller percentage of New Pentair after the Merger’s completion. Following completion of the Merger, Pentair shareholders immediately prior to the Merger collectively will own approximately 47.5% of New Pentair on a fully-diluted basis. Consequently, Pentair shareholders immediately after the Merger, collectively, will be able to exercise less influence over the management and policies of New Pentair than they could exercise over the management and policies of Pentair immediately prior to the Merger. The directors of Pentair prior to the Merger will comprise ten of the up to twelve members of the board of directors of New Pentair following the Merger.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information with respect to purchases we made of our common stock during the second quarter of 2012:


	(a)		(b)	(c)		(d)
Period	Total Number of Shares Purchased		Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs

April 1 — April 28, 2012		2,191	$44.10		—		$25,000,000
April 29 — May 26, 2012		5,586	$41.73		—		$25,000,000
May 27 — June 30, 2012		439	$40.05		—		$25,000,000

Total		8,216			—

(a)

The purchases in this column represent shares deemed surrendered to us by participants in our Omnibus Stock Incentive Plan and the Outside Directors Nonqualified Stock Option Plan (the “Plans”) to satisfy the exercise price or withholding of tax obligations related to the exercise of stock options and vesting of restricted shares.

(b)	The average price paid in this column includes shares deemed surrendered to us by participants in the Plans to satisfy the exercise price for the exercise price of stock options and withholding tax obligations due upon stock option exercises and vesting of restricted shares.

(c)	The number of shares in this column represents the number of shares repurchased as part of our publicly announced plan to repurchase shares of our common stock up to a maximum dollar limit of $25 million.

(d)	In December 2011, the Board of Directors authorized the repurchase of shares of our common stock up to a maximum dollar limit of $25 million. This authorization expires in December 2012.

ITEM 5.

OTHER INFORMATION

In June 2011, the Financial Accounting Standards Board issued guidance on the presentation of comprehensive income in financial statements. Entities are required to present total comprehensive income either in a single, continuous statement of comprehensive income or in two separate, but consecutive, statements. We adopted this standard as of January 1, 2012, and will present net income and other comprehensive income in two separate statements in our annual financial statements. The table below reflects the retrospective application of this guidance for each of the three years ended December 31^st. The retrospective application did not have a material impact on our financial condition or results of operations.

Pentair, Inc and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)


	Year Ended December 31,
In thousands	2011			2010			2009

Net income before noncontrolling interest	$	38,521		$	202,321		$	116,200

Other comprehensive income (loss), net of tax
Cumulative translation adjustment		(93,706	)		(32,706	)		35,528
Change in market value of derivative financial instruments, net of taxes of $2,884, $229 and ($2,323), respectively		4,375			310			3,585
Adjustment in retirement liability, net of taxes of ($26,650), ($8,159) and $164, respectively		(41,683	)		(12,762	)		256

Other comprehensive income (loss), net of tax		(131,014	)		(45,158	)		39,369

Comprehensive income (loss)		(92,493	)		157,163			155,569
Less: Comprehensive income (loss) attributable to noncontrolling interest		2,184			2,274			(7,136	)

Comprehensive income (loss) attributable to Pentair, Inc.	$	(94,677	)	$	154,889		$	162,705

The following will be added to the Condensed Consolidated Statements of Comprehensive Income (Loss) included in the Financial Statements of Subsidiary Guarantors Note to our annual financial statements:

Pentair, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

Year Ended

(in thousands)


	Parent			Guarantor		Non-guarantor
December 31, 2011	company			subsidiaries		subsidiaries			Eliminations			Consolidated

Comprehensive income (loss)	$	(94,677	)	$	57,225	$	(141,403	)	$	86,362		$	(92,493)
Less: Comprehensive income attributable to noncontrolling interest		—			—		2,184			—			2,184

Comprehensive income (loss) attributable to Pentair, Inc.	$	(94,677	)	$	57,225	$	(143,587	)	$	86,362		$	(94,677)


December 31, 2010

Comprehensive income (loss)	$	154,889		$	66,662	$	60,202		$	(124,590	)	$	157,163
Less: Comprehensive income attributable to noncontrolling interest		—			—		2,274			—			2,274

Comprehensive income (loss) attributable to Pentair, Inc.	$	154,889		$	66,662	$	57,928		$	(124,590	)	$	154,889


December 31, 2009

Comprehensive income (loss)	$	162,705		$	12,384	$	68,317		$	(87,837	)	$	155,569
Less: Comprehensive loss attributable to noncontrolling interest		—			—		(7,136	)		—			(7,136)

Comprehensive income (loss) attributable to Pentair, Inc.	$	162,705		$	12,384	$	75,453		$	(87,837	)	$	162,705

ITEM 6. Exhibits

(a) Exhibits


2.1		Merger Agreement, dated as of March 27, 2012, among Tyco International Ltd., Tyco Flow Control International Ltd., Panthro Acquisition Co., Panthro Merger Sub, Inc. and Pentair, Inc. (Incorporated by reference to Exhibit 2.1 contained in Pentair’s Current Report on Form 8-K dated March 30, 2012).

2.2		Separation and Distribution Agreement, dated as of March 27, 2012, by and among Tyco International Ltd., Tyco Flow Control International Ltd. and The ADT Corporation. (Incorporated by reference to Exhibit 2.2 contained in Pentair’s Current Report on Form 8-K dated March 30, 2012).

31.1		Certification of Chief Executive Officer.

31.2		Certification of Chief Financial Officer.

32.1		Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

101		The following materials from Pentair, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and July 2, 2011, (ii) the Condensed Consolidated Balance Sheets as of June 30, 2012, December 31, 2011 and July 2, 2011, (iii) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and July 2, 2011, (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2012 and July 2, 2011, and (v) Notes to Condensed Consolidated Financial Statements.

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 July 24, 2012.


		PENTAIR, INC.
		Registrant

		By		/s/ John L. Stauch
				John L. Stauch
				Executive Vice President and Chief Financial Officer

		By		/s/ Mark C. Borin
				Mark C. Borin
				Corporate Controller and Chief Accounting Officer

Exhibit Index to Form 10-Q for the Period Ended June 30, 2012



2.1		Merger Agreement, dated as of March 27, 2012, among Tyco International Ltd., Tyco Flow Control International Ltd., Panthro Acquisition Co., Panthro Merger Sub, Inc. and Pentair, Inc. (Incorporated by reference to Exhibit 2.1 contained in Pentair’s Current Report on Form 8-K dated March 30, 2012).

2.2		Separation and Distribution Agreement, dated as of March 27, 2012, by and among Tyco International Ltd., Tyco Flow Control International Ltd. and The ADT Corporation. (Incorporated by reference to Exhibit 2.2 contained in Pentair’s Current Report on Form 8-K dated March 30, 2012).

31.1		Certification of Chief Executive Officer.

31.2		Certification of Chief Financial Officer.

32.1		Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

101		The following materials from Pentair, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and July 2, 2011, (ii) the Condensed Consolidated Balance Sheets as of June 30, 2012, December 31, 2011 and July 2, 2011, (iii) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and July 2, 2011, (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2012 and July 2, 2011, and (v) Notes to Condensed Consolidated Financial Statements.