Edgar Filing: PENTAIR INC

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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 July 2, 2011

¨	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):

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 July 2, 2011, 98,766,335 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 for the three and six months ended July 2, 2011 and July 3, 2010		3

	Condensed Consolidated Balance Sheets as of July 2, 2011, December 31, 2010 and July 3, 2010		4

	Condensed Consolidated Statements of Cash Flows for the six months ended July 2, 2011 and July 3, 2010		5

	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended July 2, 2011 and July 3, 2010		6

	Notes to Condensed Consolidated Financial Statements		7 - 24

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25 - 34

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk		35

ITEM 4.	Controls and Procedures		35

PART II OTHER INFORMATION

ITEM 1.	Legal Proceedings		36

ITEM 1A.	Risk Factors		36

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		40

ITEM 6.	Exhibits		41

	Signatures		42

PART I FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)


	Three months ended						Six months ended
In thousands, except per-share data	July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010
Net sales	$	910,175		$	796,167		$	1,700,448		$	1,503,180
Cost of goods sold		622,439			547,999			1,163,653			1,041,310

Gross profit		287,736			248,168			536,795			461,870
Selling, general and administrative		158,432			131,043			303,192			263,933
Research and development		19,882			16,999			38,004			34,210

Operating income		109,422			100,126			195,599			163,727
Other (income) expense:
Equity income of unconsolidated subsidiaries		(672	)		(1,375	)		(907	)		(1,459	)
Net interest expense		14,613			8,569			23,938			18,096

Income from continuing operations before income taxes and noncontrolling interest		95,481			92,932			172,568			147,090
Provision for income taxes		27,344			31,320			52,397			49,449

Income from continuing operations		68,137			61,612			120,171			97,641
Gain on disposal of discontinued operations, net of tax		—			593			—			1,117

Net income before noncontrolling interest		68,137			62,205			120,171			98,758
Noncontrolling interest		1,425			1,124			2,918			2,356

Net income attributable to Pentair, Inc.	$	66,712		$	61,081		$	117,253		$	96,402

Net income from continuing operations attributable to Pentair, Inc.	$	66,712		$	60,488		$	117,253		$	95,285

Earnings per common share attributable to Pentair, Inc.
*Basic*
Continuing operations	$	0.68		$	0.61		$	1.19		$	0.96
Discontinued operations		—			0.01			—			0.01

Basic earnings per common share	$	0.68		$	0.62		$	1.19		$	0.97

*Diluted*
Continuing operations	$	0.67		$	0.61		$	1.17		$	0.96
Discontinued operations		—			—			—			0.01

Diluted earnings per common share	$	0.67		$	0.61		$	1.17		$	0.97

Weighted average common shares outstanding
Basic		98,333			98,208			98,190			98,081
Diluted		100,065			99,638			99,825			99,435
Cash dividends declared per common share	$	0.20		$	0.19		$	0.40		$	0.38

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)


In thousands, except share and per-share data	July 2, 2011		December 31, 2010			July 3, 2010
Assets
Current assets
Cash and cash equivalents	$	68,972	$	46,056		$	38,580
Accounts and notes receivable, net		595,407		516,905			475,679
Inventories		484,795		405,356			389,428
Deferred tax assets		60,833		56,349			49,058
Prepaid expenses and other current assets		124,632		44,631			42,878

Total current assets		1,334,639		1,069,297			995,623
Property, plant and equipment, net		410,547		329,435			318,124
Other assets
Goodwill		2,573,430		2,066,044			2,033,064
Intangibles, net		654,908		453,570			451,806
Other		78,788		55,187			54,083

Total other assets		3,307,126		2,574,801			2,538,953

Total assets	$	5,052,312	$	3,973,533		$	3,852,700

Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings	$	21,451	$	4,933		$	2,320
Current maturities of long-term debt		1,289		18			163
Accounts payable		315,403		262,357			248,679
Employee compensation and benefits		108,836		107,995			86,471
Current pension and post-retirement benefits		8,733		8,733			8,948
Accrued product claims and warranties		47,259		42,295			42,981
Income taxes		21,498		5,964			23,252
Accrued rebates and sales incentives		42,567		33,559			34,418
Other current liabilities		144,366		80,942			78,496

Total current liabilities		711,402		546,796			525,728
Other liabilities
Long-term debt		1,384,167		702,521			734,472
Pension and other retirement compensation		217,021		209,859			213,142
Post-retirement medical and other benefits		27,954		30,325			29,819
Long-term income taxes payable		23,832		23,507			24,821
Deferred tax liabilities		235,422		169,198			139,977
Other non-current liabilities		85,660		86,295			92,926

Total liabilities		2,685,458		1,768,501			1,760,885
Commitments and contingencies
Shareholders’ equity
Common shares par value $0.16 2/3; 98,766,335, 98,409,192 and 98,701,186 shares issued and outstanding, respectively		16,460		16,401			16,449
Additional paid-in capital		488,873		474,489			480,125
Retained earnings		1,702,119		1,624,605			1,560,944
Accumulated other comprehensive income (loss)		41,902		(22,342	)		(77,013	)
Noncontrolling interest		117,500		111,879			111,310

Total shareholders’ equity		2,366,854		2,205,032			2,091,815

Total liabilities and shareholders’ equity	$	5,052,312	$	3,973,533		$	3,852,700

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Six months ended
In thousands	July 2, 2011			July 3, 2010
Operating activities
Net income before noncontrolling interest	$	120,171		$	98,758
Adjustments to reconcile net income to net cash provided by (used for) operating activities
Gain on disposal of discontinued operations		—			(1,117	)
Equity income of unconsolidated subsidiaries		(907	)		(1,459	)
Depreciation		32,685			28,876
Amortization		17,180			13,357
Deferred income taxes		3,012			2,396
Stock compensation		10,527			12,365
Excess tax benefits from stock-based compensation		(1,465	)		(1,322	)
Loss (gain) on sale of assets		229			(57	)
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable		(1,111	)		(33,438	)
Inventories		2,425			(38,651	)
Prepaid expenses and other current assets		(2,696	)		1,877
Accounts payable		(22,878	)		46,938
Employee compensation and benefits		(22,675	)		11,275
Accrued product claims and warranties		2,901			9,196
Income taxes		12,780			18,872
Other current liabilities		25,481			1,043
Pension and post-retirement benefits		(853	)		(12,943	)
Other assets and liabilities		(22,195	)		448

Net cash provided by (used for) operating activities		152,611			156,414
Investing activities
Capital expenditures		(35,221	)		(28,937	)
Proceeds from sale of property and equipment		89			243
Acquisitions, net of cash acquired		(733,105	)		—
Other		119			(1,286	)

Net cash provided by (used for) investing activities		(768,118	)		(29,980	)
Financing activities
Net short-term borrowings		16,518			115
Proceeds from long-term debt		1,320,957			335,021
Repayment of long-term debt		(661,422	)		(403,742	)
Debt issuance costs		(8,721	)		(50	)
Excess tax benefits from stock-based compensation		1,465			1,322
Stock issued to employees, net of shares withheld		9,551			(817	)
Repurchases of common stock		(287	)		—
Dividends paid		(39,739	)		(37,700	)

Net cash provided by (used for) financing activities		638,322			(105,851	)
Effect of exchange rate changes on cash and cash equivalents		101			(15,399	)

Change in cash and cash equivalents		22,916			5,184
Cash and cash equivalents, beginning of period		46,056			33,396

Cash and cash equivalents, end of period	$	68,972		$	38,580

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc.

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


													Accumulated other comprehensive											Comprehensive income attributable
							Additional paid-in
In thousands, except share	Common shares						Additional paid-in			Retained						Total			Noncontrolling
and per-share data	Number			Amount			capital			earnings			income (loss)			Pentair, Inc.			interest		Total			to Pentair, Inc.
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		$	117,253
Change in cumulative translation adjustment														62,456			62,456			2,703		65,159			62,456
Changes in market value of derivative financial instruments, net of $1,249 tax														1,788			1,788					1,788			1,788

Comprehensive income																								$	181,497

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


													Accumulated												Comprehensive
							Additional						other												income (loss)
In thousands, except share	Common shares						paid-in			Retained			comprehensive			Total			Noncontrolling						attributable
and per-share data	Number			Amount			capital			earnings			income (loss)			Pentair, Inc.			interest			Total			to Pentair, Inc.
Balance - December 31, 2009		98,655,506		$	16,442		$	472,807		$	1,502,242		$	20,597		$	2,012,088		$	114,252		$	2,126,340
Net income											96,402						96,402			2,356			98,758		$	96,402
Change in cumulative translation adjustment														(96,534	)		(96,534	)		(5,298	)		(101,832	)		(96,534	)
Changes in market value of derivative financial instruments, net of ($673) tax														(1,076	)		(1,076	)					(1,076	)		(1,076	)

Comprehensive income (loss)																									$	(1,208	)

Cash dividends - $0.38 per common share											(37,700	)					(37,700	)					(37,700	)
Share repurchases
Exercise of stock options, net of 23,548 shares tendered for payment		172,383			28			2,946									2,974						2,974
Issuance of restricted shares, net of cancellations		3,981			1			607									608						608
Amortization of restricted shares								2,258									2,258						2,258
Shares surrendered by employees to pay taxes		(130,684	)		(22	)		(4,378	)								(4,400	)					(4,400	)
Stock compensation								5,885									5,885						5,885

Balance - July 3, 2010		98,701,186		$	16,449		$	480,125		$	1,560,944		$	(77,013	)	$	1,980,505		$	111,310		$	2,091,815

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, 2010, which are included in our Current Report on Form 8-K dated May 2, 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 July 2, 2011, we have evaluated subsequent events for potential recognition and disclosure through the date of this filing.

2. New Accounting Standards

In June 2011, the Financial Accounting Standards Board (FASB) amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.

There were no other new accounting pronouncements issued or effective during the first six months of 2011 that have had or are expected to have a material impact on the Condensed Consolidated Financial Statements.

3. Stock-based Compensation

Total stock-based compensation expense was $4.8 million and $5.6 million for the three months ended July 2, 2011 and July 3, 2010, respectively, and was $10.5 million and $12.4 million for the six months ended July 2, 2011 and July 3, 2010, respectively.

During the first half of 2011, 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 $2.5 million and $2.8 million for the three months ended July 2, 2011 and July 3, 2010, respectively, and was $5.8 million and $6.5 million for the six months ended July 2, 2011 and July 3, 2010, respectively.

During the first half of 2011, 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 $2.3 million and $2.8 million for the three months ended July 2, 2011 and July 3, 2010, respectively, and $4.7 million and $5.9 million for the six months ended July 2, 2011 and July 3, 2010, respectively.

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:


	July 2, 2011			July 3, 2010
Expected stock price volatility		35.5	%		35.0	%
Expected life		5.5 yrs			5.5 yrs
Risk-free interest rate		2.12	%		2.25	%
Dividend yield		2.16	%		2.20	%

The weighted-average fair value of options granted during the second quarter of 2011 and 2010 were $10.89 and $9.80 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.

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

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	July 2, 2011		July 3, 2010		July 2, 2011		July 3, 2010
Weighted average common shares outstanding — basic		98,333		98,208		98,190		98,081
Dilutive impact of stock options and restricted stock		1,732		1,430		1,635		1,354

Weighted average common shares outstanding — diluted		100,065		99,638		99,825		99,435

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		—		2,886		—		4,056

5. Restructuring

Restructuring accrual activity recorded on the Condensed Consolidated Balance Sheets is summarized as follows for the six months ended July 2, 2011 and July 3, 2010 and year ended December 31, 2010:


*In thousands*	July 2, 2011			December 31, 2010			July 3, 2010
Beginning balance	$	3,994		$	14,509		$	14,509
Cash payments and other		(909	)		(10,515	)		(7,524	)

Ending balance	$	3,085		$	3,994		$	6,985

6. Acquisitions

On May 12, 2011, we acquired as part of our Water Group 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 and significantly expands our position 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 2010 revenues generated in European Union countries and Asia-Pacific

The fair value of the business acquired 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

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

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.

The CPT business records certain long term contracts under the percentage-of-completion method of accounting. Under this method, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. We record costs and earnings in excess of billings on uncompleted contracts within Prepaid expenses and other current assets and billings in excess of costs and earnings on uncompleted contracts within Other current liabilities in the Condensed Consolidated Balance Sheets. Amounts included in Prepaid expenses and other current assets related to these contracts were $40.4 million at July 2, 2011. Amounts included in Other current liabilities related to these contracts were $11.3 million at July 2, 2011.

The total purchase price has been allocated to the estimated fair values of assets acquired and liabilities assumed as follows:


(in thousands)
Accounts and notes receivable	$	70,038
Inventories		60,382
Deferred tax assets		4,926
Prepaid expenses and other current assets		40,252
Property, plant and equipment		69,010
Goodwill		451,809
Intangibles		197,231
Accounts payable		(41,061	)
Income taxes		(3,937	)
Other current liabilities		(59,229	)
Long-term debt		(17,041	)
Deferred tax liabilities		(57,069	)

Purchase Price	$	715,311

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


	Three months ended				Six months ended
In thousands, except share and per-share data	July 2, 2011		July 3, 2010		July 2, 2011		July 3, 2010
Pro forma net sales from continuing operations	$	953,375	$	866,193	$	1,822,224	$	1,646,945
Pro forma income from continuing operations	$	66,075	$	59,536		115,517		92,977
Income (loss) from discontinued operations, net of tax		—		593		—		1,117
Pro forma net income from continuing operations attributable to Pentair, Inc.		64,650		58,412		112,599		90,621
Pro forma earnings per common share - continuing operations
Basic	$	0.66	$	0.59	$	1.15	$	0.92
Diluted	$	0.65	$	0.59	$	1.13	$	0.91
Weighted average common shares outstanding
Basic		98,333		98,208		98,190		98,081
Diluted		100,065		99,638		99,825		99,435

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.

On January 31, 2011 we acquired as part of our Water Group 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 proforma impact of this acquisition was deemed to be not material.

Additionally, during the first six months of 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 our Water Group. Total goodwill recorded as part of the purchase price allocation was $4.3 million, none of which is tax deductible. The proforma impact of these acquisitions was deemed to be not material.

Total transaction costs related to acquisition activities for the six months ended July 2, 2011 were $7.8 million, which were expensed as incurred and recorded in Selling, general and administrative in our Condensed Consolidated Statements of Income.

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

7. Inventories

Inventories were comprised of:


In thousands	July 2, 2011		December 31, 2010		July 3, 2010
Raw materials and supplies	$	246,414	$	223,482	$	211,254
Work-in-process		49,515		37,748		39,532
Finished goods		188,866		144,126		138,642

Total inventories	$	484,795	$	405,356	$	389,428

8. Goodwill and Other Identifiable Intangible Assets

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


In thousands	December 31, 2010		Acquisitions/ Divestitures		Foreign Currency Translation/Other			July 2, 2011
Water Group	$	1,784,100	$	466,182	$	35,686		$	2,285,968
Technical Products Group		281,944		—		5,518			287,462

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


In thousands	December 31, 2009		Acquisitions/ Divestitures		Foreign Currency Translation/Other			July 3, 2010
Water Group	$	1,802,913	$	—	$	(46,050	)	$	1,756,863
Technical Products Group		285,884		—		(9,683	)		276,201

Consolidated Total	$	2,088,797	$	—	$	(55,733	)	$	2,033,064

The detail of acquired intangible assets consisted of the following:


	July 2, 2011							December 31, 2010							July 3, 2010
In thousands	Gross carrying amount		Accumulated amortization			Net		Gross carrying amount		Accumulated amortization			Net		Gross carrying amount		Accumulated amortization			Net
Finite-life intangibles
Patents	$	15,485	$	(13,306	)	$	2,179	$	15,469	$	(12,695	)	$	2,774	$	15,434	$	(12,081	)	$	3,353
Proprietary technology		136,737		(34,423	)		102,314		74,176		(29,862	)		44,314		72,163		(26,426	)		45,737
Customer relationships		380,263		(97,232	)		283,031		282,479		(82,901	)		199,578		274,077		(71,807	)		202,270
Trade names		1,569		(467	)		1,102		1,532		(383	)		1,149		1,494		(299	)		1,195

Total finite-life intangibles	$	534,054	$	(145,428	)	$	388,626	$	373,656	$	(125,841	)	$	247,815	$	363,168	$	(110,613	)	$	252,555

Indefinite-life intangibles
Trade names		266,282		—			266,282		205,755		—			205,755		199,251		—			199,251

Total intangibles, net	$	800,336	$	(145,428	)	$	654,908	$	579,411	$	(125,841	)	$	453,570	$	562,419	$	(110,613	)	$	451,806

Intangible asset amortization expense was approximately $10.8 million and $6.3 million for the three months ended July 2, 2011 and July 3, 2010, respectively, and was approximately $17.2 million and $11.8 million for the six months ended July 2, 2011 and July 3, 2010, respectively.

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

The estimated future amortization expense for identifiable intangible assets during the remainder of 2011 and the next five years is as follows:


In thousands	2011 Q3-Q4		2012		2013		2014		2015		2016
Estimated amortization expense	$	25,583	$	40,725	$	40,226	$	39,902	$	39,603	$	38,539

9. Debt

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


In thousands	Average interest rate July 2, 2011			Maturity (Year)		July 2, 2011			December 31, 2010			July 3, 2010
Revolving credit facilities - USD		1.94	%		2016	$	160,400		$	97,500		$	129,400
Revolving credit facilities - EUR		2.94	%		2016		101,664			—			—
Private placement - fixed rate		5.65	%		2013-2017		400,000			400,000			400,000
Private placement - floating rate		0.86	%		2012-2013		205,000			205,000			205,000
Public - fixed rate		5.00	%		2021		500,000			—			—
Other		3.75	%		2011-2016		39,843			4,972			2,555

Total debt, including current portion							1,406,907			707,472			736,955
Less: Current maturities							(1,289	)		(18	)		(163	)
Short-term borrowings							(21,451	)		(4,933	)		(2,320	)

Long-term debt						$	1,384,167		$	702,521		$	734,472

The fair value of total debt excluding the deferred gain on interest rate swaps, was $1,440.1 million, $745.9 million and $772.6 million as of July 2, 2011, December 31, 2010 and July 3, 2010, respectively.

On May 9, 2011, we completed a public offering of $500 million aggregate principal amount of our 5.000% Senior Notes due 2021 (the “Notes”). The Notes are guaranteed by each of our wholly-owned domestic subsidiaries. These wholly-owned domestic subsidiaries may also be a guarantor under our primary bank credit facility. We used the net proceeds from the offering of the Notes to finance in part the CPT acquisition.

On April 28, 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 July 2, 2011, we had no commercial paper outstanding.

Total availability under our existing Credit Facility was $437.9 million as of July 2, 2011, which was not limited by any of the credit agreement’s financial covenants as of that date.

Our debt agreements contain certain financial covenants, the most restrictive of which is a leverage ratio (total consolidated indebtedness, as defined, over consolidated net income before interest, taxes, depreciation, amortization and non-cash compensation expense (“EBITDA”), as defined) that may not exceed 4.0 to 1.0 as of July 2, 2011, 3.75 to 1.0 as of October 1, 2011, and 3.5 to 1.0 as of the last date of each of our fiscal quarters thereafter. We were in compliance with all financial covenants in our debt agreements as of July 2, 2011.

In addition to the Credit Facility, we have $40.0 million and $39.2 million (€27.0 million translated at the July 2, 2011 exchange rate) of other credit facilities, of which $21.8 (€15.0 million translated at the July 2, 2011 exchange rate) is committed until April 2016. Borrowings under these credit facilities bear interest at the rates of Euro Interbank Offered Rate (“Euribor”) plus 1.5% to 1.75%. We had $3.4 million and $18.0 million (€12.4 million translated at the July 2, 2011 exchange rate) of borrowings under these credit facilities as of July 2, 2011. Additionally, as part of the CPT acquisition we assumed certain capital leases with an outstanding balance of $18.3 million at July 2, 2011.

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

We have $105 million of outstanding private placement debt maturing in May 2012. We classified this debt as long-term as of July 2, 2011 as we have the intent and ability to refinance such obligation on a long-term basis under the Credit Facility.

Debt outstanding at July 2, 2011 matures on a calendar year basis as follows:


In thousands	2011 Q3 - Q4		2012		2013		2014		2015		2016		Thereafter		Total
Contractual debt obligation maturities	$	22,095	$	1,285	$	201,272	$	1,271	$	1,270	$	368,334	$	811,380	$	1,406,907

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 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 $8.3 million, $9.4 million and $10.2 million at July 2, 2011, December 31, 2010 and July 3, 2010, respectively, and was recorded in Other non-current liabilities on the Condensed Consolidated Balance Sheets.

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 has a fixed interest rate of 4.89% and expires in May 2012. The fixed interest rate of 4.89% plus the .50% interest rate spread over LIBOR results in an effective fixed interest rate of 5.39%. The fair value of the swap was a liability of $4.2 million, $6.4 million and $7.9 million at July 2, 2011, December 31, 2010 and July 3, 2010, respectively, and was recorded in Other non-current liabilities on the Condensed Consolidated Balance Sheets.

The variable to fixed interest rate swaps are designated as cash-flow hedges. The fair value of these swaps are recorded as assets or liabilities on the Condensed Consolidated Balance Sheets. Unrealized income/expense is included in Accumulated other comprehensive income (“OCI”) and realized income/expense and amounts due to/from swap counterparties, are recorded in Net interest expense in our Condensed Consolidated Statements of Income. We realized incremental expense resulting from the swaps of $4.7 million for each of the six months ended July 2, 2011 and July 3, 2010.

The variable to fixed interest rate swaps are designated as and are effective as cash-flow hedges. The fair value of these swaps are recorded as assets or liabilities on the Condensed Consolidated Balance Sheets, with changes in their fair value included in OCI.

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Derivative gains and losses included in OCI are reclassified into earnings at the time the related interest expense is recognized or the settlement of the related commitment occurs.

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 variable interest rates of 3 month LIBOR plus .50% for $105 million of debt and 3 month LIBOR plus .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.

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, this amount is recorded in Prepaid expenses and other current assets within the Condensed Consolidated Balance Sheets and will be amortized as interest exposure over the 10 year life of the Notes.

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.

Foreign currency contract

In March 2011, we entered into a foreign currency option contract to reduce our exposure to fluctuations in the euro related to the planned CPT acquisition. The contract had a notional amount of €286.0 million, a strike price of 1.4375 and a maturity date of 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 is recorded in Selling, general and administrative on the Condensed Consolidated Statements on Income.

Fair value of financial information

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


In thousands	Fair Value July 2, 2011		(Level 1)		(Level 2)		(Level 3)
Cash-flow hedges	$	12,486	$	—	$	12,486	$	—
Deferred compensation plan (1)		24,967		24,967		—		—

In thousands	Fair Value December 31, 2010		(Level 1)		(Level 2)		(Level 3)
Cash-flow hedges	$	15,768	$	—	$	15,768	$	—
Foreign currency contract		1,183		—		1,183		—
Deferred compensation plan (1)		24,126		24,126		—		—

In thousands	Fair Value July 3, 2010		(Level 1)		(Level 2)		(Level 3)
Cash-flow hedges	$	18,079	$	—	$	18,079	$	—
Deferred compensation plan (1)		21,601		21,601		—		—

(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.

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.

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

The effective income tax rate for the six months ended July 2, 2011 was 30.4% compared to 33.6% for the six months ended July 3, 2010. 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 $24.8 million, $24.3 million and $27.9 million at July 2, 2011, December 31, 2010 and July 3, 2010, 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, which is consistent with our past practices.

12. Benefit Plans

Components of net periodic benefit cost were as follows:


	Three months ended
	Pension benefits						Post-retirement
In thousands	July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010
Service cost	$	3,131		$	2,886		$	45		$	50
Interest cost		8,225			7,887			472			503
Expected return on plan assets		(7,964	)		(7,710	)		—			—
Amortization of transition obligation		—			6			—			—
Amortization of prior year service cost (benefit)		—			8			(7	)		(7	)
Recognized net actuarial loss (gains)		972			406			(827	)		(823	)

Net periodic benefit cost (income)	$	4,364		$	3,483		$	(317	)	$	(277	)


		Six months ended
		Pension benefits						Post-retirement
In thousands	July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010
Service cost	$	6,261		$	5,772		$	90		$	100
Interest cost		16,450			15,774			944			1,006
Expected return on plan assets		(15,927	)		(15,420	)		—			—
Amortization of transition obligation		—			12			—			—
Amortization of prior year service cost (benefit)		—			16			(14	)		(14	)
Recognized net actuarial loss (gains)		1,943			812			(1,653	)		(1,646	)

Net periodic benefit cost (income)	$	8,727		$	6,966		$	(633	)	$	(554	)

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

13. Business Segments

Financial information by reportable segment is shown below:


	Three months ended						Six months ended
In thousands	July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010
*Net sales to external customers*
Water Group	$	631,994		$	549,318		$	1,147,362		$	1,027,356
Technical Products Group		278,181			246,849			553,086			475,824

Consolidated	$	910,175		$	796,167		$	1,700,448		$	1,503,180

*Intersegment sales*
Water Group	$	316		$	427		$	771		$	944
Technical Products Group		1,559			1,047			2,558			1,750
Other		(1,875	)		(1,474	)		(3,329	)		(2,694	)

Consolidated	$	—		$	—		$	—		$	—

*Operating income (loss)*
Water Group	$	84,521		$	75,954		$	141,049		$	118,092
Technical Products Group		48,261			37,990			96,348			71,088
Other		(23,360	)		(13,818	)		(41,798	)		(25,453	)

Consolidated	$	109,422		$	100,126		$	195,599		$	163,727


*In thousands*	July 2, 2011			December 31, 2010			July 3, 2010
		Identifiable assets (1)

Water Group	$	4,925,614		$	3,409,556		$	3,271,694
Technical Products Group		777,373			728,969			729,173
Other (1)		(650,675	)		(164,992	)		(148,167	)

Consolidated	$	5,052,312		$	3,973,533		$	3,852,700

(1)	All cash and cash equivalents are included in Other

14. Warranty

The changes in the carrying amount of service and product warranties as were as follows:


In thousands	July 2, 2011			December 31, 2010			July 3, 2010
Balance at beginning of the year	$	30,050		$	24,288		$	24,288
Service and product warranty provision		26,035			56,553			34,296
Payments		(25,040	)		(50,729	)		(25,099	)
Acquired		3,623			—			—
Translation		343			(62	)		(504	)

Balance at end of the period	$	35,011		$	30,050		$	32,981

15. Commitments and Contingencies

There have been no further material developments from the disclosures contained in our 2010 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, 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 (Unaudited)

For the three months ended July 2, 2011


In thousands	Parent Company			Guarantor Subsidiaries		Non-Guarantor 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 (loss) from continuing operations 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

Income from continuing operations		66,712			36,576		18,837			(53,988	)		68,137

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

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

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

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 (loss) from continuing operations 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

Income from continuing operations		117,253			53,137		41,076			(91,295	)		120,171

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

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

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

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

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 (Unaudited)

For the six months ended July 2, 2011


In thousands	Parent Company			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Operating activities
Net income before noncontrolling interest	$	117,253		$	53,137		$	41,076		$	(91,295	)	$	120,171
Adjustments to reconcile net income to net cash provided by (used for) operating activities
Equity (income) losses of unconsolidated subsidiaries		(783	)		—			(124	)		—			(907	)
Depreciation		2,527			13,919			16,239			—			32,685
Amortization		(24	)		7,747			9,457			—			17,180
Earnings from investments in subsidiaries		(91,295	)		—			—			91,295			—
Deferred income taxes		4,807			(334	)		(1,461	)		—			3,012
Stock compensation		10,527			—			—			—			10,527
Excess tax benefits from stock-based compensation		(1,465	)		—			—			—			(1,465	)
Loss on sale of assets		229			—			—			—			229
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable		(67,732	)		45,404			(12,957	)		34,174			(1,111	)
Inventories		—			35,209			(32,784	)		—			2,425
Prepaid expenses and other current assets		44,133			(4,716	)		(34,808	)		(7,305	)		(2,696	)
Accounts payable		68,734			(18,837	)		(38,493	)		(34,282	)		(22,878	)
Employee compensation and benefits		(11,566	)		(10,631	)		(478	)		—			(22,675	)
Accrued product claims and warranties		—			894			2,007			—			2,901
Income taxes		14,705			886			(2,811	)		—			12,780
Other current liabilities		(43,090	)		11,449			49,709			7,413			25,481
Pension and post-retirement benefits		(557	)		(1,998	)		1,702			—			(853	)
Other assets and liabilities		(58,657	)		58,032			(21,570	)		—			(22,195	)

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		(588,170	)		(256,912	)		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		50,161			(256,941	)		845,102			—			638,322
Effect of exchange rate changes on cash and cash equivalents		(31,806	)		82,352			(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 Statements of Income (Unaudited)

For the three months ended July 3, 2010


In thousands	Parent Company			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	567,505		$	295,232		$	(66,570	)	$	796,167
Cost of goods sold		—			391,677			222,775			(66,453	)		547,999

Gross profit		—			175,828			72,457			(117	)		248,168
Selling, general and administrative		1,243			84,171			45,746			(117	)		131,043
Research and development		136			10,874			5,989			—			16,999

Operating income		(1,379	)		80,783			20,722			—			100,126
Earnings from investment in subsidiaries		(43,799	)		—			—			43,799			—
Other (income) expense:
Equity income of unconsolidated subsidiaries		—			(938	)		(437	)		—			(1,375	)
Net interest (income) expense		(28,227	)		38,484			(1,688	)		—			8,569

Income (loss) from continuing operations before income taxes and noncontrolling interest		70,647			43,237			22,847			(43,799	)		92,932
Provision for income taxes		10,159			16,155			5,006			—			31,320

Income from continuing operations		60,488			27,082			17,841			(43,799	)		61,612
Gain on disposal of discontinued operations, net of tax		593			—			—			—			593

Net income before noncontrolling interest		61,081			27,082			17,841			(43,799	)		62,205
Noncontrolling interest		—			—			1,124			—			1,124

Net income attributable to Pentair, Inc.	$	61,081		$	27,082		$	16,717		$	(43,799	)	$	61,081

Net income from continuing operations attributable to Pentair, Inc.	$	60,488		$	27,082		$	16,717		$	(43,799	)	$	60,488

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

For the six months ended July 3, 2010


In thousands	Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	1,043,860		$	585,662		$	(126,342	)	$	1,503,180
Cost of goods sold		—			723,400			443,924			(126,014	)		1,041,310

Gross profit		—			320,460			141,738			(328	)		461,870
Selling, general and administrative		251			164,699			99,311			(328	)		263,933
Research and development		272			21,718			12,220			—			34,210

Operating income		(523	)		134,043			30,207			—			163,727
Earnings from investment in subsidiaries		(60,959	)		—			—			60,959			—
Other (income) expense:
Equity income of unconsolidated subsidiaries		—			(1,022	)		(437	)		—			(1,459	)
Net interest (income) expense		(55,508	)		76,978			(3,374	)		—			18,096

Income (loss) from continuing operations before income taxes and noncontrolling interest		115,944			58,087			34,018			(60,959	)		147,090
Provision for income taxes		20,659			21,419			7,371			—			49,449

Income from continuing operations		95,285			36,688			26,647			(60,959	)		97,641
Gain on disposal of discontinued operations, net of tax		1,117			—			—			—			1,117

Net income before noncontrolling interest		96,402			36,668			26,647			(60,959	)		98,758
Noncontrolling interest		—			—			2,356			—			2,356

Net income attributable to Pentair, Inc.	$	96,402		$	36,668		$	24,291		$	(60,959	)	$	96,402

Net income from continuing operations attributable to Pentair, Inc.	$	95,285		$	36,668		$	24,291		$	(60,959	)	$	95,285

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

July 3, 2010


In thousands	Parent Company			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets
Cash and cash equivalents	$	2,851		$	3,647		$	32,082	$	—		$	38,580
Accounts and notes receivable, net		1,430			319,943			218,654		(64,348	)		475,679
Inventories		—			239,255			150,173		—			389,428
Deferred tax assets		121,551			35,218			6,220		(113,931	)		49,058
Prepaid expenses and other current assets		4,937			12,048			35,213		(9,320	)		42,878

Total current assets		130,769			610,111			442,342		(187,599	)		995,623
Property, plant and equipment, net		14,504			146,412			157,208		—			318,124
Other assets
Investments in/advances to subsidiaries		2,330,701			89,758			662,849		(3,083,308	)		—
Goodwill		—			1,549,537			483,527		—			2,033,064
Intangibles, net		—			273,786			178,020		—			451,806
Other		59,385			3,857			18,686		(27,845	)		54,083

Total other assets		2,390,086			1,916,938			1,343,082		(3,111,153	)		2,538,953

Total assets	$	2,535,359		$	2,673,461		$	1,942,632	$	(3,298,752	)	$	3,852,700

Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings	$	—		$	—		$	2,320	$	—		$	2,320
Current maturities of long-term debt		93,000			35			20,392		(113,264	)		163
Accounts payable		3,532			178,314			131,222		(64,389	)		248,679
Employee compensation and benefits		26,002			29,135			31,334		—			86,471
Current pension and post-retirement benefits		8,948			—			—		—			8,948
Accrued product claims and warranties		—			26,478			16,503		—			42,981
Income taxes		13,331			7,790			2,131		—			23,252
Accrued rebates and sales incentives		—			26,814			7,604		—			34,418
Other current liabilities		17,051			35,112			35,611		(9,278	)		78,496

Total current liabilities		161,864			303,678			247,117		(186,931	)		525,728
Other liabilities
Long-term debt		734,400			1,947,442			345,975		(2,293,345	)		734,472
Pension and other retirement compensation		141,190			6,293			65,659		—			213,142
Post-retirement medical and other benefits		19,029			38,635			—		(27,845	)		29,819
Long-term income taxes payable		24,821			—			—		—			24,821
Deferred tax liabilities		484			198,892			54,532		(113,931	)		139,977
Due to/ (from) affiliates		(571,185	)		(90,379	)		714,628		(53,064	)		—
Other non-current liabilities		44,251			4,205			44,470		—			92,926

Total liabilities		554,854			2,408,766			1,472,381		(2,675,116	)		1,760,885
Noncontrolling interest		—			—			111,310		—			111,310
Shareholders’ equity attributable to Pentair, Inc.		1,980,505			264,695			358,941		(623,636	)		1,980,505

Total liabilities and shareholders’ equity	$	2,535,359		$	2,673,461		$	1,942,632	$	(3,298,752	)	$	3,852,700

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the six months ended July 3, 2010


In thousands	Parent Company			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Operating activities
Net income before noncontrolling interest	$	96,402		$	36,668		$	26,647		$	(60,959	)	$	98,758
Adjustments to reconcile net income to net cash provided by (used for) operating activities
Gain on disposal of discontinued operations		(1,117	)		—			—			—			(1,117	)
Equity (income) losses of unconsolidated subsidiaries		—			(1,022	)		(437	)		—			(1,459	)
Depreciation		832			15,388			12,656			—			28,876
Amortization		582			7,798			4,977			—			13,357
Earnings from investments in subsidiaries		(60,959	)		—			—			60,959			—
Deferred income taxes		1,530			32			834			—			2,396
Stock compensation		12,365			—			—			—			12,365
Excess tax benefits from stock-based compensation		(1,322	)		—			—			—			(1,322	)
Gain on sale of assets		(57	)		—			—			—			(57	)
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable		8,779			(23,252	)		(30,650	)		11,685			(33,438	)
Inventories		—			(17,568	)		(21,083	)		—			(38,651	)
Prepaid expenses and other current assets		34,528			(4,986	)		(19,081	)		(8,584	)		1,877
Accounts payable		(12,099	)		51,983			18,702			(11,648	)		46,938
Employee compensation and benefits		5,125			1,808			4,342			—			11,275
Accrued product claims and warranties		—			8,763			433			—			9,196
Income taxes		(4,444	)		26,669			(3,353	)		—			18,872
Other current liabilities		(24,383	)		(59	)		16,938			8,547			1,043
Pension and post-retirement benefits		(10,341	)		(3,968	)		1,366			—			(12,943	)
Other assets and liabilities		(1,400	)		(7,063	)		8,911			—			448

Net cash provided by (used for) operating activities		44,021			91,191			21,202			—			156,414
Investing activities
Capital expenditures		(6,141	)		(12,091	)		(10,705	)		—			(28,937	)
Proceeds from sale of property and equipment		—			193			50			—			243
Other		387			—			(1,673	)		—			(1,286	)

Net cash provided by (used for) investing activities		(5,754	)		(11,898	)		(12,328	)		—			(29,980	)
Financing activities
Net short-term borrowings		115			24			(24	)		—			115
Proceeds from long-term debt		335,021			—			—			—			335,021
Repayment of long-term debt		(403,742	)		—			—			—			(403,742	)
Debt issuance costs		(50	)		—			—			—			(50	)
Net change in advances to subsidiaries		66,259			(65,455	)		(804	)		—			—

Large accelerated filer

Accelerated filer

Non-accelerated filer

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Smaller reporting company