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.

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.

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:

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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.

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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.

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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.

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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.

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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.

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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:

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