UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

    For the Fiscal Year Ended December 31, 20102012

OR

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

Commission file number000-04689 001-11625

Pentair Inc.Ltd.

(Exact name of Registrant as specified in its charter)

Switzerland

98-1050812

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification number)

Freier Platz 10, 8200 Schaffhausen, Switzerland

  
Minnesota41-0907434
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification number)
5500 Wayzata Boulevard,
Suite 800, Golden Valley, Minnesota
55416-1259
(Zip code)
(Address of principal executive offices) 

Registrant’s telephone number, including area code: 41-52-630-48-00

(763) 545-1730

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

Common Shares, $0.162/3CHF 0.50 par value
 New York Stock Exchange
Preferred Share Purchase RightsNew York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yesþ    Noo¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o¨    No þ

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.    Yesþ    Noo¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit to post such files).    Yesþ    Noo¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in PART III of thisForm 10-K or any amendment to thisForm 10-K.  ¨þ

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act).    Yeso¨    Noþ

Aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of $31.57$38.28 per share as reported on the New York Stock Exchange on July 3, 2010June 29, 2012 (the last business day of Registrant’s most recently completed second quarter): $2,970,142,821

$3,624,092,524

The number of shares outstanding of Registrant’s only class of common stock on December 31, 20102012 was 98,409,192.

206,137,460.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Registrant’s definitive proxy statement for its annual meeting to be held on April 28, 2011,29, 2013, are incorporated by reference in thisForm 10-K in response to Part III, ITEM 10, 11, 12, 13 and 14.


Pentair Inc.
Ltd.

Annual Report onForm 10-K

For the Year Ended December 31, 20102012

     Page(s)Page (s)
PART I
PART I

ITEM 1.

 Business  31

ITEM 1A.

 Risk Factors  75

ITEM 1B.

 Unresolved Staff Comments  1122

ITEM 2.

 Properties  1122

ITEM 3.

 Legal Proceedings  1222

ITEM 4.

 Submission of Matters to a Vote of Security HoldersMine Safety Disclosures  1324
PART II

ITEM 5.

 

Market for Registrant’s Common Stock,Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  1526

ITEM 6.

 Selected Financial Data  1829

ITEM 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  1930

ITEM 7A.

 Quantitative and Qualitative Disclosures about Market Risk  3553

ITEM 8.

 Financial Statements and Supplementary Data  3755

ITEM 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  77115

ITEM 9A.

 Controls and Procedures  77115

ITEM 9B.

 Other Information  77115
PART III

ITEM 10.

 Directors, Executive Officers and Corporate Governance  78116

ITEM 11.

 Executive Compensation  78116

ITEM 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  78116

ITEM 13.

 Certain Relationships and Related Transactions and Director Independence  79117

ITEM 14.

 Principal AccountantAccounting Fees and Services  79117
PART IV
ITEM 15.Exhibits and Financial Statement Schedule80
Signatures81
EX-21PART IV
EX-23
EX-24
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


2


PART I

ITEM 1.  15.

Exhibits, Financial Statement Schedules118

.

BUSINESSSignatures119


PART I

ITEM 1.    BUSINESS

GENERAL

Pentair Inc.Ltd. is a focused diversified industrial manufacturing company comprised of two operatingcomprising three reporting segments: Water & Fluid Solutions, Valves & Controls and Technical Products. OurSolutions. Water Group is a global leader in providing& Fluid Solutions designs, manufactures, markets and services innovative water management and fluid processing products and systems used worldwide insolutions. Valves & Controls designs, manufactures, markets and services valves, fittings, automation and controls and actuators. Technical Solutions designs, manufactures and markets products that guard and protect some of the movement, storage, treatment and enjoyment of water. Our Technical Products Group is a leader in the global enclosures and thermal management markets, designing and manufacturing standard, modified and custom enclosures that house and protectworld’s most sensitive electronics and electrical components and protect the people that use them.

electronic equipment, as well as heat management solutions designed to provide thermal protection to temperature sensitive fluid applications.

Pentair Strategy

Our strategy is to drive sustainable, profitable growth and Returnreturn on Invested Capital (“ROIC”)invested capital improvements through:

building operational excellence through the Pentair Integrated Management System consisting of strategy deployment, lean enterprise and Rapid Growth Process, which is our process to drive organic growth;

• building operational excellence through the Pentair Integrated Management System (“PIMS”) consisting of strategy deployment, lean enterprise and Rapid Growth Process, which is our process to drive organic growth;
• driving long-term growth in sales, operating income and cash flows, through growth and productivity initiatives along with acquisitions;
• developing new products and enhancing existing products;
• penetrating attractive growth markets, particularly international;
• expanding multi-channel distribution; and
• proactively managing our business portfolio for optimal value creation, including consideration of new business platforms.

driving long-term growth in sales, operating income and cash flows, through growth and productivity initiatives along with acquisitions;

developing new products and enhancing existing products;

penetrating attractive growth markets, particularly outside of the United States;

expanding multi-channel distribution; and

proactively managing our business portfolio for optimal value creation, including consideration of new business platforms.

Unless the context otherwise indicates, references herein to “Pentair”,“Pentair,” the “Company,” and such words as “we,” “us,” and “our” include Pentair Inc.Ltd. and its consolidated subsidiaries. We are a Swiss corporation limited by shares that was formed in 2000. We are the successor to Pentair, isInc., a Minnesota corporation thatformed in 1966 and our wholly-owned subsidiary, under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

HISTORY AND DEVELOPMENT

Pentair Ltd., formerly known as Tyco Flow Control International Ltd. (as used prior to the Merger (as defined below), “Flow Control”), took its current form on September 28, 2012 as a result of a spin-off of Flow Control from its parent, Tyco International Ltd. (“Tyco”), and a reverse acquisition involving Pentair, Inc.

Prior to the spin-off, Tyco engaged in an internal restructuring whereby it transferred to Flow Control certain assets related to the flow control business of Tyco, and Flow Control assumed from Tyco certain liabilities related to the flow control business of Tyco. On September 28, 2012 prior to the Merger (as defined below), Tyco effected a spin-off of Flow Control through the pro-rata distribution of 100% of the outstanding common shares of Flow Control to Tyco’s shareholders (the “Distribution”), resulting in the distribution of 110,898,934 of our common shares to Tyco’s shareholders. Immediately following the Distribution, an indirect, wholly-owned subsidiary of ours merged with and into Pentair, Inc., with Pentair, Inc. surviving as an indirect, wholly-owned subsidiary of ours (the “Merger”). At the effective time of the Merger, each Pentair, Inc. common share was incorporatedconverted into the right to receive one of our common shares, resulting in 1966.

99,388,463 of our common shares being issued to Pentair, Inc. shareholders. The Merger is intended to be tax-free for U.S. federal income tax purposes. After the Merger, our common shares are traded on the New York Stock Exchange under the symbol PNR. Tyco equity-based awards held by Flow Control employees and certain Tyco employees and directors outstanding prior to the completion of the Distribution were converted in connection with the Distribution into equity-based awards with respect to our common shares and were assumed by us. Pentair, Inc. equity-based awards outstanding prior to the completion of the Merger were converted upon completion of the Merger into equity-based awards with respect to our common shares and were assumed by us.

1


Our registered principal office is located at Freier Platz 10, 8200 Schaffhausen, Switzerland. Our management office in the United States is located at 5500 Wayzata Boulevard, Suite 800, Minneapolis, Minnesota.

BUSINESS AND PRODUCTS

Business

Reporting segment and geographical financial information is contained in ITEM 8, Note 1517 of the Notes to Consolidated Financial Statements, included in thisForm 10-K.

WATER GROUP& FLUID SOLUTIONS

Our

The Water Group is a global leader in providing& Fluid Solutions segment designs, manufactures, markets and services innovative water management and fluid processing products and systems used worldwide in the safe, energy-efficient movement, storage, treatmentsolutions. In select geographies, Water & Fluid Solutions offers a wide variety of pumps, valves and enjoyment of water. Ourpipes for water transmission applications. The Flow Technologies, Filtration & Process, Aquatic Systems and Water Group& Environmental Systems Global Business Units (“GBUs”) comprise this segment.

Water & Fluid Solutions offers a comprehensive product suite that addresses a broad array of products and systems to multiple markets and customers. The core competencies of our Water Group center around flow and filtration. Our Water Group focuses its business portfolio in these primary vertical markets: Residential (55% of Group sales), Municipal and Desalination (14% of Group sales), Commercial (13% of Group sales), Industrial (13% of Group sales) and Agriculture (5% of Group sales). We are organized around the following global business units:

Residential Flow
Our Residential Flow business is a leader in global residential water pumps. We primarily serve residential well water installers and residential end-users, waste water dealers and distributors. We manufacture and sellfluid handling needs, with products ranging from light duty diaphragmenergy-efficient pumps and point-of-use filtration to solid handlingengineered pumps designedand fluid processing systems, applicable for a wide range of residential/commercial construction, industrial, infrastructure and food and beverage industry applications. In addition to these products, the Water & Fluid Solutions segment markets specialty products for environmental (emissions monitoring, water flow and quality monitoring and dust filter cleaning systems), instrumentation (manifolds, enclosures and isolation valves) and other applications, including entire water and wastewater applicationstransmission and agricultural spraying, as well as pressure tanks for residential applications. Applications for our broad range of productsdistribution systems. Significant brands include pumps for residential wells, water treatment, wastewater solids handling, pressure boosting, engine cooling, fluid delivery, circulation and transfer.


3


Brand names for the Residential Flow business include STA-RITE®Aurora, Berkeley, Everpure, Fairbanks Nijhuis™, Myers®Kreepy Krauly, Onga™, Hydromatic®, Flotec®, Hypro®, Berkeley®, Aermotor®, Simer®, Verti-line®, FoamPro®, Ongatm, Nocchitm, SHURflo®, Edwardstm, JUNG PUMPEN® and JUNGtm.
Residential Filtration
Our Residential Filtration business competes in residential and commercial water softening and filtration markets globally. We manufacture and sell control valves, pressure tanks, membranes, carbon products, point of entry and point of use systems and other filter cartridges. Residential Filtration products are used in the manufacture of water softeners; filtration and deionization systems; and commercial and residential water filtration applications.
Brand names for the Residential Filtration business include Fleck®, Autotrol®, Structuraltm, Aquamatic®, Pentek®, SIATAtm, WellMatetm, American Plumber®, GE®, OMNIFILTER® and Fibredynetm.
Our Residential Filtration business was formed by a transaction between GE Water & Process Technologies (a unit of General Electric Company) (“GE”) and Pentair.
Pool
Our Pool business manufactures and sells a complete line of commercial and residential pool equipment and accessories including pumps, filters, heaters and heat pumps, lights, automatic controls, automatic pool cleaners, commercial deck equipment, maintenance equipment and pool accessories. Applications for our pool products include commercial and residential pool maintenance, repair and renovation as well as service and construction. Our Pool business predominantly serves the North American market.
Brand names for the Pool business includePentair, Pentair Pool Products,®, Pentair Water Pool and Spa,®, STA-RITE,®, Paragon Aquatics®, Kreepy Krauly®, Compool®, WhisperFlo®, PoolShark®, Legend®, Rainbowtm, FIBERworks®, IntelliTouch®, IntelliFlo®, IntelliChlor®, Ongatm SHURflo, X-Flow, Sintakote and Pentair Piscinestm.
Engineered Flow
Our Engineered Flow business is a global leader in municipal, commercial and industrial water and fluid handling markets. We primarily serve commercial end-users; waste water dealers and distributors; commercial and industrial operations; and municipal water treatment facilities. We manufacture and sell products ranging from light duty diaphragm pumps to high-flow turbine pumps and solid handling pumps designed for water, wastewater and a variety of industrial applications. Applications for our broad range of products include pumps for municipal wells, water treatment, wastewater solids handling, pressure boosting, engine cooling, fluid delivery, circulation, fire suppression and transfer.
Brand names for the Engineered Flow business include Myers®, Aurora®, Hydromatic®, Fairbanks Morsetm, Layne/Verti-line®, FoamPro®, Edwards®, Aplex and Delta Environmental.
Filtration Solutions
Our Filtration Solutions business competes in selected commercial and industrial markets for both water and other fluid filtration as well as in desalination and reverse osmosis projects globally. We manufacture and sell filter systems, filter cartridges, pressure vessels and specialty dispensing pumps providing flow solutions for specific end-user market applications including, commercial, foodservice, industrial, marine and aviation. FiltrationSintaloc. Water & Fluid Solutions products are used in the manufacture of filtration, deionization and desalination systems; industrial and commercial water filtration applications; and filtration and separation technologies for hydrocarbon, medical and hydraulic applications.
Brand names for the Filtration Solutions business include Everpure®, SHURflo®, Porous Mediatm and CodeLine®.
Customers
Our Water Group distributes its productssold through wholesale distributors,and retail distributors, original equipment manufacturers, home and pool builders, home centers and homedirectly to end-users.

Customers

Water & Fluid Solutions customers include businesses engaged wholesale and pool builders. Information regarding significant customersretail distribution in our


4

the residential & commercial, food & beverage, infrastructure, industrial and energy verticals. Customers also include end-users and consumers in the residential & commercial vertical.


Seasonality

Water Group is contained in ITEM 8, Note 15 of the Notes to Consolidated Financial Statements, included in thisForm 10-K.
Seasonality
We experience seasonal demand in a number of marketswith several customers and end-users within our Water Group.& Fluid Solutions. End-user demand for pool equipment follows warm weather trends and is at seasonal highs from April to August. The magnitude of the sales increase is partially mitigated by employing some advance sale “early buy” programs (generally including extended payment termsand/or additional discounts). Demand for residential and agricultural water systems is also impacted by weather patterns, particularly by heavy flooding and droughts.

Competition

Our

Water Group& Fluid Solutions faces numerous domestic and international competitors, some of which have substantially greater resources directed to the marketsverticals in which we compete. Consolidation and globalization are continuing trends in the water industry. Competition in commercial and residential flow technologies marketsFlow Technologies focuses on brand names, product performance (including energy-efficient offerings), quality and price. While home center and national retailers are important for residential lines of water and wastewater pumps, they are not important for commercial pumps. For municipal pumps, competition focuses on performance to meet required specifications, service and price. Competition in water treatment and filtration componentsFiltration & Process focuses on product performance and design, quality, delivery and price. For pool equipment,Aquatic Systems, competition focuses on brand names, product performance (including energy-efficient offerings), quality and price. Competition in Water & Environmental Systems focuses on price, quality, product performance and the ability to provide turnkey system solutions. We compete by offering a wide variety of innovative and high-quality products, which are competitively priced. We believe our distribution channels and reputation for quality also contribute to our continuing market penetration.

2


TECHNICAL PRODUCTS GROUPVALVES & CONTROLS

Our Technical Products Group is a leader in the global enclosures

The Valves & Controls segment designs, manufactures, markets and thermal management markets, designingservices valves, fittings, automation and manufacturing standard, modifiedcontrols and custom enclosures that house and protect sensitive electronics and electrical components and protect the people that use them. Our Technical Products Group focuses its business portfolio on the following primary vertical markets: Industrial (35% of Group sales), Communications (25% of Group sales), General Electronics (10% of Group sales), Energy (10% of Group sales) and Commercial, Security and Defense, Infrastructure and Medical (these four vertical markets combined represent approximately 20% of Group sales). Products include metallic and composite enclosures, cabinets, cases, subracks, backplanes and associated thermal management systems. Applications served include industrial machinery, data communications, networking, telecommunications, test and measurement, automotive, medical, security, defense and general electronics.

Brand namesactuators for the Technical Products Group businessindustrial, food & beverage, infrastructure and energy verticals and operates as a stand-alone GBU.

Valve products include Hoffman®, Schroff®, McLean®, Taunustm, Birtcher®, Calmark®a broad range of industrial valves, including on-off valves, safety relief valves and Aspen Motionother specialty valves. Actuation products include pneumatic, hydraulic and electric actuators. Control products include limit switches, solenoid valves, valve positioners, network systems and accessories.

Valves & Controls products are used in many applications including chemical, petrochemical, oil and gas, power generation, mining, food and beverage, pulp and paper, wastewater and commercial irrigation. Valves & Controls also provides engineering, design, inspection, maintenance and repair services for its valves and related products. The product line is sold under many trade names, including Biffi, Keystone, Vanessa, Anderson Greenwood and Crosby globally via its internal sales force and in some cases through a network of independent distributors.

tm.

Customers
Our Technical Products Group distributes its products through electrical

Valves & Controls customers include businesses engaged in a wide range of applications within the energy, infrastructure, industrial and datafood & beverage verticals. Customers include end-users as well as engineering, procurement and construction companies, contractors, electrical and electronic components distributors and original equipment manufacturers. Information regarding significant customers in our Technical Products Group is contained in ITEM 8, Note 15 of the Notes to Consolidated Financial Statements, included in thismanufacturers and distributors.

Form 10-K.

Seasonality
Our Technical Products Group

Valves & Controls is not significantly affected by seasonal demand fluctuations.

Competition

The flow control industry is highly fragmented, consisting of many local and regional companies and a few global competitors. We compete against a number of international, national and local manufacturers of industrial valves, as well as against specialized manufacturers on the basis of product capability, product quality, breadth of product line, delivery, service capability and price. Our major competitors vary by region and by industry.

TECHNICAL SOLUTIONS

The Technical Solutions segment designs, manufactures and markets products that guard and protect some of the world’s most sensitive electronics and electronic equipment, as well as heat management solutions designed to provide thermal protection to temperature sensitive fluid applications. The Equipment Protection and Thermal Management GBUs comprise this segment.

Technical Solutions products include mild steel, stainless steel, aluminum and non-metallic enclosures, cabinets, cases, subracks, backplanes and thermal management systems including heat tracing, snow melting/de-icing and temperature management equipment. Technical Solutions products are produced globally.

The portfolio of products serves a range of industries, including use in industrial, residential & commercial, food & beverage and energy and industrial infrastructure verticals. Brand names for Technical Solutions offerings include Hoffman, Schroff, Raychem and Tracer. Technical Solutions products are sold largely through a global network of independent distributors and are highly engineered and sold on a project basis via a network of sales and service professionals.

Customers

Technical Solutions customers include electrical distributors, data center contractors, original equipment manufacturers, contractors mainly of greenfield developments and maintenance contractors. Technical Solutions has been able to develop a global installed base of customers.

Seasonality

Technical Solutions is not significantly affected by seasonal demand fluctuations.

3


Competition

Within Technical Solutions, Equipment Protection faces significant competition in the technical products markets can be intense,it serves, particularly inwithin the Communications market,communications industry, where product design, prototyping, global supply, price competition and customer service are significant factors. Our Technical Products Group has continued to focus on cost control and improving profitability. Recent sales increases in the Technical Products Group are the result of market recovery following the global recession in 2009. The growth derived from the market recovery was complemented by growth from initiatives


5


focused on product development, continued channel penetration, growth in targeted market segments, geographic expansion and price increases. Consolidation,However, consolidation, globalization and outsourcing are visible trends in the technical productsEquipment Protection marketplace and typically play to the strengths of a large and globally positioned supplier. We believe our Technical Products Group hasThe industries and markets served by the global manufacturing capabilityThermal Management business are highly fragmented, comprising local markets and broad product portfolio to support the globalization and outsourcing trends.
niches.

INFORMATION REGARDING ALL BUSINESSREPORTABLE SEGMENTS

Backlog

Our backlog of orders asby segment

   December 31 
In thousands  2012   2011   $ change   % change 

Water & Fluid Solutions

  $788,275   $    368,008   $420,267    114.2 

Valves & Controls

   1,412,489        1,412,489     

Technical Solutions

   290,353    109,757    180,596    164.5 

 

 

Total

  $2,491,117   $477,765   $2,013,352    421.4 

 

 

The Valves & Controls segment became effective with the Merger. Backlog from this segment consists of December 31 by segment was:

                 
In thousands 2010  2009  $ change  % change 
  
 
Water Group $212,929  $304,449  $(91,520)  (30.0)%
Technical Products Group  127,658   94,503   33,155   35.1%
 
 
Total $340,587  $398,952  $(58,365)  (14.6)%
 
 
The $91.5 million decrease in Water Group backlog was primarily due to reduced backlog related to the Gulf Intracoastal Waterway project and other large municipal projects for the Engineered Flow global business unit at December 31, 2010. The $33.2 million increase in the Technical Products Groupenergy and industrial verticals. Generally, backlog reflected growth across our vertical markets served. Due tofrom the relatively shortValves & Controls segment has a longer manufacturing cycle and general industry practice forproducts typically ship within six to twelve months of the majoritydate on which a customer places an order. The increases in Water & Fluid Solutions and Technical Solutions backlogs resulted primarily from the Flow Control businesses as a result of our businesses, backlog, whichthe Merger. Backlog from these two segments typically represents less than 60has a shorter manufacturing cycle and products generally ship within 90 days of shipments, is not deemed to bethe date on which a significant item.customer places an order. A substantial portion of ourthese revenues result from orders received and product solddelivered in the same month. We record as part of our backlog, all orders from external customers, which represent firm commitments and are supported by a purchase order or other legitimate contract. We expect that most of our backlog from all segments at December 31, 20102012 will be filled in 2011.
2013.

Research and development

We conduct research and development activities primarily in our own facilities, whichfacilities. These efforts consist primarily of the development of new products, product applications and manufacturing processes. Research and development expenditures during 2012, 2011 and 2010 2009were $93.6 million, $78.2 million and 2008 were $67.2 million, $57.9 million and $62.5 million, respectively.

Environmental

Environmental matters are discussed in ITEM 3, ITEM 7 and in ITEM 8, Note 1618 of the Notes to Consolidated Financial Statements, included in thisForm 10-K.

Raw materials

The principal materials used in the manufacturing of our products are electric motors, mild steel, stainless steel, electronic components, plastics (resins, fiberglass, epoxies), copper and paint (powder and liquid). In addition to the purchase of raw materials, we purchase some finished goods for distribution through our sales channels.

The materials used in the various manufacturing processes are purchased on the open market and the majority areis available through multiple sources andwhich are in adequate supply. We have not experienced any significant work stoppages to date due to shortages of materials. We have certain long-term commitments, principally price commitments, for the purchase of various component parts and raw materials and believe that it is unlikely that any of these agreements would be terminated prematurely. Alternate sources of supply at competitive prices are available for most materials for which long-term commitments exist and we believe that the termination of any of these commitments would not have a material adverse effect on operations.

our financial position, results of operations or cash flows.

4


Certain commodities, such as metals and resin, are subject to market and duty-driven price fluctuations. We manage these fluctuations through several mechanisms, including long-term agreements with price adjustment clauses for significant commodity market movements in certain circumstances. Prices for raw materials, such as metals and resins, may trend higher in the future.


6


Intellectual property

Patents, non-compete agreements, proprietary technologies, customer relationships, trade marks,trademarks, trade names and brand names are important to our business. However, we do not regard our business as being materially dependent upon any single patent, non-compete agreement, proprietary technology, customer relationship, trade mark,trademark, trade name or brand name.

Patents, patent applications and license agreements will expire or terminate over time by operation of law, in accordance with their terms or otherwise. We do not expect the termination of patents, patent applications or license agreements to have a material adverse effect on our financial position, results of operations or cash flows.

Employees

As of December 31, 2010,2012, we employed approximately 14,30029,700 people worldwide. Total employeesworldwide, of which 9,300 were in the United States and 15,000 were approximately 6,900, of whom approximately 475 are representedcovered by four different trade unions having collective bargaining agreements. Generally,agreements or works councils. We believe that our relations with the labor relationsunions have generally been satisfactory.

good.

Captive Insurance Subsidiaryinsurance subsidiary

We insure certain general and product liability, property, workers’ compensation and automobile liability risks through our regulated wholly-owned captive insurance subsidiary, Penwald Insurance Company (“Penwald”). Reserves for policy claims are established based on actuarial projections of ultimate losses. Accruals with respect to liabilities insured by third parties, such as liabilities arising from acquired businesses, pre-Penwald liabilities and those of certain foreign operations are established.

Matters pertaining to Penwald are discussed in ITEM 3 and ITEM 8, Note 12 of the Notes to Consolidated Financial Statements Insurance Subsidiary, included in thisForm 10-K.

Available information

We make available free of charge (other than an investor’s own Internet access charges) through our Internet website ((http://www.pentair.com)www.pentair.com) our Annual Report onForm 10-K, Quarterly Reports onForm 10-Q, Current Reports onForm 8-K and if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with or furnish it to, the Securities and Exchange Commission. Reports of beneficial ownership filed by our directors and executive officers pursuant to Section 16(a) of the Securities Exchange Act of 1934 are also available on our website. We are not including the information contained on our website as part of or incorporating it by reference into, this Annual Report onForm 10-K.

ITEM 1A.  RISK FACTORS

ITEM 1A.    RISK FACTORS

You should carefully consider all of the information in this document and the following risk factors and warnings before making an investment decision. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not considerdecision regarding our securities. Any of the following list to be a complete statement of all potential risks could materially and uncertainties. If any of the risks described below actually occur,adversely affect our business, financial condition, results of operations, or prospects could be materially adversely affected. In that case,cash flows and the priceactual outcome of our securities could decline and you could lose all or part of your investment. You should also refermatters as to other information set forthwhich forward-looking statements are made in this document.

While we believe we have identified and discussed below the material risks affecting us, there may be additional risks and uncertainties that we do not presently know or that we do not currently believe to be material that may adversely affect our business, financial condition, results of operations and cash flows in the future.

5


Risks Relating to Our Business

General global economic conditions, including difficult credit and residential construction markets,business conditions affect demand for our products.

We compete around the world in various geographic regions and product markets.markets around the world. Among these, the most significant are global industrial markets (for both the Technical Products and Water Groups) and residential markets (for the Water Group).markets. Many of our businesses have experienced periodic economic downturns. Important factors for our businesses and the businesses of our customers include the overall strength of the economy and our customers’ confidence in the economy; industrial and governmental capital spending; the strength of the residential and commercial real estate markets; unemployment rates; availability of consumer and commercial financing for our customersfinancing; interest rates; and end-users;energy and interest rates. New construction for residential


7


housing and home improvement activity fell in 2007, 2008 and 2009, which reduced revenue growth in the residential businesses within our Water Group.commodity prices. While we saw some stabilization in 2010, we believe that weakness in this market could negatively impact our revenues and margins in future periods. Further, while we attempt to minimize our exposure to economic or market fluctuations by serving a balanced mix of end markets and geographic regions, we cannot assure you thatany of these factors, individually or in the aggregate, or a significant or sustained downturn in a specific end market or geographic region would not have a material adverse effect on us.
Our inability to sustain organic growth could materially and adversely affect our business, financial performance.condition, results of operations and cash flows.

We compete in attractive markets with a high level of competition, which may result in pressure on our profit margins and limit our ability to maintain or increase the market share of our products.

Over the past five years,

The markets for our organic growth has been generated in part from expanding international sales, entering new distribution channels, introducing new products and services are geographically diverse and highly competitive. We compete against large and well-established national and global companies, as well as regional and local companies and lower cost manufacturers. We compete based on technical expertise, reputation for quality and reliability, timeliness of delivery, previous installation history, contractual terms and price. Some of our competitors, in particular smaller companies, attempt to compete based primarily on price, increases. To growlocalized expertise and local relationships, especially with respect to products and applications that do not require a great deal of engineering or technical expertise. In addition, during economic downturns average selling prices tend to decrease as market participants compete more rapidly than our end markets,aggressively on price. If we would haveare unable to continue to expanddifferentiate our geographic reach, further diversifyproducts, services and solutions, or if we are forced to cut prices or to incur additional costs to remain competitive, our distribution channels, continue to introduce new productsbusiness, financial condition, results of operations and increase sales of existing products to our customer base. Difficult economic and competitive factorscash flows could be materially and adversely impactedaffected.

Our future growth is dependent upon our financial performance in 2009. These conditions startedability to improve in manycontinue to adapt our products, services and organization to meet the demands of our endlocal markets in 2010,both developed and emerging economies and by developing or acquiring new technologies that achieve market acceptance with acceptable margins.

We operate in global markets that are characterized by customer demand that is often global in scope but we cannot assure youlocalized in delivery. We compete with thousands of smaller regional and local companies that thesemay be positioned to offer products produced at lower cost than ours, or to capitalize on highly localized relationships and knowledge that are difficult for us to replicate. Also, in several emerging markets will continuepotential customers prefer local suppliers, in some cases because of existing relationships and in other cases because of local legal restrictions or incentives that favor local businesses. Accordingly, our future success depends upon a number of factors, including our ability to improve nor that we will be ableadapt our products, services, organization, workforce and sales strategies to increase revenuesfit localities throughout the world, particularly in high growth emerging markets; identify emerging technological and profitabilityother trends in our target end-markets; and develop or acquire competitive products and services and bring them to match our earlier financial performance.market quickly and cost-effectively. We have chosen to focus our growth initiatives in specific end markets and geographies. Wegeographies, but we cannot assure youprovide assurance that these growth initiatives will be sufficient to offset revenue declines in other markets.

The failure to effectively adapt our products or services could materially and adversely affect our business, financial condition, results of operations and cash flows.

6


Our businesses operate in highly competitive markets, so we maybusiness strategy includes acquiring companies and making investments that complement our existing businesses. These acquisitions and investments could be forced to cut pricesunsuccessful or to incur additional costs.

Our businesses generally face substantial competition in each of their respective markets. Competition may force us to cut prices or to incur additional costs to remain competitive. We compete on the basis of product design, quality, availability, performance, customer service and price. Present or future competitors may have greater financial, technical or otherconsume significant resources, which could put us at a disadvantageadversely affect our operating results.

We continue to analyze and evaluate the acquisition of strategic businesses or product lines with the potential to strengthen our industry position or enhance our existing set of product and services offerings. There can be no assurance that we will identify or successfully complete transactions with suitable acquisition candidates in the affectedfuture or that completed acquisitions will be successful. Acquisitions and investments may involve significant cash expenditures, debt incurrence, operating losses and expenses that could have a material adverse effect on our business, financial condition, results of operations and cash flows. Acquisitions involve numerous other risks, including:

diversion of management time and attention from daily operations;

difficulties integrating acquired businesses, technologies and personnel into our business;

difficulties in obtaining and verifying the financial statements and other business information of acquired businesses;

inability to obtain required regulatory approvals and/or businesses.required financing on favorable terms;

potential loss of key employees, key contractual relationships or key customers of acquired companies or of ours;

assumption of the liabilities and exposure to unforeseen liabilities of acquired companies, including risks related to the U.S. Foreign Corrupt Practices Act (the “FCPA”); and

dilution of interests of holders of our common shares through the issuance of equity securities or equity-linked securities.

It may be difficult for us to complete transactions quickly and to integrate acquired operations efficiently into our business operations. Any acquisitions or investments may ultimately harm our business, financial condition, results of operations and cash flows, as such acquisitions may not be successful and may ultimately result in impairment charges.

We are exposed to political, regulatory, economic and other risks that arise from operating a multinational business.

The unaudited pro forma combined sales for Pentair, Inc. and Flow Control outside of the United States for the last twelve months ended December 31, 2012 accounted for 60% of our net sales, and we expect this percentage to be representative of our future sales mix. Further, most of our businesses obtain some products, components and raw materials from foreign suppliers. Accordingly, our business is subject to the political, regulatory, economic and other risks that are inherent in operating in numerous countries. These risks include:

changes in general economic and political conditions in countries where we operate, particularly in emerging markets;

relatively more severe economic conditions in some international markets than in the United States;

the difficulty of enforcing agreements and collecting receivables through foreign legal systems;

the difficulty of communicating and monitoring standards and directives across our global network of after-market service centers and manufacturing facilities;

trade protection measures and import or export licensing requirements and restrictions;

the possibility of terrorist action affecting us or our operations;

the threat of nationalization and expropriation;

the imposition of tariffs, exchange controls or other trade restrictions;

7


difficulty in staffing and managing widespread operations in non-U.S. labor markets;

changes in tax treaties, laws or rulings that could have an adverse impact on our effective tax rate;

limitations on repatriation of earnings;

the difficulty of protecting intellectual property in foreign countries; and

changes in and required compliance with a variety of foreign laws and regulations.

Our success depends in part on our ability to anticipate and effectively manage these and other risks. We cannot assure you that these and other factors will not have a material adverse effect on our futureinternational operations or on our business as a whole.

Volatility in currency exchange rates may adversely affect our financial condition, results of operations.

operations and cash flows.

The unaudited pro forma combined sales for Pentair, Inc. and Flow Control outside of the United States for the last twelve months ended December 31, 2012 accounted for 60% of our net sales, and we expect this percentage to be representative of our future sales mix. Our financial statements reflect translation of items denominated in non-U.S. currencies to U.S. dollars. Therefore, if the U.S. dollar strengthens in relation to the principle non-U.S. currencies from which we derive revenue as compared to a prior period, our U.S. dollar reported revenue and income will effectively be decreased to the extent of the change in currency valuations, and vice-versa. Changes in the relative values of currencies occur regularly and in some instances, may have a significant effect on our financial condition, results of operations and cash flows.

Our future revenue depends in part on the existence of and our ability to win new contracts for major capital projects.

An increasing portion of our revenue in our Thermal Management and Water & Environmental Systems GBUs is derived from major capital projects, including water pipeline and desalination projects in Water & Fluid Solutions. The number of such projects we may win in any year fluctuates, and is dependent upon the general availability of such projects and our ability to bid successfully for them. If negative market conditions arise, fewer such projects may be available, and if we fail to secure adequate financial arrangements or required governmental approvals we may not be able to pursue particular projects. Either condition could materially and adversely affect our business, financial condition, results of operations and cash flows.

We maintain a sizable backlog and the timing of our conversion of revenue out of backlog is uncertain. Our inability to convert backlog into revenue, whether due to factors that are within or outside of our control, could adversely affect our revenue and profitability.

The timing of our conversion of revenue out of backlog is subject to a variety of factors that may cause delays, many of which, including fluctuations in our customers’ delivery schedules, are beyond our control. This is especially true with respect to major global capital projects, where the extended timeline for project completion and invoice satisfaction increases the likelihood for delays in the conversion of backlog related to modifications and order cancellations. Such delays may lead to significant fluctuations in results of operations and cash flows from quarter to quarter, making it difficult to predict our financial performance on a quarterly basis. Further, while we believe that historical order cancellations have not been significant, if we were to experience a significant amount of cancellations of or reductions in orders, it would reduce our backlog and, consequently, our future sales and results of operations.

Material cost and other inflation have adversely affected and could continue to affect our results of operations.

In the past, we have experienced material cost and other inflation in a number of our businesses. We strive for productivity improvements and implement increases in selling prices to help mitigate cost increases in raw materials (especially metals and resins), energy and other costs such as pension, health care and insurance. We continue to implement our excellence in operationsoperational initiatives in order to mitigate the impacts of this inflation and continuously reduce our costs. We cannot assure you,provide assurance, however, that these actions will be successful in managing our

8


costs or increasing our productivity. Continued cost inflation or failure of our initiatives to generate cost savings or improve productivity would likely negatively impact our results of operations.

SeasonalityWe are exposed to liquidated damages in many of salesour customer contracts.

Many of our customer contracts contain liquidated damages provisions in the event that we fail to perform our obligations thereunder in a timely manner or in accordance with agreed terms, conditions and weather conditionsstandards. Liquidated damages provisions typically provide for a payment to be made by us to the customer if we fail to deliver a product or service on time. We generally try to limit our exposure to a maximum penalty within a contract. However, because our products are often components of large and complex systems or capital projects, if we incur liquidated damages they may materially and adversely affect our business, financial results.condition, results of operations and cash flows.

Certain of our products require certifications by regulators or standards organizations, and our failure to obtain or maintain such certifications could negatively impact our business.

We experience seasonal demand

In certain industries and for certain applications, in a number ofparticular with respect to our pressure relief valves and valves used in the nuclear power generation industry, we must obtain certifications for our products or installations by regulators or standards organizations. As we expand our products offering into emerging markets, withinwe will need to comply with additional and potentially different certification requirements. If we fail to obtain required certifications for our Water Group. End-user demand for pool equipment in our primary markets follows warm weather trends and is at seasonal highs from Aprilproducts, or if we fail to August. The magnitude of the sales increase is partially mitigated by employing some advance sale or “early buy” programs (generally including extended payment termsand/or additional discounts). Demand for residential and agricultural water systems is also impacted by weather patterns, particularly by heavy flooding and droughts. We cannot assure you that seasonality and weather conditions will not have a material adverse effectmaintain such certifications on our products after they have been certified, our business, financial condition, results of operations.

operations and cash flows could be materially and adversely affected.

Intellectual property challenges may hinder product developmentour ability to develop, engineer and marketing.market our products.

Patents, non-compete agreements, proprietary technologies, customer relationships, trade marks,trademarks, trade names and brand names are important to our business. Intellectual property protection, however, may not preclude


8


competitors from developing products similar to ours or from challenging our names or products. Our pending patent applications, and our pending copyright and trademark registration applications, may not be allowed or competitors may challenge the validity or scope of our patents, copyrights or trademarks. In addition, our patents, copyrights, trademarks and other intellectual property rights may not provide us a significant competitive advantage. Over the past few years, we have noticed an increasing tendency for participants in our markets to use conflicts over and challenges to intellectual property as a means to compete. Patent and trademark challenges increase our costs to develop, engineer and market our products.
Our results of operations We may be negatively impacted by litigation.
Our businesses expose usneed to potential litigation, such as product liability claims relating to the design, manufacturespend significant resources monitoring our intellectual property rights and sale of our products. While we currently maintain what we believe to be suitable product liability insurance, we cannot assure you that we willmay or may not be able to maintain this insurance on acceptable termsdetect infringement by third parties. If we fail to successfully enforce our intellectual property rights or that this insurance will provide adequate protection against potential liabilities. In addition, we self-insure a portion of product liability claims. A series of successful claims against us for significant amountsregister new patents, our competitive position could materially and adversely affectsuffer, which could harm our product reputation,business, financial condition, results of operations and cash flows.

We may not be able to expand through acquisitions and acquisitions we complete may adversely affect our financial performance.

We intend to continue to evaluate strategic acquisitions primarily in our current business segments, though we may consider acquisitions outside of these segments as well. Our ability to expand through acquisitions is subject to various risks, including the following:
• Higher acquisition prices;
• Lack of suitable acquisition candidates in targeted product or market areas;
• Increased competition for acquisitions, especially in the water industry;
• Inability to integrate acquired businesses effectively or profitably; and
• Inability to achieve anticipated synergies or other benefits from acquisitions.
Acquisitions we may undertake could have a material adverse effect on our operating results, particularly in the fiscal quarters immediately following the acquisitions, while we attempt to integrate operations of the acquired businesses into our operations. Once integrated, acquired operations may not achieve the levels of financial performance originally anticipated.
The availability and cost of capital could have a negative impact on our financial performance.
Our plans to vigorously compete in our chosen markets will require additional capital for future acquisitions, capital expenditures, growth of working capital and continued international and regional expansion. In the past, we have financed growth of our businesses primarily through cash from operations and debt financing. While we refinanced our primary credit agreements in 2007 on what we believe to be favorable terms, future acquisitions or other uses of funds may require us to expand our debt financing resources or to issue equity securities. Our financial results may be adversely affected if new financing is not available on favorable terms or if interest costs under our debt financings are higher than the income generated by acquisitions or other internal growth. In addition, future share issuances could be dilutive to your equity investment if we sell shares into the market or issue additional stock as consideration in any acquisition. We cannot assure you that we will be able to issue equity securities or obtain future debt financing at favorable terms. Without sufficient financing, we will not be able to pursue our targeted growth strategy and our acquisition program, which may limit our revenue growth and future financial performance.
We are exposed to political, economic and other risks that arise from operating a multinational business.
Sales outside of the United States, including export sales from our domestic businesses, accounted for approximately 34% of our net sales in both 2010 and 2009. Further, most of our businesses obtain some


9


products, components and raw materials from foreign suppliers. Accordingly, our business is subject to the political, economic and other risks that are inherent in operating in numerous countries. These risks include:
• changes in general economic and political conditions in countries where we operate, particularly in emerging markets;
• relatively more severe economic conditions in some international markets than in the United States;
• the difficulty of enforcing agreements and collecting receivables through foreign legal systems;
• trade protection measures and import or export licensing requirements;
• the possibility of terrorist action against us or our operations;
• the imposition of tariffs, exchange controls or other trade restrictions;
• difficulty in staffing and managing widespread operations innon-U.S. labor markets;
• changes in tax laws or rulings could have an adverse impact on our effective tax rate;
• the difficulty of protecting intellectual property in foreign countries; and
• required compliance with a variety of foreign laws and regulations.
Our business success depends in part on our ability to anticipate and effectively manage these and other risks. We cannot assure you that these and other factors will not have a material adverse effect on our international operations or on our business as a whole.
Our international operations are subject to foreign market and currency fluctuation risks.
We expect the percentage of our sales outside of the United States to increase in the future. Over the past few years, the economies of some of the foreign countries in which we do business have had slower growth than the U.S. economy. The European Union currently accounts for the majority of our foreign sales and income, in which our most significant European market is Germany. In addition, we have a significant and growing business in the Asia-Pacific region, but the economic conditions in countries in this region are subject to different growth expectations, market weaknesses and business practices. We cannot predict how changing market conditions in these regions will impact our financial results.
We are also exposed to the risk of fluctuation of foreign currency exchange rates which may affect our financial results as we manufacture and source certain products, components and raw materials throughout the world.
We have significant goodwill and intangible assets and future impairment of our goodwill and intangible assets could have a material negative impact on our financial results.

We test goodwill and indefinite-lived intangible assets for impairment on an annual basis, by comparing the estimated fair value of each of our reporting units to their respective carrying values on their balance sheets. AtAs of December 31, 20102012 our goodwill and intangible assets were approximately $2,519.6$6,804.2 million and represented approximately 63.4%58% of our total assets. Long-term declines in projected future cash flows could result in future goodwill and intangible asset impairments. Because of the significance of our goodwill and intangible assets, any future impairment of these assets could have a material adverse effect on our financial results.

In the fourth quarter of 2012 and 2011, we completed our annual goodwill and intangible assets impairment reviews. As a result, we recorded a pre-tax non-cash impairment charge of $60.7 million for trade names intangibles and $200.5 million for goodwill in the fourth quarter of 2012 and 2011, respectively. These represent impairments of trade names in Water & Fluid Solutions and Technical Solutions in 2012. The impairment charge was the result of a rebranding strategy implemented in the fourth quarter of 2012. In 2011, the goodwill impairment occurred in Water & Fluid Solutions. The impairment charges resulted from changes in our forecasts in light of economic conditions and due to continued softness in the end-markets served by residential water treatment components.

9


We may be adversely affected by work stoppages, union negotiations, labor disputes and other matters associated with our labor force.

As of December 31, 2012, 15,000 of our employees were covered by collective bargaining agreements or works councils. Although we believe that our relations with the labor unions and work councils that represent our employees are generally good and we have experienced no material strikes and only minor work stoppages recently, no assurances can be made that we will not experience in the future these and other types of conflicts with labor unions, works councils, other groups representing employees or our employees generally, or that any future negotiations with our labor unions will not result in significant increases in our cost of labor.

Seasonality of sales and weather conditions may adversely affect our financial results.

We experience seasonal demand in a number of markets within Water & Fluid Solutions and Technical Solutions. In the Aquatic Systems GBU of Water & Fluid Solutions, end-user demand for pool equipment in our primary markets follows warm weather trends and is at seasonal highs from April to August. In the Flow Technologies GBU of Water & Fluid Solutions, demand for residential water supply products and agricultural products follows warm weather trends and is at seasonal highs from April to August. The magnitude of the sales increase in both Aquatic Systems and Flow Technologies is partially mitigated by employing some advance sale or “early buy” programs (generally including extended payment terms and/or additional discounts). Also in Water & Fluid Solutions, our Water & Environmental Systems GBU generally experiences increased demand during Australia’s prime agricultural seasons. Seasonal effects may vary from year to year and are impacted by weather patterns, particularly by temperatures, heavy flooding and droughts. The Thermal Management GBU in Technical Solutions generally experiences increased demand for products and services during the fall and winter months in the Northern Hemisphere. We cannot provide assurance that seasonality and weather conditions will not have a material adverse effect on our results of operations.

Our share price may fluctuate significantly.

We cannot predict the prices at which our common shares may trade. The market price of our common shares may fluctuate widely, depending on many factors, some of which may be beyond our control, including:

actual or anticipated fluctuations in our operating results due to factors related to our business;

success or failure of our business strategy;

our quarterly or annual earnings, or those of other companies in our industry;

our ability to obtain third-party financing as needed;

announcements by us or our competitors of significant acquisitions or dispositions;

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

changes in earnings estimates by us or securities analysts or our ability to meet those estimates;

the operating and share price performance of other comparable companies;

investor perception of us;

natural or other environmental disasters that investors believe may affect us;

overall market fluctuations;

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

changes in laws and regulations affecting our business; and

general economic conditions and other external factors.

10


Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of our common shares.

Risks Relating to Legal, Regulatory and Compliance Matters

Our subsidiaries are party to asbestos-related product litigation that could adversely affect our financial condition, results of operations and cash flows.

Our subsidiaries, along with numerous other companies, are named as defendants in a substantial number of lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were attached to or used with asbestos-containing components manufactured by third parties. Each case typically names between dozens to hundreds of corporate defendants. Historically, our subsidiaries have been identified as defendants in asbestos-related claims. We have experienced an increase in the number of asbestos-related lawsuits over the past several years, including lawsuits by plaintiffs with mesothelioma-related claims. A large percentage of these suits have not presented viable legal claims and, as a result, have been dismissed or withdrawn. Our strategy has been, and continues to be, to mount a vigorous defense aimed at having unsubstantiated suits dismissed, and, only where appropriate, settling claims before trial. As of December 31, 2012, there were approximately 1,900 lawsuits pending against our subsidiaries. A lawsuit might include several claims, and we have approximately 2,300 claims outstanding as of December 31, 2012. We cannot predict with certainty the extent to which we will be successful in litigating or otherwise resolving lawsuits in the future and we continue to evaluate different strategies related to asbestos claims filed against us including entity restructuring and judicial relief. Unfavorable rulings, judgments or settlement terms could have a material adverse impact on our business and financial condition, results of operations and cash flows.

We currently record an estimated liability related to pending claims and future claims, including related defense costs, based on a number of key assumptions and estimation methodologies. These assumptions are derived from historical claims experience and reflect our expectations about future claim activities. These assumptions about the future may or may not prove accurate, and accordingly, we may incur additional liabilities in the future. A change in one or more of the inputs or the methodology that we use to estimate the asbestos liability could materially change the estimated liability and associated cash flows for pending and future claims. Although it is possible that we will incur additional costs for asbestos claims filed beyond what we have currently recorded, we do not believe there is a reasonable basis for estimating those costs at this time. On a quarterly and annual basis, we review and update as appropriate, such estimated asbestos liabilities and assets and the underlying assumptions. Such an update could result in a material change in such estimated assets and liabilities.

We also record an asset that represents our best estimate of probable recoveries from insurers or other responsible parties for the estimated asbestos liabilities. There are significant assumptions made in developing estimates of asbestos-related recoveries, such as policy triggers, policy or contract interpretation, success in litigation in certain cases, the methodology for allocating claims to policies and the continued solvency of the insurers or other responsible parties. The assumptions underlying the recorded asset may not prove accurate, and as a result, actual performance by our insurers and other responsible parties could result in lower receivables and cash flows expected to reduce our asbestos costs. We believe it is possible that the cost of asbestos claims filed beyond our estimation period, net of expected recoveries, could have a material adverse effect on our financial condition, results of operations and cash flows.

We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar anti-corruption laws outside the United States.

The FCPA and similar anti-corruption laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials or other persons for the purpose of obtaining or retaining business. Recent years have seen a substantial increase in anti-bribery law enforcement activity, with more frequent and aggressive investigations and enforcement proceedings by both the U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“SEC”), increased

11


enforcement activity by non-U.S. regulators and increases in criminal and civil proceedings brought against companies and individuals. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that are recognized as having governmental and commercial corruption and in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. Because many of our customers and end users are involved in infrastructure construction and energy production, they are often subject to increased scrutiny by regulators. We cannot assure you that our internal control policies and procedures will always protect us from reckless or criminal acts committed by our employees or third-party intermediaries. In the event that we believe or have reason to believe that our employees or agents have or may have violated applicable anti-corruption laws, including the FCPA we may be required to investigate or have outside counsel investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. Violations of these laws may result in criminal or civil sanctions, which could disrupt our business and result in a material adverse effect on our reputation, business, financial condition, results of operations and cash flows.

Prior to the Merger, the Flow Control business was subject to investigations by the DOJ and the SEC related to allegations that improper payments were made by the Flow Control business and other Tyco subsidiaries and third-party intermediaries in recent years in violation of the FCPA. Tyco reported to the DOJ and the SEC the remedial measures that it had taken in response to the allegations and Tyco’s own internal investigations. As a result of discussions with the DOJ and SEC aimed at resolving these matters, on September 24, 2012, Tyco entered into a settlement with the SEC and a non-prosecution agreement with the DOJ, pursuant to which the Flow Control business is for a three year period subject to yearly reporting to the DOJ concerning its continuing compliance efforts. As a result, the Flow Control business may be subject to investigations in other jurisdictions or suffer other criminal or civil penalties or adverse impacts, including being subject to lawsuits brought by private litigants, each of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our failure to satisfy international trade compliance regulations may adversely affect us.

Our global operations require importing and exporting goods and technology across international borders on a regular basis. Certain of the products we manufacture are “dual use” products, which are products that may have both civil and military applications, or may otherwise be involved in weapons proliferation, and are often subject to more stringent export controls. From time to time, we obtain or receive information alleging improper activity in connection with imports or exports. Our policy mandates strict compliance with U.S. and non-U.S. trade laws applicable to our products. However, even when we are in strict compliance with law and our policies, we may suffer reputational damage if certain of our products are sold through various intermediaries to entities operating in sanctioned countries. When we receive information alleging improper activity, our policy is to investigate that information and respond appropriately, including, if warranted, reporting our findings to relevant governmental authorities. Nonetheless, we cannot provide assurance that our policies and procedures will always protect us from actions that would violate U.S. and/or non-U.S. laws. Any improper actions could subject us to civil or criminal penalties, including material monetary fines, or other adverse actions including denial of import or export privileges, and could damage our reputation and business prospects.

Legislative action by the U.S. Congress could adversely affect us.

Legislative action could be taken by the U.S. Congress which, if ultimately enacted, could override tax treaties, or modify tax statutes or regulation upon which we rely. We cannot predict the outcome of any specific legislative proposals. If proposals were enacted that had the effect of disregarding our incorporation in Switzerland or limiting our ability as a Swiss company to take advantage of the tax treaties between Switzerland and the United States, we could be subject to increased taxation, which could materially adversely affect our financial condition, results of operations, cash flows or our effective tax rate in future reporting periods.

We are exposed to potential environmental and other laws, liabilities and litigation.

We are subject to federal, state, local and foreign laws and regulations governing our environmental practices, public and worker health and safety, and the indoor and outdoor environment. Compliance with these environmental, health and safety regulations could require us to satisfy environmental liabilities, increase the cost

12


of manufacturing our products or otherwise adversely affect our business, financial condition and results of operations. Any violations of these laws by us could cause us to incur unanticipated liabilities that could


10


harm our operating results and cause our business to suffer. We are also required to comply with various environmental laws and maintain permits, some of which are subject to discretionary renewal from time to time, for many of our businesses and we could suffer if we are unable to renew existing permits or to obtain any additional permits that we may require.
Compliance with environmental requirements also could require significant operating or capital expenditures or result in significant operational restrictions. We cannot assure you that we have been or will be at all times in compliance with environmental and health and safety laws. If we violate these laws, we could be fined, criminally charged or otherwise sanctioned by regulators.

We have been named as defendants, targetsdefendant, target or a potentially responsible partiesparty (“PRP”) in a number of environmentalclean-ups relating to our current or former business units. We have disposed of a number of businesses in recent years and in certain cases, we have retained responsibility and potential liability for certain environmental obligations. We have received claims for indemnification from certain purchasers. We may be named as a PRP at other sites in the future for existing business units, as well as both divested and acquired businesses.

In addition to cleanup actions brought by governmental authorities, private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances.

Certain environmental laws impose liability on current or previous owners or operators of real property for the cost of removal or remediation of hazardous substances at their properties or at properties at which they have disposed of hazardous substances. We cannot ensure youhave projects underway at several current and former manufacturing facilities to investigate and remediate environmental contamination resulting from our past operations or by other businesses that previously owned or used the properties. The cost of cleanup and other environmental liabilities can be difficult to accurately predict. In addition, environmental requirements will not change orand tend to become more stringent over time ortime. Thus, we cannot provide assurance that our eventual environmentalclean-up costs and liabilities will not exceed the amount of our current reserves.

We are exposed to certain regulatory and financial risks related to climate change.

Climate change is receiving ever increasing attention worldwide. Many scientists, legislators and others attribute global warming to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions. The U.S. Congress and federal and state regulatory agencies have been considering legislation and regulatory proposals that would regulate and limit greenhouse gas emissions. It is uncertain whether, when and in what form a federal mandatory carbon dioxide emissions reduction program may be adopted. Similarly, certain countries have adopted the Kyoto Protocol and this and other existing international initiatives or those under consideration could affect our international operations. To the extent our customers, particularly those involved in the oil and gas, power generation, petrochemical processing or petroleum refining industries, are subject to any of these or other similar proposed or newly enacted laws and regulations, we are exposed to risks that the additional costs by customers to comply with such laws and regulations could impact their ability or desire to continue to operate at similar levels in certain jurisdictions as historically seen or as currently anticipated, which could negatively impact their demand for our products and services. In addition, new laws and regulations that might favor the increased use of non-fossil fuels, including nuclear, wind, solar and bio-fuels or that are designed to increase energy efficiency, could dampen demand for oil and gas production or power generation resulting in lower spending by customers for our products and services. These actions could also increase costs associated with our operations, including costs for raw materials and transportation. Because it is uncertain what laws will be enacted, we cannot predict the potential impact of such laws on our future financial condition, results of operations and cash flows.

Our results of operations may be negatively impacted by litigation.

Our businesses expose us to potential litigation, such as product liability claims relating to the design, manufacture and sale of our products. While we currently maintain what we believe to be suitable product liability insurance, we cannot provide assurance that we will be able to maintain this insurance on acceptable terms or that this insurance will provide adequate protection against potential or previously existing liabilities. In

13


addition, we self-insure a portion of product liability claims. Successful claims against us for significant amounts could materially and adversely affect our product reputation, financial condition, results of operations and cash flows.

Risks Relating to the Distribution and the Merger

We may not realize the growth opportunities and cost synergies that are anticipated from the Merger.

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

The integration of the Pentair, Inc. and Flow Control businesses following the Merger may present significant challenges.

There is a significant degree of difficulty and management distraction inherent in the process of integrating the Pentair, Inc. and Flow Control businesses. These difficulties include:

the challenge of integrating the Pentair, Inc. and Flow Control businesses while carrying on the ongoing operations of each entity;

the necessity of coordinating geographically separate organizations;

the challenge of integrating the business cultures of the Pentair, Inc. and Flow Control businesses, which may prove to be incompatible;

the challenge and cost of integrating the information technology systems of the Pentair, Inc. and Flow Control businesses; and

the potential difficulty in retaining key executives and personnel of the Pentair, Inc. and Flow Control businesses.

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

We share responsibility for certain income tax liabilities for tax periods prior to and including the date of the Distribution.

In connection with the Distribution, we entered into a tax sharing agreement (the “2012 Tax Sharing Agreement”) with Tyco and The ADT Corporation (“ADT”), which governs the rights and obligations of ADT, Tyco and us for certain pre-Distribution tax liabilities, including Tyco’s obligations under a separate tax sharing agreement (the “2007 Tax Sharing Agreement”) entered into by Tyco, Covidien Ltd. (“Covidien”) and TE

14


Connectivity Ltd. (“TE Connectivity”) in connection with the 2007 distributions of Covidien and TE Connectivity by Tyco (the “2007 Separation”). The 2012 Tax Sharing Agreement provides that we, Tyco and ADT will share (i) certain pre-Distribution income tax liabilities that arise from adjustments made by tax authorities to our, Tyco’s and ADT’s U.S. income tax returns, and (ii) payments required to be made by Tyco with respect to the 2007 Tax Sharing Agreement (the liabilities in clauses (i) and (ii) collectively, “Shared Tax Liabilities”). Tyco is responsible for the first $500 million of Shared Tax Liabilities. We and ADT will share 42% and 58%, respectively, of the next $225 million of Shared Tax Liabilities. We, ADT and Tyco will share 20%, 27.5% and 52.5%, respectively, of Shared Tax Liabilities above $725 million.

The 2007 Tax Sharing Agreement governs the rights and obligations of Tyco, Covidien and TE Connectivity with respect to certain pre-2007 Separation tax liabilities and certain tax liabilities arising in connection with the 2007 Separation. More specifically, Tyco, Covidien and TE Connectivity share 27%, 42% and 31%, respectively, of income tax liabilities that arise from adjustments made by tax authorities to Tyco’s, Covidien’s and TE Connectivity’s U.S. and certain non-U.S. income tax returns and certain taxes attributable to internal transactions undertaken in anticipation of the 2007 Separation. In addition, in the event that the 2007 Separation or certain related transactions are determined to be taxable as a result of actions taken after the 2007 Separation by Tyco, Covidien or TE Connectivity, the party responsible for such failure would be responsible for all taxes imposed on Tyco, Covidien or TE Connectivity as a result thereof. If none of the companies is responsible for such failure, then Tyco, Covidien and TE Connectivity would be responsible for such taxes, in the same manner and in the same proportions as other shared tax liabilities under the 2007 Tax Sharing Agreement. Costs and expenses associated with the management of these shared tax liabilities are generally shared equally among the parties.

With respect to years prior to and including the 2007 Separation, tax authorities have raised issues and proposed tax adjustments that are generally subject to the sharing provisions of the 2007 Tax Sharing Agreement and which may require Tyco to make a payment to a taxing authority, Covidien or TE Connectivity. With respect to adjustments raised by the IRS, although Tyco has resolved a substantial number of these adjustments, a few significant items remain open with respect to the audit of the 1997 through 2004 years. As of the date hereof, Tyco has not been able to resolve certain open items, which primarily involve the treatment of certain intercompany debt issued during the period, through the IRS appeals process. As a result, Tyco expects to litigate these matters once it receives the requisite statutory notices from the IRS, which is likely to occur within the next six months. However, the ultimate resolution of these matters is uncertain and could result in Tyco being responsible for a greater amount than it expects under the 2007 Tax Sharing Agreement.

Any payment that Tyco is required to make under the 2007 Tax Sharing Agreement could result in a material liability for us under the 2012 Tax Sharing Agreement. To the extent we are responsible for any liability under the 2012 Tax Sharing Agreement, and indirectly the 2007 Tax Sharing Agreement, there could be a material adverse impact on our financial condition, results of operations, cash flows or our effective tax rate in future reporting periods.

If the Merger, Distribution or certain internal transactions undertaken in anticipation of the Distribution are determined to be taxable for U.S. federal income tax purposes, we, our shareholders or Tyco could incur significant U.S. federal income tax liabilities.

Pentair, Inc. and Tyco received private letter rulings from the IRS in connection with the Distribution and the Merger regarding the U.S. federal income tax consequences of the Distribution and the Merger to the effect that, for U.S. federal income tax purposes: the Distribution will qualify as tax-free under Sections 355 and 361 of the Internal Revenue Code of 1986, as amended (the “Code”), except for cash received in lieu of fractional shares; certain internal transactions undertaken in anticipation of the Distribution will qualify for favorable treatment under the Code; the Merger will qualify as a reorganization under Section 368(a) of the Code; certain anticipated post-closing transactions will not prevent the tax-free treatment of the Distribution or the Merger; and Section 367(a)(1) of the Code will not cause the Merger to be taxable to Pentair, Inc. shareholders (except for a U.S. shareholder who is or will be a “five-percent transferee shareholder” within the meaning of applicable Treasury Regulations but who does not enter into a “gain recognition agreement with the IRS). In addition, Tyco received a legal opinion confirming the tax-free status of the Distribution for U.S. federal income tax purposes

15


and Tyco and Pentair, Inc. received legal opinions to the effect that the Merger will qualify as a reorganization under section 368(a) of the Code and that Section 367(a)(1) of the Code will not cause the Merger to be taxable to Pentair, Inc. shareholders (except for a U.S. shareholder who is or will be a “five-percent transferee shareholder” within the meaning of applicable Treasury Regulations but who does not enter into a “gain recognition agreement” with the IRS).

The private letter rulings and opinions relied on certain facts and assumptions, and certain representations and undertakings, from us, Tyco and Pentair, Inc. Notwithstanding the private letter rulings and the opinions, the IRS could determine on audit that the Distribution, the internal transactions or the Merger should be treated as taxable transactions if it determines that any of these facts, assumptions, representations or undertakings is not correct or has been violated, or that the Distribution, the internal transactions or the Merger should be taxable for other reasons, including as a result of significant changes in share or asset ownership after the Merger.

If the Distribution ultimately is determined to be taxable, the Distribution could be treated as a taxable dividend or capital gain to Tyco shareholders for U.S. federal income tax purposes, and Tyco shareholders could incur significant U.S. federal income tax liabilities. In addition, Tyco would recognize a gain in an amount equal to the excess of the fair market value of our common shares distributed to Tyco shareholders on the Distribution date over Tyco’s tax basis in such common shares, but such gain, if recognized, generally would not be subject to U.S. federal income tax. However, Tyco could incur significant U.S. federal income tax liabilities if it is ultimately determined that certain internal transactions undertaken in anticipation of the Distribution are taxable. If the Merger ultimately is determined to be taxable, Pentair, Inc. shareholders would recognize taxable gain or loss on their disposition of Pentair, Inc. common shares in the Merger.

Under the terms of the 2012 Tax Sharing Agreement, in the event the Distribution, the ADT distribution, the internal transactions or the Merger were determined to be taxable as a result of actions taken after the Distribution by us, ADT or Tyco, the party responsible for such failure would be responsible for all taxes imposed as a result thereof. If such failure is not the result of actions taken after the Distribution by us, ADT or Tyco, then we, ADT and Tyco would be responsible for any taxes imposed as a result of such determination in the same manner and in the same proportions as we, ADT and Tyco are responsible for Shared Tax Liabilities. Such tax amounts could be significant. In the event that any party to the 2012 Tax Sharing Agreement defaults in its obligation to pay certain taxes to another party that arise as a result of no party’s fault, each non-defaulting party would be responsible for an equal amount of the defaulting party’s obligation to make a payment to another party in respect of such other party’s taxes. In addition, if another party to the 2012 Tax Sharing Agreement that is responsible for all or a portion of an income tax liability were to default in its payment of such liability to a taxing authority, we could be legally liable under applicable tax law for such liabilities and required to make additional tax payments. Accordingly, under certain circumstances, we may be obligated to pay amounts in excess of our agreed-upon share of our, Tyco’s and ADT’s tax liabilities.

If the Distribution or the Merger are determined to be taxable for Swiss withholding or other tax purposes, we could incur significant Swiss withholding tax or other tax liabilities.

Generally, Swiss withholding tax of 35% is due on dividends and similar distributions to Tyco’s shareholders, regardless of the place of residency of the shareholder. As of January 1, 2011, distributions to shareholders out of qualifying contributed surplus (Kapitaleinlage) accumulated on or after January 1, 1997 are exempt from Swiss withholding tax if certain conditions are met (Kapitaleinlageprinzip). Tyco has obtained a ruling from the Swiss Federal Tax Administration confirming that the Distribution qualifies as payment out of such qualifying contributed surplus and no amount will be withheld by Tyco when making the Distribution.

As a condition to closing of the Merger, Tyco obtained rulings from the Swiss Federal Tax Administration confirming: (i) that the Merger will be a transaction that is generally tax-free for Swiss federal, cantonal, and communal tax purposes (including with respect to Swiss stamp tax and Swiss withholding tax); (ii) the relevant Swiss tax base of an acquisition subsidiary of ours for Swiss tax (including federal and cantonal and communal) purposes; (iii) the relevant amount of capital contribution reserves (Kapitaleinlageprinzip) which will be exempt

16


from Swiss withholding tax in the event of a distribution to our shareholders after the Merger; and (iv) that no Swiss stamp tax will be levied on certain post-Merger restructuring transactions.

These tax rulings rely on certain facts and assumptions, and certain representations and undertakings, from Tyco. Notwithstanding these tax rulings, the Swiss Federal Tax Administration could determine on audit that the Distribution or the Merger or certain internal transactions undertaken in anticipation of the Distribution should be treated as a taxable transaction for withholding tax or other tax purposes if it determines that any of these facts, assumptions, representations or undertakings is not correct or has been violated. If the Distribution or the Merger or certain internal transactions undertaken in anticipation of the Distribution ultimately are determined to be taxable for withholding tax or other tax purposes, we and Tyco could incur material Swiss withholding tax or other tax liabilities that could significantly detract from, or eliminate, the benefits of the Distribution and the Merger. In addition, we could become liable to indemnify Tyco for part of any Swiss withholding tax liabilities to the extent provided under the 2012 Tax Sharing Agreement.

We might not be able to engage in desirable strategic transactions and equity issuances because of restrictions relating to U.S. federal income tax requirements for tax-free distributions.

Our ability to engage in desirable strategic transactions or equity issuances could be significantly limited or restricted in order to preserve, for U.S. federal income tax purposes, the tax-free nature of the Distribution and certain related transactions. Even if the Distribution otherwise qualifies for tax-free treatment under Section 355 of the Code, it may result in corporate-level gain to Tyco under Section 355(e) of the Code if 50% or more, by vote or value, of our shares or Tyco’s shares are acquired or issued as part of a plan or series of related transactions that includes the Distribution. Any acquisitions or issuances of our shares or Tyco’s shares within two years after the Distribution are generally presumed to be part of such a plan, although we or Tyco may be able to rebut that presumption. For purposes of this test, the Merger might be treated as part of such a plan or series of related transactions, but if so would not, by itself, cause the Distribution to be taxable to Tyco since Pentair, Inc. shareholders acquired less than 50% of our common shares in the Merger. The change in ownership resulting from the Merger, if treated as part of a plan or series of related transactions that includes the Distribution, would be aggregated with other acquisitions or issuances of our shares that occur as part of a plan or series of related transactions that include the Distribution in determining whether a 50% change in ownership has occurred. The process for determining whether a change of ownership has occurred under the tax rules is complex, inherently factual and subject to interpretation of the facts and circumstances of a particular case. If we do not carefully monitor our compliance with these rules, we could inadvertently cause or permit a change of ownership to occur, triggering our obligation to indemnify Tyco or ADT pursuant to the 2012 Tax Sharing Agreement.

To preserve the tax-free treatment to Tyco of the Distribution, under the 2012 Tax Sharing Agreement, we are prohibited from taking or failing to take any action that prevents the Distribution and related transactions from being tax-free. Further, for the two-year period following the Distribution, without obtaining the consent of Tyco and ADT, a private letter ruling from the IRS or an unqualified opinion of a nationally recognized law firm, we may be prohibited from, among other things:

approving or allowing any transaction that results in a change in ownership of more than 35% of our common shares, when combined with any other changes in ownership of our common shares,

redeeming equity securities,

selling or otherwise disposing of more than 35% of our assets, or

engaging in certain internal transactions.

These restrictions may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business. Moreover, the 2012 Tax Sharing Agreement also

17


provides that we are responsible for any taxes imposed on Tyco or any of its affiliates or on ADT or any of its affiliates as a result of the failure of the Distribution or the internal transactions to qualify for favorable treatment under the Code if such failure is attributable to certain actions taken after the Distribution by or in respect of us, any of our affiliates or our shareholders.

Our accounting and other management systems and resources may not be adequately prepared to quickly integrate and update the financial reporting systems of the Flow Control business.

The financial results of the Flow Control business previously were included within the consolidated results of Tyco, and were not directly subject to the reporting and other requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). As a result of the Distribution and the Merger, we are subject to reporting and other obligations under the Exchange Act. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. We are responsible for ensuring that all aspects of our business comply with Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), which will require annual management assessments of the effectiveness of internal control over financial reporting and a report by an independent registered public accounting firm addressing these assessments. Although our management has experience with these reporting and related obligations, ensuring compliance with respect to the Flow Control business may place significant demands on management, administrative and operational resources, including accounting systems and resources.

Our report on our internal control over financial reporting (“ICFR”) in the Annual Report on Form 10-K for the year ended December 31, 2012 includes a scope exception for the acquired Flow Control business because it is a significant acquisition for which our management would otherwise have had only three months to evaluate and implement ICFR.

Under the Sarbanes-Oxley Act, we are required to maintain effective disclosure controls and procedures and internal controls over financial reporting. To comply with these requirements with respect to the Flow Control business, we may need to upgrade our systems; implement additional financial and management controls, reporting systems and procedures; and hire additional accounting and finance staff. It is expected that we will incur annual expenses for the purpose of addressing these requirements, and those expenses may be significant. If we are unable to upgrade its financial and management controls, reporting systems, information technology systems and procedures in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies under the Exchange Act could be impaired. Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Risks Relating to Our Liquidity

Disruptions in the financial markets could adversely affect us, our customers and our suppliers by increasing funding costs or reducing availability of credit.

In the normal course of our business, we may access credit markets for general corporate purposes, which may include repayment of indebtedness, acquisitions, additions to working capital, repurchase of common shares, capital expenditures and investments in our subsidiaries. Although we expect to have sufficient liquidity to meet our foreseeable needs, our access to and the cost of capital could be negatively impacted by disruptions in the credit markets, which have occurred in the past and made financing terms for borrowers unattractive or unavailable. These factors may make it more difficult or expensive for us to access credit markets if the need arises. In addition, these factors may make it more difficult for our suppliers to meet demand for their products or for prospective customers to commence new projects, as customers and suppliers may experience increased costs of debt financing or difficulties in obtaining debt financing. Disruptions in the financial markets have had adverse effects on other areas of the economy and have led to a slowdown in general economic activity that may continue to adversely affect our businesses. These disruptions may have other unknown adverse effects. One or more of these factors could adversely affect our business, financial condition, results of operations or cash flows.

18


Provisions of our Restated Articles of Incorporation, Bylaws and Minnesota law could deter takeover attempts.

Anti-takeover provisionsCovenants in our charter documents, under Minnesota lawdebt instruments may adversely affect us.

Our credit agreements and inindentures contain customary financial covenants. Our ability to meet the financial covenants can be affected by events beyond our shareholder rights plan could prevent or delay transactionscontrol, and we cannot provide assurance that our shareholders may favor.

Our Restated Articleswe will meet those tests. A breach of Incorporation and Bylaws include provisions relating to the election, appointment and removalany of directors, as well as shareholder notice and shareholder voting requirements which could delay, prevent or make more difficult a merger, tender offer, proxy contest or other change of control. In addition, our common share purchase rights could cause substantial dilution to a person or group that attempts to acquire us, which could deter some acquirers from making takeover proposals or tender offers. Also, the Minnesota Business Corporations Act contains control share acquisition and business combination provisions which could delay, prevent or make more difficult a merger, tender offer, proxy contest or other change of control. Our shareholders might view any such transaction as being in their best interests since the transactionthese covenants could result in a higher stock pricedefault under our credit agreements or indentures. Upon the occurrence of an event of default under any of our credit facilities or indentures, the lenders or trustees could elect to declare all amounts outstanding thereunder to be immediately due and payable and, in the case of credit facility lenders, terminate all commitments to extend further credit. If the lenders or trustees accelerate the repayment of borrowings, we cannot provide assurance that we will have sufficient assets to repay our credit facilities and our other indebtedness. Furthermore, acceleration of any obligation under any of our material debt instruments will permit the holders of our other material debt to accelerate their obligations, which could have a material adverse effect on our financial condition.

We may increase our debt or raise additional capital in the future, which could affect our financial condition, and may decrease our profitability.

As of December 31, 2012, we had $2.5 billion of total debt outstanding. We may increase our debt or raise additional capital in the future, subject to restrictions in our debt agreements. If our cash flow from operations is less than we anticipate, or if our cash requirements are more than we expect, we may require more financing. However, debt or equity financing may not be available to us on acceptable terms, if at all. If we incur additional debt or raise equity through the issuance of additional capital shares, the terms of the debt or capital shares issued may give the holders rights, preferences and privileges senior to those of holders of our common shares, particularly in the event of liquidation. The terms of the debt may also impose additional and more stringent restrictions on our operations than we currently have. If we raise funds through the issuance of additional equity, the percentage ownership of existing shareholders in our company would decline. If we are unable to raise additional capital when needed, our financial condition could be adversely affected. Also, regardless of the terms of our financings, the amount of our shares that we can issue may be limited because the issuance of our shares may cause the Distribution to be a taxable event for Tyco under Section 355(e) of the Code, and under the 2012 Tax Sharing Agreement, we could be required to indemnify Tyco for that tax. See discussion under “We might not be able to engage in desirable strategic transactions and equity issuances following the Distribution and the Merger because of restrictions relating to U.S. federal income tax requirements for tax-free distributions.”

Our leverage could have a material adverse effect on our business, financial condition or results of operations.

Our ability to make payments on and to refinance our indebtedness, including our existing debt as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are not able to repay or refinance our debt as it becomes due, we may be forced to sell assets or take other disadvantageous actions, including (i) reducing financing in the future for working capital, capital expenditures and general corporate purposes or (ii) dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. The lenders who hold such debt could also accelerate amounts due, which could potentially trigger a default or acceleration of any of our other debt.

Risks Relating to Our Jurisdiction of Incorporation in Switzerland

Our status as a Swiss corporation may limit our flexibility with respect to certain aspects of capital management and may cause us to be unable to make distributions without subjecting our shareholders to Swiss withholding tax.

Swiss law allows shareholders to authorize share capital that can be issued by the board of directors without additional shareholder approval. This authorization is limited to 50% of the existing registered share capital and must be renewed by the shareholders every two years. Additionally, subject to specified exceptions, Swiss law grants preemptive rights to existing shareholders to subscribe to any new issuance of shares. Swiss law also does not provide as much flexibility in the various terms that can attach to different classes of shares as the laws of

19


some other jurisdictions. Swiss law also reserves for approval by shareholders certain corporate actions over which a board of directors would have authority in some other jurisdictions. These Swiss law requirements relating to our capital management may limit our flexibility, and situations may arise where greater flexibility would have provided substantial benefits to our shareholders.

Under Swiss law, a Swiss corporation may pay dividends only if the corporation has sufficient distributable profits from previous fiscal years, or if the corporation has distributable reserves, each as evidenced by its audited statutory balance sheet. Distributable reserves are generally recorded either as “free reserves” or as “qualifying contributed surplus” (contributions received from shareholders) in “Capital contribution reserve.” Distributions may be made out of registered share capital—the aggregate par value of a company’s registered shares—only by way of a capital reduction. After the Merger, the amount available for future dividends or capital reductions from reserve from capital contributions on a Swiss withholding tax free basis is CHF 8.7 billion. We are awaiting approval from the Swiss tax authorities of the reserve from capital contributions. We will not be able to pay dividends or make other distributions to shareholders on a Swiss withholding tax free basis in excess of that amount unless we increase our share capital or our reserves from capital contributions. We would also be able to pay dividends out of distributable profits or freely distributable reserves, but such dividends would be subject to Swiss withholding tax. There can be no assurance that we will have sufficient distributable profits, free reserves, reserves from capital contributions or registered share capital to pay a dividend or effect a capital reduction or that we will be able to meet the other legal requirements for dividend payments or distributions as a result of capital reductions.

Generally, Swiss withholding tax of 35% is due on dividends and similar distributions to our shareholders, regardless of the place of residency of the shareholder, unless the distribution is made to shareholders out of (i) a reduction of par value or (ii) assuming certain conditions are met, qualifying contributed surplus accumulated on or after January 1, 1997. A U.S. holder that qualifies for benefits under the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income (the “U.S.-Swiss Treaty”) may apply for a refund of the tax withheld in excess of the 15% treaty rate (or in excess of the 5% reduced treaty rate for qualifying corporate shareholders with at least 10% participation in our voting shares, or for a full refund in the case of qualified pension funds). There can be no assurance that we will have sufficient qualifying contributed surplus to pay dividends free from Swiss withholding tax or that Swiss withholding rules will not be changed in the future. In addition, there can be no assurance that the current marketSwiss law with respect to distributions out of qualifying contributed surplus will not be changed or that a change in Swiss law will not adversely affect us or our shareholders, in particular as a result of distributions out of qualifying contributed surplus becoming subject to additional corporate law or other restrictions. There are currently motions pending in the Swiss Parliament that purport to limit the distribution of qualifying contributed surplus. In addition, over the long term, the amount of par value available to us for par value reductions or qualifying contributed surplus available to us to pay out as distributions is limited. If we are unable to make a distribution through a reduction in par value or out of qualifying contributed surplus, we may not be able to make distributions without subjecting our shareholders to Swiss withholding taxes.

Under present Swiss tax laws, repurchases of shares for the purposes of cancellation are treated as a partial liquidation subject to 35% Swiss withholding tax on the difference between the repurchase price and the par value except, since January 1, 2011, to the extent attributable to qualifying contributed surplus (Kapitaleinlagereserven) if any. If, and to the extent that, the repurchase of shares is out of retained earnings or other taxable reserves, the Swiss withholding tax becomes due. No partial liquidation treatment applies and no withholding tax is triggered if the shares are not repurchased for cancellation but held by us as treasury shares. However, should we not resell such treasury shares within six years, the withholding tax becomes due at the end of the six year period.

Although we may follow a share repurchase process for future share repurchases, if any, similar to a “second trading line” on the SIX Swiss Exchange in which Swiss institutional investors sell shares to us and are generally able to receive a refund of the Swiss withholding tax, if we are unable to use this process successfully, we may

20


not be able to repurchase shares for the purposes of capital reduction without triggering Swiss withholding tax if and to the extent that the repurchase of shares is made out of retained earnings or other taxable reserves. No withholding tax would be applicable if and to the extent that tax-free qualifying contributed surplus is attributable to the share repurchase.

Changes in the U.S. dollar/Swiss franc exchange rate could limit the amount of dividends authorized on our common stock.shares, and there can be no assurance that we will be able to continue to pay dividends on our common shares.

Prior to the consummation of the Merger, our board of directors proposed, and Tyco as our sole shareholder authorized, us to pay quarterly cash dividends through the first annual general meeting of our shareholders in 2013. The authorization provides that a dividend will be made out of our “contributed surplus” equity position in our statutory accounts to our shareholders in the amount of $0.23 for the second quarter of 2013. The deduction to our contributed surplus in our statutory accounts, which is required to be made in Swiss francs, will be determined based on the aggregate amount of the dividend and will be calculated based on the U.S. dollar/Swiss franc exchange rate in effect on September 14, 2012. The U.S. dollar amount of the dividend will be capped at an amount such that the aggregate reduction to our contributed surplus will not exceed 240 million Swiss francs. To the extent that a dividend payment would exceed the cap, the U.S. dollar per share amount of the current or future dividends will be reduced on a pro rata basis so that the aggregate amount of all dividends paid does not exceed the cap. In addition, the aggregate reduction in contributed surplus will be increased for any shares issued, and decreased for any shares acquired, after September 14, 2012 and before the record date for the applicable dividend payment.

Any future dividends that may be proposed by our board of directors will be subject to approval by our shareholders at our annual general meeting. There can be no assurance that our shareholders will approve dividends. Whether our board of directors exercises its discretion to propose any dividends to holders of our common shares will depend on many factors, including our financial condition, earnings, capital requirements of our business, covenants associated with debt obligations, legal requirements, regulatory constraints, industry practice and other factors that our board of directors deems relevant. There can be no assurance that we will continue to pay any dividend in the future.

Swiss laws differ from the laws in effect in the United States and may afford less protection to holders of our securities.

Because of differences between Swiss law and U.S. state and federal laws and differences between the governing documents of Swiss companies and those incorporated in the U.S., it may not be possible to enforce in Switzerland court judgments obtained in the United States against us based on the civil liability provisions of the federal or state securities laws of the United States. As a result, in a lawsuit based on the civil liability provisions of the U.S. federal or state securities laws, U.S. investors may find it difficult to:

effect service within the United States upon us or our directors and officers located outside the United States;

enforce judgments obtained against those persons in U.S. courts or in courts in jurisdictions outside the United States; and

enforce against those persons in Switzerland, whether in original actions or in actions for the enforcement of judgments of U.S. courts, civil liabilities based solely upon the U.S. federal or state securities laws.

Original actions against persons in Switzerland based solely upon the U.S. federal or state securities laws are governed, among other things, by the principles set forth in the Swiss Federal Act on Private International Law. This statute provides that the application of provisions of non-Swiss law by the courts in Switzerland shall be precluded if the result was incompatible with Swiss public policy. Also, mandatory provisions of Swiss law may be applicable regardless of any other law that would otherwise apply.

21


Switzerland and the United States do not have a treaty providing for reciprocal recognition of and enforcement of judgments in civil and commercial matters. The recognition and enforcement of a judgment of the courts of the United States in Switzerland is governed by the principles set forth in the Swiss Federal Act on Private International Law. This statute provides in principle that a judgment rendered by a non-Swiss court may be enforced in Switzerland only if:

the non-Swiss court had jurisdiction pursuant to the Swiss Federal Act on Private International Law;

the judgment of such non-Swiss court has become final and non-appealable;

the judgment does not contravene Swiss public policy;

the court procedures and the service of documents leading to the judgment were in accordance with the due process of law; and

no proceeding involving the same position and the same subject matter was first brought in Switzerland, or adjudicated in Switzerland, or that it was earlier adjudicated in a third state and this decision is recognizable in Switzerland.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES
ITEM 1B.  UNRESOLVED STAFF COMMENTS
None.
ITEM 2.  PROPERTIES

Our principal executive office is located in leased premises in Schaffhausen, Switzerland, and our management office in the United States is located in leased premises in Golden Valley, Minnesota. Our operations are conducted in facilities throughout the world. These facilities house manufacturing and distribution operations, as well as sales and marketing, engineering and administrative offices.

We carry out our Water Group& Fluid Solutions manufacturing operations at 26 plants located throughout the United States and at 1434 plants located in 1017 other countries. In addition, our Water Group& Fluid Solutions has 1955 distribution facilities and 3558 sales offices located in numerous countries throughout the world.

We carry out our Technical Products GroupValves & Controls manufacturing operations at 611 plants located throughout the United States and 1052 plants located in 820 other countries. In


11


addition, our Technical Products GroupValves & Controls has 951 distribution facilities and 2690 sales offices located in numerous countries throughout the world.

We carry out our Technical Solutions manufacturing operations at 10 plants located throughout the United States and 13 plants located in 11 other countries. In addition, Technical Solutions has 20 distribution facilities and 42 sales offices located in numerous countries throughout the world.

We believe that our production facilities are suitable for their purpose and are adequate to support our businesses.

ITEM 3.  LEGALLEGAL PROCEEDINGS

We have been made parties to a number of actions filed or have been given notice of potential claims relating to the conduct of our business, including those pertaining to commercial disputes, product liability, asbestos, environmental, safety and health, patent infringement and employment matters.

While we believe that a material adverse impact on our consolidated financial position, results of operations or cash flows from any such future chargesclaims or potential claims is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future adverse ruling or unfavorable development could result in future charges that could have a material adverse impact. We do and will continue to periodically reexamine our estimates of probable liabilities

22


and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our consolidated financial position, results of operations and cash flows for the proceedings and claims described in “Legal Proceedings”the notes to our consolidated financial statements could change in the future.

EnvironmentalAsbestos Matters

We have been

Our subsidiaries and numerous other companies are named as defendants targetsin personal injury lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or PRPdistribution of industrial products that either contained asbestos or were attached to or used with asbestos-containing components manufactured by third-parties. Each case typically names between dozens to hundreds of corporate defendants. While we have observed an increase in a smallthe number of environmentalclean-ups,these lawsuits over the past several years, including lawsuits by plaintiffs with mesothelioma-related claims, a large percentage of these suits have not presented viable legal claims and, as a result, have been dismissed by the courts. Our historical strategy has been to mount a vigorous defense aimed at having unsubstantiated suits dismissed, and, where appropriate, settling suits before trial. Although a large percentage of litigated suits have been dismissed, we cannot predict the extent to which we will be successful in resolving lawsuits in the future.

As of December 31, 2012, there were approximately 1,900 lawsuits pending against our subsidiaries. A lawsuit might include several claims, and we have approximately 2,300 claims outstanding as of December 31, 2012. This amount is not adjusted for claims that are not actively being prosecuted, identified incorrect defendants, or duplicated other actions, which would ultimately reflect our current or former business units have generally been givende minimisstatus. To date, noneestimate of these claims have resulted inclean-up costs, fines, penalties or damages in an amount material to our financial position or results of operations. We have disposed of athe number of businessesviable claims made against us, our affiliates, or entities for which we assumed responsibility in connection with acquisitions or divestitures. In addition, the amount does not include certain claims pending against third parties for which we have provided an indemnification.

Our estimated liability for asbestos-related claims was $234.6 million and $0.6 million as of December 31, 2012 and 2011, respectively, and was recorded inOther non-current liabilities in the past yearsConsolidated Balance Sheets for pending and future claims and related defense costs. Our estimated receivable for insurance recoveries was $157.4 million at December 31, 2012, all of which was acquired in certain cases, suchthe Merger, and was recorded inOther non-current assets in the Consolidated Balance Sheets. We had no estimated receivable for insurance recoveries as the disposition of the Cross Pointe Paper Corporation uncoated paper businessDecember 31, 2011.

Environmental Matters

We are involved in 1995, the disposition of the Federal Cartridge Company ammunition business in 1997, the disposition of Lincoln Industrial in 2001 and the disposition of the Tools Group in 2004, weor have retained responsibility and potential liability for environmental obligations and legal proceedings related to our current business and, including pursuant to certain indemnification obligations, related to certain formerly owned businesses. We are responsible, or alleged to be responsible, for ongoing environmental obligations.investigation and/or remediation of sites in several countries. These sites are in various stages of investigation and/or remediation and at some of these sites our liability is considered de minimis. We received notification from the U.S. Environmental Protection Agency and from similar state and non-U.S. environmental agencies that several sites formerly or currently owned and/or operated by us, and other properties or water supplies that may be or may have been impacted from those operations, contain disposed or recycled materials or waste and require environmental investigation and/or remediation. Those sites include instances where we have been identified as a potentially responsible party under U.S. federal, state and/or non-U.S. environmental laws and regulations. For several formerly owned businesses, we have also received claims for indemnification from purchasers of these businesses and have established what we believe to be adequatebusinesses.

Our accruals for potential liabilities arising out of retained responsibilities. We settled someenvironmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the claims in prior years;liability can be reasonably estimated, based on current law and existing technologies. It can be difficult to dateestimate reliably the final costs of investigation and remediation due to various factors. In our opinion, the amounts accrued are appropriate based on facts and circumstances as currently known. Based upon our experience, current information regarding known contingencies and applicable laws, we have recorded accruals have been adequate.

In addition, there are ongoingreserves for these environmental issues at a limited numbermatters of sites relating to operations no longer carried out at the sites. We have established what we believe to be adequate accruals for remediation costs at these sites.$35.9 million and $1.5 million as of December 31,

23


2012 and 2011, respectively. We do not believe that projected response costsanticipate these environmental conditions will result inhave a material liability. We have also made claims against third parties for indemnification against potential liabilities foradverse effect on our financial position, results of operations or cash flows. However, unknown conditions, new details about existing conditions or changes in environmental remediations or other obligations. We cannot assure you that we will be successful in obtaining indemnity or reimbursement for such costs.

Werequirements may be named as a PRP at other sites in the future, for both divested and acquired businesses. When the outcome of the matter is probable and it is possible to provide reasonable estimates of our liability with respectgive rise to environmental sites, provisions have been made in accordance with generally accepted accounting principles in the United States. As of December 31, 2010 and 2009, our undiscounted reserves for such environmental liabilities were approximately $1.3 million and $2.3 million, respectively. We cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmentalclean-up costs and liabilities will not exceed the amount of our current reserves.
reserves and could have a material adverse effect in the future.

Product liability claims

We are subject to various product liability lawsuits and personal injury claims. A substantial number of these lawsuits and claims are insured and accrued for by Penwald, our captive insurance subsidiary. See discussion in ITEM 1 and ITEM 8, Note 12 of the Notes to Consolidated Financial Statements — Insurance subsidiary. Penwald records a liability for these claims based on actuarial projections of ultimate losses. For all other claims, accruals covering the claims are recorded, on an undiscounted basis, when it is probable that a liability


12


has been incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are adjusted periodically as additional information becomes available. In 2004, we disposed of the Tools Group and we retained responsibility for certain product claims. We have not experienced significant unfavorable trends in either the severity or frequency of product liability lawsuits or personal injury claims.

Compliance Matters

Prior to the Merger, the Flow Control business was subject to investigations by the DOJ and the SEC related to allegations that improper payments were made by the Flow Control business and other Tyco subsidiaries and third-party intermediaries in recent years in violation of the Foreign Corrupt Practices Act. Tyco reported to the DOJ and the SEC the remedial measures that it had taken in response to the allegations and Tyco’s own internal investigations. As a result of discussions with the DOJ and SEC aimed at resolving these matters, on September 24, 2012, Tyco entered into a settlement with the SEC and a non-prosecution agreement with the DOJ, pursuant to which the Flow Control business is for a three year period subject to yearly reporting to the DOJ concerning its continuing compliance efforts.

ITEM 4.  MINESUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSSAFETY DISCLOSURES
None.


13Not applicable.

24


EXECUTIVE OFFICERS OF THE REGISTRANT

Current executive officers of Pentair Ltd., their ages, current position and their business experience during at least the past five years are as follows:

Name

  

Age

  
Name
Age

Current Position and Business Experience

Randall J. Hogan

  5557  Chief Executive Officer since January 2001 and Chairman of the Board effectivesince May 1, 2002; President and Chief Operating Officer, December 1999 — December 2000; Executive Vice President and President of Pentair’s Electrical and Electronic Enclosures Group, March 1998 — December 1999; United Technologies Carrier Transicold President 1995 — 1997; Pratt & Whitney Industrial Turbines Vice President and General Manager 1994 — 1995; General Electric various executive positions 1988 — 1994; McKinsey & Company consultant 1981 — 1987.

Michael V. Schrock

  5860  President and Chief Operating Officer since September 2006; President and Chief Operating Officer of Filtration and Technical Products,Solutions, October 2005 — September 2006; President and Chief Operating Officer of Enclosures, October 2001 — September 2005; President, Pentair Water Technologies — Americas, January 2001 — October 2001; President, Pentair Pump and Pool Group, August 2000 — January 2001; President, Pentair Pump Group, January 1999 — August 2000; Vice President and General Manager, Aurora, Fairbanks Morse and Pentair Pump Group International, March 1998 — December 1998; Divisional Vice President and General Manager, Honeywell International Inc., 1994 — 1998.

John L. Stauch

  4648  Executive Vice President and Chief Financial Officer since February 2007; Chief Financial Officer of the Automation and Control Systems unit of Honeywell International Inc., July 2005 — February 2007; Vice President, Finance and Chief Financial Officer of the Sensing and Controls unit of Honeywell International Inc., January 2004 — July 2005; Vice President, Finance and Chief Financial Officer of the Automation & Control Products unit of Honeywell International Inc., July 2002 — January 2004; Chief Financial Officer and IT Director of PerkinElmer Optoelectronics, a unit of PerkinElmer, Inc., April 2000 — April 2002; Various executive, investor relations and managerial finance positions with Honeywell International Inc. and its predecessor AlliedSignal Inc., 1994 — 2000.

Frederick S. Koury

  5052  Senior Vice President, Human Resources, since August 2003; Vice President of Human Resources at Limited Brands, September 2000 — August 2003; PepsiCo, Inc., various executive positions, June 1985 — September 2000.

Angela D. Lageson

  4244  Senior Vice President, General Counsel and Secretary since February 2010; Assistant General Counsel, November 2002 — February 2010; Shareholder and Officer of the law firm of Henson & Efron, P.A., January 2000 — 2002; Associate Attorney in the law firm of Henson & Efron, P.A. October 1996 — January 2000 and in the law firm of Felhaber Larson Fenlon & Vogt, P.A., 1992 — 1996.

Todd R. Gleason

42Senior Vice President, Growth since January 2013; President, Integration and Standardization, March 2012 — January 2013; Vice President, Marketing & Strategy June 2010 — March 2012; Vice President, Investor Relations and Business Analysis and Planning, June 2007 — June 2010; Director of Investor Relations with American Standard (now Ingersoll Rand), January 2005 — June 2007; Various business leadership positions with Honeywell International Inc. and its predecessor AlliedSignal Inc., 1998 — 2005.

Michael G. Meyer

  5254  Vice President, Treasurer since September 2012; Vice President of Treasury and Tax since April 2004;2004 – September 2012; Treasurer, January 2002 — March 2004; Assistant Treasurer, September 1994 — December 2001; Various executive positions with Federal-Hoffman, Inc. (former subsidiary of Pentair), August 1985 — August 1994.

Mark C. Borin

  4345  Corporate Controller and Chief Accounting Officer since March 2008; Partner in the audit practice of the public accounting firm KPMG LLP, June 2000 — March 2008; Various positions in the audit practice of KPMG LLP, September 1989 — June 2000.


14

25


PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON STOCK,EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock isshares are listed for trading on the New York Stock Exchange and tradestrade under the symbol “PNR.” As of December 31, 2010,2012, there were 3,73521,033 shareholders of record.

The high, low and closing sales price for our common stockshares and the dividends declaredpaid for each of the quarterly periods for 20102012 and 20092011 were as follows:

                                 
  2010 2009
  First Second Third Fourth First Second Third Fourth
 
 
High
 $36.40  $39.32  $35.68  $37.22  $26.38  $29.07  $31.69  $34.27 
Low
 $29.55  $30.62  $29.41  $31.89  $17.23  $20.91  $23.20  $28.18 
Close
 $36.08  $31.57  $33.57  $36.51  $22.05  $25.54  $29.26  $32.30 
Dividends declared
 $0.19  $0.19  $0.19  $0.19  $0.18  $0.18  $0.18  $0.18 

   2012   2011 
    First     Second     Third     Fourth     First     Second     Third     Fourth   

High

  $    48.77   $    47.59   $    45.21   $    49.50   $    38.97   $    41.38   $    42.43   $    38.62 

Low

   33.88    36.31    37.43    40.30    34.85    36.74    29.73    30.38 

Close

   47.61    38.28    44.51    49.15    38.00    41.27    32.01    33.29 

Dividends paid

   0.22    0.22    0.22    0.22    0.20    0.20    0.20    0.20 

Pentair has paid 140148 consecutive quarterly dividends and has increased dividends each year for 3436 consecutive years.


15Future dividends on our common shares or reductions of registered share capital for distribution to shareholders, if any, must be approved by our shareholders. We expect to obtain shareholder approval of the annual dividend amount out of contributed surplus each year at our annual general meeting, and we expect to distribute the approved dividend amount in four quarterly installments, on dates determined by our Board of Directors. The timing, declaration and payment of future dividends to holders of our common shares will depend upon many factors, including our financial condition and results of operations, the capital requirements of our businesses, industry practice and any other relevant factors.

26


StockShare Performance Graph

The following information under the caption “Stock“Share Performance Graph” in this ITEM 5 of this Annual Report onForm 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934 and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.

The following graph sets forth the cumulative total shareholder return on our common stockshares for the last five years, assuming the investment of $100 on December 31, 20052007 and the reinvestment of all dividends since that date to December 31, 2010.2012. The graph also contains for comparison purposes the S&P 500 Index, the S&P 500 Industrials Index and the S&P MidCap 400 Index, assuming the same investment level and reinvestment of dividends.

By virtue of our market capitalization, we are a component of the S&P 500 Index. Prior to the Merger, we used the S&P MidCap 400 Index. OnIndex as a comparison because we had not found a readily identifiable peer group and using a published industry index would have skewed results by including significantly larger companies. After the Merger, on the basis of our size and diversity of businesses, we have not found a readily identifiable peer group. We believe the S&P MidCap 400500 Industrials Index is an appropriate comparison. We have evaluated other published indices, but have determined that the results are skewed by significantly larger companies included in the indices. We believe such aindustry index for comparison would not be meaningful.

                         
  Base Period
  INDEXED RETURNS
 
  December
  Years Ending December 31: 
Company/Index 2005  2006  2007  2008  2009  2010 
  
PENTAIR INC
  100   92.47   104.35   72.46   101.62   117.51 
S&P 500 INDEX
  100   115.79   122.16   76.96   97.33   111.99 
S&P MIDCAP 400 INDEX
  100   110.32   119.12   75.96   104.36   132.16 
purposes.


16

27


   Base Period
December
2007
   INDEXED RETURNS
Years ended December 31
 
Company / Index    2008   2009   2010   2011   2012 

Pentair Ltd.

   100    69.44    97.38    112.61    104.90    158.20 

S&P 500 Index

   100    63.00    79.67    91.68    93.61    108.59 

S&P 500 Industrials

   100    60.08    72.65    92.07    91.53    105.58 

S&P MidCap 400 Index

   100    63.77    87.61    110.94    109.02    128.51 

Purchases of Equity Securities

The following table provides information with respect to purchases we made of our common stockshares during the fourth quarter of 2010:

                 
      (c)
 (d)
      Total Number of
 Dollar Value of
  (a)
   Shares Purchased
 Shares that
  Total Number
 (b)
 as Part of Publicly
 May Yet Be
  of Shares
 Average Price
 Announced Plans
 Purchased Under the
Period Purchased Paid per Share or Programs Plans or Programs
 
October 3 — October 30, 2010  205,137  $34.32   202,800  $15,253,293 
October 31 — November 27, 2010  201,029  $32.96   200,800  $8,634,761 
November 28 — December 31, 2010  273,209  $35.17   246,503  $0 
 
 
Total
  679,375       650,103     
2012:

   (a)   (b)   (c)   (d) 
    Total number of
shares
purchased
   Average price
paid per share
   

Total number of
shares

purchased as

part of publicly

announced
plans or
programs

   Dollar value
of
shares that may
yet be purchased
under the plans or
programs
 

September 30 – October 27, 2012

   2,391,851    $43.25     2,311,900    $1,100,059,133  

October 28 – November 24, 2012

   1,891,644    44.91    1,891,600    1,015,099,184 

November 25 – December 31, 2012

   3,100,640    48.34    3,087,578    865,840,803 

 

 

Total

   7,384,135      7,291,078   

(a)The purchases in this column include 79,951 shares repurchased as part of our publicly announced programs and in addition, 2,337for the period September 30 – October 27, 2012, 44 shares for the period October 3 — October 30, 2010, 229 shares for the period October 31 —28 – November 27, 201024, 2012, and 26,70613,062 shares for the period November 28 —25 – December 31, 20102012 deemed surrendered to us by participants in our Omnibus2012 Stock and Incentive Plan (the “2012 Plan”) and earlier stock incentive plans that are now outstanding under the Outside Directors Nonqualified Stock Option2012 Plan (the “Plans”(collectively “the Plans”) to satisfy the exercise price or withholding of tax obligations related to the exercise of stock options and vesting of restricted shares.

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

 
(c)The number of shares in this column represents the number of shares repurchased as part of our publicly announced planplans to repurchase shares of our common stock up to a maximum dollar limit of $25$1,200 million. The purchases in this column include 500,000 shares for the period November 25 – December 31, 2012 repurchased from the Master Trust (“the Trust”) for our U.S. pension plans. These shares were repurchased in a single transaction and represented all of our shares held by the Trust.

 
(d)On July 27, 2010Prior to the Boardclosing of Directorsthe Merger, our board of directors, and Tyco as our sole shareholder, authorized the repurchase of shares of our common stock up toshares with a maximum dollar limitaggregate value of $25 million. As$400 million following the closing of December 31, 2010, we had repurchased 734,603 shares for $25 million pursuant to this plan. In December 2010, the BoardMerger. This authorization does not have an expiration date. On October 1, 2012, our board of Directorsdirectors authorized the repurchase of shares of our common stock up toshares with a maximum dollar limitaggregate value of $25$800 million. This authorization expires on December 31, 2015 and is in December 2011.addition to the $400 million share repurchase authorization.


17

28


ITEM 6.  SELECTED FINANCIAL DATA

ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected historical financial data from continuing operations for the five years ended December 31, 2010.
                     
  Years Ended December 31,
  2010 2009 2008 2007 2006
 
 
Statement of Operations Data:
                    
Net sales $3,030,773  $2,692,468  $3,351,976  $3,280,903  $3,022,602 
Operating income  334,155   219,948   324,685   379,049   312,943 
Income from continuing operations attributable to Pentair, Inc.   198,454   115,512   256,363   212,118   186,251 
Per Share Data:
                    
Basic:                    
EPS from continuing operations attributable to Pentair, Inc.  $2.02  $1.19  $2.62  $2.15  $1.87 
Weighted average shares  98,037   97,415   97,887   98,762   99,784 
Diluted:                    
EPS from continuing operations attributable to Pentair, Inc.  $2.00  $1.17  $2.59  $2.12  $1.84 
Weighted average shares  99,294   98,522   99,068   100,205   101,371 
Cash dividends declared per common share $0.76  $0.72  $0.68  $0.60  $0.56 
Balance Sheet Data:
                    
Total assets $3,973,533  $3,911,334  $4,053,213  $4,000,614  $3,364,979 
Total debt  707,472   805,637   954,092   1,060,586   743,552 
Total shareholders equity  2,202,032   2,126,340   2,020,069   1,910,871   1,669,999 
In February2012. All periods presented have been revised, as applicable, for a retrospective change in accounting principle for recognizing pension and April 2007, we acquired the outstanding shares of capital stock of Jung Pump and allother post-retirement plan expense. See ITEM 8, Note 3 of the capital interests of Porous Media, respectively, as partNotes to Consolidated Financial Statements for additional information.

   Years ended December 31 
In thousands, except per-share
data
  2012  2011  2010   2009   2008 
Consolidated statements of operations and comprehensive income (loss) data        

Net sales

  $4,416,146  $  3,456,686  $  3,030,773   $  2,692,468   $  3,351,976 

Operating income (loss)

   (43,119  100,203   312,983    219,060    214,813 
Net income (loss) from continuing operations attributable to Pentair Ltd.   (107,186  (7,450  185,539    114,970    189,341 

Per-share data

        

Basic:

        

Earnings (loss) per share from continuing operations attributable to Pentair Ltd.

  $(0.84 $(0.08 $1.89   $1.18   $1.93 

Weighted average shares

   127,368   98,233   98,037    97,415    97,887 

Diluted:

        

Earnings (loss) per share from continuing operations attributable to Pentair Ltd.

  $(0.84 $(0.08 $1.87   $1.16   $1.91 

Weighted average shares

   127,368   98,233   99,294    98,522    99,068 
Cash dividends declared and paid per common share  $0.88  $0.80  $0.76   $0.72   $0.68 
Cash dividends declared and unpaid per common share   0.46               

Consolidated balance sheets data

        

Total assets

  $11,795,311  $4,586,313  $3,973,533   $3,911,334   $4,053,213 

Total debt

   2,457,374   1,309,087   707,472    805,637    954,092 

Total equity

   6,483,357   2,047,392   2,205,032    2,126,340    2,020,069 

Factors Affecting Comparability of our Water Group. Selected Financial Data

For periods prior to 2012, the Consolidated Statements of Operations and Comprehensive Income (Loss) and Consolidated Statements of Cash Flows include the historical results of Pentair, Inc. Following the consummation of the Merger on September 28, 2012, the consolidated financial statements include the results of Flow Control.

In May 2007,2011, we acquired as part of our Technical Products GroupWater & Fluid Solutions, the assetsClean Process Technologies division of Calmark. privately held Norit Holding B.V. In the fourth quarter of 2011, we recorded a pre-tax non-cash goodwill impairment charge of $200.5 million.

In June 2008, we entered into a transaction with GE that was accounted for as an acquisition of an 80.1 percent ownership interest in GE’s global water softener and residential water filtration business in exchange for a 19.9 percent interest in our global water softener and residential water filtration business.

This transaction resulted in a pre-tax non-cash gain of $109.6 million.


18

29


ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-LookingForward-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. Forward-lookingAll statements, give our current expectationsother than statements of historical fact are forward-looking statements. Without limitation, any statements preceded or forecasts of future events. Forward-looking statements generally can be identifiedfollowed by or that include the use of forward-looking terminology such as “may,words “targets,” “plans,” “believes,” “expects,” “intends,” “will,” “expect,“likely,“intend,“may,“estimate,“anticipates,“anticipate,“estimates,“believe,“projects,“project,“should,“would,” “positioned,” “strategy,” “future” or “continue,”words, phrases or terms of similar wordssubstance or the negative thereof, . From time to time, we also may provide oral or writtenare forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors include the ability to successfully integrate Pentair, Inc. and the Flow Control (as defined below) business and achieve expected benefits from the Merger (as defined below); overall global economic and business conditions; competition and pricing pressures in the markets we serve; the strength of housing and related markets; volatility in currency exchange rates and commodity prices; inability to generate savings from excellence in operations initiatives consisting of lean enterprise, supply management and cash flow practices; increased risks associated with operating foreign businesses; the ability to deliver backlog and win future project work; failure of markets to accept new product introductions and enhancements; the impact of changes in laws and regulations, including those that limit U.S. tax benefits; the outcome of litigation and governmental proceedings; and the ability to achieve our long-term strategic operating goals. Additional information concerning these and other materials we release tofactors is contained in our filings with the public. Any or allU.S. Securities and Exchange Commission, including in Item 1A of ourthis Annual Report on Form 10-K. All forward-looking statements inspeak only as of the date of this report and in any public statements we make could be materially different from actual results. They can be affected by assumptions we might make or by known or unknown risks or uncertainties. Consequently, we cannot guarantee any forward-looking statements. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties.

The following factors and those discussed in ITEM 1A, Risk Factors, of thisForm 10-K may impact the achievement of forward-looking statements:
• 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;
• stabilization or strength of the North American 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;
• our ability to access capital markets and obtain anticipated financing under favorable terms;
• our ability to identify, complete and integrate acquisitions successfully and to realize expected synergies on our anticipated timetable;
• changes in our business strategies, including acquisition, divestiture and restructuring activities;
• any impairment of goodwill and indefinite-lived intangible assets as a result of deterioration in our markets;
• domestic and foreign governmental and regulatory policies;


19


• 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;
• our ability to generate savings from our restructuring actions;
• unanticipated developments that could occur with respect to contingencies such as litigation, intellectual property matters, product liability exposures and environmental matters; and
• our ability to accurately evaluate the effects of contingent liabilities such as tax, product liability, environmental and other claims.
The foregoing factors are not exhaustive and new factors may emerge or changes to the foregoing factors may occur that would impact our business. We assumereport. Pentair Ltd. assumes no obligation, and disclaimdisclaims any duty,obligation, to update the forward-looking statementsinformation contained in this report.

Overview

We

Pentair Ltd., formerly known as Tyco Flow Control International Ltd. (as used prior to the Merger (as defined below), “Flow Control”), is a company organized under the laws of Switzerland. The terms “us, “we” or “our” refer to Pentair Ltd. and its consolidated subsidiaries. Our business took its current form on September 28, 2012 as a result of a spin-off of Flow Control from its parent, Tyco International Ltd. (“Tyco”), and a reverse acquisition involving Pentair, Inc.

Prior to the spin-off, Tyco engaged in an internal restructuring whereby it transferred to Flow Control certain assets related to the flow control business of Tyco, and Flow Control assumed from Tyco certain liabilities related to the flow control business of Tyco. On September 28, 2012 prior to the Merger (as defined below), Tyco effected a spin-off of Flow Control through the pro-rata distribution of 100% of the outstanding common shares of Flow Control to Tyco’s shareholders (the “Distribution”), resulting in the distribution of 110,898,934 of our common shares to Tyco’s shareholders. Immediately following the Distribution, an indirect, wholly-owned subsidiary of ours merged with and into Pentair, Inc., with Pentair, Inc. surviving as an indirect, wholly-owned subsidiary of ours (the “Merger”). At the effective time of the Merger, each Pentair, Inc. common share was converted into the right to receive one of our common shares, resulting in 99,388,463 of our common shares being issued to Pentair, Inc. shareholders. The Merger is intended to be tax-free for U.S. federal income tax purposes. After the Merger, our common shares are traded on the New York Stock Exchange under the symbol PNR. Tyco equity-based awards held by Flow Control employees and certain Tyco employees and directors outstanding prior to the completion of the Distribution were converted in connection with the Distribution into equity-based awards with respect to our common shares and were assumed by us. Pentair, Inc. equity-based awards outstanding prior to the completion of the Merger were converted upon completion of the Merger into equity-based awards with respect to our common shares and were assumed by us. The total purchase price for Flow Control was $4.9 billion, consisting of $4.8 billion of common shares issued to Tyco shareholders, $0.5 million of cash paid to Tyco shareholders in lieu of fractional shares, and $92.3 million in replacement equity-based awards to holders of Tyco equity-based awards. The Merger is accounted for under the acquisition method of accounting with Pentair, Inc. treated as the acquirer.

30


Following the Merger, we are a focused diversified industrial manufacturing company comprised of two operatingcomprising three reporting segments: Water & Fluid Solutions, Valves & Controls and Technical Products. OurSolutions. We classify our continuing operations into business segments based primarily on types of products offered and markets served:

The Water Group& Fluid Solutions segment designs, manufactures, markets and services innovative water management and fluid processing products and solutions. In select geographies, Water & Fluid Solutions offers a wide variety of pumps, valves and pipes for water transmission applications. The Flow Technologies, Filtration & Process, Aquatic Systems and Water & Environmental Systems GBUs comprise this segment.

The Valves & Controls segment designs, manufactures, markets, and services valves, fittings, automation and controls, and actuators and operates as a stand-alone GBU.

The Technical Solutions segment designs, manufactures and markets products that guard and protect some of the world’s most sensitive electronics and electronic equipment, as well as heat management solutions designed to provide thermal protection to temperature sensitive fluid applications. The Equipment Protection and Thermal Management GBUs comprise this segment.

In 2012, Water & Fluid Solutions and Technical Solutions accounted for 70 percent and 30 percent of total revenues through the first nine months of the year, respectively. Water & Fluid Solutions, Valves & Controls and Technical Solutions accounted for 44 percent, 31 percent and 25 percent of total revenues during the fourth quarter of the year, respectively, reflecting our post-Merger revenue mix.

In May 2011, Pentair, Inc. acquired, as part of the Water & Fluid Solutions reporting segment, 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 providing innovative productsmembrane solutions and systems used worldwideclean process technologies in the movement, storage, treatmenthigh growth water and enjoymentbeverage filtration and separation segments.

In the fourth quarter of water. Our Technical Products Group is2012 and 2011, we completed our annual goodwill and intangible assets impairment reviews. As a leaderresult, we recorded a pre-tax non-cash impairment charge of $60.7 million for trade name intangibles and $200.5 million for goodwill in the global enclosuresfourth quarter of 2012 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 2010,2011, respectively. These represent impairments of trade names across several of our reporting units in Water Group& Fluid Solutions and Technical Products Group accounted for approximately 2/3 and 1/3 of total revenues, respectively.

Our Water Group has progressively becomeSolutions in 2012. The impairment charges resulted from a more important part of our business portfolio with sales increasing from approximately $125 million in 1995 to approximately $2.0 billion in 2010. 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 usedrebranding strategy implemented in the movement, storage, treatmentfourth quarter of 2012. In 2011, the goodwill impairment occurred in Water & Fluid Solutions. The impairment charge resulted from changes in our forecasts in light of economic conditions and enjoyment of water.
On June 28, 2008, we entered into a transaction with GE that was accounted for as an acquisition of an 80.1 percent ownership interestcontinued softness in GE’s global water softener andthe end-markets served by residential water filtration business in exchange for a 19.9 percent interest in our global water softener and residential water filtration business. The acquisition was effected through the formation of two new entities, (collectively, “Pentair Residential Filtration” or “PRF”) a U.S. entity and an international entity, into which we and GE contributed certain assets, properties, liabilities and operations representing our respective global water softener and residential water filtration businesses. We are an 80.1 percent owner of the new entities and GE is a 19.9 percent owner.
With the formation of Pentair Residential Filtration, we believe we are better positioned to serve residential customers with industry-leading technical applications in the areas of water conditioning, whole house and point of use filtration.
Our Technical Products Group operates in a large global market with significant potential for growth in industry segments such as data communications, industrial, infrastructure and energy. 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.
treatment components.

Key Trends and Uncertainties Regarding Our Existing Business

Our net sales revenue for the full year2012 were $4.4 billion, and were composed of 2010 was approximately $3.0 billion, increasing 13% from sales in the prior year. Ourour reporting segments, as follows: Water Group sales increased 10% in the year to approximately $2.0& Fluid Solutions – $2.6 billion, compared to the same period in 2009. OurValves & Controls – $0.6 billion and Technical Products Group sales increased 17% to approximately $1.0 billion as compared to the same period in 2009.


20

Solutions – $1.2 billion.


The following trends and uncertainties affected our financial performance in 20102012 and 2011, and will likely impact our results in the future:

Since 2010, most markets we serve have shown signs of improvement since the global recession in 2008 and 2009. Because our businesses are significantly affected by general economic trends, a lack of continued improvement in our most important markets addressed below would likely have an adverse impact on our results of operations for 2013 and beyond.

In the fourth quarter of 2011, as a result of economic conditions and continued softness in end markets, we recorded goodwill impairment charges of $200.5 million.

31


In September 2012, we completed the Merger. With an acquisition of this magnitude and complexity, there are uncertainties and risks associated with realizing the amount and timing of anticipated growth opportunities and cost and tax synergies as described in ITEM 1A – Risk Factors

We 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.

End markets for new home building and new pool starts are showing signs of rebound from their historically low levels in 2007—2011. New product introductions, expanded distribution, channel penetration and a recovering housing market have resulted in volume increases for 2012.

Despite the overall strength of our end-markets, some of them have exhibited differing levels of volatility and may continue to do so over the medium and longer term. While we believe the general trends are favorable, factors specific to each of our major end-markets may affect the capital spending plans of our customers.

Economic uncertainty in Western Europe has negatively impacted business results and may continue to do so for the foreseeable future.

Through 2011 and 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.

• Most markets we serve slowed dramatically in late 2008 and throughout 2009 as a result of the global recession. In 2010, most markets showed signs of improvement. Because our businesses are significantly affected by general economic trends, further deterioration in our most important markets addressed below would likely have an adverse impact on our results of operation for 2011 and beyond.
 
We have also identified specific market opportunities that we have been and are pursuing 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 will be limited.
 
• After four years of new home building and new pool start contraction in the United States, these end markets stabilized in 2010. Overall, we believe approximately 40% of Pentair sales are used in global residential applications — for replacement and refurbishment, remodeling and repair and new construction. We expect this stabilization, along with new product introductions and expanded distribution and channel penetration, to result in volume increases in 2011. We believe that housing construction will modestly improve in 2011, which we expect will have a favorable impact on these businesses, but our participation in this trend historically has lagged approximately six months from inception.
• Industrial, communications and commercial markets for all of our businesses, including commercial and industrial construction, also slowed significantly in 2009. Order rates and sales improved in our industrial and communications businesses in 2010 as business spending returned, while non-residential construction markets still declined. We believe that the outlook for most of these markets is mixed and we currently expect that non-residential construction declines will moderate to approximately down 5% year over year in 2011, compared to a decline of approximately 10% in 2010.
• Through 2010, we experienced material and other cost inflation. We strive for productivity improvements, and we implement increases in selling prices to mitigate this inflation. We expect the current economic environment will result in continuing price volatility for many of our raw materials. We believe that the impact of higher commodity prices will continue to impact us in 2011, but we are uncertain on the timing and impact of this cost inflation.
• Despite higher interest expense and lower discount rates, our unfunded pension liabilities declined to approximately $201 million as of the end of 2010 due to investment performance and plan contributions. The contributions included accelerated contributions of $25 million in December 2009 and 2010, respectively, to improve plan balances and reduce future contributions. We anticipate that our pension expense will increase over 2010 levels.
• 

We have a long-term goal to consistently generate free cash flow that equals or exceeds 100 percent of our net income. We define free cash flow as cash flow from continuing operating activities less capital expenditures plus proceeds from sale of property and equipment. FreeOur free cash flow for the full year 20102012 was approximately $211$(21.0) million. The negative free cash flow resulted primarily from accelerated pension funding of $193.0 million, or 106%acquisition-related payments of our net income; which included an accelerated contribution to our pension plan$126.0 million and repositioning payments of $25 million in December 2010.$20.0 million. We continue to expect to generate free cash flow in excess of 100 percent of our net income from continuing operationsbefore noncontrolling interest in 2011.2013. We are continuing to target reductions in working capital and particularly inventory as a percentage of sales. See ourthe discussion ofOther financial measuresunder the caption “Liquidity and Capital Resources”Resources—Other financial measures” in this report for a reconciliation of our free cash flow.

In 2011,2013, our operating objectives include the following:

• 

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

• Leveraging our technological capabilities to increasingly generate innovative new products;


21


Optimizing our technological capabilities to increasingly generate innovative new products;

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

Focusing on developing global talent in light of our increased global presence; and

Integrating Pentair, Inc. and the Flow Control business.

• Driving operating excellence through lean enterprise initiatives, with specific focus on sourcing and supply management, cash flow management and lean operations; and
• Focusing on proactive talent development, particularly in international management and other key functional areas.

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

32


RESULTS OF OPERATIONS

Net Salessales

Consolidated net sales and the year-over-year changes were as follows:

In thousands 2012  2011  $ change  % change  2011  2010  $ change  % change 

Net sales

 $4,416,146  $3,456,686  $959,460   27.8%   $3,456,686  $3,030,773  $425,913   14.1%  

 

 

Net sales by segment and year-over-year changes were as follows:

           2012 vs. 2011  2011 vs. 2010 
In thousands 2012  2011  2010  $ change  % change  $ change  % change 

Water & Fluid Solutions

 $2,638,403  $2,369,804  $2,041,281  $268,599   11.3 %   $328,523   16.1 %  

Valves & Controls

  546,707         546,707   — %       — %  

Technical Solutions

  1,231,036   1,086,882   989,492   144,154   13.3 %    97,390   9.8 %  

 

 

Total

 $4,416,146  $3,456,686  $3,030,773  $959,460   27.8 %   $425,913   14.1 %  

 

 

The components of the net sales change were:were as follows:

         
Percentages 2010 vs. 2009 2009 vs. 2008
 
 
Volume  12.6   (19.7)
Price     1.2 
Currency     (1.2)
 
 
Net sales  12.6   (19.7)
 
 

   2012 vs. 2011  2011 vs. 2010 
Percentages  Water &
Fluid
Solutions
  Valves &
Controls
   Technical
Solutions
  Total  Water &
Fluid
Solutions
   Technical
Solutions
   Total 

Volume

   0.7       (5.2  (1.0  2.4    6.2    3.7 

Acquisition

   10.1   100.0    18.0   28.3   11.5        7.7 

Price

   1.5       1.5   1.5   1.0    1.9    1.3 

Currency

   (1.0      (1.0  (1.0  1.2    1.7    1.4 

 

 

Total

   11.3   100.0    13.3   27.8   16.1    9.8    14.1 

 

 

Consolidated net sales

The 12.627.8 percentage point increase in consolidated net sales in 20102012 from 2009 was primarily driven by:

• higher sales volume in the Technical Products Group;
• higher sales of certain pump, pool and filtration products primarily related to the stabilization in the North American residential housing markets and other global markets following the global recession in 2009; and
• increased sales resulting from the Gulf Intracoastal Waterway Project.
The 19.7 percentage point decrease in consolidated net sales in 2009 from 20082011 was primarily the result of:

• lower sales of certain pump, pool and filtration products primarily related to the downturn in the North American and Western European residential housing markets and other global markets;
• lower Technical Products Group sales in both the Electrical and Electronics businesses; and
• unfavorable foreign currency effects.
These decreases were partially offset by:
• selective increases in selling prices to mitigate inflationary cost increases; and
• an increase in sales volume related to the formation of PRF.
Sales by segment

sales volume of the Flow Control businesses subsequent to the Merger of $886.5 million andyear-over-year changes were as follows:

                             
           2010 vs. 2009  2009 vs. 2008 
In thousands 2010  2009  2008  $ change  % change  $ change  % change 
  
 
Water Group $2,041,281  $1,847,764  $2,206,142  $193,517   10.5% $(358,378)  (16.2)%
Technical Product Group  989,492   844,704   1,145,834   144,788   17.1%  (301,130)  (26.3)%
 
 
Total $3,030,773  $2,692,468  $3,351,976  $338,305   12.6% $(659,508)  (19.7)%
 
 
higher sales volume related to the May 2011 acquisition of CPT;


22


Water Group
The 10.5 percentage point increaseorganic sales growth in Water Group net& Fluid Solutions primarily due to higher sales of certain pump, pool and filtration products primarily serving the North American residential housing market and other global markets;

continued sales growth in 2010 from 2009 was primarily driven by:fast growth regions including in Latin America and Eastern Europe; and

• organic sales growth of approximately 10.3 percent in 2010 (excluding foreign currency exchange) primarily due to higher sales of certain pump, pool and filtration products primarily related to the stabilization in the North American residential housing markets and other global markets following the global recession in 2009 primarily related to:
• increased sales resulting from the Gulf Intracoastal Waterway Project;
• continued sales growth in India, China and in other emerging markets in the Asia-Pacific region as well as Latin America; and
• 

selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

decreases in Technical Solutions sales volume in Western Europe and in the infrastructure vertical; and

unfavorable foreign currency effects.

• price concessions in the form of growth rebates.

33


The 16.214.1 percentage point decreaseincrease in Water Groupconsolidated net sales in 20092011 from 20082010 was primarily the result of:

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

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

• organic sales decline (excluding acquisitions and foreign currency exchange) of 16.1 percent primarily due to lower sales of certain pump, pool and filtration products primarily related to the downturn in the North American and Western European residential housing markets and other global markets; and
• unfavorable foreign currency effects.

These decreases were partially offset by:
• selective increases in selling prices to mitigate inflationary cost increases; and
• an increase in sales volume due to the formation of PRF.

higher sales within the industrial and energy verticals by Technical Products GroupSolutions;

favorable foreign currency effects; and

The 17.1 percentage point increase in Technical Products Group net sales in 2010 from 2009 was primarily driven by:
• organic sales growth of approximately 17.7 percent in 2010 (excluding foreign currency exchange) primarily related to:
• an increase in sales in industrial, general electronics, communications, energy and infrastructure vertical markets; and
• 

selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

2010 sales resulting from the Gulf Intracoastal Waterway Project which did not reoccur in 2011; and

lower sales within the infrastructure vertical by Technical Solutions.

Water & Fluid Solutions

• unfavorable foreign currency effects in 2010 primarily related to the euro.

The 26.311.3 percentage point decreaseincrease in Technical Products GroupWater & Fluid Solutions sales in 20092012 from 20082011 was primarily the result of:

sales volume of the Flow Control businesses subsequent to the Merger of $144.2 million and higher sales volume related to the May 2011 acquisition of CPT;

organic sales growth primarily due to higher sales of certain pump, pool and filtration products primarily serving the North American residential housing market in our residential & commercial vertical and other global markets;

continued sales growth in fast growth regions including Latin America and Eastern Europe;

increased sales in our Aquatic Systems business driven by pool dealer expansion and continued strong demand for our energy efficient products and solutions; and

selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

Decreases in sales due to continued weakness in Western Europe and low flood-related product sales in the U.S. due to unusually dry weather; and

unfavorable foreign currency effects.

• organic sales decline (excluding foreign currency exchange) of 25.4 percent primarily related to:

The 16.1 percentage point increase in Water & Fluid Solutions sales in 2011 from 2010 was primarily the result of:

higher sales volume as a result of the May 2011 acquisition of CPT;

• a decrease in sales to electrical markets resulting from lower capital spending by customers in the industrial vertical market;
• a decrease in sales to electronics markets that was largely attributable to reduced spending in the communications

organic sales growth primarily due to higher sales of certain pump, pool and filtration products;

continued sales growth in Latin America, India and emerging markets in the Asia Pacific region;

favorable foreign currency effects; and general electronics vertical markets; and


23


34


selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

2010 sales resulting from the Gulf Intracoastal Waterway Project which did not reoccur in 2011.

• unfavorable foreign currency effects.

Valves & Controls

The Valves & Controls sales in 2012 was the result of:

sales volume of the Flow Control businesses subsequent to the Merger of $546.7 million.

Technical Solutions

The 13.3 percentage point increase in Technical Solutions sales in 2012 from 2011 was primarily the result of:

sales volume of the Flow Control businesses subsequent to the Merger of $195.6 million;

sales increases in our enclosures & cabinets businesses in the industrial vertical; and

selective increases in selling prices to mitigate inflationary cost increases.

These decreases were partially offset by:

decreases in sales volume in Western Europe and the industrial vertical, including project delays; and

unfavorable foreign currency effects.

The 9.8 percentage point increase in Technical Solutions sales in 2011 from 2010 was primarily the result of:

an increase in sales in industrial, energy and infrastructure verticals;

favorable foreign currency effects; and

• selective increases in selling prices to mitigate inflationary cost increases.

selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

lower sales within the infrastructure vertical.

Gross profit

In thousands  2012   % of sales  2011   % of sales  2010   % of sales 

Gross profit

  $1,269,592    28.7%   $1,073,722    31.1%   $930,640    30.7%  

 

 

Percentage point change

     (2.4)pts     0.4 pts    

Gross Profit

                         
In thousands 2010 % of sales 2009 % of sales 2008 % of sales
 
 
Gross Profit $930,640   30.7% $785,135   29.2% $1,014,550   30.3%
 
 
Percentage point change      1.5pts      (1.1) pts        

The 1.52.4 percentage point decrease in gross profit as a percentage of sales in 2012 from 2011 was primarily the result of:

higher cost of goods sold in 2012 as a result of inventory fair market value step-up and customer backlog recorded as part of the Merger purchase accounting; and

inflationary increases related to raw materials and labor costs.

35


These decreases were partially offset by:

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

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

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

The 0.4 percentage point increase in gross profit as a percentage of sales in 20102011 from 20092010 was primarily the result of:

higher sales volumes in Water & Fluid Solutions and Technical Solutions and higher fixed cost absorption resulting from that volume;

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

• higher sales volumes in our Water and Technical Products Groups and higher fixed cost absorption resulting from that volume;
• cost savings from restructuring actions and other personnel reductions taken in response to the economic downturn and resulting volume decline in 2009; and
• savings generated from our PIMS initiatives including lean and supply management practices across both the Water and Technical Products Groups.

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

These increases were partially offset by:

inflationary increases related to raw materials and labor costs; and

• inflationary increases related to certain raw materials and labor and related costs.
The 1.1 percentage point decrease

higher cost of goods sold in gross profit2011 as a percentresult of sales in 2009 from 2008 was primarilya fair market value inventory step-up and customer backlog recorded as a part of the result of:CPT purchase accounting.

• lower sales of certain pump, pool and filtration products primarily related to the downturn in the North American and Western European residential housing markets and other global market downturns;
• lower sales volume in our Technical Products Group and lower fixed cost absorption resulting from that volume decline;
• inflationary increases related to raw materials and labor costs; and
• period restructuring costs and write-offs of inventory associated with the consolidation of facilities.

These decreases were partially offset by:

• cost savings from restructuring actions and other personnel reductions taken in response to the current economic downturn and resulting volume decline;
• selective increases in selling prices in our Water and Technical Products Groups to mitigate inflationary cost increases;
• savings generated from our PIMS initiatives, including lean and supply management practices; and
• higher cost of goods sold in 2008 as a result of a fair market value inventorystep-up related to the formation of PRF.
Selling, general and administrative (SG&A)
                         
In thousands 2010  % of sales  2009  % of sales  2008  % of sales 
  
 
*SG&A $529,329   17.5% $507,303   18.8% $627,415   18.7%
 
 
Percentage point change      (1.3) pts      0.1 pts         


24


In thousands  2012(1)   % of sales  2011(2)   % of sales  2010   % of sales 

SG&A

  $  1,219,154    27.6%   $    895,361    25.9%   $    550,501    18.2%  

 

 

Percentage point change

     1.7 pts     7.7 pts    

(1)
*

Includes Legal settlement in 2008trade name impairment charge of $20.4 million, which is presented on a separate line in the Consolidated Statements of Income$60.7 million.

(2)

Includes goodwill impairment charge of $200.5 million.

The 1.31.7 percentage point decreaseincrease in SG&A expense as a percentage of sales in 20102012 from 20092011 was primarily due to:the result of:

“mark-to-market” actuarial losses related to pension and other post-retirement benefit plans for 2012 of $141.7 million, an increase of $73.4 million from 2011;

costs associated with the Merger, including $23.2 million in transaction advisory fees, $21.8 million of change of control costs and $34.1 million of other transaction costs;

• higher sales volume in both our Water and Technical Products Groups, which resulted in increased leverage on the fixed operating expenses;
• reduced costs related to restructuring actions taken throughout 2009 to consolidate facilities and streamline general and administrative costs;
• impairment charge of $11.3 million in 2009 for selected trade names resulting from volume declines; and
• insurance proceeds related to the Horizon litigation and other legal settlements received in 2010.

restructuring actions taken in 2012;

trade name impairment charge of $60.7 million;

intangible asset amortization related to the Merger and to the May 2011 acquisition of CPT; and

continued investments in future growth with emphasis on international markets, including personnel and business infrastructure investments.

36


These decreasesincreases were partially offset by:

nonrecurring goodwill impairment charge in 2011 of $200.5 million in Water & Fluid Solutions; and

sales volume of the Flow Control businesses subsequent to the Merger, which resulted in increased leverage on our fixed operating expenses.

• continued investments in future growth with emphasis on growth in international markets, including personnel and business infrastructure investments; and
• certain increases for labor and related costs as well as reinstatement of certain employee benefits.

The 0.17.7 percentage point increase in SG&A expense as a percentpercentage of sales in 20092011 from 20082010 was primarily the result of:

goodwill impairment charge of $200.5 million in Water & Fluid Solutions;

integration costs and intangible asset amortization costs related to the May 2011 acquisition of CPT;

• lower sales volume and the resultant loss of leverage on the SG&A expense spending;
• expense associated with incremental restructuring actions in both our Water and Technical Products Groups in 2009;
• impairment charge of $11.3 million for selected trade names resulting from significant volume declines;
• higher costs associated with the integration of and intangible amortization related to the June 2008 formation of PRF; and
• continued investments in future growth with emphasis on growth in international markets, including personnel and business infrastructure investments.

“mark-to-market” actuarial losses related to pension and other post-retirement benefit plans for 2011 of $68.3 million, an increase of $47.1 million from 2010;

restructuring actions taken in 2011;

insurance proceeds related to the Horizon litigation and other legal settlements received in 2010 which did not reoccur at the same levels in 2011;

continued investments in future growth with emphasis on international markets, including personnel and business infrastructure investments; and

certain increases for labor and related costs.

These increases were partially offset by:

higher sales volumes in both Water & Fluid Solutions and Technical Solutions, which resulted in increased leverage on our fixed operating expenses.

• 2008 charges for the Horizon legal settlement, which were non-recurring in 2009; and
• reduced costs related to productivity actions taken throughout 2008 and 2009 to consolidate facilities and streamline general and administrative costs.

Research and development (R&D)

                         
In thousands 2010 % of sales 2009 % of sales 2008 % of sales
 
 
R&D $67,156   2.2% $57,884   2.2% $62,450   1.9%
 
 
Percentage point change      — pts       0.3 pts         

In thousands  2012  % of sales  2011  % of sales  2010  % of sales 

R&D

  $        93,557   2.1%   $    78,158   2.3%   $        67,156   2.2%  

 

 

Percentage point change

    (0.2)pts    0.1 pts   

The 0.2 percentage point decrease in R&D expense as a percentage of sales in 20102012 from 2011 was flat comparedprimarily the result of:

sales volume of the Flow Control businesses subsequent to 2009 primarily as a result of:the Merger, which resulted in increased leverage on the R&D spending; and

higher sales volumes in Water & Fluid Solutions which resulted in increased leverage on the R&D spending.

These decreases were partially offset by:

• Continued investments in the development of new products to generate growth in line with higher sales volume.


25continued investments in the development of new products to generate growth.


37


The 0.30.1 percentage point increase in R&D expense as a percentpercentage of sales in 20092011 from 20082010 was primarily the result of:

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

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

These increases were partially offset by:

higher sales volumes in Water & Fluid Solutions and Technical Solutions, which resulted in increased leverage on the R&D expense spending.

• lower sales volume and the resultant loss of leverage on the R&D expense spending.

Operating income - Water & Fluid Solutions

In thousands 2012  % of sales  2011  % of sales  2010  % of sales 

Operating income - Water & Fluid Solutions

 $    168,043   6.4%   $58,311   2.5%   $    231,588   11.3%  

 

 

Percentage point change

   3.9 pts    (8.8)pts   

Water Group

                         
In thousands 2010 % of sales 2009 % of sales 2008 % of sales
 
 
Operating income $231,588   11.3% $163,745   8.9% $206,357   9.4%
 
 
Percentage point change      2.4 pts       (0.5) pts        
The 2.43.9 percentage point increase in Water segment operating income for Water & Fluid Solutions as a percentage of net sales in 2010 as compared to 20092012 from 2011 was primarily the result of:

goodwill impairment charge in 2011 of $200.5 million;

lower margin associated with the May 2011 acquisition of CPT, including the fair market value inventory step-up and customer backlog, intangible asset amortization and integration costs;

• higher sales volume in our Water Group, which resulted in increased leverage of the fixed cost base;
• cost savings from restructuring actions and other personnel reductions taken throughout 2009 to consolidate and streamline operations;
• savings generated from our PIMS initiatives including lean and supply management practices;
• impairment change of $11.3 million in 2009 for selected trade names resulting from volume declines; and
• insurance proceeds related to the Horizon litigation and other legal settlements received in 2010.

higher sales volume in Water & Fluid Solutions, which resulted in increased leverage of our fixed cost base;

continued sales growth in fast growth regions led by strength in Latin America, India and emerging markets in the Asia Pacific region;

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

selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

cost of goods sold including inventory fair market value step-up and customer backlog recorded as part of the Merger purchase accounting;

trade name impairment charge of $49.1 million;

• cost increases for certain raw materials and labor as well as reinstatement of certain employee benefits; and
• continued investment in future growth with emphasis on growth in international markets.

restructuring actions taken in 2012;

cost increases for certain raw materials and labor related costs; and

continued investments in future growth with emphasis on international markets, including personnel and business infrastructure investments.

38


The 0.58.8 percentage point decrease in Water Group operating income for Water & Fluid Solutions as a percentpercentage of net sales in 20092011 from 20082010 was primarily the result of:

goodwill impairment charge of $200.5 million;

lower margin associated with the May 2011 acquisition of CPT, including the fair market value inventory step-up and customer backlog, intangible asset amortization and integration costs;

• lower sales of certain pump, pool and filtration products resulting from the downturn in the North American and Western European residential housing markets;
• inflationary increases related to raw materials and labor;
• incremental restructuring actions taken in 2009;
• continued investments in future growth with emphasis on growth in international markets, including personnel and business infrastructure investments;
• impairment charge of $11.3 million for selected trade names resulting from significant volume declines; and
• higher costs associated with the integration of and intangible amortization related to the June 2008 formation of PRF.

cost increases for certain raw materials and labor;

incremental restructuring actions taken in 2011;

insurance proceeds related to the Horizon litigation and other legal settlements received in 2010 which did not reoccur at the same levels in 2011; and

continued investments in future growth with emphasis on international markets, including personnel and business infrastructure investments.

These decreases were partially offset by:

higher sales volume in Water & Fluid Solutions, which resulted in increased leverage of our fixed cost base;

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

selective increases in selling prices to mitigate inflationary cost increases.

Operating loss - Valves & Controls

In thousands  2012  % of sales  2011   % of sales  2010   % of sales 

Operating loss - Valves & Controls

  $    (76,843  (14.1%)   $    —    0.0%   $    —    0.0%  

 

 

Percentage point change

    (14.1)pts     pts    

The operating loss for Valves & Controls in 2012 was the result of:

Valves & Controls operations subsequent to the Merger. Valves & Controls is a new reporting segment, effective with the Merger and as a result, 2012 operating loss represents the segment’s operating results for the fourth quarter of 2012; and

cost of goods sold including inventory fair market value step-up and customer backlog recorded as part of the Merger purchase accounting.

• selective increases in selling prices to mitigate inflationary cost increases;
• cost savings from restructuring actions and other personnel reductions taken in response to the current economic downturn and resulting volume decline;
• savings generated from our PIMS initiatives including lean and supply management practices; and
• 2008 charges for the Horizon legal settlement, which were non-recurring in 2009.


26Operating income - Technical Solutions

In thousands 2012  % of sales  2011  % of sales  2010  % of sales 

Operating income - Technical Solutions

 $    165,017   13.4%   $185,240   17.0%   $151,533   15.3%  

 

 

Percentage point change

   (3.6) pts    1.7 pts   

The 3.6 percentage point decrease in operating income for Technical Solutions as a percentage of net sales in 2012 from 2011 was primarily the result of:

cost of goods sold including inventory fair market value step-up and customer backlog recorded as part of the Merger purchase accounting;


39


trade name impairment charge of $11.6 million;

restructuring actions taken in 2012;

inflationary increases related to raw materials and labor related costs; and

continued investment in future growth with emphasis on international markets, including personnel and business infrastructure investments.

These decreases were offset by:

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

selective increases in selling prices to mitigate inflationary cost increases.

Operating income

Technical Products Group
                         
In thousands 2010 % of sales 2009 % of sales 2008 % of sales
 
 
Operating income $151,533   15.3% $100,355   11.9% $169,315   14.8%
 
 
Percentage point change      3.4 pts       (2.9) pts        
The 3.41.7 percentage point increase in Technical Products Group operating income for Technical Solutions as a percentage of sales in 20102011 from 20092010 was primarily the result of:

higher sales volume, which resulted in increased leverage of our fixed cost base;

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

• higher gross margins due to higher sales volumes in the Technical Products Group;
• cost savings from restructuring actions and other personnel reductions taken in response to the economic downturn and resulting volume decline in 2009;
• savings generated from our PIMS initiatives including lean and supply management practices; and
• selective increases in selling prices to mitigate inflationary cost increases.

selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

cost increases for certain raw materials, such as carbon steel, as well as labor; and

continued investment in future growth with emphasis on international markets, including personnel and business infrastructure investments.

Net interest expense

• cost increases for certain raw materials and labor as well as reinstatement of certain employee benefits; and
• continued investment in future growth with emphasis on growth in international markets, including personnel and business infrastructure investments.

In thousands 2012  2011  $ change  % change  2011  2010  $ change  % change 

Net interest expense

 $67,635  $58,835  $8,800   15.0 %   $58,835  $36,116  $22,719   62.9 %  

 

 

The 2.915.0 percentage point decreaseincrease in Technical Products Group operating income as a percent of net salesinterest expense in 20092012 from 20082011 was primarily the result of:

the impact of higher debt levels following the Merger;

• a decrease in sales to electrical markets resulting from lower capital spending by customers in the industrial vertical market;
• a decrease in sales into electronics markets that

This increase was largely attributable to reduced spending in the communications and general electronics vertical markets;

• lower fixed cost absorption resulting from the sales volume decline; and
• incremental restructuring actions taken in 2009 and associated period costs related to the closure of certain facilities.
These decreases were partially offset by:

• cost savings from restructuring actions and other personnel reductions taken in response to the current economic downturn and resulting volume decline;
• savings generated from our PIMS initiatives, including lean and supply management practices; and
• lower material cost for key commodities such as carbon steel.
Net

reduced overall interest expenserates in effect on our outstanding debt.

                                 
In thousands 2010  2009  $ change  % change  2009  2008  $ change  % change 
  
 
Net interest expense $36,116  $41,118  $(5,002)  (12.2)% $41,118  $59,435  $(18,317)  (30.8)%
 
 

The 12.262.9 percentage point decreaseincrease in net interest expense in 2011 from 2010 from 2009 was primarily the result of:

• the favorable impact of lower debt levels in 2010 as compared to 2009 in addition to the redemption on April 15, 2009 of our 7.85% Senior Notes due 2009 (the “Notes”).


27


The 30.8 percentage point decrease in interest expense in 2009 from 2008 was primarily the result of:
• favorable impact of lower variable interest rates and lower debt levels in part attributable to the redemption on April 15, 2009 of the Notes.
Gain on sale of interest in subsidiaries
On June 28, 2008, we entered into a transaction with GE that was accounted for as anhigher debt levels following the May 2011 acquisition of an 80.1 percent ownership interest in GE’s global water softener and residential water filtration business in exchange for a 19.9 percent interest in our global water softener and residential water filtration business. The acquisition was effected through the formation of two new entities, a U.S. entity and an international entity into which we and GE contributed certain assets, properties, liabilities and operations representing our respective global water softener and residential water filtration businesses. We are an 80.1 percent owner of the new entities and GE is a 19.9 percent owner. The acquisition and related sale of our 19.9 percent interest resulted in a gain of $109.6 million representing the difference between the carrying amount and the fair value of the 19.9 percent interest sold.CPT.

Loss on early extinguishment of debt

On July 8, 2008,

In October 2012, we commenced a cash tender offer for all of ourredeemed the remaining outstanding $250 million aggregate principal of our 5.65% fixed rate senior notes due 2013-2017 totaling $400 million and our 1.05% floating rate senior notes due 2013 totaling $100 million (the “Fixed/Floating Rate Notes”). The redemptions included make-whole premiums of $65.8 million. Concurrent with the Notes. Upon expirationredemption of the tenderFixed/Floating Rate Notes, we terminated a related interest rate swap that was designated as a cash flow hedge, which resulted in the reclassification of $3.4 million of previously

40


unrecognized variable to fixed swap losses fromAccumulated other comprehensive income (loss) (“AOCI”) to earnings in October 2012. All costs associated with the redemption were recorded as aLoss on the early extinguishment of debt including $0.6 million of unamortized deferred financing costs.

In December 2012, Pentair Finance S.A. (“PFSA”), completed an exchange offer on August 4, 2008, we purchased $116.1pursuant to which it exchanged $373 million in aggregate principal amount of 5.00% Senior Notes due 2021 of Pentair, Inc. a wholly-owned, indirect subsidiary of the Notes. AsCompany for a resultlike amount of this transaction, we recognizednew 5.00% Senior Notes due 2021 of PFSA, plus $5.6 million in transaction-related costs which were recorded as a loss of $4.6 millionLoss on the early extinguishment of debt in 2008. The loss included the write off of $0.1 million in unamortized deferred financing fees in addition to recognition of $0.6 million in previously unrecognized swap gains and cash paid of $5.1 million related to the tender premium and other costs associated with the purchase.

On March 16, 2009, we announced the redemption of all of our remaining outstanding $133.9 million aggregate principal of Notes. The Notes were redeemed on April 15, 2009 at a redemption price of $1,035.88 per $1,000 of principal outstanding plus accrued interest thereon. As a result of this transaction, we recognized a loss of $4.8 million on early extinguishment of debt in the second quarter of 2009. The loss included the write off of $0.1 million in unamortized deferred financing fees in addition to recognition of $0.3 million in previously unrecognized swap gains and cash paid of $5.0 million related to the redemption and other costs associated with the purchase.
.

Provision (benefit) for income taxes

             
In thousands 2010 2009 2008
 
 
Income from continuing operations before income taxes and noncontrolling interest $300,147  $172,647  $367,140 
Provision for income taxes  97,200   56,428   108,344 
Effective tax rate  32.4%  32.7%  29.5%

In thousands 2012  2011  2010 
Income (loss) from continuing operations before income taxes and noncontrolling interest $(183,965)   $43,266  $278,975 

Provision (benefit) for income taxes

  (79,353)    46,417   88,943 

Effective tax rate

  43.1%    107.3%    31.9%  

The 0.364.2% percentage point decrease in the effective tax rate in 20102012 from 20092011 was primarily due to:

the result of:unfavorable tax impact of the $200.5 million goodwill impairment charge in 2011.

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

• the mix of global earnings.

the mix of global earnings, including the impact of the Merger and the CPT acquisition; and

the favorable tax impact related to the 2012 exchange offer.

The 3.2decreases were partially offset by:

nonrecurring impacts of the Merger, including non-deductible transaction costs and loss of domestic manufacturing deduction tax benefits.

The 75.4 percentage point increase in the tax rate in 2009 from 2008 was primarily the result of:

• a portion of the gain on the formation of PRF in 2008 being taxed at a rate of 0%.
This increase was partially offset by:
• favorable adjustments in 2009 related to prior years’ tax returns.
We expect our full year effective tax rate in 2011 to be between 32% and 32.5%. We will continue to pursuefrom 2010 was primarily due to:

the unfavorable tax impact of the $200.5 million goodwill impairment charge in Water & Fluid Solutions. Excluding this item our tax rate reduction opportunities.would have been 27.0% in 2011.


28The increases were partially offset by:

certain discrete items in 2011 that did not occur in 2010;


the mix of global earnings, and;

favorable benefits related to the May 2011 acquisition of CPT.

LIQUIDITY AND CAPITAL RESOURCES

We generally fund cash requirements for working capital, capital expenditures, equity investments, acquisitions, debt repayments, dividend payments and share repurchases from cash generated from operations, availability under existing committed revolving credit facilities and in certain instances, public and private debt and equity offerings. We have grown our businesses in significant part in the past through acquisitions financed by credit provided under our revolving credit facilities and from time to time, by private or public debt issuance. Our primary revolving credit facilities have generally been adequate for these purposes, although we have negotiated additional credit facilities as needed to allow us to complete acquisitions; these are temporary loans that have in the past been repaid within less thanacquisitions. We intend to issue commercial paper to fund our financing needs on a year.

short-term basis and to use our revolving credit facility as back-up liquidity to support commercial paper.

41


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

Our current $800 million multi-currency revolving credit facility (the “Credit Facility”) expires on June 4, 2012. The agent banks under the Credit Facility are J.P. Morgan, Bank of America, Wells Fargo, U.S. Bank and Bank of Tokyo-Mitsubishi. We believe we have ample borrowing capacity for our currently projected operating needs. Our availability under the Credit Facility was $702.5 million at December 31, 2010, which was not limited by any of the credit agreement’s financial covenants as of that date.

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

Operating activities

Cash provided by operating activities was $270.4$68.0 million in 20102012 or $12.0$252.2 million lower than in 2011. The decrease in cash provided by operating activities was due primarily to accelerated contributions of pension and other post-retirement obligations.

Cash provided by operating activities was $320.2 million in 2011 or $49.8 million higher than in 2009.2010. The increase in cash provided by operating activities was due primarily to higheran increase in net income from continuing operationsbefore non-cash items, partially offset by increased working capital necessary to support revenue growth.

Cash

Investing activities

Net cash provided by operatinginvesting activities was $258.4$375.6 million in 2009 or $54.22012. Net cash used in investing activities was $808.1 million higher thanand $60.3 million in 2008.2011 and 2010, respectively.

Acquisitions

In September 2012, we acquired $691.7 million of cash, in conjunction with the Merger.

In October 2012, we acquired, as part of Valves & Controls, the remaining 25% equity interest in Pentair Middle East Holding S.a.R.L. (“KEF”) for $100 million in cash.

Additionally, during 2012, we completed other small acquisitions in Water & Fluid Solutions with purchase prices totaling $121.2 million in cash, net of cash acquired.

In May 2011, we acquired as part of Water & Fluid Solutions, the CPT division of privately held Norit Holdings for $715.3 million.

Additionally, during 2011, we completed other small acquisitions in Water & Fluid Solutions with purchase prices totaling $21.6 million, consisting of $17.8 million in cash and $3.8 million as notes payable.

Capital expenditures

Capital expenditures in 2012, 2011 and 2010 were $94.5 million, $73.3 million and $59.5 million, respectively. The increase in cash provided by operating activities wascapital expenditures in 2012 from 2011 is primarily due primarily to a reduction in working capital, offset by an accelerated pension contribution of $25 million and lower income from continuing operations.

In December 2008, we sold approximately $44 million of a customer’s account receivable to a third-party financial institution to mitigate accounts receivable concentration risk. Sales of accounts receivable are reflected as a reduction of accounts receivable in our Consolidated Balance Sheets and the proceeds are included in the cash flows from operating activities in our Consolidated Statements of Cash Flows. In 2008 we incurred a loss in the amount of $0.5 million related to the sale of accounts receivable which is included in the line item Otherin our Consolidated Statements of Income. We did not undertake a similar sale of customer receivables in 2009 or 2010.
Investing activities
Capital expenditures in 2010, 2009 and 2008 were $59.5 million, $54.1 million and $53.1 million, respectively.Merger. We anticipate capital expenditures for fiscal 20112013 to be approximately $60$180 to $65$200 million, primarily for capacity expansions of manufacturing facilities located in our low cost country manufacturing facilities,low-cost countries, developing new product developmentproducts and general maintenance capital.
On December 15, 2008, we sold our Spa and Bath (“Spa/Bath”) business to Balboa Water Group in amaintenance.

Financing activities

Net cash transactionused for $9.2 million. The results of Spa/Bath have been reported as discontinued operations for all periods presented.


29


On February 28, 2008, we sold our National Pool Tile (“NPT”) business to Pool Corporation in a cash transaction for $29.8 million. The results of NPT have been reported as discontinued operations for all periods presented.
Cash proceeds from the sale of property and equipment of $0.4financing activities was $232.3 million in 2010 and $1.22012. Net cash provided by financing activities was $503.6 million in 2009 was primarily related to various asset dispositions. Cash proceeds from the sale of property and equipment of $4.7 million in 2008 was primarily related to the sale of a facility in our Water Group.
Financing activities
2011. Net cash used for financing activities was $190.6 in 2010, $209.1 million in 20092010. Cash used for financing activities in 2012 included payments of dividends, early debt termination fees and $217.2share repurchases, partially offset by net borrowings of long-term debt. Cash provided by financing activities in 2008. The decrease2011 primarily relates to fluctuationsborrowings used to fund the CPT acquisition in liquidity. FinancingMay 2011, partially offset by repayments of long-term

42


debt, dividend payments and share repurchases. Additionally, financing activities included draw downs and repayments on our revolving credit facilities to fund our operations in the normal course of business, payments of dividends, cash received/used for stockshares issued to employees, repurchase of common stockshares and tax benefits related to stock-basedshare-based compensation.

In December 2012, our wholly-owned subsidiary, Pentair Finance S.A. (“PFSA”), completed an exchange offer (the “Exchange Offer”) pursuant to which it exchanged $373 million in aggregate principal amount of 5.00% Senior Notes due 2021 of Pentair, Inc., a wholly-owned, indirect subsidiary of the Company (the “2021 Notes”) for a like amount of new 5.00% Senior Notes due 2021 of PFSA (the “New 2021 Notes”) plus $5.6 million in transaction-related costs. Upon completion of the Exchange Offer, $127 million in aggregate principal amount of 2021 Notes remained outstanding. The Credit Facility createsremaining 2021 Notes and New 2021 Notes are guaranteed as to payment by Pentair Ltd.

In November 2012, PFSA completed a private offering of $350 million aggregate principal amount of 1.35% Senior Notes due 2015 (the “2015 Notes”) and $250 million aggregate principal amount of 2.65% Senior Notes due 2019 (the “2019 Notes” and, collectively, the “2015/2019 Notes”), which are guaranteed as to payment by Pentair Ltd. In certain circumstances, PFSA may be required to pay additional interest on the 2015/2019 Notes. We used the net proceeds from the sale of the 2015/2019 Notes to repay commercial paper and for general corporate purposes.

In October 2012, we redeemed the remaining outstanding aggregate principal of our 5.65% fixed rate senior notes due 2013-2017 totaling $400 million and our 1.05% floating rate senior notes due 2013 totaling $100 million (the “Fixed/Floating Rate Notes”). The redemptions included make-whole premiums of $65.8 million. Concurrent with the redemption of the Fixed/Floating Rate Notes, we terminated a related interest rate swap that was designated as a cash flow hedge, which resulted in the reclassification of $3.4 million of previously unrecognized variable to fixed swap losses from AOCI to earnings in October 2012. All costs associated with the redemption were recorded as aLoss on the early extinguishment of debt including $0.6 million of unamortized deferred financing costs.

In September 2012, PFSA, completed a private offering of $550 million aggregate principal amount of 3.15% Senior Notes due 2022 (the “2022 Notes”) and $350 million aggregate principal amount of 1.875% Senior Notes due 2017 (the “2017 Notes” and, collectively, the “2017/2022 Notes”), which are guaranteed as to payment by Pentair Ltd. In certain circumstances, PFSA may be required to pay additional interest on the 2017/2022 Notes. The 2017/2022 Notes remained outstanding after the Merger. A portion of the net proceeds from the 2017/2022 Notes offering were used to repay $435 million to Tyco in conjunction with the Distribution and the Merger.

In September 2012, Pentair, Inc. entered into a credit agreement providing for an unsecured, committed revolving credit facility (the “Credit Facility”) with initial maximum aggregate availability of up to $800$1,450 million. The Credit Facility replaced Pentair, Inc.’s $700 million Former Credit Facility (as defined below). The Credit Facility matures in September 2017. Upon the completion of the Merger, Pentair Ltd. became the guarantor under the Credit Facility and PFSA and certain other of our subsidiaries became affiliate borrowers under the Credit Facility. Borrowings under the Credit Facility generally bear interest at a variable rate equal to the London Interbank Offered Rate (“LIBOR”) plus a specified margin based upon PFSA’s credit ratings. PFSA must also pay a facility fee ranging from 10.0 to 30.0 basis points per annum (based upon PFSA’s credit ratings) on the amount of each lender’s commitment.

In May 2011, Pentair, Inc. completed a public offering of $500 million aggregate principal amount of the 2021 Notes. Pentair, Inc. used the net proceeds from the offering of the 2021 Notes to finance in part the CPT acquisition in 2011. The 2021 Notes which remain outstanding subsequent to the Exchange Offer are guaranteed as to payment by Pentair Ltd.

In April 2011, Pentair, Inc. entered into a Fourth Amended and Restated Credit Agreement that provided for an unsecured, committed revolving credit facility (the “Former Credit Facility”) of up to $700 million, with multi-currency sub facilitiesmulti-

43


currency sub-facilities to support investments outside the U.S. Borrowings under the Former Credit Facility bearbore interest at the rate of LIBOR plus 0.625%1.75%. Interest ratesWe used borrowings under the Former Credit Facility to fund a portion of the CPT acquisition in 2011 and fees onto repay $105 million of matured senior notes in May 2012. The Former Credit Facility was terminated in September 2012 in connection with the Merger and replaced by the Credit Facility, vary based on our credit ratings. We believe that internally generated funds and funds availableat which time the subsidiary guarantees in place under ourthe Former Credit Facility will be sufficientceased to support our normal operations, dividend payments, stock repurchases and debt maturities over the life of the Credit Facility.

We areexist.

PFSA is authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We usePFSA uses the Credit Facility asback-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 December 31, 20102012 and 20092011, we had no$424.7 million and $3.5 million, respectively, of commercial paper outstanding, all of which 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.

We used borrowings under the Credit Facility and proceeds from the 2017/2022 Notes offering, to repay the Former Credit Facility and to pay other fees and expenses in connection with the Merger. Total availability under the Credit Facility was $1,025.3 million as of December 31, 2012, which was not limited by any covenants contained in the Credit Facility’s credit agreement. Subsequent to the Merger, we used the remaining proceeds from the 2017/2022 Notes offering and issuances of commercial paper.

paper to redeem the Fixed/Floating Rate Notes as discussed above, to repurchase shares in conjunction with our share repurchase as discussed in ITEM 8, Note 15 of the Notes to Consolidated Financial Statements and to purchase the remaining 25% interest in KEF for $100 million as discussed in ITEM 8, Note 4 of the Notes to Consolidated Financial Statements.

Our debt agreements contain certain financial covenants, the most restrictive of which is a leverageare in the Credit Facility, including that we may not permit (i) the ratio (totalof our consolidated indebtedness, as defined, overdebt plus synthetic lease obligations to our consolidated earningsnet income (excluding, among other things, non-cash gains and losses) before interest, taxes, depreciation, amortization, non-cash share-based compensation expense, and amortizationup to $40 million of costs and expenses incurred in connection with the Merger (“EBITDA”) for the four consecutive fiscal quarters then ended (the “Leverage Ratio”) to exceed 3.50 to 1.00 on the last day of each fiscal quarter, and (ii) the ratio of our EBITDA for the four consecutive fiscal quarters then ended to our consolidated interest expense, including consolidated yield or discount accrued as to outstanding securitization obligations (if any), for the same period to be less than 3.00 to 1.00 as defined) that may not exceed 3.5of the end of each fiscal quarter. For purposes of the Leverage Ratio, the Credit Facility provides for the calculation of EBITDA giving pro forma effect to 1.0. Wethe Merger and certain acquisitions, divestitures and liquidations during the period to which such calculation relates. As of December 31, 2012, we were in compliance with all financial covenants underin our debt agreements as of December 31, 2010.

agreements.

In addition to the Credit Facility, we have $40.0various other credit facilities with an aggregate availability of $89.0 million, of uncommittedwhich $3.0 million was outstanding at December 31, 2012. Borrowings under these credit facilities under whichbear interest at variable rates. Additionally, as part of the Merger and CPT acquisition we had $4.8assumed certain capital leases with an outstanding balance of $23.8 million of borrowings asand $15.8 million at December 31, 2012 and 2011, respectively.

As of December 31, 2010.

Our current credit ratings are as follows:
Long-Term Debt
Current Rating
Rating Agency
Rating
Outlook
Standard & Poor’sBBB-Stable
Moody’sBaa3Stable
Our long-term debt rating is an investment grade rating. Investment grade is a credit rating2012, we have $143.5 million of BBB- or higher by Standard & Poor’s or Baa3 or higher by Moody’s.
On March 28, 2010, Standard & Poor’s (“S&P”) affirmed our BBB- rating with a stable outlook. On April 6, 2010, Moody’s affirmed our Baa3 rating and changed our current rating outlook from negative to stable.
A credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations or a specific financial program. The credit rating takes into consideration the creditworthiness of guarantors, insurers or other forms of credit enhancement on the obligation and takes into account the currencycash held in certain countries in which the obligation is denominated. The ratings outlook also highlights the potential direction of a short or long-term rating. It focuses on identifiable events and short-term trends that cause ratings to be placed under observation by the respective rating agencies. A change in rating outlook does not mean a rating change is inevitable. Prior changes in our ratings outlook have had no immediate impact on our liquidity exposure or on our cost of debt. We believe the potential impact of a downgrade in our financial outlook is currently not material to our liquidity exposure or cost of debt.


30


We issue short-term commercial paper notes that are currently not rated by Standard & Poor’s or Moody’s. Even though our short-term commercial paper is unrated, we believe a downgrade in our long-term debt rating could have a negative impact on our ability to continuerepatriate is limited due to issue unrated commercial paper.
We do not expect that a one rating downgrade of our long-term debt by either Standard & Poor’slocal regulations or Moody’s would substantially affect our ability to access the long-term debt capital markets. However, depending upon market conditions, the amount, timing and pricing of new borrowings could be adversely affected. If both of our long-term debt ratings were downgraded to below BBB-/Baa3, our flexibility to access the term debt capital markets would be reduced.
significant potential tax consequences.

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

We paid dividends in 20102012 of $75.5$112.4 million, or $0.88 per common share, compared with $70.9$79.5 million, in 2009 and $67.3 million in 2008. We recently announced an increase in our dividend rate for 2011 from $0.76or $0.80 per share in 2010 to $0.80 percommon share, in 2011 and $75.5 million, or $0.76 per common share in 2010. Prior to the completion of the Merger, our board of directors proposed, and Tyco as our sole shareholder authorized, us to pay cash dividends of $0.23 per share on February 8, 2013 to shareholders of record on January 25, 2013 and $0.23 per share on

44


May 10, 2013, to shareholders of record on April 26, 2013 and we expect to continue paying dividends on a quarterly basis. We intend to seek authorization from our shareholders at our 2013 annual general meeting of shareholders to extend the increased dividend or increase the dividend for the remainder of 2013, which iswill mark the 35th37th consecutive year in which we have increased dividends.

Authorized shares

Our authorized share capital consists of 213.0 million common shares with a par value of CHF 0.50 per share. Our board of directors is authorized to increase the total share capital until September 14, 2014 by a maximum amount of 106.5 million shares. In addition, our dividend.

share capital may be increased by:

In December 2007,

a maximum of 81.5 million shares upon the Boardexercise of Directorsconversion, option, exchange, warrant or similar rights for the subscription of shares granted to third parties or shareholders in connection with bonds, notes, options, warrants or other securities issued by us in national or international capital markets or pursuant to our existing and future contractual obligations (“Rights Bearing Obligations”); and/or

a maximum of 25.0 million shares upon the exercise of rights related to Rights-Bearing Obligations granted to members of the board of directors, members of the executive management, employees, contractors, consultants or other persons providing services for our benefit.

Share repurchases

Prior to the closing of the Merger, our board of directors, and Tyco as our sole shareholder, authorized the repurchase of shares of our common stock during 2008 up toshares with a maximum dollar limitaggregate value of $50 million. As$400.0 million following the closing of December 31, 2008, we had purchased 1,549,893 shares for $50 million pursuant to this authorization.the Merger. This authorization expired on December 31, 2008. No authorization for the repurchasedoes not have an expiration date. On October 1, 2012, our board of shares of our common stock was sought from or granted by our Board for 2009. On July 27, 2010 the Board of Directorsdirectors authorized the repurchase of our common shares with a maximum aggregate value of $800.0 million. This authorization expires on December 31, 2015 and is in addition to the $400.0 million share repurchase authorization. Under these authorizations, we repurchased 7,291,078 of our common stock up to a maximum dollar limit of $25shares in 2012 for $334.2 million. As of December 31, 2010 we had repurchased 734,603 shares for $25 million pursuant to this plan. In December 2010, the Board of Directors authorized the repurchase of shares of our common stock up to a maximum dollar limit of $25 million. The authorization expires December 2011.

Contractual obligations

The following summarizes our significant contractual obligations that impact our liquidity:

                             
  Payments Due by Period 
                 More than
    
In thousands 2011  2012  2013  2014  2015  5 Years  Total 
  
 
Long-term debt obligations $4,951  $202,517  $200,003  $1  $  $300,000  $707,472 
Interest obligations on fixed-rate debt , including effects of derivative financial instruments  33,524   30,697   26,550   17,610   17,610   26,415   152,406 
Operating lease obligations, net of sublease rentals  21,088   17,521   12,250   9,337   7,458   11,865   79,519 
Pension and post retirement plan contributions  36,100   34,500   32,900   9,800   10,700   108,200   232,200 
Other long-term liabilities  235   118               353 
 
 
Total contractual cash
obligations, net
 $95,898  $285,353  $271,703  $36,748  $35,768  $446,480  $1,171,950 
 
 

  Years ended December 31 
In thousands 2013  2014  2015  2016  2017  Thereafter  Total 
Debt obligations $  $65  $350,000  $  $777,706  $1,305,793  $2,433,564 
Capital lease obligations  3,096   3,171   6,036   1,236   1,236   9,035   23,810 
Interest obligations on fixed-rate debt  59,850   60,238   60,238   55,513   55,513   187,375   478,727 
Operating lease obligations, net of sublease rentals  52,306   40,190   28,785   20,715   16,322   31,831   190,149 
Purchase obligations  26,198    3,200               29,398  
Pension and other post-retirement plan contributions  33,200   38,800   38,800   30,300   17,200   189,600   347,900 

 

 
Total contractual obligations, net $  174,650   $  145,664   $  483,859  $  107,764  $  867,977  $  1,723,634  $  3,503,548  

 

 

The majority of the purchase obligations represent commitments for raw materials to be utilized in the normal course of business. For purposes of the above table, arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure, and approximate timing of the transaction.

In addition to the summary of significant contractual obligations, we will incur annual interest expense on outstanding variable rate debt. As of December 31, 2010,2012, variable interest rate debt including the effects of derivative financial instruments, was $102.4$428 million at a weighted average interest rate of 1.05%0.67%.

45


The estimated annual pension plan contribution amounts are intended to achieve fully funded status of our domestic qualified pension plan in accordance with the Pension Protection Act of 2006.

Pension and post retirementother post-retirement plan contributions are based on an assumed U.S pension plan discount rate of 5.9% for all periods and an expected rate of return on plan assets ranging from 6.0% to 8.0%. In December 2010 and 2009 we made accelerated contributions of $25 million to our defined benefit pension plan.


31

3.75% for all periods.


The total gross liability for uncertain tax positions at December 31, 20102012 is estimated to be approximately $24.3$54.5 million. We record penalties and interest related to unrecognized tax benefits inProvision for income taxesandInterest expense, respectively, which is consistent with our past practices. As of December 31, 2010,2012, we had recorded approximately $0.8$3.1 million for the possible payment of penalties and $4.8$19.5 million related to the possible payment of interest.

Other financial measures

In addition to measuring our cash flow generation or usage based upon operating, investing and financing classifications included in the Consolidated Statements of Cash Flows, we also measure our free cash flow. We have a long-term goal to consistently generate free cash flow that equals or exceeds 100%100 percent conversion of net income from continuing operations. Free cash flow is a non-Generally Accepted Accounting Principles financial measure that we use to assess our cash flow performance. We believe free cash flow is an important measure of operating performance because they provideit provides us and our investors a measurement of cash generated from operations that is available to pay dividends, make acquisitions, repay debt and repurchase shares. In addition, free cash flow is used as a criterion to measure and pay compensation-based incentives. Our measure of free cash flow may not be comparable to similarly titled measures reported by other companies. The following table is a reconciliation of free cash flow:

             
  Twelve Months Ended December 31 
In thousands 2010  2009  2008 
  
 
Net cash provided by (used for) continuing operations $270,376  $259,900  $212,612 
Capital expenditures  (59,523)  (54,137)  (53,089)
Proceeds from sale of property and equipment  358   1,208   4,741 
 
 
Free cash flow $211,211  $206,971  $164,264 
 
 

  Years ended December 31 
In thousands 2012  2011  2010 

Net cash provided by operations

 $67,960  $320,226  $270,376 

Capital expenditures

  (94,532  (73,348  (59,523

Proceeds from sale of property and equipment

  5,508   1,310   358 

 

 

Free cash flow

 $(21,064 $248,188  $211,211 

 

 

Off-balance sheet arrangements

At December 31, 2010,2012, we had no off-balance sheet financing arrangements.

COMMITMENTS AND CONTINGENCIES

Environmental

We have been made parties to a number of actions filed or have been given notice of potential claims relating to the conduct of our business, including those pertaining to commercial disputes, product liability, asbestos, environmental, safety and health, patent infringement and employment matters.

While we believe that a material impact on our consolidated financial position, results of operations or cash flows from any such future claims or potential claims is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future adverse ruling or unfavorable development could result in future charges that could have a material impact. We do and will continue to periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our consolidated financial position, results of operations and cash flows for the proceedings and claims described in ITEM 8, Note 18 of the Notes to Consolidated Financial Statements could change in the future.

Asbestos Matters

Our subsidiaries and numerous other companies are named as defendants targetsin personal injury lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or PRPdistribution of industrial products that either contained asbestos

46


or were attached to or used with asbestos-containing components manufactured by third-parties. Each case typically names between dozens to hundreds of corporate defendants. While we have observed an increase in a smallthe number of environmentalclean-ups,these lawsuits over the past several years, including lawsuits by plaintiffs with mesothelioma-related claims, a large percentage of these suits have not presented viable legal claims and, as a result, have been dismissed by the courts. Our historical strategy has been to mount a vigorous defense aimed at having unsubstantiated suits dismissed, and, where appropriate, settling suits before trial. Although a large percentage of litigated suits have been dismissed, we cannot predict the extent to which we will be successful in resolving lawsuits in the future.

As of December 31, 2012, there were approximately 1,900 lawsuits pending against our subsidiaries. A lawsuit might include several claims, and we have approximately 2,300 claims outstanding as of December 31, 2012. This amount was not adjusted for claims that are not actively being prosecuted, identified incorrect defendants, or duplicated other actions, which would ultimately reflect our current or former business units have generally been givende minimisstatus. To date, noneestimate of these claims have resulted inclean-up costs, fines, penalties or damages in an amount material to our financial position or results of operations. We have disposed of athe number of businessesviable claims made against us, our affiliates, or entities for which we assumed responsibility in recent yearsconnection with acquisitions or divestitures. In addition, the amount does not include certain claims pending against third parties for which we have provided an indemnification.

Our estimated liability for asbestos-related claims was $234.6 million and $0.6 million as of December 31, 2012 and 2011, respectively, and was recorded inOther non-current liabilitiesin certain cases, suchthe Consolidated Balance Sheets for pending and future claims and related defense costs. Our estimated receivable for insurance recoveries was $157.4 million at December 31, 2012, all of which was acquired in the Merger, and was recorded inOther non-current assets in the Consolidated Balance Sheets. We had no estimated receivable for insurance recoveries as the disposition of the Cross Pointe Paper Corporation uncoated paper businessDecember 31, 2011.

Environmental Matters

We are involved in 1995, the disposition of the Federal Cartridge Company ammunition business in 1997, the disposition of Lincoln Industrial in 2001 and the disposition of the Tools Group in 2004, weor have retained responsibility and potential liability for environmental obligations and legal proceedings related to our current business and, including pursuant to certain indemnification obligations, related to certain formerly owned businesses. We are responsible, or alleged to be responsible, for ongoing environmental obligations.investigation and/or remediation of sites in several countries. These sites are in various stages of investigation and/or remediation and at some of these sites our liability is considered de minimis. We received notification from the U.S. Environmental Protection Agency and from similar state and non-U.S. environmental agencies that several sites formerly or currently owned and/or operated by us, and other properties or water supplies that may be or may have been impacted from those operations, contain disposed or recycled materials or waste and require environmental investigation and/or remediation. Those sites include instances where we have been identified as a potentially responsible party under U.S. federal, state and/or non-U.S. environmental laws and regulations. For several formerly owned businesses, we have also received claims for indemnification from purchasers of these businesses and have established what we believe to be adequatebusinesses.

Our accruals for potential liabilities arising out of retained responsibilities. We settled someenvironmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the claims in prior years;liability can be reasonably estimated, based on current law and existing technologies. It can be difficult to dateestimate reliably the final costs of investigation and remediation due to various factors. In our opinion, the amounts accrued are appropriate based on facts and circumstances as currently known. Based upon our experience, current information regarding known contingencies and applicable laws, we have recorded accruals have been adequate.

In addition, there are ongoingreserves for these environmental issues at a limited numbermatters of sites relating to operations no longer carried out at the sites. We have established what we believe to be adequate accruals for remediation costs at these sites.$35.9 million and $1.5 million as of December 31, 2012 and 2011, respectively. We do not believe that projected response costsanticipate these environmental conditions will result inhave a material liability.
Weadverse effect on our financial position, results of operations or cash flows. However, unknown conditions, new details about existing conditions or changes in environmental requirements may be named as a PRP at other sites in the future, for both divested and acquired businesses. When the outcome of the matter is probable and it is possible to provide reasonable estimates of our liability with respectgive rise to environmental sites, provisions have been made in accordance with generally accepted accounting principles in the United States (“GAAP”). As of December 31, 2010 and 2009, our undiscounted reserves for such environmental liabilities were approximately $1.3 million and $2.3 million, respectively. We cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmentalclean-up costs and liabilities will not exceed the amount of our current reserves.
reserves and could have a material adverse effect in the future.


32

47


Product liability claims

We are subject to various product liability lawsuits and personal injury claims. A substantial number of these lawsuits and claims are insured and accrued for by Penwald, our captive insurance subsidiary. See discussion in ITEM 1 and ITEM 8, Note 2 of the Notes to Consolidated Financial Statements — Insurance subsidiary. Penwald records a liability for these claims based on actuarial projections of ultimate losses. For all other claims, accruals covering the claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are adjusted periodically as additional information becomes available. In 2004, we disposed of the Tools Group and we retained responsibility for certain product claims. We have not experienced significant unfavorable trends in either the severity or frequency of product liability lawsuits or personal injury claims.

Compliance Matters

Prior to the Merger, the Flow Control business was subject to investigations by the U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“SEC”) related to allegations that improper payments were made by the Flow Control business and other Tyco subsidiaries and third-party intermediaries in recent years in violation of the Foreign Corrupt Practices Act. Tyco reported to the DOJ and the SEC the remedial measures that it had taken in response to the allegations and Tyco’s own internal investigations. As a result of discussions with the DOJ and SEC aimed at resolving these matters, on September 24, 2012, Tyco entered into a settlement with the SEC and a non-prosecution agreement with the DOJ, pursuant to which the Flow Control business is for a three year period subject to yearly reporting to the DOJ concerning its continuing compliance efforts.

Stand-by lettersLetters of creditCredit, Bank Guarantees and bondsBonds

In certain situations, Tyco guaranteed Flow Control’s performance to third parties or provided financial guarantees for financial commitments of Flow Control. In situations where Flow Control and Tyco were unable to obtain a release from these guarantees in connection with the Spin-off, we will indemnify Tyco for any losses it suffers as a result of such guarantees.

In disposing of assets or businesses, we often provide representations, warranties and indemnities to cover various risks including unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not have the ability to reasonably estimate the potential liability due to the inchoate and unknown nature of these potential liabilities. However, we have no reason to believe that these uncertainties would have a material adverse effect on our financial position, results of operations or cash flows.

In the ordinary course of business, we are required to commit to bonds, letters of credit and bank guarantees that require payments to our customers for any non-performance. The outstanding face value of the bondsthese instruments fluctuates with the value of our projects in process and in our backlog. In addition, we issue financial stand-by letters of credit primarily to secure our performance to third parties under self-insurance programs and certain legal matters. programs.

As of December 31, 20102012 and 2009,2011, the outstanding value of these instrumentsbonds, letters of credit and bank guarantees totaled $116.5$493.2 million and $51.2$136.2 million, respectively.

NEW ACCOUNTING STANDARDS

See ITEM 8, Note 12 of the Notes to Consolidated Financial Statements, included in this form 10-K, for information pertaining to recently adopted accounting standards or accounting standards to be adopted in the future.

48


CRITICAL ACCOUNTING POLICIES

We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States.GAAP. Our significant accounting policies are more fully described in ITEM 8, Note 12 of the Notes to Consolidated Financial Statements. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry and information available from other outside sources, as appropriate. We consider an accounting estimate to be critical if:

it requires us to make assumptions about matters that were uncertain at the time we were making the estimate; and

changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations.

• it requires us to make assumptions about matters that were uncertain at the time we were making the estimate; and
• changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations.

Our critical accounting estimates include the following:

Impairment of Goodwillgoodwill and Indefinite-Lived Intangiblesindefinite-lived intangibles

Goodwill

Goodwill represents the excess of the cost of acquired businesses over the net of the fair value of identifiable tangible net assets and identifiable intangible assets purchased.

purchased and liabilities assumed.

Goodwill is tested at least annually for impairment and is tested for impairment more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is performed using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. If the estimated fair value is less than the carrying amount of the reporting unit there is an indication that goodwill impairment exists and a second step must be completed in order to determine the amount of the goodwill impairment, if any that should be recorded. In the second step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. 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.

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.

In developing our discounted cash flow analysis, assumptions about future revenues and expenses, capital expenditures and changes in working capital are based on our annual operating plan and long-term business plan for each of our reporting units. These plans take into consideration numerous factors including historical experience, anticipated future economic conditions, changes in raw material prices and growth expectations for the industries and end markets we participate in. These assumptions are determined over a five year long-term planning period. The five year growth rates for revenues and operating profits vary for each reporting unit


33


being evaluated. Revenues and operating profit beyond 20172019 are projected to grow at a 3% perpetual growth rate for all reporting units.
of 3.0%.

Discount rate assumptions for each reporting unit take into consideration our assessment of risks inherent in the future cash flows of the respective reporting unit and our weighted-average cost of capital. We utilized a discount rate ranging from 13%12.0% to 15%13.0% in determining the discounted cash flows in our fair value analysis.

In estimating fair value using the market approach, we identify a group of comparable publicly-traded companies for each operatingreporting segment that are similar in terms of size and product offering. These groups of comparable companies are used to develop multiples based on total market-based invested capital as a multiple of EBITDA.earnings

49


before interest, taxes, depreciation and amortization (“EBITDA”). We determine our estimated values by applying these comparable EBITDA multiples to the operating results of our reporting units. The ultimate fair value of each reporting unit is determined considering the results of both valuation methods.

Impairment charge

We completed step one of our annual goodwill impairment evaluation during the fourth quarter for 2012 with each reporting unit’s fair value exceeding its carrying value. Accordingly, step two of the impairment analysis was not required.

In connection withrequired for 2012.

For the year ended December 31, 2011, we recorded a pre-tax non-cash impairment charge of $200.5 million as a result of our annual goodwill impairment test, we determined that the fair valuetest. This represented impairment of onegoodwill in Water & Fluid Solutions. The impairment charge resulted from changes in our forecasts in light of our reporting units did not exceed its carrying value by a significant amount. Goodwill for this reporting unit was $436.6 million at December 31, 2010. If cash flow projections decreased by 2.7% or if the discount rate increased by 50 basis points (the discount rate usedeconomic conditions prevailing in these markets and due to continued softness in the impairment analysis was 13.5%), this reporting unit would have failed the step one test and a step two analysis would have been required.

end-markets served by residential water treatment components.

Identifiable intangible assets

Indefinite-Lived Intangibles

Our primary identifiable intangible assets include trade marks andinclude: customer relationships, trade names patents, non-compete agreements,and trademarks, proprietary technology, backlog and customer relationships.patents. Identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant. DuringWe complete our annual impairment test during the fourth quarter of 2010 and 2009, we completed our annual impairment testeach year for those identifiable assets not subject to amortization. There were noAn impairment chargescharge of $60.7 million was recorded in 2010. We recorded impairment charges of $11.3 million in 2009.2012, related to trade names. These charges were recorded inSelling, generalImpairment of trade names and administrativegoodwillin our Consolidated Statements of Income.
Operations and Comprehensive Income (Loss). There was no impairment charge recorded in 2011 or 2010 for identifiable intangible assets.

The impairment test consists of a comparison of the fair value of the trade name with its carrying value. Fair value is measured using the relief-from-royalty method. This method assumes the trade name has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. The impairment charge recorded in 20092012 was the result of significant declinesa rebranding strategy implemented in sales volume.

the fourth quarter of 2012.

At December 31, 20102012 our goodwill and intangible assets were approximately $2,519.6$6,804.2 million and represented approximately 63.4%58% of our total assets. If we experience furtherfuture declines in sales and operating profit or do not meet our operating forecasts, we may be subject to future impairments. Additionally, changes in assumptions regarding the future performance of our businesses, increases in the discount rate used to determine the discounted cash flows of our businesses or significant declines in our stockshare price or the market as a whole could result in additional impairment indicators. Because of the significance of our goodwill and intangible assets, any future impairment of these assets could have a material adverse effect on our financial results.

Impairment of Long-lived Assetslong-lived assets

We review the recoverability of long-lived assets to be held and used, such as property, plant and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying


34


value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced for the cost to dispose of the assets. The measurement of impairment requires us to estimate future cash flows and the fair value of long-lived assets.
There were no material impairment charges recorded related to long-lived assets in 2012, 2011 or 2010.

50


PensionPercentage of completion revenue recognition

Revenue from certain long-term contracts is recognized over the contractual period under the percentage of completion (“POC”) method of accounting. Under this method, sales and gross profit are recognized as work is performed either based on the relationship between the actual costs incurred and the total estimated costs at completion (“the cost-to-cost method”) or based on efforts expended for measuring progress towards completion in situations in which this approach is more representative of the progress on the contract than the cost-to-cost method. Changes to the original estimates may be required during the life of the contract and such estimates are reviewed on a regular basis. Sales and gross profit are adjusted using the cumulative catch-up method for revisions in estimated total contract costs and contract values. These reviews have not resulted in adjustments that were significant to our results of operations. Estimated losses are recorded when identified. Claims against customers are recognized as revenue upon settlement.

Pension and other post-retirement plans

We sponsor domestic and foreign defined-benefit pension and other post-retirement plans. The amounts recognized in our consolidated financial statements related to our defined-benefit pension and other post-retirement plans are determined from actuarial valuations. Inherent in these valuations are assumptions, includingincluding: expected return on plan assets, discount rates, rate of increase in future compensation levels and health care cost trend rates. These assumptions are updated annually and are disclosed in ITEM 8, Note 1214 to the Notes to Consolidated Financial Statements. Changes to theseDifferences in actual experience or changes in assumptions willmay affect pension expense, pension contributions and the funded status of our pension plans.

We recognize the overfunded or underfunded status of our defined benefit and retiree medical plans as an asset or liability in our Consolidated Balance Sheets, withother post-retirement obligations and future expense. The primary factors contributing to actuarial gains and losses each year are (1) changes in the funded status recognized through comprehensive income indiscount rate used to value pension and other post-retirement benefit obligations as of the year in which they occur.
measurement date and (2) differences between the expected and the actual return on plan assets.

Discount rate

The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to payments from a stream of AA or higher bonds available in the marketplace rated AA or higher, adjusted to eliminate the effects of call provisions. This produced a discount rate for our U.S. plans of 3.67% in 2012, 5.05% in 2011 and 5.90% in 2010, 6.00% in 2009 and 6.50% in 2008.2010. The discount rates on our foreign plans ranged from 0.50% to 4.50% in 2012, 0.75% to 5.00% in 2011 and 0.75% to 5.40% in 2010, 2.00% to 6.00% in 2009 and 2.00% to 6.25% in 2008.2010. There are no other known or anticipated changes in our discount rate assumption that will impact our pension expense in 2011.

2013.

Expected rate of return

Our expected rate of return on plan assets for our U.S. plans was 7.5% for 2012 and 8.0% in 2011 and 8.5% for 2010, 2009 and 2008.in 2010. The expected rate of return is designed to be a long-term assumption that may be subject to considerableyear-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical returns, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader longer-term market indices.

We base The expected rate of return on our determinationnon U.S. plans ranged from 1.0% to 4.6% in 2012, 0.25% to 5.20% in 2011 and 1.5% to 5.5% in 2010.

During 2012, we adopted an investment strategy for our U.S. pension plans with a primary objective of preserving the funded status of the U.S. plans. This is achieved through investments in fixed interest instruments with interest rate sensitivity characteristics closely reflecting the interest rate sensitivity of our benefit obligations. Shifting of allocations away from equities to liability hedging fixed income investments is currently in progress. As equity investments are redeemed, proceeds are reinvested in fixed income instruments. After we have completed the transition, the U.S. pension expense orplans will have in excess of 90 percent allocation to fixed income investments. As a result of the adoption of this investment strategy, we will be decreasing our expected return on a market-related valuationassets for our funded U.S. pension plans to 3.75% in 2013, based on expectations of assets which reducesfuture market returns and the asset mix of the plans’ investments.

year-to-year volatility. This market-related valuation recognizes investmentIn the fourth quarter of 2012, we changed our method of recognizing actuarial gains or losses over a five-year period from the year in which they occur. Investment gains orand losses for this purpose arepension and other post-retirement benefits for all of our benefit plans. Historically, we have recognized the difference betweenactuarial gains and losses as a component ofEquity on our Consolidated Balance Sheets on an annual basis and have amortized them

51


into our operating results over the average future service period of the active employees of these plans, to the extent such gains and losses were outside of a corridor. We have elected to immediately recognize actuarial gains and losses in our operating results on the basis that it is preferable to accelerate the recognition of deferred gains and losses into income rather than to delay such recognition. Additionally, for purposes of calculating the expected return on plan assets, we will no longer use a calculated usingvalue for the market-related value of plan assets, but instead will use the actual fair value of our plan assets. These changes will improve transparency in our operating results by more quickly recognizing the effects of economic and interest rate conditions on plan obligations, investments and assumptions.

Under our new accounting method, we will recognize changes in the fair value of plan assets and the actual return based on the market-related value of assets. Since the market-related value of assets recognizesnet actuarial gains or losses over afive-year-period,annually in the future valuefourth quarter each year. The remaining components of pension expense, primarily service and interest costs and the expected return on plan assets, will be impactedrecorded on a quarterly basis as previously deferred gains or losses are recorded.

ongoing pension expense. We have applied this change retrospectively, adjusting all prior periods. See ITEM 8, Note 123 of the Notes to Consolidated Financial Statements for a presentation of our operating results before and after the application of this accounting change.

See ITEM 8, Note 14 of the Notes to Consolidated Financial Statements for further information regarding pension plans.

Loss contingencies

Accruals are recorded for various contingencies including legal proceedings, self-insurance and other claims that arise in the normal course of business. The accruals are based on judgment, the probability of losses and, where applicable, the consideration of opinions of internal and/or external legal counsel and actuarially determined estimates. Additionally, we record receivables from third party insurers when recovery has been determined to be probable.

We recognize asbestos-related liabilities on an undiscounted basis when a loss is probable and can be reasonably estimated. Certain of these liabilities are subject to insurance coverage. Our subsidiaries and numerous other companies are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were attached to or used with asbestos-containing components manufactured by third-parties. The process of estimating asbestos-related liabilities and the corresponding insurance recoveries receivable is complex and dependent primarily on our historical claim experience, estimates of potential future claims, our legal strategy for resolving these claims, the availability of insurance coverage, and the solvency and creditworthiness of insurers.

See ITEM 8, Note 18 of the Notes to Consolidated Financial Statements for further information regarding loss contingencies.

Income taxes

In determining taxable income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.

We currently have recorded valuation allowances that we will maintain until when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Our

52


income tax expense recorded in the future may be reduced to the extent of decreases in our valuation allowances. The realization of our remaining deferred tax assets is primarily dependent on future taxable income in the appropriate jurisdiction. Any reduction in future taxable income including but not limited to any future restructuring activities may require that we record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance could result in additional income tax expense in such period and could have a significant impact on our future earnings.

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management records the effect of a tax rate or law change on the Company’s deferred tax assets and liabilities in the period of enactment. Future tax rate or law changes could have a material effect on the Company’s financial condition, results of operations or cash flows.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We perform reviews of our income tax positions on a quarterly basis and accrue for uncertain tax positions. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the tax jurisdictions in which we operate based on our estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. As events change or resolution occurs, these liabilities are adjusted, such as in the case of audit settlements with taxing authorities. The ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential economic loss that may result from adverse changes in the fair value of financial instruments. We are exposed to various market risks, including changes in interest rates and foreign currency rates. WePeriodically, we use derivative financial instruments to manage or reduce the impact of changes in interest rates. Counterparties to all derivative contracts are major financial institutions. All instruments are entered into for other than trading purposes. The major accounting policies and utilization of these instruments is described more fully in ITEM 8, Note 1 of the Notes to Consolidated Financial Statements.


35


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.
Interest rate risk

Our debt portfolio excluding impact of swap agreements, as of December 31, 2010,2012, was comprised of debt predominantly denominated in U.S. dollars. This debt portfolio is comprised of 56%83% fixed-rate debt and 44% variable-rate debt, not considering the effects of our interest rate swaps. Taking into account the variable to fixed-rate swap agreements we entered into with an effective date of April 2006 and August 2007, our debt portfolio is comprised of 85% fixed-rate debt and 15%17% variable-rate debt. Changes in interest rates have different impacts on the fixed and variable-rate portions of our debt portfolio. A change in interest rates on the fixed portion of the debt portfolio impacts the fair value but has no impact on interest incurred or cash flows. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows but does not impact the net financial instrument position.

Based on the fixed-rate debt included in our debt portfolio, as of December 31, 2010,2012, a 100 basis point increase or decrease in interest rates would result in a $20.0$120.4 million decrease or a $130.1 million increase or decrease in fair value.

Based on the variable-rate debt included in our debt portfolio including the interest rate swap agreements, as of December 31, 2010,2012, a 100 basis point increase or decrease in interest rates would result in a $1.0$4.2 million increase orin interest incurred. A decrease in our interest rates on our variable-rate debt of 66.4 basis points (to zero) would result in a decrease in interest incurred.

incurred of $2.8 million.

Foreign currency risk

We conduct business in various locations throughout the world and are subject to market risk due to changes in the value of foreign currencies in relation to our reporting currency, the U.S. dollar. We generally do notPeriodically, we use derivative financial instruments to manage these risks. The functional currencies of our foreign operating

53


locations are the local currency in the country of domicile. We manage these operating activities at the local level and revenues, costs, assets and liabilities are generally denominated in local currencies, thereby mitigating the risk associated with changes in foreign exchange. However, our results of operations and assets and liabilities are reported in U.S. dollars and thus will fluctuate with changes in exchange rates between such local currencies and the U.S. dollar.

From time to time, we may enter in tointo short duration foreign currency contracts to hedge foreign currency risk on intercompany transactions.

risks. As the majority of our foreign currency contracts have an original maturity date of less than one year, there is no material foreign currency risk. Changes in the fair value of all derivatives are recognized immediately in income unless the derivative qualifies as a hedge of future cash flows. Gains and losses related to a hedge are deferred and recorded in the Consolidated Balance Sheets as a component of AOCI and subsequently recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss) when the hedged item affects net income.


36

54


ITEM
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Pentair Inc.Ltd. and its subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inRules 13a-15(f) and15d-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010.2012. In making this assessment, management used the criteria for effective internal control over financial reporting described inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2010,2012, the Company’s internal control over financial reporting was effective based on those criteria.

Management has excluded from its assessment the internal control over financial reporting at Tyco Flow Control International Ltd. (“Flow Control”), which we merged with on September 28, 2012 and whose financial statements constitute 60 percent of total assets and 20 percent of total revenues in the consolidated financial statements as of and for the year ended December 31, 2012.

Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on the Company’s internal control over financial reporting as of year ended December 31, 2010.2012. That attestation report is set forth immediately following this management report.

Randall J. Hogan John L. Stauch
Chairman and Chief Executive Officer
 Executive Vice President and Chief Financial Officer


37

55


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Pentair Inc.
Ltd.

We have audited the internal control over financial reporting of Pentair Inc.Ltd. and subsidiaries (the “Company”) as of December 31, 2010,2012, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Tyco Flow Control International Ltd. (“Flow Control”), which was acquired on September 28, 2012 and whose financial statements constitute 60 percent of total assets and 20 percent of total revenues on the consolidated financial statements as of and for the year ended December 31, 2012. Accordingly, our audit did not include the internal control over financial reporting at Flow Control.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010,2012, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule listed in the Index at Item 15 as of and for the year ended December 31, 20102012 of the Company and our report dated February 22, 201126, 2013 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.

 
included an explanatory paragraph regarding changes in certain of the Company’s methods of accounting for defined benefit pension and other postretirement benefit costs.

[GRAPHIC ]

Minneapolis, Minnesota

February 22, 2011

26, 2013


38

56


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Pentair Inc.
Ltd.

We have audited the accompanying consolidated balance sheets of Pentair Inc.Ltd. and subsidiaries (the “Company”) as of December 31, 20102012 and 20092011, and the related consolidated statements of operations and comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010.2012. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the CompanyPentair Ltd. and subsidiaries at December 31, 20102012 and 20092011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010,2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 3 to the consolidated financial statements, the Company has elected to change its method of accounting for defined benefit pension and other post-retirement benefit plan costs in 2012. Such changes are reflected in the accompanying consolidated balance sheet as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2012.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010,2012, based on the criteria established inInternal Control — Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 201126, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

[GRAPHIC]

Minneapolis, Minnesota

February 22, 2011

26, 2013


39

57


Pentair Inc.Ltd. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income (Loss)

             
  Years Ended December 31 
In thousands, except per-share data 2010  2009  2008 
  
 
Net sales $3,030,773  $2,692,468  $3,351,976 
Cost of goods sold  2,100,133   1,907,333   2,337,426 
 
 
Gross profit  930,640   785,135   1,014,550 
Selling, general and administrative  529,329   507,303   606,980 
Research and development  67,156   57,884   62,450 
Legal settlement        20,435 
 
 
Operating income  334,155   219,948   324,685 
Other (income) expense:            
Gain on sale of interest in subsidiaries        (109,648)
Equity (income) losses of unconsolidated subsidiaries  (2,108)  1,379   3,041 
Loss on early extinguishment of debt     4,804   4,611 
Interest income  (1,263)  (999)  (2,029)
Interest expense  37,379   42,117   61,464 
Other        106 
 
 
Income from continuing operations before income taxes and noncontrolling interest  300,147   172,647   367,140 
Provision for income taxes  97,200   56,428   108,344 
 
 
Income from continuing operations  202,947   116,219   258,796 
Loss from discontinued operations, net of tax        (5,783)
Loss on disposal of discontinued operations, net of tax  (626)  (19)  (21,846)
 
 
Net income before noncontrolling interest  202,321   116,200   231,167 
Noncontrolling interest  4,493   707   2,433 
 
 
Net income attributable to Pentair, Inc.  $197,828  $115,493  $228,734 
 
 
Net income from continuing operations attributable to Pentair, Inc.  $198,454  $115,512  $256,363 
 
 
Earnings per common share attributable to Pentair, Inc.
            
Basic
            
Continuing operations $2.02  $1.19  $2.62 
Discontinued operations  (0.01)     (0.28)
 
 
Basic earnings per common share $2.01  $1.19  $2.34 
 
 
Diluted
            
Continuing operations $2.00  $1.17  $2.59 
Discontinued operations  (0.01)     (0.28)
 
 
Diluted earnings per common share $1.99  $1.17  $2.31 
 
 
Weighted average common shares outstanding
            
Basic  98,037   97,415   97,887 
Diluted  99,294   98,522   99,068 

   Years ended December 31 
In thousands, except per-share data  2012  2011  2010 
Net sales  $  4,416,146  $  3,456,686  $  3,030,773 
Cost of goods sold   3,146,554   2,382,964   2,100,133 

 

 
Gross profit   1,269,592   1,073,722   930,640 
Selling, general and administrative   1,158,436   694,841   550,501 
Research and development   93,557   78,158   67,156 
Impairment of trade names and goodwill   60,718   200,520    

 

 
Operating income (loss)   (43,119  100,203   312,983 
Other (income) expense    
Loss on early extinguishment of debt   75,367       
Equity income of unconsolidated subsidiaries   (2,156  (1,898  (2,108
Interest income   (2,902  (1,432  (1,263
Interest expense   70,537   60,267   37,379 

 

 
Income (loss) from continuing operations before income taxes and noncontrolling interest   (183,965  43,266   278,975 
Provision (benefit) for income taxes   (79,353  46,417   88,943 

 

 
Income (loss) from continuing operations   (104,612  (3,151  190,032 
Loss on disposal of discontinued operations, net of tax         (626

 

 
Net income (loss) before noncontrolling interest   (104,612  (3,151  189,406 
Noncontrolling interest   2,574   4,299   4,493 

 

 
Net income (loss) attributable to Pentair Ltd.  $(107,186 $(7,450 $184,913 

 

 
Net income (loss) from continuing operations attributable to Pentair Ltd.  $(107,186 $(7,450 $185,539 

 

 
Comprehensive income (loss), net of tax    
Net income (loss) before noncontrolling interest  $(104,612 $(3,151 $189,406 
Changes in cumulative translation adjustment   35,830   (93,706  (32,706
Amortization of pension and other post-retirement prior service cost and transition obligation   (253  (11  153 
Changes in market value of derivative financial instruments   (3,630  4,375   310 

 

 
Total comprehensive income (loss)   (72,665  (92,493  157,163 
Less: Comprehensive income (loss) attributable to noncontrolling interest   3,988   2,184   2,274 

 

 
Comprehensive income (loss) attributable to Pentair Ltd.  $(76,653 $(94,677 $154,889 

 

 
Earnings (loss) per common share attributable to Pentair Ltd.    
Basic    
Continuing operations  $(0.84 $(0.08 $1.89 
Discontinued operations         (0.01

 

 
Basic earnings (loss) per common share  $(0.84 $(0.08 $1.88 

 

 
Diluted    
Continuing operations  $(0.84 $(0.08 $1.87 
Discontinued operations         (0.01

 

 
Diluted earnings (loss) per common share  $(0.84 $(0.08 $1.86 

 

 
Weighted average common shares outstanding    
Basic   127,368   98,233   98,037 
Diluted   127,368   98,233   99,294 
Dividends paid per common share  $0.88  $0.80  $0.76 

See accompanying notes to consolidated financial statements.


40

58


Pentair Inc.Ltd. and Subsidiaries

Consolidated Balance Sheets

         
  December 31,
  December 31,
 
In thousands, except share and per-share data 2010  2009 
  
 
ASSETS
Current assets
        
Cash and cash equivalents $46,056  $33,396 
Accounts and notes receivable, net of allowances of $36,343 and $27,081, respectively  516,905   455,090 
Inventories  405,356   360,627 
Deferred tax assets  56,349   49,609 
Prepaid expenses and other current assets  44,631   47,576 
 
 
Total current assets  1,069,297   946,298 
Property, plant and equipment, net
  329,435   333,688 
Other assets
        
Goodwill  2,066,044   2,088,797 
Intangibles, net  453,570   486,407 
Other  55,187   56,144 
 
 
Total other assets  2,574,801   2,631,348 
 
 
Total assets
 $3,973,533  $3,911,334 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
        
Short-term borrowings $4,933  $2,205 
Current maturities of long-term debt  18   81 
Accounts payable  262,357   207,661 
Employee compensation and benefits  107,995   74,254 
Current pension and post-retirement benefits  8,733   8,948 
Accrued product claims and warranties  42,295   34,288 
Income taxes  5,964   5,659 
Accrued rebates and sales incentives  33,559   27,554 
Other current liabilities  80,942   85,629 
 
 
Total current liabilities  546,796   446,279 
Other liabilities
        
Long-term debt  702,521   803,351 
Pension and other retirement compensation  209,859   234,948 
Post-retirement medical and other benefits  30,325   31,790 
Long-term income taxes payable  23,507   26,936 
Deferred tax liabilities  169,198   146,630 
Other non-current liabilities  86,295   95,060 
 
 
Total liabilities  1,768,501   1,784,994 
Commitments and contingencies        
Shareholders’ equity
        
Common shares par value $0.162/3; 98,409,192 and 98,655,506 shares issued and
        
outstanding, respectively  16,401   16,442 
Additional paid-in capital  474,489   472,807 
Retained earnings  1,624,605   1,502,242 
Accumulated other comprehensive income (loss)  (22,342)  20,597 
Noncontrolling interest  111,879   114,252 
 
 
Total shareholders’ equity  2,205,032   2,126,340 
 
 
Total liabilities and shareholders’ equity
 $3,973,533  $3,911,334 
 
 

   December 31 
In thousands, except share and per-share data  2012  2011 
Assets  
Current assets   
Cash and cash equivalents  $261,341  $50,077 
Accounts and notes receivable, net of allowances of $37,455 and $39,111, respectively   1,292,648   569,204 
Inventories   1,380,271   449,863 
Other current assets   326,108   168,691 

 

 
Total current assets   3,260,368   1,237,835 
Property, plant and equipment, net   1,224,488   387,525 
Other assets   
Goodwill   4,894,512   2,273,918 
Intangibles, net   1,909,656   592,285 
Other non-current assets   506,287   94,750 

 

 
Total other assets   7,310,455   2,960,953 

 

 
Total assets  $  11,795,311  $4,586,313 

 

 
Liabilities and Equity  
Current liabilities   
Current maturities of long-term debt and short-term borrowings  $3,096  $4,862 
Accounts payable   569,596   294,858 
Employee compensation and benefits   295,067   118,413 
Other current liabilities   670,162   223,708 

 

 
Total current liabilities   1,537,921   641,841 
Other liabilities   
Long-term debt   2,454,278   1,304,225 
Pension and other post-retirement compensation and benefits   378,066   280,389 
Deferred tax liabilities   488,102   188,957 
Other non-current liabilities   453,587   123,509 

 

 
Total liabilities   5,311,954   2,538,921 
Equity   
Common shares CHF 0.50 par value, 213,000,000 authorized and issued at December 31, 2012; 250,000,000 shares authorized at December 31, 2011 and 98,622,564 shares issued and outstanding at December 31, 2011   113,454   47,526 
Common shares held in treasury, 6,862,540 shares at December 31, 2012   (315,519   
Capital contribution reserve   5,283,835   457,754 
Retained earnings   1,292,288   1,465,780 
Accumulated other comprehensive income (loss)   (7,198  (37,731

 

 
Shareholders’ equity attributable to Pentair Ltd.   6,366,860   1,933,329 
Noncontrolling interest   116,497   114,063 

 

 
Total equity   6,483,357   2,047,392 

 

 
Total liabilities and equity  $  11,795,311  $  4,586,313 

 

 

See accompanying notes to consolidated financial statements.


41

59


Pentair Inc.Ltd. and Subsidiaries

Consolidated Statements of Cash Flows

             
  Year Ended 
  December 31,
  December 31,
  December 31,
 
In thousands 2010  2009  2008 
  
 
Operating activities
            
Net income before noncontrolling interest $202,321  $116,200  $231,167 
Adjustments to reconcile net income to net cash provided by (used for) operating activities
            
Loss from discontinued operations        5,783 
Loss on disposal of discontinued operations  626   19   21,846 
Equity (income) losses of unconsolidated subsidiaries  (2,108)  1,379   3,041 
Depreciation  57,995   64,823   59,673 
Amortization  26,184   40,657   27,608 
Deferred income taxes  29,453   30,616   40,754 
Stock compensation  21,468   17,324   20,572 
Excess tax benefits from stock-based compensation  (2,686)  (1,746)  (1,617)
Loss on sale of assets  466   985   510 
Gain on sale of interest in subsidiaries        (109,648)
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
            
Accounts and notes receivable  (62,344)  11,307   (18,247)
Inventories  (44,495)  66,684   (33,311)
Prepaid expenses and other current assets  2,777   16,202   (27,394)
Accounts payable  55,321   (13,822)  (1,973)
Employee compensation and benefits  27,252   (22,431)  (21,919)
Accrued product claims and warranties  8,068   (7,440)  (7,286)
Income taxes  1,791   1,972   (4,409)
Other current liabilities  561   (21,081)  8,987 
Pension and post-retirement benefits  (43,024)  (39,607)  301 
Other assets and liabilities  (9,250)  (2,141)  18,174 
 
 
Net cash provided by (used for) continuing operations  270,376   259,900   212,612 
Net cash provided by (used for) operating activities of discontinued operations     (1,531)  (8,397)
 
 
Net cash provided by (used for) operating activities  270,376   258,369   204,215 
Investing activities
            
Capital expenditures  (59,523)  (54,137)  (53,089)
Proceeds from sale of property and equipment  358   1,208   4,741 
Acquisitions, net of cash acquired        (2,027)
Divestitures     1,567   37,907 
Other  (1,148)  (3,224)  (12)
 
 
Net cash provided by (used for) investing activities  (60,313)  (54,586)  (12,480)
Financing activities
            
Net short-term borrowings  2,728   2,205   (16,994)
Proceeds from long-term debt  703,641   580,000   715,000 
Repayment of long-term debt  (804,713)  (730,304)  (805,016)
Debt issuance costs  (50)  (50)  (114)
Excess tax benefits from stock-based compensation  2,686   1,746   1,617 
Stock issued to employees, net of shares withheld  9,941   8,247   5,590 
Repurchases of common stock  (24,712)     (50,000)
Dividends paid  (75,465)  (70,927)  (67,284)
Distribution to noncontrolling interest  (4,647)      
 
 
Net cash provided by (used for) financing activities  (190,591)  (209,083)  (217,201)
Effect of exchange rate changes on cash and cash equivalents
  (6,812)  (648)  (5,985)
 
 
Change in cash and cash equivalents
  12,660   (5,948)  (31,451)
Cash and cash equivalents, beginning of period
  33,396   39,344   70,795 
 
 
Cash and cash equivalents, end of period
 $46,056  $33,396  $39,344 
 
 

  Years ended December 31 
In thousands 2012  2011  2010 

Operating activities

   

Net income (loss) before noncontrolling interest

 $(104,612 $(3,151 $189,406 
Adjustments to reconcile net income (loss) before noncontrolling interest to net cash provided by (used for) operating activities   

Loss on disposal of discontinued operations

        626 

Equity income of unconsolidated subsidiaries

  (2,156  (1,898  (2,108

Depreciation

  87,835   66,235   57,995 

Amortization

  75,957   41,897   26,184 

Deferred income taxes

  (146,896  (5,583  29,453 

Share-based compensation

  35,847   19,489   21,468 

Impairment of trade names and goodwill

  60,718   200,520    

Loss on early extinguishment of debt

  75,367       

Excess tax benefits from share-based compensation

  (4,976  (3,310  (2,686

Pension and other post-retirement expense

  167,536   84,345   34,098 

Pension and other post-retirement contributions

  (238,014  (40,294  (52,992

Loss (gain) on sale of assets

  (2,276  933   466 
Changes in assets and liabilities, net of effects of business acquisitions   

Accounts and notes receivable

  55,720   1,348   (62,344

Inventories

  125,099   18,263   (44,495

Other current assets

  (6,696  10,032   2,777 

Accounts payable

  (61,990  (24,330  55,321 

Employee compensation and benefits

  (81,313  (20,486  27,252 

Other current liabilities

  27,178   (7,954  (795

Other non-current assets and liabilities

  5,632   (15,830  (9,250

 

 

Net cash provided by (used for) operating activities

  67,960   320,226   270,376 

Investing activities

   

Capital expenditures

  (94,532  (73,348  (59,523

Proceeds from sale of property and equipment

  5,508   1,310   358 

Acquisitions, net of cash acquired

  470,459   (733,105   

Other

  (5,858  (2,943  (1,148

 

 

Net cash provided by (used for) investing activities

  375,577   (808,086  (60,313

Financing activities

   

Net short-term borrowings

  (3,700  (1,239  2,728 

Proceeds from long-term debt

  1,536,146   1,421,602   703,641 

Repayment of long-term debt

  (1,305,339  (832,147  (804,713

Debt issuance costs

  (9,704  (8,973  (50

Debt extinguishment costs

  (74,752      

Excess tax benefits from share-based compensation

  4,976   3,310   2,686 

Shares issued to employees, net of shares withheld

  68,177   13,322   9,941 

Repurchases of common shares

  (334,159  (12,785  (24,712

Dividends paid

  (112,397  (79,537  (75,465

Distribution to noncontrolling interest

  (1,554     (4,647

 

 

Net cash provided by (used for) financing activities

  (232,306  503,553   (190,591

Effect of exchange rate changes on cash and cash equivalents

  33   (11,672  (6,812

 

 

Change in cash and cash equivalents

  211,264   4,021   12,660 

Cash and cash equivalents, beginning of year

  50,077   46,056   33,396 

 

 

Cash and cash equivalents, end of year

 $261,341  $50,077  $46,056 

 

 

See accompanying notes to consolidated financial statements.


42

60


Pentair Inc.

Ltd. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

                                     
              Accumulated
           Comprehensive
 
        Additional
     other
           income (loss)
 
  Common shares  paid-in
  Retained
  comprehensive
  Total
  Noncontrolling
     attributable
 
In thousands, except share and per-share data Number  Amount  capital  earnings  income (loss)  Pentair, Inc.  Interest  Total  to Pentair, Inc. 
  
 
Balance — December 31, 2007
  99,221,831  $16,537  $476,242  $1,296,226  $121,866  $1,910,871  $  $1,910,871     
     
     
Net income              228,734       228,734       228,734  $228,734 
Change in cumulative translation adjustment                  (72,117)  (72,117)      (72,117)  (72,117)
Adjustment in retirement liability, net of $42,793 tax                  (66,933)  (66,933)      (66,933)  (66,933)
Changes in market value of derivative financial instruments, net of ($6,284) tax                  (9,431)  (9,431)      (9,431)  (9,431)
                                     
Comprehensive income (loss)                                 $80,253 
                                     
Cash dividends — $0.68 per common share              (67,284)      (67,284)      (67,284)    
Tax benefit of stock compensation          2,247           2,247       2,247     
Share repurchase  (1,549,893)  (258)  (49,742)          (50,000)      (50,000)    
Exercise of stock options, net of 121,638 shares tendered for payment  322,574   53   4,948           5,001       5,001     
Issuance of restricted shares, net of cancellations  366,005   61   388           449       449     
Amortization of restricted shares          9,378           9,378       9,378     
Shares surrendered by employees to pay taxes  (83,598)  (14)  (2,730)          (2,744)      (2,744)    
Stock compensation          10,510           10,510       10,510     
PRF Acquisition                          121,388   121,388     
     
     
Balance — December 31, 2008
  98,276,919  $16,379  $451,241  $1,457,676  $(26,615) $1,898,681  $121,388  $2,020,069     
     
     
Net income              115,493       115,493   707   116,200  $115,493 
Change in cumulative translation adjustment                  43,371   43,371   (7,843)  35,528   43,371 
Adjustment in retirement liability, net of $164 tax                  256   256       256   256 
Changes in market value of derivative financial instruments, net of ($2,323) tax                  3,585   3,585       3,585   3,585 
                                     
Comprehensive income (loss)                                 $162,705 
                                     
Cash dividends — $0.72 per common share              (70,927)      (70,927)      (70,927)    
Tax benefit of stock compensation          1,025           1,025       1,025     
Exercise of stock options, net of 124,613 shares tendered for payment  433,533   72   7,639           7,711       7,711     
Issuance of restricted shares, net of cancellations  24,531   4   516           520       520     
Amortization of restricted shares          7,190           7,190       7,190     
Shares surrendered by employees to pay taxes  (79,477)  (13)  (1,867)          (1,880)      (1,880)    
Stock compensation          7,063           7,063       7,063     
     
     
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              197,828       197,828   4,493   202,321  $197,828 
Change in cumulative translation adjustment                  (30,487)  (30,487)  (2,219)  (32,706)  (30,487)
Adjustment in retirement liability, net of ($8,159) tax                  (12,762)  (12,762)      (12,762)  (12,762)
Changes in market value of derivative financial instruments, net of $229 tax                  310   310       310   310 
                                     
Comprehensive income (loss)                                 $154,889 
                                     
Tax benefit of stock compensation          2,171           2,171       2,171     
Cash dividends — $0.76 per common share              (75,465)      (75,465)      (75,465)    
Distribution to noncontrolling interest                          (4,647)  (4,647)    
Share repurchase  (726,777)  (121)  (24,591)          (24,712)      (24,712)    
Exercise of stock options, net of 27,177 shares tendered for payment  651,331   109   14,817           14,926       14,926     
Issuance of restricted shares, net of cancellations  (4,122)  (1)  707           706       706     
Amortization of restricted shares          3,538           3,538       3,538     
Shares surrendered by employees to pay taxes  (166,746)  (28)  (5,663)          (5,691)      (5,691)    
Stock compensation          10,703           10,703       10,703     
     
     
Balance — December 31, 2010
  98,409,192  $16,401  $474,489  $1,624,605  $(22,342) $2,093,153  $111,879  $2,205,032     
     
     


43

In thousands, except share

 Common shares  Treasury shares  

Capital
contribution

  

Retained

  

Accumulated
other
comprehensive

  

Total

  

Non-
controlling

    
and per-share data Number  Amount  Number  Amount  reserve  earnings  income (loss)  Pentair Ltd.  interest  Total 

Balance - December 31, 2009

  98,655,506  $47,530      $   $441,719   $1,443,319   $79,520   $2,012,088   $114,252   $2,126,340  

Net income

                 184,913      184,913   4,493   189,406 
Change in cumulative translation adjustment                    (30,487  (30,487  (2,219  (32,706
Amortization of pension and other post-retirement prior service cost and transition obligation, net of $111 tax                    153   153      153 
Changes in market value of derivative financial instruments, net of $229 tax                    310   310      310 
Tax benefit of share-based compensation              2,171         2,171      2,171 
Dividends declared                 (75,465     (75,465     (75,465
Distribution to noncontrolling interest                          (4,647  (4,647
Share repurchase  (726,777  (350        (24,362        (24,712     (24,712
Exercise of options, net of 27,177 shares tendered for payment  651,331   314         14,612         14,926      14,926 
Issuance of restricted shares, net of cancellations  (4,122  (2        708         706      706 
Amortization of restricted shares              3,538         3,538      3,538 
Shares surrendered by employees to pay taxes  (166,746  (80        (5,611        (5,691     (5,691
Share-based compensation              10,703         10,703      10,703 

 

 
Balance - December 31, 2010  98,409,192  $47,412      $   $443,478   $1,552,767   $49,496   $2,093,153   $111,879   $2,205,032  

 

 
Net income (loss)                 (7,450     (7,450  4,299   (3,151
Change in cumulative translation adjustment                    (91,591  (91,591  (2,115  (93,706
Amortization of pension and other post-retirement prior service cost, net of $7 tax                    (11  (11     (11
Changes in market value of derivative financial instruments, net of $2,884 tax                    4,375   4,375      4,375 
Tax benefit of share-based compensation              3,868         3,868      3,868 
Dividends declared                 (79,537     (79,537     (79,537
Share repurchase  (397,126  (211        (12,574        (12,785     (12,785
Exercise of options, net of 182,270 shares tendered for payment  657,616   350         14,358         14,708      14,708 
Issuance of restricted shares, net of cancellations  28,603   15         1,460         1,475      1,475 
Amortization of restricted shares              1,006         1,006      1,006 
Shares surrendered by employees to pay taxes  (75,721  (40        (2,758        (2,798     (2,798
Share-based compensation              8,916         8,916      8,916 

 

 

Balance - December 31, 2011

  98,622,564  $47,526      $   $457,754   $1,465,780   $(37,731 $1,933,329   $114,063   $2,047,392  

 

 

61


In thousands, except share

 Common shares  Treasury shares  

Capital
contribution

  

Retained

  

Accumulated
other
comprehensive

  

Total

  

Non-
controlling

    
and per-share data Number  Amount  Number  Amount  reserve  earnings  income (loss)  Pentair Ltd.  interest  Total 
Net income (loss)                 (107,186     (107,186  2,574   (104,612
Change in cumulative translation adjustment                    34,416   34,416   1,414   35,830 
Amortization of pension and other post-retirement prior service cost, net of $161 tax                    (253  (253     (253
Changes in market value of derivative financial instruments, net of $3,661 tax                    (3,630  (3,630     (3,630
Tax benefit of share-based compensation              5,555       5,555      5,555 
Dividends declared              (141,058  (66,306     (207,364     (207,364
Distribution to noncontrolling interest                          (1,554  (1,554
Issuance of shares related to the Merger  113,611,537   65,521   (2,712,603  (119,626  4,977,249         4,923,144      4,923,144 
Share repurchase        (7,291,078  (334,159           (334,159     (334,159
Exercise of options, net of 45,123 shares tendered for payment  669,361   356   2,319,367   97,549   (7,833        90,072      90,072 
Issuance of restricted shares, net of cancellations  168,936   90   1,254,449   59,798   (40,904        18,984      18,984 
Amortization of restricted shares              24,209         24,209      24,209 
Shares surrendered by employees to pay taxes  (72,398  (39  (432,675  (19,081  (2,775        (21,895     (21,895
Share-based compensation              11,638         11,638      11,638 

 

 

Balance - December 31, 2012

  213,000,000  $113,454    (6,862,540 $(315,519 $5,283,835   $1,292,288   $(7,198 $6,366,860   $116,497   $6,483,357  

 

 

See accompanying notes to consolidated financial statements.

62


Pentair Inc.Ltd. and Subsidiaries

Notes to consolidated financial statements

1. Summary

1.Background and Nature of Operations

Pentair Ltd., formerly known as Tyco Flow Control International Ltd. (as used prior to the Merger (as defined below), “Flow Control”), is a company organized under the laws of Significant Accounting PoliciesSwitzerland. In these notes, the terms “the Company,” “Pentair,” “us,” “we” or “our” refer to Pentair Ltd. and its consolidated subsidiaries. Our business took its current form on September 28, 2012 as a result of a spin-off of Flow Control from its parent, Tyco International Ltd. (“Tyco”), and a reverse acquisition involving Pentair, Inc.

Prior to the spin-off, Tyco engaged in an internal restructuring whereby it transferred to Flow Control certain assets related to the flow control business of Tyco, and Flow Control assumed from Tyco certain liabilities related to the flow control business of Tyco. On September 28, 2012 prior to the Merger (as defined below), Tyco effected a spin-off of Flow Control through the pro-rata distribution of 100% of the outstanding common shares of Flow Control to Tyco’s shareholders (the “Distribution”), resulting in the distribution of 110,898,934 of our common shares to Tyco’s shareholders. Immediately following the Distribution, an indirect, wholly-owned subsidiary of ours merged with and into Pentair, Inc., with Pentair, Inc. surviving as an indirect, wholly-owned subsidiary of ours (the “Merger”). At the effective time of the Merger, each Pentair, Inc. common share was converted into the right to receive one of our common shares, resulting in 99,388,463 of our common shares being issued to Pentair, Inc. shareholders. The Merger is intended to be tax-free for U.S. federal income tax purposes. After the Merger, our common shares are traded on the New York Stock Exchange under the symbol PNR. Tyco equity-based awards held by Flow Control employees and certain Tyco employees and directors outstanding prior to the completion of the Distribution were converted in connection with the Distribution into equity-based awards with respect to our common shares and were assumed by us. Pentair, Inc. equity-based awards outstanding prior to the completion of the Merger were converted upon completion of the Merger into equity-based awards with respect to our common shares and were assumed by us.

The Merger was accounted for as a reverse acquisition under the purchase method of accounting with Pentair, Inc. treated as the acquirer, reflecting the control maintained by the executive management and board of directors of Pentair, Inc. after the Merger. As such, on the acquisition date of September 28, 2012, the assets and liabilities of Flow Control have been assessed at fair value and the assets and liabilities of Pentair, Inc. are carried over at historical cost. For periods prior to September 28, 2012, the Consolidated Statements of Operations and Comprehensive Income (Loss) and Consolidated Statements of Cash Flows include the historical results of Pentair, Inc. The consolidated financial statements include the results of Flow Control from the date of the Merger. Flow Control’s net sales and net loss from continuing operations for the period from the acquisition date to December 31, 2012 were $886.5 million and $117.0 million, respectively.

Our common share balances prior to the Merger have been adjusted to reflect the one-for-one conversion of the Pentair, Inc. shares to Pentair Ltd. shares, with the difference in par value recorded inCapital contribution reserve.

Based on the price of Pentair, Inc. common stock and our common shares issued on the date of the Merger, the purchase price was composed of the following:

In thousands

Value of common shares issued to Tyco shareholders(1)

$  4,811,363

Cash paid to Tyco shareholders in lieu of fractional common shares(2)

542

Value of replacement equity-based awards to holders of Tyco equity-based awards(3)

111,239

Total purchase price

$  4,923,144

(1)Equals 110,886,444 Pentair Ltd. shares distributed to Tyco shareholders multiplied by the Merger date share price of $43.39.

63


Fiscal yearPentair Ltd. and Subsidiaries

Our fiscal year endsNotes to consolidated financial statements

(2)Equals cash paid to Tyco shareholders in lieu of 12,490 Pentair Ltd. fractional shares multiplied by the Merger date share price of $43.39.

(3)In accordance with applicable accounting guidance, the fair value of replacement equity-based awards attributable to pre-combination service is recorded as part of the consideration transferred in the Merger, while the fair value of replacement equity-based awards attributable to post-combination service is recorded separately from the business combination and recognized as compensation cost in the post-acquisition period over the remaining service period. The fair value of our equivalent stock options was estimated using the Black-Scholes valuation model utilizing various assumptions.

During the fourth quarter of 2012, we recorded fair value adjustments to our preliminary purchase price allocation, which resulted in an increase to goodwill of $32.6 million.

The purchase price has been preliminarily allocated based on December 31.the estimated fair value of net assets acquired and liabilities assumed at the date of the Merger. The preliminary purchase price allocation is subject to further refinement and may require significant adjustments to arrive at the final purchase price allocation. These adjustments will primarily relate to accounts receivable, inventories, property, plant and equipment, certain contingent liabilities and income tax-related items. We reportexpect the purchase price allocation to be completed in the second quarter of 2013. There can be no assurance that such finalization will not result in material changes from the preliminary purchase price allocation. The purchase price is subject to a working capital and net indebtedness adjustment.

The following table summarizes our interim quarterly periodspreliminary fair values of the assets acquired and liabilities assumed in the Merger:

In thousands

Cash and cash equivalents

$        691,702

Accounts and notes receivable

771,576

Inventories

1,046,165

Other current assets

98,212

Property, plant and equipment

822,001

Goodwill

2,520,110

Intangibles

1,425,072

Other non-current assets

275,103

Current liabilities

(856,341

Long-term debt

(914,530

Income taxes, including current and deferred

(364,573

Other liabilities and redeemable noncontrolling interest

(591,353

Total purchase price

$        4,923,144

The excess of purchase price over tangible net assets and identified intangible assets acquired was allocated to goodwill in the amount of $2.5 billion. Goodwill has been preliminarily allocated to our reporting segments as follows: $321.4 million to Water & Fluid Solutions, $1,342.6 million to Valves & Controls and $856.1 million to Technical Solutions. None of the goodwill recognized from the Merger is expected to be deductible for income tax purposes. Goodwill recognized from the Merger reflects the value of future income resulting from synergies of our combined operations. Identifiable intangible assets acquired as part of the Merger were $1.4 billion and include $362.3 million of indefinite life trade name intangibles and the following definite-lived intangibles: $905.7 million of customer relationships with a weighted average useful life of 14.2 years, $115.9 million of proprietary technology with weighted average useful life of 13.7 years and $41.2 million of customer backlog with a weighted average useful life of less than one year.

64


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

Flow Control is a global leader in the industrial flow control market, specializing in the design, manufacture and servicing of highly engineered valves, actuation & controls, electric heat management solutions and water transmission and distribution products. Flow Control’s broad portfolio of products and services serves flow control needs primarily across the general process, oil & gas, water, power generation and mining industries. Sales are conducted through multiple channels based on local market conditions and demand. A global customer base is served through major manufacturing and after-market service centers around the world. Flow Control, through its valves & controls business, is one of the world’s largest manufacturers of valves, actuators and controls, with leading products, services and solutions to address many of the most challenging flow applications in the general process, oil & gas, power generation and mining industries. Through its thermal management business, Flow Control is a 13-week basis ending onleading provider of complete electric heat management solutions, primarily for the oil & gas, general process and power generation industries. Additionally, Flow Control’s water & environmental systems business is a Saturday.

leading provider of large-scale water transmission and distribution products and water/wastewater systems in the Pacific and Southeast Asia regions.

We believe the Merger combines two complementary leaders in water and fluid solutions, valves and controls and technical solutions, providing us with the ability to achieve operational and tax synergies and increase global revenue. Following the Merger, we are a diversified industrial manufacturing company comprising three reporting segments: Water & Fluid Solutions, Valves & Controls and Technical Solutions. Water & Fluid Solutions designs, manufactures, markets and services innovative water management and fluid processing products and solutions. Valves & Controls designs, manufactures, markets and services valves, fittings, automation and controls and actuators. Technical Solutions designs, manufactures and markets products that guard and protect some of the world’s most sensitive electronics and electronic equipment, as well as heat management solutions designed to provide thermal protection to temperature sensitive fluid applications.

2.Basis of Presentation and Summary of Significant Accounting Policies

PrinciplesBasis of consolidationpresentation

The accompanying consolidated financial statements include the accounts of Pentair and all subsidiaries, both the U.S. andnon-U.S., that non-U.S, which we control. Intercompany accounts and transactions have been eliminated. Investments in companies of which we own 20% to 50% of the voting stock or have the ability to exercise significant influence over operating and financial policies of the investee are accounted for using the equity method of accounting and as a result, our share of the earnings or losses of such equity affiliates is included in the Consolidated Statements of Income.

Use of estimates
Operations and Comprehensive Income (Loss).

The preparation of our consolidated financial statements have been prepared in conformityUnited States dollars (“USD”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain information described under Article 663-663h of the Swiss Code of Obligations has been presented in the Company’s Swiss statutory financial statements for the year ended December 31, 2012.

Fiscal year

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

Use of estimates

The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Duenotes of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates include our accounting for valuation of long-lived assets, including goodwill and indefinite lived intangible

65


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

assets, percentage of completion revenue recognition, assets acquired and liabilities assumed in acquisitions and the inherent uncertainty involved in making estimates, actualMerger, contingent liabilities, income taxes, and pension and other post-retirement benefits. Actual results reported in future periods may be based upon amounts that could differ from thoseour estimates. The critical accounting policies that require our most significant estimates and judgments include:

• the assessment of recoverability of long-lived assets, including goodwill and indefinite-life intangibles; and
• accounting for pension benefits, because of the importance in making the estimates necessary to apply these policies.

Revenue recognition

We

Generally, we recognize revenue when it is realized or realizable and has been earned. Revenue is recognized when persuasive evidence of an arrangement exists; shipment or delivery has occurred (depending on the terms of the sale); the seller’sour price to the buyer is fixed or determinable; and collectability is reasonably assured.

Generally, there is no post-shipment obligation on product sold other than warranty obligations in the normal and ordinary course of business. In the event significant post-shipment obligations were to exist, revenue recognition would be deferred until substantially all obligations were satisfied.

Percentage of completion

Revenue from certain long-term contracts is recognized over the contractual period under the percentage of completion method of accounting. Under this method, sales and gross profit are recognized as work is performed either based on the relationship between the actual costs incurred and the total estimated costs at completion (“the cost-to-cost method”) or based on efforts for measuring progress towards completion in situations in which this approach is more representative of the progress on the contract than the cost-to-cost method. Changes to the original estimates may be required during the life of the contract and such estimates are reviewed on a regular basis. Sales and gross profit are adjusted using the cumulative catch-up method for revisions in estimated total contract costs. These reviews have not resulted in adjustments that were significant to our results of operations. Estimated losses are recorded when identified. Claims against customers are recognized as revenue upon settlement.

We record costs and earnings in excess of billings on uncompleted contracts withinOther current assetsand billings in excess of costs and earnings on uncompleted contracts withinOther current liabilities in the Consolidated Balance Sheets. Amounts included inOther current assetsrelated to these contracts were $124.4 million and $54.7 million at December 31, 2012 and 2011, respectively. Amounts included inOther current liabilities related to these contracts were $61.1 million and $17.7 million at December 31, 2012 and 2011, respectively.

Sales returns

The right of return may exist explicitly or implicitly with our customers. OurGenerally, our return policy allows for customer returns only upon our authorization. Goods returned must be product we continue to market and must be in salable condition. Returns of custom or modified goods are normally not allowed. At the time of sale, we reduce revenue for the estimated effect of returns. Estimated sales returns include consideration of historical sales levels, the timing and magnitude of historical sales return levels as a percent of sales, type of product, type of customer and a projection of this experience into the future.

Pricing and sales incentives

We record estimated reductions to revenue for customer programs and incentive offerings including pricing arrangements, promotions and other volume-based incentives at the later of the date revenue is recognized or the incentive is offered. Sales incentives given to our customers are recorded as a reduction of revenue unless we (1) receive an identifiable benefit for the goods or services in exchange for the consideration and (2) we


44


Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
can reasonably estimate the fair value of the benefit received.

66


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

The following represents a description of our pricing arrangements, promotions and other volume-based incentives:

Pricing arrangements

Pricing is established up front with our customers and we record sales at theagreed-upon net selling price. However, one of our businesses allows customers to apply for a refund of a percentage of the original purchase price if they can demonstrate sales to a qualifying OEMoriginal equipment manufacturer customer. At the time of sale, we estimate the anticipated refund to be paid based on historical experience and reduce sales for the probable cost of the discount. The cost of these refunds is recorded as a reduction in gross sales.

Promotions

Our primary promotional activity is what we refer to as cooperative advertising. Under our cooperative advertising programs, we agree to pay the customer a fixed percentage of sales as an allowance that may be used to advertise and promote our products. The customer is generally not required to provide evidence of the advertisement or promotion. We recognize the cost of this cooperative advertising at the time of sale. The cost of this program is recorded as a reduction in gross sales.

Volume-based incentives

These incentives involve rebates that are negotiated up front with the customer and are redeemable only if the customer achieves a specified cumulative level of sales or sales increase. Under these incentive programs, at the time of sale, we reforecast the anticipated rebate to be paid based on forecasted sales levels. These forecasts are updated at least quarterly for each customer and sales are reduced for the anticipated cost of the rebate. If the forecasted sales for a customer changes, the accrual for rebates is adjusted to reflect the new amount of rebates expected to be earned by the customer.

Shipping and handling costs

Amounts billed to customers for shipping and handling are recorded inNet salesin the accompanying Consolidated Statements of Income.Operations and Comprehensive Income (Loss). Shipping and handling costs incurred by Pentair for the delivery of goods to customers are included inCost of goods soldin the accompanying Consolidated Statements of Income.

Operations and Comprehensive Income (Loss).

Research and development

We conduct research and development (“R&D”) activities in our own facilities, which consist primarily of the development of new products, product applications and manufacturing processes. We expense R&D costs as incurred. R&D expenditures during 2012, 2011 2010 2009were $93.6 million, $78.2 million and 2008 were $67.2 million, $57.9 million and $62.5 million, respectively.

Cash equivalents

We consider highly liquid investments with original maturities of three months or less to be cash equivalents.

Trade receivables and concentration of credit risk

We record an allowance for doubtful accounts;accounts, reducing our receivables balance to an amount we estimate is collectible from our customers. Estimates used in determining the allowance for doubtful accounts are based on historical collection experience, current trends, aging of accounts receivable, and periodic credit evaluations of our customers’ financial condition.condition, and historical collection experience. We generally do not require collateral. No customer receivable balances exceeded 10% of total net receivable balances as of December 31, 2010. One customer had a receivable balance of approximately 10% of the total net receivable balance as of2012 and December 31, 2009.

In December 2008 we sold approximately $44 million of one customer’s accounts receivable to a third-party financial institution to mitigate accounts receivable concentration risk. Sales of accounts receivable are reflected as a reduction of accounts receivable in our Consolidated Balance Sheets and the proceeds are


45

2011.


Inventories

Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
included in the cash flows from operating activities in our Consolidated Statements of Cash Flows. In 2008, a loss in the amount of $0.5 million related to the sale of accounts receivable is included in the line item Otherin our Consolidated Statements of Income. We did not undertake a similar sale of customer receivables in 2010 or 2009.
Inventories
Inventories are stated at the lower of cost or market with substantially all costedinventories recorded using thefirst-in, first-out (“FIFO”) cost method and with an insignificant amount of inventories located outside the United States costedrecorded using a moving average cost method which approximates FIFO.

67


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

Property, plant and equipment, net

Property, plant and equipment is stated at historical cost. We compute depreciation by the straight-line method based on the following estimated useful lives:

   Years
 

Land improvements

   5 to 20  

Buildings and leasehold improvements

   5 to 50  

Machinery and equipment

   3 to 15  

Significant improvements that add to productive capacity or extend the lives of properties are capitalized. Costs for repairs and maintenance are charged to expense as incurred. When property is retired or otherwise disposed of, the recorded cost of the assets and their related accumulated depreciation are removed from the accountsConsolidated Balance Sheets and any related gains or losses are included in income.

We review the recoverability of long-lived assets to be held and used, such as property, plant and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset or asset group, an impairment loss is recognized for the difference between estimated fair value and carrying value. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced for the cost to dispose of the assets. The measurement of impairment requires us to estimate future cash flows and the fair value of long-lived assets.

There was no material impairment charge recorded related to long-lived assets.

Goodwill and identifiable intangible assets

Goodwill

Goodwill represents the excess of the cost of acquired businesses over the net of the fair value of identifiable tangible net assets and identifiable intangible assets purchased.

purchased and liabilities assumed.

Goodwill is tested at least annually for impairment and is tested for impairment more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is performed using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. If the estimated fair value is less than the carrying amount of the reporting unit there is an indication that goodwill impairment exists and a second step must be completed in order to determine the amount of the goodwill impairment, if any that should be recorded. In the second step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. 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.

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


46


Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
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. This non-recurring fair value measurement is a “Level 3” measurement under the fair value hierarchy described below.

In developing our discounted cash flow analysis, assumptions about future revenues and expenses, capital expenditures and changes in working capital, are based on our annual operating plan and long-term business plan

68


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

for each of our reporting units. These plans take into consideration numerous factors including historical experience, anticipated future economic conditions, changes in raw material prices and growth expectations for the industries and end markets we participate in. These assumptions are determined over a five year long-term planning period. The five year growth rates for revenues and operating profits vary for each reporting unit being evaluated. Revenues and operating profit beyond 20172019 are projected to grow at a 3% perpetual growth rate for all reporting units.

of 3.0%.

Discount rate assumptions for each reporting unit take into consideration our assessment of risks inherent in the future cash flows of the respective reporting unit and our weighted-average cost of capital. We utilized discount rates ranging from 13%12.0% to 15%13.0% in determining the discounted cash flows in our fair value analysis.

In estimating fair value using the market approach, we identify a group of comparable publicly-traded companies for each operatingreporting segment that are similar in terms of size and product offering. These groups of comparable companies are used to develop multiples based on total market-based invested capital as a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA). We determine our estimated values by applying these comparable EBITDA multiples to the operating results of our reporting units. The ultimate fair value of each reporting unit is determined considering the results of both valuation methods.

Impairment charge

We completed step one of our annual goodwill impairment evaluation during the fourth quarter for 2012 with each reporting unit’s fair value exceeding its carrying value. Accordingly, step two of the impairment analysis was not required for 2012.

For the year ended December 31, 2011, we recorded a pre-tax non-cash impairment charge of $200.5 million in Water & Fluid Solutions as a result of our annual goodwill impairment test. The impairment charge resulted from changes in our forecasts in light of economic conditions and continued softness in the end-markets served by residential water treatment components.

Identifiable intangible assets

Our primary identifiable intangible assets include trade marks andinclude: customer relationships, trade names patents, non-compete agreements,and trademarks, proprietary technology, backlog and customer relationships.patents. Identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant. During the fourth quarter of 2010 and 2009, weWe completed our annual impairment test during the fourth quarter for those identifiable assets not subject to amortization andamortization. As a result, an impairment charge of $60.7 million was recorded impairment charges in 2009 of $11.3 million,2012, related to trade names. These charges were recorded inSelling, generalImpairment of trade names and administrativegoodwillin our Consolidated Statements of Income.Operations and Comprehensive Income (Loss). There was no impairment charge requiredrecorded in 2010.

2011 or 2010 for identifiable intangible assets.

The impairment test consists of a comparison of the fair value of the trade name with its carrying value. Fair value is measured using the relief-from-royalty method. This method assumes the trade name has value to the extent that theirthe owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. ThisThe non-recurring fair value measurement is a “Level 3” measurement under the fair value hierarchy described below. The impairment charge recorded in 2012 was the result of significant declinesa rebranding strategy implemented in sales volume. These charges were recorded inSelling, general and administrativein our Consolidated Statementsthe fourth quarter of Income.

2012.

At December 31, 20102012 our goodwill and intangible assets were approximately $2,519.6$6,804.2 million and represented approximately 63.4%58% of our total assets. If we experience furtherfuture declines in sales and operating profit or do not meet our operating forecasts, we

69


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

may be subject to future impairments. Additionally, changes in assumptions regarding the future performance of our businesses, increases in the discount rate used to determine the discounted cash flows of our businesses or significant declines in our stockshare price or the market as a whole could result in additional impairment indicators. Because of the significance of our goodwill and


47


Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
intangible assets, any future impairment of these assets could have a material adverse effect on our financial results.

Equity and cost method investments

We have investments that are accounted for using the equity method. Our proportionate share of income or losses from investments accounted for under the equity method is recorded in the Consolidated Statements of Income.Operations and Comprehensive Income (Loss). We write down or write off an investment and recognize a loss when events or circumstances indicate there is impairment in the investment that isother-than-temporary. This requires significant judgment, including assessment of the investees’ financial condition and in certain cases the possibility of subsequent rounds of financing, as well as the investees’ historical and projected results of operations and cash flows. If the actual outcomes for the investees are significantly different from projections, we may incur future charges for the impairment of these investments.

We have a 50% Our investment in FARADYNE Motors LLC (“FARADYNE”), a joint venture with ITT Water Technologies, Inc. that began design, development and manufacturing of submersible pump motors in 2005. We do not consolidate the investment in our consolidated financial statements as we do not have a controlling interest over the investment. There were investments in and loans to FARADYNE of $6.1equity method investees was $10.3 million and $4.5$6.0 million at December 31, 20102012 and December 31, 2009,2011, respectively, which is net of our proportionate share of the results of their operations.

Investments for which we do not have significant influence are accounted for under the cost method. The aggregate balance of these investments was $6.9 million at December 31, 2012 and December 31, 2011.

Income taxes

We use the asset and liability approach to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basisbases using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in our tax provision in the period of change. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Environmental

We recognize environmentalclean-up liabilities on an undiscounted basis when a loss is probable and can be reasonably estimated. Such liabilities generally are not subject to insurance coverage. The cost of each environmentalclean-up is estimated by engineering, financial and legal specialists based on current law. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the likelihood that, where applicable, other potentially responsible parties (“PRPs”) will be able to fulfill their commitments at the sites where Pentair may be jointly and severally liable. The process of estimating environmentalclean-up liabilities is complex and dependent primarily on the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, the uncertainty as to what remedy and technology will be required and the outcome of discussions with regulatory agencies and other PRPs at multi-party sites. In future periods, new laws or regulations, advances inclean-up technologies and additional information about the ultimateclean-up remedy that is used could significantly change our estimates. Accruals for environmental liabilities are included inOther current liabilitiesandOther non-current liabilitiesin the Consolidated Balance Sheets.


48

70


Pentair Inc.Ltd. and Subsidiaries

Notes to consolidated financial statements — (continued)

Asbestos Matters

We recognize asbestos-related liabilities on an undiscounted basis when a loss is probable and can be reasonably estimated. Certain of these liabilities are subject to insurance coverage. Our subsidiaries and numerous other companies are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were attached to or used with asbestos-containing components manufactured by third-parties. The process of estimating asbestos-related liabilities and the corresponding insurance recoveries receivable is complex and dependent primarily on our historical claim experience, estimates of potential future claims, our legal strategy for resolving these claims, the availability of insurance coverage, and the solvency and creditworthiness of insurers. Accruals for asbestos-related liabilities are included inOther non-current liabilitiesand the estimated receivable for insurance recoveries are recorded inOther non-current assetsin the Consolidated Balance Sheets.

Insurance subsidiary

We insure certain general and product liability, property, workers’ compensation and automobile liability risks through our regulated wholly-owned captive insurance subsidiary, Penwald Insurance Company (“Penwald”). Reserves for policy claims are established based on actuarial projections of ultimate losses. As of December 31, 20102012 and 2009,2011, reserves for policy claims were $49.0$42.9 million ($12.013.3 million included inAccrued product claims and warrantiesOther current liabilitiesand $37.0$29.6 million included inOther non-current liabilities) and $56.3$44.3 million ($10.013.3 million included inAccrued product claims and warrantiesOther current liabilitiesand $46.3$31.0 million included inOther non-current liabilities), respectively.

Stock-based compensation

We account for stock-basedshare-based compensation awards on a fair value basis. The estimated grant date fair value of each option award is recognized in income on an accelerated basis over the requisite service period (generally the vesting period). The estimated fair value of each option award is calculated using the Black-Scholes option-pricing model. From time to time, we have elected to modify the terms of the original grant. These modified grants are accounted for as a new award and measured using the fair value method, resulting in the inclusion of additional compensation expense in our Consolidated Statements of Income.Operations and Comprehensive Income (Loss). Restricted share awards and units are recorded as compensation cost on a straight-line basis over the requisite service periods based on the market value on the date of grant.

Earnings (loss) per common share

Basic earnings (loss) per share are computed by dividing net income (loss) attributable to Pentair Ltd. by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share are computed by dividing net income (loss) attributable to Pentair Ltd. by the weighted-average number of common shares outstanding including the dilutive effects of common stockshare equivalents. The dilutive effects of stock options and restricted stock awards and units increased weighted average common shares outstanding by 1,257 thousand, 1,107 thousand and 1,181 thousand in 2010, 2009 and 2008, respectively.

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 were 3,711 thousand, 5,283 thousand and 5,268 thousand in 2010, 2009 and 2008, respectively.

Derivative financial instruments

We recognize all derivatives, including those embedded in other contracts, as either assets or liabilities at fair value in our Consolidated Balance Sheets. If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and the hedged item are recognized in earnings. If the derivative is designated and is effective as a cash-flow hedge, changes in the fair value of the derivative are recorded inAccumulated other comprehensive income (loss)(“OCI”AOCI”) as a separate component of equity in the Consolidated Balance Sheets and are recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss) when the hedged item affects earnings. If the underlying hedged transaction ceases to exist or if the hedge becomes ineffective, all changes in fair value of the related derivatives that have not been settled are recognized in current earnings. For a derivative that is not designated as or does not qualify as a hedge, changes in fair value are reported in earnings immediately.

We use derivative instruments for the purpose of hedging interest rate and currency exposures, which exist as part of ongoing business operations. We do not hold or issue derivative financial instruments for trading or

71


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

speculative purposes. All other contracts that contain provisions meeting the definition of a derivative also meet the requirements of and have been designated as, normal purchases or sales. Our policy is not to enter into contracts with terms that cannot be designated as normal purchases or sales. From time to time, we may enter in to short duration foreign currency contracts to hedge foreign currency risks on intercompany transactions.


49

risks.


Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
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.

Foreign currency translation

The financial statements of subsidiaries located outside of the U.S. are measured using the local currency as the functional currency.currency, except for certain corporate entities outside of the U.S. which are measured using USD. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date. Income and expense items are translated at average monthly rates of exchange. The resultant translation adjustments are included inAccumulated other comprehensive income (loss)(“AOCI”), AOCI, a separate component of shareholders’ equity.

Discontinued Operations

In 2010, we were notified of a product recall required by our former Tools Group (which was sold to Black and Decker Corporation in 2004 and treated as a discontinued operation). Under the terms of the sale agreement we are liable for a portion of the product recall costs. We recorded a liability of $3.2 million ($2.0 million net of tax) in 2010 representing our estimate of the potential cost for products sold prior to the date of sale of the Tools Group associated with this recall. In addition, we received the remaining escrow balances from our sale of Lincoln Industrial of $0.5 million, and we reversed tax reserves of $1.0 million due to the expiration of various statues of limitations.

New accounting standards

On

In May 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance to improve the consistency of fair value measurement and disclosure requirements between 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 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

72


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

assets and liabilities which are not recorded at fair value, but where fair value is disclosed. This guidance was 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. This guidance, other than certain provisions pertaining to the reclassification of items out of OCI that were deferred, was effective for fiscal years and interim periods beginning after December 15, 2011. We adopted this guidance as of January 1, 2009, we adopted new2012, and have presented total comprehensive income (loss) in our Consolidated Statements of Operations and Comprehensive Income (Loss).

In September 2011, the FASB issued an amendment to an existing accounting guidance that changesstandard, which provides entities an option to perform a qualitative assessment to determine whether further impairment testing on goodwill is necessary. Specifically, an entity has the accounting and reporting for minority interests. Minority interests have been recharacterized as noncontrolling interests and are reportedoption to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a componentresult of equity separateits qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The adoption of this guidance did not impact our financial condition or results of operations.

In September 2011, the FASB issued authoritative guidance which expanded and enhanced the existing disclosure requirements related to multi-employer pension and other postretirement benefit plans. The amendments require additional quantitative and qualitative disclosures to provide more detailed information regarding these plans including: the significant multi-employer plans in which we participate, the level of our participation and contributions with respect to such plans, the financial health of such plans and an indication of funded status. These disclosures are intended to provide users of financial statements with a better understanding of the employer’s involvement in multi-employer benefit plans. The disclosure provisions of the guidance were adopted concurrent with the pension disclosures associated with our annual valuation process during the fourth quarter of 2012. We concluded that our participation in any individual multi-employer plan was not significant.

In July 2012, the FASB issued an amendment to an existing accounting standard, which provides entities an option to perform a qualitative assessment to determine whether further impairment testing on indefinite-lived intangible assets is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This guidance is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012, and early adoption is permitted. We believe that the adoption of this guidance will not have a material impact on our financial condition or results of operations.

In February 2013, the FASB issued authoritative guidance surrounding the presentation of items reclassified from OCI to net income. This guidance requires entities to disclose, either in the parent’s equity. Purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributablenotes to the noncontrolling interest will be included in consolidated net incomefinancial statements or parenthetically on the face of the Consolidated Income Statementsstatement that reports comprehensive income, items reclassified out of AOCI and uponinto net income in their entirety and the effect of the reclassification on each affected net income line item. In addition, for AOCI reclassification items that are not reclassified in their entirety into net income, a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. We have classified noncontrolling interest (previously minority interest) as a component of equity for all periods presented.

In June 2009, the Financial Accounting Standards Board issued an amendmentcross reference to the accounting and disclosure requirements for the consolidation of variable interest entities. The guidance affects the overall consolidation analysis and requires enhancedother required GAAP disclosures on involvement with variable interest entities. Theis required. This guidance is effective for fiscal years and interim periods beginning after NovemberDecember 15, 2009.2012. We adoptedbelieve that the newadoption of this guidance will not have a material impact on our financial condition or results of operations.

73


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

3.Change in Accounting Principle

During the fourth quarter of 2012, we changed our method of recognizing actuarial gains and losses for all of our pension and other post-retirement plans. Historically, we recognized actuarial gains and losses as a component of AOCI in our Consolidated Balance Sheets and amortized them into our Consolidated Statements of Operations and Comprehensive Income (Loss) over the average future service period of the active employees of these plans to the extent such gains and losses were outside of a corridor. We elected to immediately recognize actuarial gains and losses in our Consolidated Statements of Operations and Comprehensive Income (Loss) on the basis that it is preferable to accelerate the recognition of such gains and losses into income rather than to delay such recognition. Additionally, for purposes of calculating the expected return on plan assets, we will no longer use a calculated value for the market-related valuation of plan assets, but instead will use the actual fair value of our plan assets. These changes will improve transparency in our operating results by more quickly recognizing the effects of external conditions on our plan obligations, investments and assumptions. We applied these changes retrospectively to all periods presented. The cumulative effect of the change on retained earnings as of January 1, 2010 whichwas a reduction of $58.9 million, with an offset to AOCI. The annual recognition of actuarial losses totaled $146.6 million, $65.7 million and $13.6 million for the years ended December 31, 2012, 2011 and 2010, respectively. This change did not have an impact on cash provided by operating activities for any effect onperiod presented.

The following table presents our consolidated financial statements.

Subsequent events
In connection with preparing the audited consolidated financial statementsresults under our historical method and our results had we applied these new methods for the year ended December 31, 2010, we have evaluated subsequent events for potential recognitionperiods presented:

In thousands, except per-share data  Computed
under
previous
method
  Recognized
under new
method
  Effect of
Change
 

As of and for the year ended December 31, 2012

    

Statement of Operations and Comprehensive Income (Loss)

    

Selling, general and administrative

  $    1,016,698  $    1,158,436  $141,738 

Provision (benefit) for income taxes

   (24,076  (79,353  (55,277

Income (loss) from continuing operations

   (18,151  (104,612  (86,461

Net income (loss) attributable to Pentair Ltd.

   (20,725  (107,186  (86,461
Amortization of pension and other post-retirement prior service cost and transition obligation   (86,714  (253  86,461 

Basic earnings (loss) per share attributable to Pentair Ltd.

  $(0.16 $(0.84 $(0.68

Diluted earnings (loss) per share attributable to Pentair Ltd.

   (0.16  (0.84  (0.68

Balance Sheet

    

Retained earnings

  $1,492,258  $1,292,288  $    (199,970

Accumulated other comprehensive income (loss)

   (207,168  (7,198  199,970 

Statement of Cash Flows

    

Net income (loss) before noncontrolling interest

  $(18,151 $(104,612 $(86,461

Pension and other post-retirement expense

   25,798   167,536   141,738 

Other current liabilities

   82,455   27,178   (55,277

74


Pentair Ltd. and disclosure through the date of this filing.

2. AcquisitionsSubsidiaries
On June 28, 2008, we entered into a transaction with GE Water & Process Technologies (a unit of General Electric Company) (“GE”) that was accounted for as an acquisition of an 80.1 percent ownership interest in GE’s global water softener and residential water filtration business in exchange for a 19.9 percent interest in


50


Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)

    Previously
Reported
  Adjusted  Effect of
Change
 

As of and for the year ended December 31, 2011

    

Statement of Operations and Comprehensive Income (Loss)

    

Selling, general and administrative

  $626,527  $694,841  $68,314 

Provision for income taxes

   73,059   46,417   (26,642

Income (loss) from continuing operations

   38,521   (3,151  (41,672

Net income (loss) attributable to Pentair Ltd.

   34,222   (7,450  (41,672
Amortization of pension and other post-retirement prior service cost and transition obligation   (41,683  (11  41,672 

Basic earnings (loss) per share attributable to Pentair Ltd.

  $0.35  $(0.08 $(0.43

Diluted earnings (loss) per share attributable to Pentair Ltd.

   0.34   (0.08  (0.42

Balance Sheet

    

Retained earnings

  $    1,579,290  $    1,465,780  $    (113,510

Accumulated other comprehensive income (loss)

   (151,241  (37,731  113,510 

Statement of Cash Flows

    

Net income (loss) before noncontrolling interest

  $38,521  $(3,151 $(41,672

Pension and other post-retirement expense

   16,031   84,345   68,314 

Other current liabilities

   18,688   (7,954  (26,642
    Previously
Reported
  Adjusted  Effect of
Change
 

For the year ended December 31, 2010

    

Statement of Operations and Comprehensive Income (Loss)

    

Selling, general and administrative

  $529,329  $550,501  $21,172 

Provision for income taxes

   97,200   88,943   (8,257

Income from continuing operations

   202,947   190,032   (12,915

Net income attributable to Pentair Ltd.

   197,828   184,913   (12,915
Amortization of pension and other post-retirement prior service cost and transition obligation   (12,762  153   12,915 

Basic earnings per share attributable to Pentair Ltd.

  $2.01  $1.88  $(0.13

Diluted earnings per share attributable to Pentair Ltd.

   1.99   1.86   (0.13

Statement of Cash Flows

    

Net income (loss) before noncontrolling interest

  $202,321  $189,406  $(12,915

Pension and other post-retirement expense

   12,926   34,098   21,172 

Other current liabilities

   7,462   (795  (8,257

75


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

4.Other Acquisitions

Other material acquisitions

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 global water softener and residential water filtration business. The acquisition was effected throughconsolidated financial statements since the formationdate of two new entities (collectively, “Pentair Residential Filtration” or “PRF”), a U.S. entity and an international entity, into which we and GE contributed certain assets, properties, liabilities and operations representing our respective global water softener and residential water filtration businesses. We are an 80.1 percent owner of PRF and GEacquisition. CPT is a 19.9 percent owner. The fair value of the acquisition was $229.2 million, which includes approximately $3.3 million of acquisition related costs. The acquisitionglobal leader in membrane solutions and related sale of our 19.9 percent interest resulted in a gain of $109.6 million ($85.8 million after tax), representing the difference between the carrying amount and the fair value of the 19.9 percent interest sold.

With the formation of Pentair Residential Filtration, we believe we are better positioned to serve residential customers with industry-leading technical applicationsclean process technologies in the areashigh 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 conditioning, whole-house filtration, point of use water managementscarcity, rising energy costs and water sustainabilitypollution. CPT’s product offerings include innovative ultrafiltration and expect to accelerate revenue growth by selling GE’s existing residential conditioning products through our sales channels.
The fair value of the 80.1 percent interestnanofiltration membrane technologies, aseptic valves, CO2 recovery and control systems and specialty pumping equipment. Based in the global water softenerNetherlands, CPT has broad sales diversity with the majority of revenues generated in European Union and residential water filtration business of GE acquired was determined using both an income approach and a market approach. The income approach utilizes a discounted cash flow analysis based on certain key assumptions including a discount rate based on a computed weighted average cost of capital and expected long-term revenue and expense growth rates. The market approach indicates the fair value of a business based on a comparison of the business to guideline publicly traded companies and transactions in its industry.
Asia-Pacific countries.

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 approximately $137.9$451.8 million, none of which is tax deductible. Identifiable intangible assets acquired as part of the acquisition were $66.5$197.2 million, including definite-lived intangibles, such as customer relationships and proprietary technology and trade names with a weighted average amortization period of approximately 1510 years.

Pro forma results of material acquisitions

The following unaudited pro forma consolidated condensed financial results of operations for the year ended December 31, 2008 isare presented as if the Merger described in Note 1 and the CPT acquisition had beendescribed above were completed at the beginning of the comparable annual reporting period presented:

     
In thousands, except share and per-share data  
 
 
Pro forma net sales from continuing operations $3,406,449 
Pro forma net income from continuing operations  256,363 
Pro forma net income  228,734 
Pro forma earnings per common share — continuing operations
    
Basic $2.62 
Diluted $2.59 
Weighted average common shares outstanding
    
Basic  97,887 
Diluted  99,068 
Thesefrom the date of the transaction. Specifically, the unaudited pro forma results give effect as though the Merger was consummated on January 1, 2011 and as though the CPT acquisition was consummated on January 1, 2010.

   Years ended December 31 
In thousands, except per-share data  2012   2011 

Pro forma net sales

  $        7,409,917   $        7,326,432 

Pro forma net income (loss) from continuing operations attributable to Pentair Ltd.

   157,471    (47,373

Diluted earnings (loss) per common share attributable to Pentair Ltd.

   0.75    (0.23

The 2011 unaudited pro forma net income includes the impact of $262.0 million in non-recurring items related to acquisition date fair value adjustments to inventory and customer backlog, $21.8 million of change of control costs and $8.7 million of transaction costs associated with the Merger. The 2011 unaudited pro forma net income excludes the impact of $12.9 million in non-recurring items related to acquisition date fair value adjustments to inventory and customer backlog and $8.0 million, respectively, of transaction costs associated with the CPT acquisition.

The 2012 unaudited pro forma net income excludes the impact $57.3 million of transaction related costs, $21.8 million of change of control costs and $178.1 million of non-recurring items related to acquisition date fair value adjustments to inventory and customer backlog associated with the Merger.

The pro forma consolidated condensed financial results have beeninformation was prepared for comparative purposes only and includeincludes certain adjustments.adjustments, as noted above. The adjustments are estimates based on currently available information and actual amounts may have differed materially from these estimates. They do not reflect the effect of costs or synergies that would have been expected to result from the integration of this acquisition.the acquisitions. The pro forma

76


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

information does not purport to be indicative of the results of operations that actually would have resulted had the combinationcombinations occurred on January 1,at the beginning of each period presented or of future results of the consolidated entities.


51Other acquisitions

On October 4, 2012, we acquired, as part of Valves & Controls, the remaining 25% equity interest in Pentair Middle East Holding S.a.R.L. (“KEF”), a privately held company, for $100 million in cash. Prior to the acquisition, we held a 75% equity interest in KEF, a vertically integrated valve manufacturer in the Middle East. There was no pro forma impact from this acquisition as the results of KEF were consolidated into Flow Control’s financial statements prior to acquiring the remaining 25% interest in KEF.

Additionally, during 2012, we completed other small acquisitions as part of Water & Fluid Solutions with purchase prices totaling $121.2 million in cash, net of cash acquired. Total goodwill recorded as part of the purchase price allocations was $80.9 million, none of which is tax deductible. During 2011, we completed other small acquisitions as part of Water & Fluid Solutions with purchase prices totaling $21.6 million, consisting of $17.8 million in cash and $3.8 million as notes payable. Total goodwill recorded as part of the purchase price allocations was $14.4 million, none of which is tax deductible. The pro forma impact of these acquisitions was not material.

Total transaction costs related to acquisition activities for the year ended December 31, 2012 and December 31, 2011 were $57.3 million and $8.2 million, respectively, and were expensed as incurred and recorded inSelling, general and administrative in our Consolidated Statements of Operations and Comprehensive Income (Loss).

5.Earnings (Loss) Per Share

Basic and diluted earnings (loss) per share were calculated as follows:

   Years ended December 31 
In thousands, except per share data  2012  2011  2010 

Net income (loss) attributable to Pentair Ltd.

  $    (107,186 $    (7,450 $    184,913 

 

 

Net income (loss) from continuing operations attributable to Pentair Ltd.

  $(107,186 $(7,450 $185,539 

 

 

Weighted average common shares outstanding

    

Basic

   127,368   98,233   98,037 

Dilutive impact of stock options and restricted stock awards(1)

         1,257 

 

 

Diluted

   127,368   98,233   99,294 

 

 

Earnings (loss) per common share attributable to Pentair Ltd.

    

Basic

    

Continuing operations

  $(0.84 $(0.08 $1.89 

Discontinued operations

         (0.01

 

 

Basic earnings (loss) per common share

  $(0.84 $(0.08 $1.88 

 

 

Diluted

    

Continuing operations

  $(0.84 $(0.08 $1.87 

Discontinued operations

         (0.01

 

 

Diluted earnings (loss) per common share

  $(0.84 $(0.08 $1.86 

 

 

Anti-dilutive stock options and restricted stock awards(2)

   16,007   8,357   3,711 

 

 

77


Pentair Inc.Ltd. and Subsidiaries

Notes to consolidated financial statements — (continued)

3. Discontinued Operations
In 2010 we were notified of a product recall required by our former Tools Group (which was sold to Black

(1)The incremental share impact from stock options and restricted stock awards was computed using the treasury stock method.

(2)Stock options and restricted stock awards that were not dilutive were excluded from our calculation of diluted weighted average shares.

6.Restructuring

During 2012 and Decker Corporation in 2004 and treated as a discontinued operation). Under the terms of the sale agreement2011, we are liable for a portion of the product recall costs for products sold prior to the date of sale of the Tools Group. We recorded a liability of $3.2 million ($2.0 million net of tax) in 2010 representing our estimate of the potential cost associated with this recall. In addition, we received the remaining escrow balances from our sale of Lincoln Industrial of approximately $0.5 million, and we reversed tax reserves of approximately $1.0 million due to the expiration of various statues of limitations.

On December 15, 2008, we sold our Spa and Bath (“Spa/Bath”) business to Balboa Water Group in a cash transaction for $9.2 million. The results of Spa/Bath have been reported as discontinued operations for all periods presented. Goodwill of $5.6 million was included in the assets of Spa/Bath.
On February 28, 2008, we sold our National Pool Tile (“NPT”) business to Pool Corporation in a cash transaction for $29.8 million. The results of NPT have been reported as discontinued operations for all periods presented. Goodwill of $16.8 million was included in the assets of NPT.
Operating results of the discontinued operations are summarized below:
             
In thousands 2010  2009  2008 
  
 
Net Sales $  $  $43,346 
Loss from discontinued operations before income taxes        (9,392)
Income tax benefit on operations        3,609 
 
 
Loss from discontinued operations, net of tax        (5,783)
 
 
Gain (loss) on disposal of discontinued operations, before taxes  (2,743)  221   (28,692)
Income tax (expense) benefit on (loss)  2,117   (240)  6,846 
 
 
Loss on disposal of discontinued operations, net of tax $(626) $(19) $(21,846)
 
 
4. Restructuring
During 2009 and 2008, we announced and initiated certain business restructuring initiatives aimed at reducing our fixed cost structure and rationalizingrealigning our manufacturing footprint. Thesebusiness. The 2012 initiatives included the announcement of the closure of certain manufacturing facilities as well as the reduction in hourly and salaried headcount of approximately 800 and 17001,000 employees, in 2009 and 2008, respectively, which included 350500 in Water & Fluid Solutions, 300 in Valves & Controls and 1,300200 in Technical Solutions. The 2011 initiatives included the reduction in hourly and salaried headcount of approximately 210 employees, which included 160 in Water Group& Fluid Solutions and 450 and 40050 in the Technical Products Group. These actions were generally completed by the end of 2009.
Solutions.

Restructuring related costs included inSelling, general and administrativeexpenses onin the Consolidated Statements of Operations and Comprehensive Income include(Loss) included costs for severance and related benefits, asset impairment charges and other restructuring costs as follows:

         
  Years Ended December 31 
In thousands 2009  2008 
  
 
Severance and related costs $11,160  $34,615 
Asset impairment  4,050   5,282 
Contract termination costs  2,030   5,309 
 
 
Total restructuring costs $17,240  $45,206 
 
 


52


   Years ended December 31 
In thousands  2012   2011   2010 

Severance and related costs

  $        61,560   $        11,500   $        — 

Other

   5,340    1,500     

 

 

Total restructuring costs

  $66,900   $13,000   $ 

 

 

Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
Total restructuring costs related to the Water Group& Fluid Solutions, Valves & Controls and the Technical Products GroupSolutions were $7.7$49.1 million, $5.1 million and $9.5$12.7 million, respectively, for the year ended December 31, 2009.2012. Total restructuring costs related to the Water Group& Fluid Solutions and the Technical Products GroupSolutions were $36.3$11.0 million and $8.9$2.0 million, respectively, for the year ended December 31, 2008.
Restructuring2011.

We assumed $17.1 million of restructuring accruals from actions initiated by Flow Control prior to the Merger relating to employee severance, facility exit and other restructuring costs. Activity in the restructuring accrual activity recorded oninOther current liabilitiesandEmployee compensation and benefitsin the Consolidated Balance Sheets is summarized as follows:

         
  Years Ended December 31 
In thousands 2010  2009 
  
 
Beginning balance $14,509  $34,174 
Costs incurred     13,190 
Cash payments and other  (10,515)  (32,855)
 
 
Ending balance $3,994  $14,509 
 
 

   Years ended December 31 
In thousands  2012  2011 

Beginning balance

  $        12,805  $3,994 

Acquired

   17,062    

Costs incurred

   61,560   11,500 

Cash payments and other

   (34,868  (2,689

 

 

Ending balance

  $        56,559  $        12,805 

 

 

78


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

7.
5.  Goodwill and Other Identifiable Intangible Assets

The changes in the carrying amount of goodwill for the year ended December 31, 20102012 and December 31, 20092011 by reportable segment were as follows:

                 
     Acquisitions/
  Foreign Currency
    
In thousands December 31, 2009  Divestitures  Translation/Other  December 31, 2010 
  
 
Water Group $1,802,913  $  $(18,813) $1,784,100 
Technical Products Group  285,884      (3,940)  281,944 
 
 
Consolidated Total $2,088,797  $  $(22,753) $2,066,044 
 
 
                 
     Acquisitions/
  Foreign Currency
    
In thousands December 31, 2008  Divestitures  Translation/Other  December 31, 2009 
  
 
Water Group $1,818,470  $895  $(16,452) $1,802,913 
Technical Products Group  283,381      2,503   285,884 
 
 
Consolidated Total $2,101,851  $895  $(13,949) $2,088,797 
 
 
Included

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

Water & Fluid Solutions

  $1,994,781   $402,254   $18,684  $2,415,719 

Valves & Controls

       1,342,621       1,342,621 

Technical Solutions

   279,137    856,111    924   1,136,172 

 

 

Total goodwill

  $2,273,918   $2,600,986   $19,608  $4,894,512 

 

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

Water & Fluid Solutions

  $1,784,100   $466,182   $(255,501 $1,994,781 

Valves & Controls

               

Technical Solutions

   281,944        (2,807  279,137 

 

 

Total goodwill

  $2,066,044   $466,182   $(258,308 $2,273,918 

 

 

In 2011, we recorded an impairment charge of $200.5 million in Water & Fluid Solutions which is included in “Foreign Currency Translation/Other” in 2009 is the effectcurrency translation/other” above. Accumulated goodwill impairment losses were $200.5 million as of an immaterial error corrected in 2009 related to the previous accounting treatment for certain acquisitions. The correction resulted in a decrease in goodwillDecember 31, 2012 and a decrease of deferred tax liabilities of $28.5 million ($27.5 million in the Water Group and $1.0 million in the Technical Products Group).


53

December 31, 2011.


Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
The detail of acquiredIdentifiable intangible assets consisted of the following:
                         
  2010  2009 
  Gross
        Gross
       
  Carrying
  Accumulated
     Carrying
  Accumulated
    
In thousands Amount  Amortization  Net  Amount  Amortization  Net 
  
 
Finite-life intangibles
                        
Patents $15,469  $(12,695) $2,774  $15,458  $(11,502) $3,956 
Non-compete agreements           4,522   (4,522)   
Proprietary technology  74,176   (29,862)  44,314   73,244   (23,855)  49,389 
Customer relationships  282,479   (82,901)  199,578   288,122   (66,091)  222,031 
Trade names  1,532   (383)  1,149   1,562   (235)  1,327 
 
 
Total finite-life intangibles $373,656  $(125,841) $247,815  $382,908  $(106,205) $276,703 
Indefinite-life intangibles
                        
Trade names  205,755      205,755   209,704      209,704 
 
 
Total intangibles, net $579,411  $(125,841) $453,570  $592,612  $(106,205) $486,407 
 
 
Intangiblefollowing at December 31:

   2012  2011 
In thousands Cost  Accumulated
amortization
  Net  Cost  Accumulated
amortization
  Net 

Finite-life intangibles

      

Customer relationships

 $    1,276,793  $(152,769 $    1,124,024  $    358,410  $(109,887 $    248,523 

Trade names

  1,525   (686  839   1,515   (530  985 

Proprietary technology

  263,647   (57,711  205,936   134,737   (43,994  90,743 

Backlog

  41,240   (18,278  22,962          

 

 
Total finite-life intangibles  1,583,205   (229,444  1,353,761   494,662   (154,411  340,251 
Indefinite-life intangibles      

Trade names

  555,895      555,895   252,034      252,034 

 

 

Total intangibles, net

 $2,139,100  $(229,444 $1,909,656  $746,696  $(154,411 $    592,285 

 

 

Identifiable intangible asset amortization expense in 2012, 2011 and 2010 2009was $76.0 million, $41.9 million and 2008 was approximately $24.5 million, $27.3 million and $24.0 million, respectively.

In 20092012 we recorded an impairment charge to write downfor trade name intangible assets of $11.3$49.1 million and $11.6 million in the Water Group. Additionally, in 2008 we recorded an impairment charge to write-off a trade name intangible asset of $1.0 million in the& Fluid Solutions and Technical Products Group.

The estimatedSolutions, respectively.

Estimated future amortization expense for identifiable intangible assets during the next five years is as follows:

                     
In thousands 2011 2012 2013 2014 2015
 
 
Estimated amortization expense $25,140  $24,405  $23,956  $23,631  $23,333 

In thousands  2013   2014   2015   2016   2017 

Estimated amortization expense

  $    135,308   $    113,848   $    113,559   $    112,770   $    111,625 

79


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

8.
6.  Supplemental Balance Sheet Information
         
In thousands 2010  2009 
  
 
Inventories
        
Raw materials and supplies $223,482  $200,931 
Work-in-process  37,748   38,338 
Finished goods  144,126   121,358 
 
 
Total inventories $405,356  $360,627 
 
 
Property, plant and equipment
        
Land and land improvements $36,484  $36,635 
Buildings and leasehold improvements  212,168   213,453 
Machinery and equipment  598,554   586,764 
Construction in progress  33,841   28,408 
 
 
Total property, plant and equipment  881,047   865,260 
Less accumulated depreciation and amortization  551,612   531,572 
 
 
Property, plant and equipment, net $329,435  $333,688 
 
 


54

    December 31 
In thousands  2012     2011 

Inventories

      

Raw materials and supplies

  $615,809     $219,487 

Work-in-process

   207,794      47,707 

Finished goods

   556,668      182,669 

 

 

Total inventories

  $    1,380,271     $449,863 

 

 

Other current assets

      

Cost in excess of billings

  $124,447     $54,701 

Prepaid expenses

   94,950      42,831 

Deferred income taxes

   68,277      60,899 

Other current assets

   38,434      10,260 

 

 

Total other current assets

  $326,108     $168,691 

 

 

Property, plant and equipment, net

      

Land and land improvements

  $247,868     $41,111 

Buildings and leasehold improvements

   482,106      244,246 

Machinery and equipment

   1,096,469      692,930 

Construction in progress

   114,309      40,251 

 

 

Total property, plant and equipment

   1,940,752          1,018,538 

Accumulated depreciation and amortization

   716,264      631,013 

 

 

Total property, plant and equipment, net

  $1,224,488     $387,525 

 

 

Other non-current assets

      

Asbestos-related insurance receivable

  $157,394     $ 

Deferred income taxes

   89,040       

Other non-current assets

   259,853      94,750 

 

 

Total other non-current assets

  $506,287     $94,750 

 

 

Other current liabilities

      

Deferred revenue and customer deposits

  $127,149     $10,151 

Dividends payable

   94,967       

Billings in excess of cost

   61,126      17,732 

Accrued warranty

   53,696      29,355 

Other current liabilities

   333,224      166,470 

 

 

Total other current liabilities

  $670,162     $223,708 

 

 

Other non-current liabilities

      

Asbestos-related liabilities

  $234,567     $630 

Deferred revenue

   73,397       

Taxes payable

   49,324      26,470 

Other non-current liabilities

   96,299      96,409 

 

 

Total other non-current liabilities

  $453,587     $123,509 

 

 

80


Pentair Inc.Ltd. and Subsidiaries

Notes to consolidated financial statements — (continued)

9.
7.  Supplemental Cash Flow Information

The following table summarizes supplemental cash flow information:

             
In thousands 2010 2009 2008
 
 
Interest payments $37,083  $43,010  $63,851 
Income tax payments  55,991   8,719   80,765 
On June 28, 2008, we entered into a transaction with GE that was accounted for as an acquisition of an 80.1 percent ownership interest in GE’s global water softener and residential water filtration business in exchange for a 19.9 percent interest in our global water softener and residential water filtration business. The transaction is more fully described in Note 2.Acquisitions.

    Years ended December 31 
In thousands  2012   2011   2010 

Cash paid for interest, net

  $        66,683   $        54,516   $        37,083 

Cash paid for income taxes, net

   82,235    64,389    55,991 

10.
8.  Accumulated Other Comprehensive Income (Loss)

Components of accumulated other comprehensive income (loss) consistsAOCI consist of the following:

         
In thousands 2010  2009 
  
 
Retirement liability adjustments, net of tax $(71,210) $(58,448)
Cumulative translation adjustments  58,184   88,671 
Market value of derivative financial instruments, net of tax  (9,316)  (9,626)
 
 
Accumulated other comprehensive income (loss) $(22,342) $20,597 
 
 

    December 31 
In thousands  2012  2011 

Unrecognized pension and other post-retirement benefit costs, net of tax

  $        364  $        617 

Cumulative translation adjustments

   1,009   (33,407

Market value of derivative financial instruments, net of tax

   (8,571  (4,941

 

 

Accumulated other comprehensive income (loss)

  $(7,198 $(37,731

 

 

11.
9.  Debt

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

                 
  Average
          
  interest rate
          
  December 31,
  Maturity
  December 31,
  December 31,
 
In thousands 2010  (Year)  2010  2009 
  
 
Revolving credit facilities  0.89%  2012  $97,500  $198,300 
Private placement — fixed rate  5.65%  2013-2017   400,000   400,000 
Private placement — floating rate  0.84%  2012-2013   205,000   205,000 
Other  4.36%  2012-2016   4,972   2,337 
 
 
Total debt, including current portion per balance sheet          707,472   805,637 
Less: Current maturities          (18)  (81)
Short-term borrowings          (4,933)  (2,205)
 
 
Long-term debt         $702,521  $803,351 
 
 

In thousands

  

Average
interest rate at

December 31, 2012

  

Maturity

year

  December 31 
      2012  2011 

Commercial paper

  0.664%  2017  $424,684  $3,497 

Revolving credit facilities

    2017      168,500 

Senior notes - fixed rate

  1.350%  2015   350,000    

Senior notes - fixed rate

  1.875%  2017   350,000    

Senior notes - fixed rate

  2.650%  2019   250,000    

Senior notes - fixed rate

  5.000%  2021   500,000   500,000 

Senior notes - fixed rate

  3.150%  2022   550,000    

Senior notes - fixed rate

          400,000 

Senior notes - floating rate

          205,000 

Other

  0.562%  2014-2030   8,880   16,302 

Capital lease obligations

  4.313%  2015-2025   23,810   15,788 

 

 

Total debt

       2,457,374   1,309,087 
Less: Current maturities and short-term borrowings       (3,096  (4,862

 

 

Long-term debt

      $2,454,278  $1,304,225 

 

 

In December 2012, our wholly-owned subsidiary, Pentair Finance S.A. (“PFSA”), completed an exchange offer (the “Exchange Offer”) pursuant to which it exchanged $373 million in aggregate principal amount of 5.00% Senior Notes due 2021 of Pentair, Inc., a wholly-owned, indirect subsidiary of the Company (the “2021 Notes”) for a like amount of new 5.00% Senior Notes due 2021 of PFSA (the “New 2021 Notes”) plus $5.6 million in

81


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

transaction-related costs. Upon completion of the Exchange Offer, $127 million in aggregate principal amount of 2021 Notes remained outstanding. The remaining 2021 Notes and New 2021 Notes are guaranteed as to payment by Pentair Ltd.

In November 2012, PFSA completed a private offering of $350 million aggregate principal amount of 1.35% Senior Notes due 2015 (the “2015 Notes”) and $250 million aggregate principal amount of 2.65% Senior Notes due 2019 (the “2019 Notes” and, collectively, the “2015/2019 Notes”), which are guaranteed as to payment by Pentair Ltd. In certain circumstances, PFSA may be required to pay additional interest on the 2015/2019 Notes. We have a multi-currency revolving Credit Facility (“Credit Facility”used the net proceeds from the sale of the 2015/2019 Notes to repay commercial paper and for general corporate purposes.

In October 2012, we redeemed the remaining outstanding aggregate principal of our 5.65% fixed rate senior notes due 2013-2017 totaling $400 million and our 1.05% floating rate senior notes due 2013 totaling $100 million (the “Fixed/Floating Rate Notes”). The Credit Facility createsredemptions included make-whole premiums of $65.8 million. Concurrent with the redemption of the Fixed/Floating Rate Notes, we terminated a related interest rate swap that was designated as a cash flow hedge, which resulted in the reclassification of $3.4 million of previously unrecognized variable to fixed swap losses from AOCI to earnings in October 2012. All costs associated with the redemption were recorded as aLoss on the early extinguishment of debt including $0.6 million of unamortized deferred financing costs.

In September 2012, PFSA, completed a private offering of $550 million aggregate principal amount of 3.15% Senior Notes due 2022 (the “2022 Notes”) and $350 million aggregate principal amount of 1.875% Senior Notes due 2017 (the “2017 Notes” and, collectively, the “2017/2022 Notes”), which are guaranteed as to payment by Pentair Ltd. In certain circumstances, PFSA may be required to pay additional interest on the 2017/2022 Notes. The 2017/2022 Notes remained outstanding after the Merger. A portion of the net proceeds from the 2017/2022 Notes offering were used to repay $435 million to Tyco in conjunction with the Distribution and the Merger.

In September 2012, Pentair, Inc. entered into a credit agreement providing for an unsecured, committed revolving credit facility (the “Credit Facility”) with initial maximum aggregate availability of up to $800$1,450 million. The Credit Facility replaced Pentair, Inc.’s $700 million Former Credit Facility (as defined below). The Credit Facility matures in September 2017. Upon the completion of the Merger, Pentair Ltd. became the guarantor under the Credit Facility and PFSA and certain other of our subsidiaries became affiliate borrowers under the Credit Facility. Borrowings under the Credit Facility generally bear interest at a variable rate equal to the London Interbank Offered Rate (“LIBOR”) plus a specified margin based upon PFSA’s credit ratings. PFSA must also pay a facility fee ranging from 10.0 to 30.0 basis points per annum (based upon PFSA’s credit ratings) on the amount of each lender’s commitment.

In May 2011, Pentair, Inc. completed a public offering of $500 million aggregate principal amount of the 2021 Notes. Pentair, Inc. used the net proceeds from the offering of the 2021 Notes to finance in part the CPT acquisition in 2011. The 2021 Notes which remain outstanding subsequent to the Exchange Offer are guaranteed as to payment by Pentair Ltd.

In April 2011, Pentair, Inc. entered into a Fourth Amended and Restated Credit Agreement that provided for an unsecured, committed revolving credit facility (the “Former Credit Facility”) of up to $700 million, with multi-currency sub facilitiessub-facilities to support investments outside the U.S. The Credit Facility expires on June 4, 2012. Borrowings under the Former Credit Facility bearbore interest at the rate of LIBOR plus 0.625%1.75%. Interest ratesWe used borrowings under the Former Credit Facility to fund a portion of the CPT acquisition in 2011 and fees onto repay $105 million of matured senior notes in May 2012. The Former Credit Facility was terminated in September 2012 in connection with the Merger and replaced by the Credit Facility, vary based on our credit ratings.

We areat which time the subsidiary guarantees in place under the Former Credit Facility ceased to exist.

82


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

PFSA is authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We usePFSA uses the Credit Facility asback-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 paper compared to the cost of borrowing under our Credit Facility. As of December 31, 20102012 and December 31, 20092011, we had no$424.7 million and $3.5 million, respectively, of commercial paper outstanding, commercial paper.


55

all of which 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.


Pentair, Inc.We used borrowings under the Credit Facility and Subsidiaries
proceeds from the 2017/2022 Notes offering, to consolidated financial statements — (continued)
repay the Former Credit Facility and to pay other fees and expenses in connection with the Merger. Total availability under our existingthe Credit Facility was $702.5$1,025.3 million as of December 31, 2010,2012, which was not limited by any ofcovenants contained in the Credit Facility’s credit agreement’s financial covenants as of that date.
In additionagreement. Subsequent to the Credit Facility,Merger, we have $40.0used the remaining proceeds from the 2017/2022 Notes offering and issuances of commercial paper to redeem the Fixed/Floating Rate Notes as discussed above, to repurchase shares in conjunction with our share repurchase as discussed in Note 15 and to purchase the remaining 25% interest in KEF for $100 million of uncommitted credit facilities, under which we had $4.8 million of borrowings as of December 31, 2010.
discussed in Note 4.

Our debt agreements contain certain financial covenants, the most restrictive of which is a leverage ratio (total consolidated indebtedness, as defined, over consolidated EBITDA, as defined)are in the Credit Facility, including that we may not permit (i) the ratio of our consolidated debt plus synthetic lease obligations to our consolidated net income (excluding, among other things, non-cash gains and losses) before interest, taxes, depreciation, amortization, non-cash share-based compensation expense, and up to $40 million of costs and expenses incurred in connection with the Merger (EBITDA) for the four consecutive fiscal quarters then ended (the “Leverage Ratio”) to exceed 3.53.50 to 1.0. We1.00 on the last day of each fiscal quarter, and (ii) the ratio of our EBITDA for the four consecutive fiscal quarters then ended to our consolidated interest expense, including consolidated yield or discount accrued as to outstanding securitization obligations (if any), for the same period to be less than 3.00 to 1.00 as of the end of each fiscal quarter. For purposes of the Leverage Ratio, the Credit Facility provides for the calculation of EBITDA giving pro forma effect to the Merger and certain acquisitions, divestitures and liquidations during the period to which such calculation relates. As of December 31, 2012, we were in compliance with all financial covenants in our debt agreements asagreements.

In addition to the Credit Facility, we have various other credit facilities with an aggregate availability of $89.0 million, of which $3.0 million was outstanding at December 31, 2010.

On July 8, 2008, we commenced a cash tender offer for all of our outstanding $250 million aggregate principal of 7.85% Senior Notes due 2009 (the “Notes”). Upon expiration of the tender offer on August 4, 2008, we purchased $116.1 million aggregate principal amount of the Notes. As a result of this transaction, we recognized a loss of $4.6 million on early extinguishment of debt in 2008. The loss included the write off of $0.1 million in unamortized deferred financing fees in addition to recognition of $0.6 million in previously unrecognized swap gains and cash paid of $5.1 million related to the tender premium and other costs associated with the purchase.
On March 16, 2009, we announced the redemption of all of our remaining outstanding $133.9 million aggregate principal of Notes. The Notes were redeemed on April 15, 20092012. Borrowings under these credit facilities bear interest at a redemption price of $1,035.88 per $1,000 of principal outstanding plus accrued interest thereon. As a result of this transaction, we recognized a loss of $4.8 million on early extinguishment of debt in the second quarter of 2009. The loss included the write off of $0.1 million in unamortized deferred financing fees in addition to recognition of $0.3 million in previously unrecognized swap gains and cash paid of $5.0 million related to the redemption and other costs associated with the purchase.
variable rates.

Debt outstanding at December 31, 20102012 matures on a calendar year basis as follows:

                             
In thousands 2011  2012  2013  2014  2015  Thereafter  Total 
  
 
Contractual debt obligation maturities $4,951  $202,517  $200,003  $1  $  $300,000  $707,472 
 
 

In thousands 2013  2014  2015  2016  2017  Thereafter  Total 

Contractual debt obligation

    maturities

 $  $65  $350,000  $  $777,706  $1,305,793  $2,433,564 

Capital lease obligations

  3,096   3,171   6,036   1,236   1,236   9,035   23,810 

 

 

Total maturities

 $    3,096  $    3,236  $    356,036  $    1,236  $    778,942  $    1,314,828  $    2,457,374 

 

 

As part of the Merger and CPT acquisition, we assumed capital lease obligations related primarily to land and buildings. As of December 31, 2012 and December 31, 2011, the recorded values of the assets acquired under those capital leases were $35.5 million and $22.7 million, respectively, less accumulated amortization of $6.0 million and $5.1 million, respectively, all of which were included inProperty, plant and equipment, net on the Consolidated Balance Sheets.

Capital lease obligations consist of total future minimum lease payments of $26.1 million less the imputed interest of $2.3 as of December 31, 2012.

83


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

12.
10.  Derivatives and Financial Instruments

Cash-flow HedgesDerivative financial instruments

We are exposed to market risk related to changes in foreign currency exchange rates and interest rates on our floating rate indebtedness. To manage the volatility related to these exposures, we periodically enter into a variety of derivative financial instruments. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency rates and interest rates. The derivative contracts contain credit risk to the extent that our bank counterparties may be unable to meet the terms of the agreements. The amount of such credit risk is generally limited to the unrealized gains, if any, in such contracts. Such risk is minimized by limiting those counterparties to major financial institutions of high credit quality.

Interest rate swaps

During 2012 and 2011, we used floating to fixed rate interest rate swaps to mitigate our exposure to future changes in interest rates related to our floating rate indebtedness. We designated these interest rate swap arrangements as cash flow hedges. As a result, changes in the fair value of the interest rate swaps were recorded inAOCI on the Consolidated Balance Sheets throughout the contractual term of each of the interest rate swap arrangements.

During the year ended December 31, 2012, all of our interest rate swaps expired or were terminated and, as a result, we had no outstanding interest rate swap arrangements at December 31, 2012.

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 hashad a fixed interest rate of 4.89% and expiresexpired in May 2012. The fixed interest rate of 4.89% plus the .50% interest rate spread over LIBOR resultsresulted in an effective fixed interest rate of 5.39%. The fair value of the swap was a liability of $6.4 million and $8.1$1.7 million at December 31, 2010 and December 31, 2009, respectively2011 and was recorded in AOCI onOther current liabilities in the Consolidated Balance Sheets.

In September 2005, we entered into a $100 million interest rate swap agreement with several major financial institutions to exchange variable-ratevariable rate interest payment obligations for fixed-ratefixed rate obligations without the exchange of the underlying principal amounts in order to manage interest rate exposures. The effective date of the fixed-ratefixed rate swap was April 25, 2006. The swap agreement has a fixed interest rate of 4.68% and expireswas set to expire 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%. This swap was terminated in October 2012. The fair value of the swap was a liability of $9.4 million and $8.3$6.3 million at December 31, 2010 and December 31, 2009, respectively2011 and was recorded in AOCI onOther current liabilities in the Consolidated Balance Sheets.

The variable to fixed interest rate swaps are designated as cash-flow hedges. The fair value A loss of these swaps are$3.3 million was recognized upon termination and was recorded as assets or liabilitiesinLoss on early extinguishment of debtin the Consolidated Balance Sheets. Unrealized income/expense is included in


56


Pentair, Inc.Statements of Operations and Subsidiaries
Notes to consolidated financial statements — (continued)
AOCI and realized income/expense and amounts due to/from swap counterparties, are included in earnings. We realized incremental interest expense resulting fromComprehensive Income (Loss) for the swaps of $9.2 million and $7.9 million atyear ended December 31, 2010 and December 31, 2009, respectively.
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 Consolidated Balance Sheets, with changes in their fair value included in OCI. 2012.

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

Failureoccurred. Interest expense from swaps was $5.3 million and $9.3 million in 2012 and 2011, respectively, and was recorded inInterest expensein the Consolidated Statements of one or moreOperations and Comprehensive Income (Loss).

In April 2011, as part of our planned debt issuance to fund the CPT acquisition, we entered into interest rate swap counterparties would resultcontracts 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 2021 Notes, the swaps were terminated at a cost of $11.0 million. Because we

84


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

used the contracts to hedge future interest payments, this was recorded inAOCI in the loss of any benefit to usConsolidated Balance Sheets and will be amortized as interest expense over the 10 year life of the swap agreement. In this case, we would continue2021 Notes. The ending unrealized net loss inAOCI at December 31, 2012 was $9.2 million.

Foreign currency contracts

We conduct business in various locations throughout the world and are subject to be obligatedmarket risk due to paychanges in the variable interest payments pervalue of foreign currencies in relation to our reporting currency, the underlying debt agreements which are at variable interest ratesU.S. dollar. We manage our economic and transaction exposure to certain market-based risks through the use of 3 month LIBOR plus .50% for $105 millionforeign currency derivative financial instruments. Our objective in holding these derivatives is to reduce the volatility of debtnet earnings and 3 month LIBOR plus .60% for $100 million of debt. Additionally, failure of one or allcash flows associated with changes in foreign currency exchange rates. The majority 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.

foreign currency contracts have an original maturity date of less than one year. At December 31, 20102012 and 2009,2011, we had outstanding foreign currency derivative contracts with gross notional U.S. dollar equivalent amounts of $163.7 million and $79.9 million, respectively. The impact of these contracts on the Consolidated Statements of Operations and Comprehensive Income (Loss) is not material for any period presented.

In March 2011, we entered into a foreign currency option contract to reduce our interest rate swaps are carriedexposure 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. In May 2011, we sold the foreign currency option contract for $1.0 million. The net cost of $2.1 million was recorded inSelling, general and administrativeon the Consolidated Statements of Operations and Comprehensive Income (Loss).

Fair value of financial instruments

The recorded amounts and estimated fair values of total debt at December 31, excluding the effects of derivative financial instruments, were as follows:

   2012   2011 
In thousands  Recorded
Amount
   Fair Value   Recorded
Amount
   Fair Value 

Variable rate debt

  $  427,706   $  427,706   $  406,978   $  406,978 

Fixed rate debt

   2,029,669    2,081,264    902,109    954,053 

 

 

Total debt

  $  2,457,375   $  2,508,970   $  1,309,087   $  1,361,031 

 

 

The following methods were used to estimate the fair valuevalues of each class of financial instrument measured on a recurring basis. Fairbasis:

short-term financial instruments (cash and cash equivalents, accounts and notes receivable, accounts and notes payable and variable-rate debt) — recorded amount approximates fair value because of the short maturity period;

long-term fixed-rate debt, including current maturities — fair value is based on market quotes available for issuance of debt with similar terms, which are inputs that are classified as Level 2 in the valuation hierarchy defined by the accounting guidance; and

interest rate swaps and foreign currency contract agreements — 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.

Foreign currency hedges
At December 31, 2010 we had a euro to U.S. dollar contract that expired on January 7, 2011 with a notional amount of $132.5 million. The fair value ofhierarchy defined by the contract was an asset of $1.2 million.
Fair value of financial instruments
The recorded amounts and estimated fair values of long-term debt, excluding the effects of derivative financial instruments and the recorded amounts and estimated fair value of those derivative financial instruments were as follows:
                 
  2010  2009 
  Recorded
  Fair
  Recorded
  Fair
 
In thousands amount  value  amount  value 
  
 
Total debt, including current portion
                
Variable rate $307,433  $307,433  $405,505  $405,505 
Fixed rate  400,039   438,492   400,132   390,930 
 
 
Total $707,472  $745,925  $805,637  $796,435 
 
 
Derivative financial instruments
                
Market value of interest rate swaps and foreign currency contracts, net $(14,585) $(14,585) $(16,354) $(16,354)
 
 
The following methods were used to estimate the fair values of each class of financial instrument measured on a recurring basis:
• short-term financial instruments (cash and cash equivalents, accounts and notes receivable, accounts and notes payable and variable-rate debt) — recorded amount approximates fair value because of the short maturity period;
• long-term fixed-rate debt, including current maturities — fair value is based on market quotes available for issuance of debt with similar terms, which are inputs that are classified as Level 2 in the valuation hierarchy defined by the accounting guidance; and


57accounting guidance.

85


Pentair Inc.Ltd. and Subsidiaries

Notes to consolidated financial statements — (continued)

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

Recurring fair value measurements  December 31, 2012 
In thousands  Level 1   Level 2  Level 3   Total 

Foreign currency contract assets

  $    —   $      2,924  $         —   $    2,924 

Foreign currency contract liabilities

       (551      (551

Deferred compensation plan assets (1)

   22,394           22,394 

 

 

Total recurring fair value measurements

  $      22,394   $      2,373  $        —   $      24,767 

 

 

Nonrecurring fair value measurements

       

Trade name intangibles(2)

  $   $  $63,700   $63,700 

 

 
Recurring fair value measurements  December 31, 2011 
In thousands  Level 1   Level 2  Level 3   Total 

Foreign currency contract assets

  $   $242  $   $242 

Foreign currency contract liabilities

       (341      (341

Interest rate swap liabilities

       (8,034      (8,034

Deferred compensation plan assets (1)

   22,987           22,987 

 

 

Total recurring fair value measurements

  $      22,987   $      (8,133 $         —   $      14,854 

 

 

Nonrecurring fair value measurements

       

Goodwill (3)

  $   $  $      242,800   $      242,800 

 

 

(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.

 interest(2)In the fourth quarter of 2012, we completed our annual intangible assets impairment review. As a result, we recorded a pre-tax non-cash impairment charge of $60.7 million for trade names intangibles. The fair value of trade names is measured using the relief-from-royalty method. This method assumes the trade name has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate swaps and foreign currency contract agreements —the weighted average cost of capital.

(3)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 a reporting unit part of Water & Fluid Solutions. The fair values arevalue of each reporting unit is determined throughusing 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 useappropriate discount rate. Use of models that consider various assumptions, including time value, yield curves, as well as other relevant economic measures, which are inputsthe market approach consists of comparisons to comparable publicly-traded companies that are classified as Level 2similar 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 valuation hierarchy defined byfair value of the accounting guidance.reporting unit in a manner similar to a purchase price allocation.

86


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

13.
11.  Income Taxes

Income from continuing operations before income taxes and noncontrolling interest consisted of the following:

             
In thousands 2010  2009  2008 
  
 
U.S. $217,213  $111,530  $220,294 
International  82,934   61,117   146,846 
 
 
Income from continuing operations before taxes and noncontrolling interest $300,147  $172,647  $367,140 
 
 

   Years ended December 31
In thousands    2012     2011     2010  

Federal(1)

   $    39,177   $(31,471)  $196,101 

International

    (223,142)   74,737    82,874 

 

 
Income (loss) from continuing operations before income taxes and noncontrolling interest   $(183,965)  $    43,266   $    278,975 

 

 

(1) As a result of the Merger, “Federal” reflects income (loss) from continuing operations before income taxes and noncontrolling interest for Switzerland in 2012 and U.S. for 2011 and 2010.

The provision (benefit) for income taxes for continuing operations consisted of the following:

             
In thousands 2010  2009  2008 
  
 
Currently payable
            
Federal $44,766  $10,502  $41,985 
State  6,591   2,456   5,140 
International  17,877   13,947   25,735 
 
 
Total current taxes  69,234   26,905   72,860 
Deferred
            
Federal and state  26,445   26,733   35,535 
International  1,521   2,790   (51)
 
 
Total deferred taxes  27,966   29,523   35,484 
 
 
Total provision for income taxes $97,200  $56,428  $108,344 
 
 
Reconciliation For 2012, Federal represents Swiss taxes, while International represents non-Swiss taxes, including U.S. federal, state and local taxes. For 2011 and 2010 Federal represents U.S. federal taxes, while International reflects non-U.S. taxes.

   Years ended December 31 
In thousands  2012  2011  2010 

Currently payable

    

Federal

  $      6,490  $51,158  $44,766 

State

      6,980   6,591 

International

   61,053   24,005   17,877 

 

 

Total current taxes

   67,543   82,143   69,234 

Deferred

    

Federal

   1,270   (26,223  18,188 

International

   (148,166  (9,503  1,521 

 

 

Total deferred taxes

   (146,896  (35,726  19,709 

 

 

Total provision (benefit) for income taxes

  $      (79,353 $      46,417  $      88,943 

 

 

Reconciliations of the U.S.federal statutory income tax rate to our effective tax rate for continuing operationswere as follows:

             
Percentages 2010  2009  2008 
  
 
U.S. statutory income tax rate  35.0   35.0   35.0 
State income taxes, net of federal tax benefit  2.1   2.6   1.6 
Tax effect of stock-based compensation  0.2   0.2   0.2 
Tax effect of international operations  (3.8)  (3.5)  (6.1)
Tax credits  (0.3)  (1.4)  (1.0)
Domestic manufacturing deduction  (1.4)  (0.4)  (0.7)
ESOP dividend benefit  (0.2)  (0.4)  (0.2)
All other, net  0.8   0.6   0.7 
 
 
Effective tax rate on continuing operations  32.4   32.7   29.5 
 
 


58

   Years ended December 31 
Percentages  2012  2011  2010 

Federal statutory income tax rate(1)

   7.8   35.0   35.0 

Tax effect of international operations(2)

   23.6   (25.3  (4.1

Non-deductible transaction costs

   (4.7      

Impact of debt-financing

   10.8       

Resolution of tax audits

   5.6       

Goodwill

      104.4    

Domestic manufacturing deduction

      (8.4  (1.5

State income taxes, net of federal tax benefit

      4.3   2.0 

All other, net

      (2.7  0.5 

 

 

Effective tax rate

           43.1           107.3           31.9 

 

 

87


Pentair Inc.Ltd. and Subsidiaries

Notes to consolidated financial statements — (continued)

Reconciliation

(1) As a result of the Merger, the statutory rate for 2012 reflects the Swiss statutory rate of 7.83 percent. For 2011 and 2010, the statutory rate reflects the U.S. statutory rate of 35 percent.

(2) As a result of the Merger, the tax effect of international operations for 2012 consists of non-Swiss jurisdictions. For 2011 and 2010, the tax effect of international operations consists of non-U.S. jurisdictions.

Reconciliations of the beginning and ending gross unrecognized tax benefits were as follows:

             
In thousands 2010  2009  2008 
  
 
Gross unrecognized tax benefits — beginning balance $29,962  $28,139  $23,879 
Gross increases for tax positions in prior periods  286   3,191   3,526 
Gross decreases for tax positions in prior periods  (2,490)  (2,433)  (411)
Gross increases based on tax positions related to the current year  1,431   1,789   2,666 
Gross decreases related to settlements with taxing authorities  (4,182)  (209)   
Reductions due to statute expiration  (747)  (515)  (1,521)
 
 
Gross unrecognized tax benefits at December 31 $24,260  $29,962  $28,139 
 
 

   Years ended December 31 
In thousands  2012  2011  2010 

Beginning balance

  $26,469  $24,260  $29,962 

Gross increases for tax positions in prior periods

   2,198   2,042   286 

Gross decreases for tax positions in prior periods

   (641  (192  (2,490

Gross increases based on tax positions related to the current year

   13,641   3,201   1,431 

Gross decreases related to settlements with taxing authorities

   (13,202  (2,465  (4,182

Reductions due to statute expiration

   (370  (377  (747

Gross increases due to acquisitions

   25,938       

Gross increases due to currency fluctuations

   438       

 

 

Ending balance

  $      54,471  $      26,469  $      24,260 

 

 

Included in the $24.3$54.5 million of total gross unrecognized tax benefits as of December 31, 20102012 was $22.4$38.6 million of tax benefits that, if recognized, would impact the effective tax rate. It is reasonably possible that the gross unrecognized tax benefits as of December 31, 20102012 may decrease by a range of $0 to $17.5$36.9 million during the next twelve months2013, primarily as a result of the resolution of non-Swiss examinations, including U.S. federal state and foreignstate examinations, and the expiration of various statutes of limitations.

The determination of annual income tax expense takes into consideration amounts which may be needed to cover exposures for open tax years. The Internal Revenue Service (“IRS”) has examined ourthe Pentair, Inc. U.S. federal income tax returns through 20032009 with no material adjustments. The IRS hasA number of tax periods from 2004 to present are under audit by tax authorities in various jurisdictions, including Germany and Italy. We anticipate that several of these audits may be concluded in the foreseeable future. We are also completed a survey of our 2004 U.S. federal incomesubject to the 2012 Tax Sharing Agreement, discussed below, which generally applies to pre-Distribution Tyco tax return with no material findings. The IRS is currently examining our federal tax returns for years 2005 through 2009. No material adjustments have been proposed, however, actual settlements may differ from amounts accrued.

periods beginning in 1997 which remain subject to audit by the IRS.

We record penalties and interest related to unrecognized tax benefits inProvision (benefit) for income taxes andInterest expense, respectively, which is consistent with our past practices.respectively. As of December 31, 2010,2012 and 2011, we had recorded approximately $0.8accrued $3.1 million and $0.9 million, respectively, for the possible payment of penalties and $4.8$19.5 million related toand $5.9 million, respectively, for the possible payment of interest expense.

U.S. incomeexpense, which are recorded inOther current liabilities in the Consolidated Balance Sheets.

Deferred taxes in the amount of $21.0 million have been provided on undistributed earnings of certain subsidiaries. Taxes have not been provided on undistributed earnings of international subsidiaries. Itsubsidiaries where it is our intention to reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to do so. As of December 31, 2010, approximately $223.7 million of unremitted earnings attributable to international subsidiaries were considered to be indefinitely invested. It is not practicable to estimate the amount of tax that might be payable if such earnings were to be remitted.

Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as “temporary differences.” We record the tax effect of these temporary differences as “deferred tax

88


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

assets” (generally items that can be used as a tax deduction or credit in future periods) and “deferred tax liabilities” (generally items for which we received a tax deduction but the tax impact has not yet been recorded in the Consolidated Statements of Income)Operations and Comprehensive Income (Loss)).

Deferred taxes were classifiedrecorded in the Consolidated Balance Sheets as follows:

         
In thousands 2010  2009 
  
 
Deferred tax assets $56,349  $49,609 
Other noncurrent assets  1,647   5,132 
Other current liabilities  (547)  (149)
Deferred tax liabilities  (169,198)  (146,630)
 
 
Net deferred tax liability $(111,749) $(92,038)
 
 


59


   December 31 
In thousands  2012   2011 

Other current assets

  $      68,277   $60,899 

Other non-current assets

   89,040     

Deferred tax liabilities

   488,102    188,957 

 

 

Net deferred tax liabilities

  $      330,785   $      128,058 

 

 

Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
The tax effects of the major items recorded as deferred tax assets and liabilities arewere as follows:
                 
  2010
  2009
 
  Deferred tax  Deferred tax 
In thousands Assets  Liabilities  Assets  Liabilities 
  
 
Accounts receivable allowances $4,490  $  $4,073  $ 
Inventory valuation  17,381      11,005    
Accelerated depreciation/amortization     11,436      12,893 
Accrued product claims and warranties  25,753      24,558    
Employee benefit accruals  110,547      119,357    
Goodwill and other intangibles     187,103      172,675 
Other, net     71,381      65,463 
 
 
Total deferred taxes $158,171  $269,920  $158,993  $251,031 
 
 
Net deferred tax liability     $(111,749)     $(92,038)
                 
Included in Other, net in the table above are deferred tax assets of $2.3 million and $4.7 million as

   December 31 
In thousands  2012   2011 

Deferred tax assets

    

Accrued liabilities and reserves

  $86,714   $58,420 

Postretirement benefits

   79,065     82,823 

Employee compensation & benefits

   95,170     49,404 

Tax loss and credit carryforwards

   398,921    24,350 

Other

   53,531    4,698 

 

 

Total deferred tax assets

   713,401    219,695 

Valuation allowance(1)

   167,640    13,242 

 

 

Deferred tax assets, net of valuation allowance

   545,761    206,453 

Deferred tax liabilities

    

Property, plant and equipment

   97,370    43,572 

Goodwill and other intangibles

   779,176    290,939 

 

 

Total deferred tax liabilities

   876,546    334,511 

 

 

Net deferred tax liabilities

  $      330,785   $      128,058 

 

 

(1)The increase in valuation allowance from 2011 to 2012 was primarily related to balances acquired in the Merger.

As of December 31, 2010 and 2009, respectively, related to a foreign2012, tax credit carryover from the tax period ended December 31, 2006 and related to state net operating losses. The foreign tax credit is eligible for carryforward until the tax period ending December 31, 2016.

Non-U.S. tax lossesloss carryforwards of $49.6 million and $49.1$1,460.9 million were available for carryforward at December 31, 2010 and 2009, respectively.to offset future income. A valuation allowance reflected above in Other, net of $9.4 million and $7.5$163.8 million exists for deferred income tax benefits related to thenon-U.S. tax loss carryforwards available as of December 31, 2010 and 2009, respectively thatwhich may not be realized. We believe that sufficient taxable income will be generated in the respective countriesjurisdictions to allow us to fully recover the remainder of the tax losses. Thenon-U.S. operating tax losses relate to Non-U.S. carryforwards of $903.4 million which are subject to varying expiration periods and will begin to expire in 2011. State2013. In addition, there were $367.1 million of U.S. federal and $190.4 million of state tax lossesloss carryforwards as of $69.3 million and $73.0 million were available for carryforward at December, 31, 2010 and 2009, respectively. A valuation allowance reflected above in Other, net of $2.4 million and $2.6 million exists for deferred income tax benefits related to the carryforwards available at December 31, 2010 and 2009, respectively. Certain state tax losses2012, which will expire in 2011, while othersfuture years through 2032. When realized, $6.2 million of tax benefits will be recorded as an increase in equity.

Tax sharing agreement and other income tax matters

In connection with the Distribution, we entered into a tax sharing agreement (the “2012 Tax Sharing Agreement”) with Tyco and The ADT Corporation (“ADT”), which governs the rights and obligations of Tyco,

89


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

ADT and us for certain pre-Distribution tax liabilities, including Tyco’s obligations under a separate tax sharing agreement (the “2007 Tax Sharing Agreement”) that Tyco, Covidien Ltd. (“Covidien”) and TE Connectivity Ltd. (“TE Connectivity”) entered into in 2007. The 2012 Tax Sharing Agreement provides that we, Tyco and ADT will share (i) certain pre-Distribution income tax liabilities that arise from adjustments made by tax authorities to our, Tyco’s and ADT’s U.S. income tax returns, and (ii) payments required to be made by Tyco in respect to the 2007 Tax Sharing Agreement (collectively, “Shared Tax Liabilities”). Tyco is responsible for the first $500 million of Shared Tax Liabilities. We and ADT will share 42% and 58%, respectively, of the next $225 million of Shared Tax Liabilities. We, ADT and Tyco will share 20%, 27.5% and 52.5%, respectively, of Shared Tax Liabilities above $725 million.

In the event the Distribution, the spin-off of ADT, or certain internal transactions undertaken in connection therewith were determined to be taxable as a result of actions taken after the Distribution by us, ADT or Tyco, the party responsible for such failure would be responsible for all taxes imposed on us, ADT or Tyco as a result thereof. Taxes resulting from the determination that the Distribution, the spin-off of ADT, or any internal transaction is taxable are referred to herein as “Distribution Taxes.” If such failure is not the result of actions taken after the Distribution by us, ADT or Tyco, then we, ADT and Tyco would be responsible for any Distribution Taxes imposed on us, ADT or Tyco as a result of such determination in the same manner and in the same proportions as the Shared Tax Liabilities. ADT will have sole responsibility for any income tax liability arising as a result of Tyco’s acquisition of Brink’s Home Security Holdings, Inc. (“BHS”) in May 2010, including any liability of BHS under the tax sharing agreement between BHS and The Brink’s Company dated October 31, 2008 (collectively, the “BHS Tax Liabilities”). Costs and expenses associated with the management of Shared Tax Liabilities, Distribution Taxes and BHS Tax Liabilities will generally be shared 20% by us, 27.5% by ADT and 52.5% by Tyco. We are responsible for all of our own taxes that are not shared pursuant to the 2012 Tax Sharing Agreement’s sharing formulae. In addition, Tyco and ADT are responsible for their tax liabilities that are not subject to carryforward periodsthe 2012 Tax Sharing Agreement’s sharing formulae.

The 2012 Tax Sharing Agreement also provides that, if any party were to default in its obligation to another party to pay its share of upthe distribution taxes that arise as a result of no party’s fault, each non-defaulting party would be required to twentypay, equally with any other non-defaulting party, the amounts in default. In addition, if another party to the 2012 Tax Sharing Agreement that is responsible for all or a portion of an income tax liability were to default in its payment of such liability to a taxing authority, we could be legally liable under applicable tax law for such liabilities and required to make additional tax payments. Accordingly, under certain circumstances, we may be obligated to pay amounts in excess of our agreed-upon share of our, Tyco’s and ADT’s tax liabilities.

With respect to years prior to and including the 2007 separation of Covidien and TE Connectivity by Tyco, tax authorities have raised issues and proposed tax adjustments that are generally subject to the sharing provisions of the 2007 Tax Sharing Agreement and which may require Tyco to make a payment to a taxing authority, Covidien or TE Connectivity. With respect to adjustments raised by the IRS, although Tyco has resolved a substantial number of these adjustments, a few significant items remain open with respect to the audit of the 1997 through 2004 years.

As of the date hereof, it is unlikely that Tyco will be able to resolve all the open items, which primarily involve the treatment of certain intercompany debt issued during the period, through the IRS appeals process. As a result, Tyco expects to litigate these matters once it receives the requisite statutory notices from the IRS, which may occur as soon as within the next three months. However, the ultimate resolution of these matters is uncertain and could result in Tyco being responsible for a greater amount than it expects under the 2007 Tax Sharing Agreement. To the extent we are responsible for any Shared Tax Liability or Distribution Tax, there could be a material adverse impact on our financial condition, results of operations, or cash flows in future reporting periods.

90


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

14.
12. Benefit Plans

Pension and other post-retirement benefitsplans

We sponsor domestic and foreign defined-benefit pension and other post-retirement plans. Pension benefits are based principally on an employee’s years of serviceand/or compensation levels near retirement. In addition, we also provide certain post-retirement health care and life insurance benefits. Generally, the post-retirement health care and life insurance plans require contributions from retirees. We use a December 31 measurement date each year. In December 2007, we announced that we will be freezing certain U.S. pension plans as of December 31, 2017. Since the announcement, we have pursued a strategy of gradually shifting our U.S. pension asset allocations towards liability hedging assets such as fixed income instruments and away from equity securities. During the last quarter of 2012 we made significant progress in reducing the risk and volatility of our U.S. pension plans by taking the following steps:

We paid $331 million to settle pension obligations through a combination of lump sum payments to deferred vested participants and through the purchase of an annuity contract to settle obligations to plan participants in retiree status.


60

We made a special contribution of $190 million to fund our U.S. pension plans.

We accelerated our transition to increase the allocations of investments to liability hedging assets.

During the fourth quarter of 2012, we changed our method of recognizing actuarial gains and losses for all of our pension and other post-retirement plans. Historically, we recognized actuarial gains and losses as a component of AOCI in our Consolidated Balance Sheets and amortized them into our Consolidated Statements of Operations and Comprehensive Income (Loss) over the average future service period of the active employees of these plans to the extent such gains and losses were outside of a corridor. We elected to immediately recognize actuarial gains and losses in our Consolidated Statements of Operations and Comprehensive Income (Loss) on the basis that it is preferable to accelerate the recognition of such gains and losses into income rather than to delay such recognition. Additionally, for purposes of calculating the expected return on plan assets, we will no longer use a calculated value for the market-related valuation of plan assets, but instead will use the actual fair value of our plan assets. These changes will improve transparency in our operating results by more quickly recognizing the effects of external conditions on our plan obligations, investments and assumptions. Generally, these gains and losses are measured annually as of December 31 and accordingly will be recorded during the fourth quarter. We have applied these changes retrospectively, adjusting all prior periods (see Note 3).

91


Pentair Inc.Ltd. and Subsidiaries

Notes to consolidated financial statements — (continued)

Obligations and Funded Statusfunded status

The following tables present reconciliations of theplan benefit obligationobligations, fair value of the plans, the plan assets of the pension plans and the funded status of the plans:

                 
  Pension benefits Post-retirement
In thousands 2010 2009 2010 2009
 
 
Change in benefit obligation
                
Benefit obligation beginning of year $552,309  $521,698  $35,301  $38,417 
Service cost  11,588   12,334   200   214 
Interest cost  31,671   32,612   2,013   2,377 
Amendments  (281)  3      (1,303)
Settlements  (104)         
Actuarial (gain) loss  24,677   13,309   (647)  (1,517)
Translation (gain) loss  (4,208)  2,469       
Benefits paid  (28,844)  (30,116)  (3,152)  (2,887)
 
 
Benefit obligation end of year $586,808  $552,309  $33,715  $35,301 
 
 
Change in plan assets
                
Fair value of plan assets beginning of year $329,188  $265,112  $  $ 
Actual gain (loss) return on plan assets  35,495   44,521       
Company contributions  49,840   49,044   3,152   2,887 
Settlements  (104)         
Translation gain (loss)  (92)  627       
Benefits paid  (28,844)  (30,116)  (3,152)  (2,887)
 
 
Fair value of plan assets end of year $385,483  $329,188  $  $ 
 
 
Funded status
                
Plan assets less than benefit obligation $(201,325) $(223,121) $(33,715) $(35,301)
 
 
Net amount recognized $(201,325) $(223,121) $(33,715) $(35,301)
 
 
Of the $201.3 million underfunding at December 31, 2010, $123.6 million relates to foreign pension plans and our supplemental executive retirementother post-retirement plans which are not commonly funded.
as of and for the years ended December 31, 2012 and 2011:

   U.S. pension plans  Non-U.S. pension plans  Other post-retirement
plans
 
In thousands  2012  2011  2012  2011  2012  2011 

Change in benefit obligations

       
Benefit obligation beginning of year  $572,068  $502,657  $89,503  $84,151  $35,081  $33,715 
Service cost   12,867   10,270   3,295   2,196   219   180 
Interest cost   28,208   28,647   7,545   4,121   1,860   1,889 
Amendments   372                
Benefit obligations assumed in Merger   10,821      338,532      16,815    
Settlements            (257      
Actuarial loss   128,817   58,672   26,647   4,079   8,159   2,494 
Translation (gain) loss         1,502   (2,477      
Benefits paid   (358,854  (28,178  (6,175  (2,310  (2,837  (3,197

 

 
Benefit obligation end of year   394,299   572,068   460,849   89,503   59,297   35,081 

 

 
Change in plan assets       
Fair value of plan assets beginning of year   408,837   374,934   10,934   10,549       
Actual return on plan assets   43,944   27,628   6,413   343       
Plan assets acquired in Merger   7,482      227,253          
Company contributions   224,786   34,453   10,391   2,644   2,837   3,197 
Settlements            (257      
Translation gain (loss)         166   (35      
Benefits paid   (358,854  (28,178  (6,175  (2,310  (2,837  (3,197

 

 
Fair value of plan assets end of year   326,195   408,837   248,982   10,934       

 

 
Funded status       
Benefit obligations in excess of the fair value of plan assets  $  (68,104 $  (163,231 $  (211,867 $  (78,569 $  (59,297 $  (35,081

 

 

Amounts recognizedrecorded in the Consolidated Balance Sheets arewere as follows:

                 
  Pension benefits  Post-retirement 
In thousands 2010  2009  2010  2009 
  
 
Current liabilities $(5,343) $(5,437) $(3,390) $(3,511)
Noncurrent liabilities  (195,982)  (217,684)  (30,325)  (31,790)
 
 
Net amount recognized $(201,325) $(223,121) $(33,715) $(35,301)
 
 

   U.S. pension plans  Non-U.S. pension plans  Other post-
retirement plans
 
In thousands  2012  2011  2012  2011  2012  2011 
Current liabilities  $  (3,490 $(3,303 $(4,925 $(2,442 $(4,520 $(3,307
Non-current liabilities   (64,614  (159,928  (206,942  (76,127  (54,777  (31,774

 

 
Benefit obligations in excess of the fair value of plan assets  $  (68,104 $  (163,231 $  (211,867 $  (78,569 $  (59,297 $  (35,081

 

 

The accumulated benefit obligation for all defined benefit plans was $557.7$804.2 million and $534.9$625.9 million at December 31, 20102012 and 2009,2011, respectively.


61

92


Pentair Inc.Ltd. and Subsidiaries

Notes to consolidated financial statements — (continued)

Information for pension plans with an accumulated benefit obligation or projected benefit obligation in excess of plan assets as of December 31 are as follows:

         
In thousands 2010  2009 
  
 
Pension plans with an accumulated benefit obligation in excess of plan assets:        
Fair value of plan assets $385,483  $329,188 
Accumulated benefit obligation  557,712   534,936 
Pension plans with a projected benefit obligation in excess of plan assets:        
Fair value of plan assets $385,483  $329,188 
Accumulated benefit obligation  586,808   552,309 

   Projected benefit obligation
exceeds the fair value

of plan assets
   Accumulated benefit  obligation
exceeds the fair value of
plan assets
 
In thousands  2012   2011   2012   2011 

U.S. pension plans

        

Projected benefit obligation

  $158,063   $572,068   $87,147   $572,068 

Fair value of plan assets

   85,332    408,837    15,499    408,837 

Accumulated benefit obligation

           77,165    539,453 

Non-U.S. pension plans

        

Projected benefit obligation

  $436,652   $89,503   $431,271   $89,503 

Fair value of plan assets

   222,387    10,934    217,174    10,934 

Accumulated benefit obligation

           420,044    86,431 

Components of net periodic benefit cost arefor our pension plans for the years ended December 31 were as follows:

                         
  Pension benefits  Post-retirement 
In thousands 2010  2009  2008  2010  2009  2008 
  
 
Service cost $11,588  $12,334  $14,104  $200  $214  $263 
Interest cost  31,671   32,612   32,383   2,013   2,377   2,534 
Expected return on plan assets  (30,910)  (30,286)  (29,762)         
Amortization of transition                        
obligation  13   25   25          
Amortization of prior year                        
service cost (benefit)  7   23   179   (27)  (41)  (136)
Recognized net actuarial (gain) loss  1,674   82   121   (3,295)  (3,326)  (3,301)
Settlement gain  (8)  (9)            
 
 
Net periodic benefit cost $14,035  $14,781  $17,050  $(1,109) $(776) $(640)
 
 
Amounts

   
   U. S. pension plans  Non-U.S. pension plans 
In thousands  2012  2011  2010  2012  2011  2010 
Service cost  $12,867  $10,270  $9,743  $3,295  $2,196  $1,845 
Interest cost   28,208   28,647   27,518   7,545   4,121   4,153 
Expected return on plan assets   (29,400  (27,952  (24,679  (3,928  (461  (433
Amortization of transition obligation                  13 
Amortization of prior year service cost (benefit)   17   17   17   (15  (17  (10
Actuarial loss   114,272   58,995   6,990   24,162   4,196   7,305 

 

 
Net periodic benefit cost  $125,964  $69,977  $19,589  $31,059  $10,035  $12,873 

 

 

Components of net periodic benefit cost for our other post-retirement plans for the years ended December 31 were as follows:

   Other post-retirement plans 
In thousands  2012  2011  2010 

Service cost

  $219  $180  $200 

Interest cost

   1,860   1,889   2,013 

Amortization of prior year service benefit

   (24  (27  (27

Actuarial (gain) loss

   8,159   2,494   (647

 

 

Net periodic benefit cost

  $10,214  $4,536  $1,539 

 

 

The components of comprehensive income (loss) for our pension and other post-retirement plans for the years ended December 31, 2012, 2011 and 2010 are not material.

93


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

The amounts in AOCI at December 31, 2012 and 2011 that have not yet been recognized inas components of net periodic benefit cost and includedthe amounts in accumulated other comprehensive income (pre-tax):

                 
  Pension benefits  Post-retirement 
In thousands 2010  2009  2010  2009 
  
 
Net transition obligation $  $11  $  $ 
Prior service cost (benefit)  (162)  118   (878)  (905)
Net actuarial (gain) loss  138,558   120,022   (20,781)  (23,429)
 
 
Accumulated other comprehensive (income) loss $138,396  $120,151  $(21,659) $(24,334)
 
 
The estimated amount that willAOCI expected to be amortized from accumulated other comprehensive income intorecognized as components of net periodic benefit cost in 2011 is as follows:
         
  Pension
  Post-
 
In thousands benefits  retirement 
  
 
Prior service cost (benefit) $1  $(27)
Net actuarial (gain) loss  3,898   (3,306)
 
 
Total estimated 2011 amortization $3,899  $(3,333)
 
 


62

2013 for our pension and other post-retirement plans are not material.


Assumptions

Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
Additional Information
Change in accumulated other comprehensive income, net of tax:
         
In thousands 2010  2009 
  
 
Beginning of the year $(58,448) $(58,704)
Additional prior service cost incurred during the year  171   794 
Actuarial gains (losses) incurred during the year  (11,861)  1,500 
Translation gains (losses) incurred during the year  (75)  (63)
Amortization during the year:        
Transition obligation  8   15 
Unrecognized prior service cost (benefit)  (12)  (11)
Actuarial gains  (993)  (1,979)
 
 
End of the year $(71,210) $(58,448)
 
 
Assumptions
Weighted-average assumptions used to determine domestic benefit obligations atas of December 31 arewere as follows:
                         
  Pension benefits Post-retirement
Percentages 2010 2009 2008 2010 2009 2008
 
 
Discount rate  5.90   6.00   6.50   5.90   6.00   6.50 
Rate of compensation increase  4.00   4.00   4.00             
Weighted-average

  U.S. pension plans Non-U.S. pension plans Other post-retirement
plans
Percentages 2012 2011 2010 2012 2011 2010 2012 2011 2010

Discount rate

 3.67 5.05 5.90 3.85 4.82 5.10 3.40 5.05 5.90

Rate of compensation increase

 4.37 4.00 4.00 3.02 2.98 3.00   
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 were as follows:
  U.S. pension plans Non-U.S. pension
plans
 Other post-
retirement plans
Percentages 2012 2011 2010 2012 2011 2010 2012 2011 2010

Discount rate

 5.05 5.90 6.00 4.82 5.13 5.50 5.05 5.90 6.00

Expected long-term return on plan assets

 7.50 8.00 8.50 4.09 4.50 4.50   

Rate of compensation increase

 4.21 4.00 4.00 2.98 2.98 3.00   

Uncertainty in the securities markets and U.S. economy could result in investment returns less than those assumed. Should the securities markets decline or medical and prescription drug costs increase at a rate greater than assumed, we would expect increasing annual combined net pension and other post-retirement costs for the next several years. Should actual experience differ from actuarial assumptions, used to determine the domesticprojected pension benefit obligation and net periodicpension cost and accumulated other post-retirement benefit obligation and other post-retirement benefit cost for years ending December 31 are as follows:

                         
  Pension benefits Post-retirement
Percentages 2010 2009 2008 2010 2009 2008
 
 
Discount rate  6.00   6.50   6.50   6.00   6.50   6.50 
Expected long-term return on plan assets  8.50   8.50   8.50             
Rate of compensation increase  4.00   4.00   5.00             
would be affected in future years.

Discount raterates

The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to payments from a stream of bonds rated AA or higher bonds available in the marketplace, adjusted to eliminate the effects of call provisions. This produced a discount rate for our U.S. pension plans of 3.67%, 5.05% and 5.90% in 2012, 2011 and 2010, 6.00% in 2009 and 6.50% in 2008.respectively. The discount rates on our foreignnon-U.S. pension plans ranged from 0.50 % to 4.50%, 0.75% to 5.00% and 0.75% to 5.40% in 2012, 2011 and 2010, 2.00% to 6.00% in 2009 and 2.00% to 6.25% in 2008.respectively. There are no other known or anticipated changes in our discount rate assumptionassumptions that will impact our pension expense in 2011.

2013.

Expected raterates of return

Our expected raterates of return on U.S. pension plan assets waswere 7.5%, 8.0% and 8.5% for 2012, 2011 and 2010, 2009 and 2008.respectively. The expected rate of return is designed to be a long-term assumption that may be subject to considerableyear-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical returns, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader longer-term market indices. In 2010, theU.S. pension plan assets yielded returns of 10.8%, 7.8% and 11.2% in 2012, 2011 and returns2010, respectively. As a result of 19.5% in 2009our de-risking

94


Pentair Ltd. and a loss of 28.8% in 2008. OurSubsidiaries

Notes to consolidated financial statements

strategy to reduce U.S. pension plan, our expected rate of return on plan assets assumption is 8.0%3.75% for 2011.


63


Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
We base our determination of pension expense or income on a market-related valuation of assets which reducesyear-to-year volatility. This market-related valuation recognizes investment gains or losses over afive-year period from the year2013. Any difference in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assetsrate and the actual return based on the market-related value of assets. Since the market-related value of assets recognizes gains or losses over afive-year-period, the future value of assetsreturns will be impacted as previously deferred gainsincluded with the actuarial gain or losses are recorded.
Unrecognized pension and post-retirement losses
As of our December 31, 2010 measurement date,loss recorded in the fourth quarter when our plans have $117.8 million of cumulative unrecognized losses. To the extent the unrecognized losses, when adjusted for the difference between market and market related values of assets, exceeds 10% of the projected benefit obligation, it will be amortized into expense each year on a straight-line basis over the remaining expected future-working lifetime of active participants (currently approximating 12 years).
are remeasured.

Healthcare cost trend rates

The assumed health carehealthcare cost trend rates atfor other post-retirement plans as of December 31 arewere as follows:

         
  2010 2009
 
 
Health care cost trend rate assumed for next year  7.50%  7.70%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)  4.50%  4.50%
Year that the rate reaches the ultimate trend rate  2027   2027 

    2012  2011 

Healthcare cost trend rate assumed for following year

   7.4   7.5 

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)

   4.5   4.5 

Year the cost trend rate reaches the ultimate trend rate

   2027    2027   

The assumed health carehealthcare cost trend rates can have a significant effect on the amounts reported for health carehealthcare plans. A one-percentage-point change in the assumed health carehealthcare cost trend rates would have the following effects:

         
  1-Percentage-Point
 1-Percentage-Point
In thousands Increase Decrease
 
 
Effect on total annual service and interest cost $51  $(45)
Effect on post-retirement benefit obligation  750   (667)
effects as of and for the year ended December 31, 2012:

   One Percentage Point 
In thousands  Increase   Decrease 

Increase (decrease) in annual service and interest cost

  $59   $(52

Increase (decrease) in other post-retirement benefit obligations

   2,748    (2,390

Plan AssetsPension plans assets

Objective

The primary objective of our investment strategy is to meet the pension obligation to our employees at a reasonable cost to us. This is primarily accomplished through growth of capital and safety of the funds invested. The

During 2012, we adopted an investment strategy for our U.S. pension plans with a primary objective of preserving the funded status of the U.S. plans. This is achieved through investments in fixed interest instruments with interest rate sensitivity characteristics closely reflecting the interest rate sensitivity of our benefit obligations. Shifting of allocations away from equities to liability hedging fixed income investments is currently in progress. As equity investments are redeemed, proceeds are reinvested in fixed income instruments. After we have completed the transition, the U.S. pension plans will therefore be actively investedhave in excess of 90 percent allocation to achieve real growth of capital over inflation through appreciation of securities held and through the accumulation and reinvestment of dividend and interest income.

fixed income investments.

Asset allocation

Our actual overall asset allocation for theour U.S. and non-U.S. pension plans as compared to our investment policy goals isas of December 31 was as follows:

                 
  Plan Assets Target Allocation
Asset Class 2010 2009 2010 2009
 
 
Equity Securities  47%  53%  50%  60%
Fixed Income Investments  37%  22%  40%  30%
Alternative Investments  12%  14%  10%  10%
Cash  4%  11%  0%  0%

   U.S. pension plans 
   Actual   Target 
Percentages  2012   2011   2012   2011 

Equity securities

   32%     41%         50%  

Fixed income

   56%     50%     100%     40%  

Alternative

   7%     6%         10%  

Cash

   5%     3%          

95


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

   Non-U.S. pension plans 
   Actual  Target 
Percentages  2012  2011  2012  2011 

Equity securities

   51  66  55  75

Fixed income

   42  20  45  25

Alternative

   3         

Cash

   4  14      

While the target allocations do not have a percentage allocated to cash, the plan assets will always include some cash due to cash flow requirements. In 2009, as a result

Fair value measurement

The fair values of our year end decision to make a $25 million


64


Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
accelerated pension plan contribution, a higher percentage of assets were heldand their respective levels in cash equivalents. This contribution was directed to be invested in fixed income investments and was invested shortly after year end. After taking this into consideration, our fixed income investment percentage would have been 30% and our cash percentage would have been 3%.
As part of our strategy to reduce U.S. pension plan funded status volatility, we plan to increase the allocation to long duration fixed income securities in future years as the funded status of our U.S. pension plans improve. In 2010 we increased our fixed income investments from 30% to 40% and from 10% to 30% in 2009.
Fair Value Measurement
The following table presents our plan assets using the fair value hierarchy as of December 31, 20102012 and December 31, 2009.
                     
     Quoted Prices in
     Significant
    
     Active Markets for
  Significant Other
  Unobservable
    
     Identical Assets
  Observable Inputs
  Inputs
    
In thousands    (Level 1)  (Level 2)  (Level 3)  Total 
  
 
Cash Equivalents     $  $13,803  $  $13,803 
Fixed Income:                    
Corporate and Non U.S. Government         42,544   284   42,828 
U.S. Treasuries         60,710      60,710 
Mortgage-Backed Securities         30,052   1,368   31,420 
Other         6,818   125   6,943 
Global Equity Securities:                    
Small Cap Equity      7,982         7,982 
Mid Cap Equity      8,811         8,811 
Large Cap Equity         45,700      45,700 
International Equity      23,964   21,895      45,859 
Long/short Equity         56,639      56,639 
Pentair Company Stock      18,255         18,255 
Other Investments         33,542   12,991   46,533 
 
 
Total as of December 31, 2010     $59,012  $311,703  $14,768  $385,483 
 
 
2011 were as follows:


65

   December 31, 2012 
In thousands  Level 1   Level 2   Level 3   Total 

Cash and cash equivalents

  $6,238   $21,235   $   $27,473 

Fixed income:

        

Corporate and non U.S. government

       164,255        164,255 

U.S. treasuries

       69,375        69,375 

Mortgage-backed securities

       23,382        23,382 

Other

       28,111        28,111 

Global equity securities:

        

Mid cap equity

       6,726        6,726 

Large cap equity

       88,985        88,985 

International equity

       89,768        89,768 

Long/short equity

       47,597        47,597 

Other investments

       11,215    18,290    29,505 

 

 

Total fair value of plan assets

  $6,238   $550,649   $18,290   $575,177 

 

 
   December 31, 2011 
In thousands  Level 1   Level 2   Level 3   Total 

Cash equivalents

  $   $13,084   $   $13,084 

Fixed income:

        

Corporate and non U.S. government

       76,046    150    76,196 

U.S. treasuries

       82,989        82,989 

Mortgage-backed securities

       40,286    629    40,915 

Other

       7,958    219    8,177 

Global equity securities:

        

Small cap equity

   7,094            7,094 

Mid cap equity

   7,528    4        7,532 

Large cap equity

       47,398        47,398 

International equity

   19,942    19,652        39,594 

Long/short equity

       56,575        56,575 

Pentair Ltd. common shares

   16,645            16,645 

Other investments

       4,563    19,009    23,572 

 

 

Total fair value of plan assets

  $51,209   $348,555   $20,007   $419,771 

 

 

96


Pentair Inc.Ltd. and Subsidiaries

Notes to consolidated financial statements — (continued)

                     
     Quoted Prices in
     Significant
    
     Active Markets for
  Significant Other
  Unobservable
    
     Identical Assets
  Observable Inputs
  Inputs
    
In thousands    (Level 1)  (Level 2)  (Level 3)  Total 
  
 
Cash Equivalents     $  $35,575  $  $35,575 
Fixed Income:                    
Corporate and Non U.S. Government         16,682   438   17,120 
U.S. Treasuries         28,675      28,675 
Mortgage-Backed Securities         21,636   2,109   23,745 
Other         3,952   192   4,144 
Global Equity Securities:                    
Small Cap Equity      7,227         7,227 
Mid Cap Equity      8,389         8,389 
Large Cap Equity         39,569      39,569 
International Equity      21,665   19,955      41,620 
Long/short Equity         54,082      54,082 
Pentair Company Stock      21,742         21,742 
Other Investments         32,873   14,427   47,300 
 
 
Total as of December 31, 2009     $59,023  $252,999  $17,166  $329,188 
 
 

Valuation methodologies used for investments measured at fair value arewere as follows:

Cash Equivalents:and cash equivalents:  ConsistCash consists of cash held in bank accounts and was classified as Level 1. Cash equivalents consist of investments in commingled funds valued based on observable market data. Such investments arewere classified as Level 2.

 

Fixed Income:income: Investments in corporate bonds, government securities, mortgages and asset backed securities arewere value based upon quoted market prices for identical or similar securities and other observable market data. Investments in commingled funds arewere generally valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices or by a pricing service. Such investments arewere classified as Level 2. Certain investments in commingled funds arewere valued based on unobservable inputs due to liquidation restrictions. These investments arewere classified as Level 3.

 

Global Equity Securities:equity securities: Equity securities and Pentairour common stock areshares were valued based on the closing market price in an active market and arewere classified as Level 1. Investments in commingled funds arewere valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices or by a pricing service. Such investments arewere classified as Level 2.

 

Other Investments:investments: Other investments include investments in commingled funds with diversified investment strategies. Investments in commingled funds that arewere valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices or by a pricing service arewere classified as Level 2. Investments in commingled funds that arewere valued based on unobservable inputs due to liquidation restrictions arewere classified as Level 3.

66


Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
The following tables present a reconciliation of Level 3 assets held during the years ended December 31, 20102012 and December 31, 2009, respectively.
                     
     Net realized
  Net purchases,
  Net
    
  Balance
  and unrealized
  issuances and
  transfers into
  Balance
 
  January 1, 2010  gains (losses)  settlements  (out of) level 3  December 31, 2010 
    
 
Other Investments $14,427  $678  $(2,113) $  $12,992 
Fixed Income Investments  2,739   334   (1,296)     1,777 
   
   
  $17,166  $1,012  $(3,409) $  $14,769 
   
   
                     
     Net realized
  Net purchases,
  Net
    
  Balance
  and unrealized
  issuances and
  transfers into
  Balance
 
  January 1, 2009  gains (losses)  settlements  (out of) level 3  December 31, 2009 
    
 
Other Investments $32,083  $(774) $  $(16,882) $14,427 
Fixed Income Investments  25,640   1,027      (23,928)  2,739 
   
   
  $57,723  $253  $  $(40,810) $17,166 
   
   
2011, respectively:

In thousands January 1,
2012
  Net realized
and unrealized
gains (losses)
  Net issuances
and
settlements
  Net transfers
into (out of)
level 3
  December 31,
2012
 

Other investments

 $19,009  $1,051  $(1,770 $  $18,290 

Fixed income investments

  998   22   (1,020      

 

 

Total

 $20,007  $1,073  $(2,790 $  $18,290 

 

 
In thousands January 1,
2011
  Net realized
and unrealized
gains (losses)
  Net issuances
and
settlements
  Net transfers
into (out of)
level 3
  December 31,
2011
 

Other investments

 $12,991  $251  $5,767  $  $19,009 

Fixed income investments

  1,777   87   (866     998 

 

 

Total

 $14,768  $338  $4,901  $  $20,007 

 

 

Cash Flowsflows

Contributions

Pension contributions totaled $49.8$235.2 million and $49.0$37.1 million in 20102012 and 2009,2011, respectively. Our 20112013 required pension contributions are expected to be in the range of $25approximately $30 million to $30$35 million. The decrease in the 2011 expected contribution is primarily a result of the December 2010 accelerated contribution of $25 million to our defined benefit pension plan. The 20112013 expected contributions will equal or exceed our minimum funding requirements.

97


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

Estimated Future Benefit Paymentsfuture benefit payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the plans for the years ended December 31 as follows:

         
In millions Pension benefits Post-retirement
 
 
2011 $34.2  $3.4 
2012  31.8   3.3 
2013  32.8   3.2 
2014  33.7   3.1 
2015  35.8   3.0 
2016-2020  212.7   13.4 

In millions  U.S. pension
plans
   

Non-U.S.

pension plans

   Other post-
retirement plans
 

2013

  $7.5   $16.7   $4.5 

2014

   8.6    17.8    4.5 

2015

   10.2    18.5    4.4 

2016

   12.9    17.5    4.3 

2017

   14.8    18.3    4.2 

2018-2022

   103.3    105.7    19.6 

Savings plan

We have a 401(k) plan (“the 401(k) plan”) with an employee stockshare ownership (“ESOP”) bonus component, which covers certain union and nearly all non-union U.S. employees who meet certain age requirements. Under the 401(k) plan, eligible U.S. employees may voluntarily contribute a percentage of their eligible compensation. We match contributions made by employees who meet certain eligibility and service requirements. Our matching contribution is 100% of eligible employee contributions for the first 1% of eligible compensation and 50% of the next 5% of eligible compensation. In June 2009, we temporarily suspended the company match of the plan and ESOP. We reinstated the company match in 2010.

In addition to the matching contribution, all employees who meet certain service requirements receive a discretionary ESOP contribution equal to 1.5% of annual eligible compensation.


67


Additionally, we have a 401(k) plan acquired as part of the Merger (“the Flow 401(k) plan”) which covers certain union and all non-union U.S. employees who meet certain age requirements. Under the Flow 401(k) plan, eligible U.S. employees may voluntarily contribute a percentage of their eligible compensation. We match contributions made by employees who meet certain eligibility and service requirements. Our matching contribution is 500% of eligible employee contributions for the first 1% of eligible compensation. Additional company match is based on years of service, as follows: an additional 1% match at 10 – 19 years of service, an additional 2% match at 20 – 24 years, an additional 3% match at 25 – 29 years and an additional 4% match at 30+ years. Participants are 100% vested in the employer match after 3 years of service.

Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
Our combined expense for the 401(k) plan, the Flow 401(k) plan and the ESOP was approximately$19.7 million, $15.8 million and $11.0 million $6.7 millionin 2012, 2011 and $17.0 million, in 2010, 2009 and 2008, respectively.

Other retirement compensation

Total other accrued retirement compensation, primarily related to deferred compensation and supplemental retirement plans, was $13.9$52.6 million and $17.3$12.6 million in 2010as of December 31, 2012 and 2009,2011, respectively, and is included in the pensionPension and other retirementpost-retirement compensation line of ourand benefits in the Consolidated Balance Sheet.

Sheets.

Multi-employer defined benefit plans

We participate in a number of multi-employer defined benefit plans on behalf of certain employees. Pension expense related to multi-employer plans was not material in 2012, 2011 and 2010.

98


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

15.
13. Shareholders’ Equity

Authorized shares

We

Our authorized share capital consists of 213.0 million common shares with a par value of 0.50 Swiss francs per share. The board of directors is authorized to increase the total share capital until September 14, 2014 by a maximum amount of 106.5 million shares. In addition, our share capital may issue up to 250be increased by:

a maximum of 81.5 million shares upon the exercise of common stock. Our Boardconversion, option, exchange, warrant or similar rights for the subscription of Directors may designate upshares granted to 15 millionthird parties or shareholders in connection with bonds, notes, options, warrants or other securities issued by us in national or international capital markets or pursuant to our existing and future contractual obligations (“Rights Bearing Obligations”); and/or

a maximum of those shares as preferred stock. On December 10, 2004, the Board of Directors designated a new series of preferred stock with authorization to issue up to 2.525.0 million shares Series A Junior Participating Preferred Stock, par value $0.10 per share. No shares of preferred stock were issued or outstanding as of December 31, 2010 or December 31, 2009.

Purchase rights
On December 10, 2004, our Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock. The dividend was payable upon the closeexercise of business on January 28, 2005rights related to the shareholders of record upon the close of business on January 28, 2005. Each Right entitles the registered holderRights-Bearing Obligations granted to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock, at a price of $240.00 per one one-hundredth of a share, subject to adjustment. However, the Rights are not exercisable unless certain change in control events occur, such as a person acquiring or obtaining the right to acquire beneficial ownership of 15% or more of our outstanding common stock. The description and termsmembers of the Rights are set forth in a Rights Agreement, dated December 10, 2004. The Rights will expire on January 28, 2015, unless the Rights are earlier redeemed or exchanged in accordance with the termsboard of directors, members of the Rights Agreement. On January 28, 2005, the common share purchase rights issued pursuant to the Rights Agreement dated July 31, 1995 were redeemed in their entiretyexecutive management, employees, contractors, consultants or other persons providing services for an amount equal to $0.0025 per right.our benefit.

Share repurchases

In December 2007, the Board of Directors authorized the repurchase of shares of our common stock during 2008 up to a maximum dollar limit of $50 million. As of December 31, 2008, we had purchased 1,549,893 shares for $50.0 million pursuant to this authorization. This authorization expired on December 31, 2008. There were no share repurchase authorizations for 2009. On July 27, 2010, the Board of Directors authorized the repurchase of shares of our common stock up to a maximum dollar limit of $25 million. As of December 31, 20102011, we had repurchased 734,603389,300 shares for $25$12.5 million pursuant to this plan.authorization, which expired in December 2011. In December 2010,2011, the Board of Directors authorized the repurchase of shares of our common stock during 2011shares up to a maximum dollar limit of $25 million. No purchases were made under this authorization in 2012, and the authorization expired on September 28, 2012 in connection with the closing of the Merger.

Prior to the closing of the Merger, our board of directors, and Tyco as our sole shareholder, authorized the repurchase of our common shares with a maximum aggregate value of $400.0 million following the closing of the Merger. This authorization does not have an expiration date. On October 1, 2012, our board of directors authorized the repurchase of our common shares with a maximum aggregate value of $800.0 million. This authorization expires on December 31, 2015 and is in addition to the $400.0 million share repurchase authorization. As of December 31, 2012, we had repurchased 7,291,078 of our common shares for $334.2 million pursuant to these authorizations.

Dividends payable

Prior to the consummation of the Merger, our board of directors proposed, and Tyco as our then sole shareholder, authorized us to pay quarterly cash dividends through the first annual general meeting of our shareholders in 2013. The authorization expiresprovided that dividends of $0.68 per share will be made out of ourCapital contribution reserve equity position in our statutory accounts to our shareholders in quarterly installments of $0.22 for the fourth quarter of 2012 and $0.23 for each of the first and second quarters of 2013. The deduction from ourCapital contribution reserve in our statutory accounts, which is required to be made in Swiss francs, was determined based on the aggregate amount of the dividend and was calculated based on the U.S. dollar/Swiss franc exchange rate in effect on September 14, 2012 and subsequently adjusted for the actual shares outstanding and exchange rate in effect at the time of our fourth quarter dividend payment and again at December 2011.

31, 2012. As a result, the balance of dividends payable included inOther current liabilitieson our Consolidated Balance Sheets was $95.0 million at December 31, 2012.


68On February 26, 2013, our board of directors recommended that our shareholders approve at our 2013 annual meeting of shareholders a proposal to pay quarterly cash dividends through the second quarter of 2014. The proposal provides that dividends of $1.00 per share will be made out of ourCapital contribution reserve equity position in our statutory accounts to our shareholders in quarterly installments of $0.25 for each of the third and fourth quarters of 2013 and first and second quarters of 2014.

99


Pentair Inc.Ltd. and Subsidiaries

Notes to consolidated financial statements — (continued)

16.
14. StockShare Plans

Share-based compensation expense

Total stock-basedshare-based compensation expense infor 2012, 2011 and 2010 2009was $35.8 million, $19.5 million and 2008 was $21.5 million, $17.3respectively. The expense for 2012 included $13.5 million of expense due to the Merger triggering change of control provisions of Pentair, Inc. share-based compensation plans resulting in immediate vesting of certain outstanding awards.

Share Incentive Plans

Prior to the Merger, our board of directors approved, and $20.6 million, respectively.

Omnibus stock incentive plans
In May 2008,Tyco as our sole shareholder approved, the 2008 OmnibusPentair Ltd. 2012 Stock and Incentive Plan as Amended(the “2012 Plan”). The 2012 Plan became effective on September 28, 2012 and Restated (the “2008 Plan” or the “Plan”) was approved by shareholders. The 2008 Plan authorizes the issuance of additional shares9,000,000 of our common stock and extends through February 2018.shares. The 2008shares may be issued as new shares or from shares held in treasury. Our practice is to settle equity-based awards from shares held in treasury. The 2012 Plan terminates in September 2022. The 2012 Plan allows for the granting of:
• nonqualified stock options;
• incentive stock options;
• restricted shares;
• restricted stock units;
• dividend equivalent units;
• stock appreciation rights;
• performance shares;
• performance units; and
• other stock based awards.
to our officers, directors, employees and consultants of nonqualified stock options, incentive stock options, stock appreciation rights, performance shares, performance units, restricted shares, restricted stock units, deferred stock rights, annual incentive awards, dividend equivalent units and other equity-based awards.

The 2012 Plan is administered by our Compensation Committeecompensation committee (the “Committee”), which is made up of independent members of our Boardboard of Directors.directors. Employees eligible to receive awards under the 2012 Plan are managerial, administrative or other key employees who are in a position to make a material contribution to the continued profitable growth and long-term success of Pentair.our company. The Committee has the authority to select the recipients of awards, determine the type and size of awards, establish certain terms and conditions of award grants and take certain other actions as permitted under the 2012 Plan. The 2012 Plan restrictsprohibits the Committee’s authority to repriceCommittee from re-pricing awards or to cancelcancelling and reissuereissuing awards at lower prices.

In connection with the Distribution, we issued a total of $108.9 million like-kind equity-based awards under the 2012 Plan to former Tyco equity-based award holders in replacement of a portion of their Tyco equity-based awards. Such awards do not deplete the 9,000,000 of our common shares reserved for issuance under the 2012 Plan. Of the total issued, $37.8 million in like-kind equity-based awards were issued to former holders who are active employees of our company, and $71.1 million like-kind equity-based awards were issued to former holders who are not employees of our company. As no change of control provisions related to Tyco equity-based awards were triggered by the Distribution or the Merger, the original vesting and exercise term provisions remain in effect for all such replacement equity-based awards.

The 2008 Omnibus Stock Incentive Plan approved byas Amended and Restated (the “2008 Plan”) terminated upon the shareholders in 2004 (the “2004 Plan”) expired upon approvalcompletion of the 2008 Plan by shareholders.Merger. Prior grants of restricted stock units and stock options made under the 20042008 Plan and earlier stock incentive plans remained outstanding at completion of the Merger were converted into equity-based awards with respect to our common shares and were assumed by us on the terms in effect at the time of grant.

grant and are outstanding under the 2012 Plan.

Non-qualified and incentive stock options

Under the 2012 Plan, we may grant stock options to any eligible employee with an exercise price equal to the market value of the shares on the dates the options were granted. Options generally vest over a three-year period commencing on the grant date and expire ten years after the grant date. Prior to 2006, option grants typically had a reload feature when shares are retired to pay the exercise price, allowing individuals to receive additional options upon exercise equal to the number of shares retired. Option awards granted after 2005 under the 2004 Plan and under the 2008 Plan do not have a reload feature attached to the option. Annual expense for the fair value of stock options was $11.6 million 2012, $8.9 million in 2011 and $10.7 million in 2010, $7.1 million in 2009 and $10.5 million in 2008.

2010.

Restricted shares and restricted stock units

Under the 2012 Plan, eligible employees aremay be awarded restricted shares or restricted stock units (awards) of our common stock. Share awardsRestricted shares and restricted stock units generally vest from two to five years after issuance, subject

100


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

to continuous employment and certain other conditions. Restricted share awardsshares and restricted stock units are valued at market value on the date of grant and are expensed over the vesting period. Annual expense for the fair value of restricted shares and restricted stock units was $24.2 million in 2012, $10.6 million in 2011 and $10.8 million in 2010, $10.2 million in 2009 and $10.1 million in 2008.


69

2010.


Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
Stock appreciation rights, performance shares and performance units

Under the 2012 Plan, the Committee is permitted to issue these awards; however, there have been no issuances of these awards.

Outside directors nonqualified stock option plan
Nonqualified stock options were granted to outside directors under the Outside Directors Nonqualified Stock Option Plan (the “Directors Plan”) with an exercise price equal to the market value of the shares on the option grant dates. Optionsawards which are generally vestearned over a three-year vesting period commencing on the grant date and expire ten years after the grant date. The Directors Plan expired in January 2008. Prior grants remain outstanding on the terms in effect at the time of grant.
Non-employee Directors are also eligibletied to receive awards under the 2008 Plan. Director awards are made by our Governance Committee, which is made up of independent members of our Board of Directors.
specific financial metrics.

Stock options

The following table summarizes stock option activity under all plans:

                 
        Weighted Average
    
     Weighted Average
  Remaining
  Aggregate
 
Options Outstanding Shares  Exercise Price  Contractual Life  Intrinsic Value 
  
 
Balance January 1, 2010
  7,962,519  $30.70         
Granted  1,478,660   33.54         
Exercised  (678,627)  23.32         
Forfeited  (112,528)  28.38         
Expired  (682,608)  37.08         
 
 
Balance December 31, 2010
  7,967,416  $31.34   6.0  $46,776,147 
 
 
Options exercisable as of December 31, 2010
  5,313,225  $31.80   4.6  $30,599,073 
Options expected to vest as of December 31, 2010
  2,608,273  $30.42   8.3  $16,177,074 
Shares available for grant as of December 31, 2010
  5,773,901             
plans for the year ended December 31, 2012:

Options outstanding Shares  Weighted-
average exercise
price
  Weighted-
average
remaining
contractual life
   Aggregate
intrinsic value
 

Beginning balance

  7,837,696  $32.50    

Grants assumed in Merger

  2,791,678   28.04    

Granted

  834,918   36.05    

Exercised

  (2,740,778  29.60    

Forfeited

  (83,994  32.64    

Expired

  (234,774  38.88    

 

 

Ending balance

  8,404,746  $32.13   5.3   $128,370,687 

 

 

Options exercisable as of December 31, 2012

  6,931,146  $31.99   4.7   $105,758,171 
Options expected to vest as of December 31, 2012  1,422,898  $32.92   8.1   $21,763,738 

Fair value of options granted

The weighted average grant date fair value of options granted under Pentair plans in 2012, 2011 and 2010 was estimated to be $9.63, $9.98 and $9.47 per share, respectively. The weighted-average grant date fair value of options grantedassumed in 2010, 2009 and 2008the Merger was estimated to be $9.47, $5.09 and $7.41 per share, respectively.$11.76. The total intrinsic value of options that were exercised during 2012, 2011 and 2010 2009 and 2008 was $7.4$41.6 million, $5.2$10.9 million and $6.3$7.4 million, respectively. At December 31, 2010,2012, the total unrecognized compensation cost related to stock options was $6.5$4.0 million. This cost is expected to be recognized over a weighted average period of 1.5 years.

We estimated the fair valuesvalue of each stock option award on the date of grant using thea Black-Scholes option-pricingoption pricing model, modified for dividends and using the following weighted average assumptions:

             
  2010 2009 2008
 
 
Risk-free interest rate  2.45%  1.77%  2.78%
Expected dividend yield  2.30%  3.20%  2.12%
Expected stock price volatility  35.00%  32.50%  27.00%
Expected lives  5.5 yrs   5.2 yrs   4.8 yrs 

   December 31 
   2012   2011   2010 
    Assumed in
Merger
   Granted by
Pentair plans
   Granted by
Pentair plans
   Granted by
Pentair plans
 

Risk-free interest rate

   0.02 - 0.68%     0.96%     1.51%     2.45%  

Expected dividend yield

   2.12%     2.48%     2.32%     2.30%  

Expected share price volatility

   33.00%     36.50%     35.50%     35.00%  

Expected term (years)

   0.1 - 5.1     5.7    5.5    5.5 

101


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

These estimates require us to make assumptions based on historical results, observance of trends in our share price, changes in option exercise behavior, future expectations and other relevant factors. If other assumptions had been used, share-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.

Cash received from option exercises for the years ended December 31, 2012, 2011 and 2010 2009 and 2008 was $14.9$91.6 million, $8.2$14.7 million and $5.6$14.9 million, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $2.8$12.2 million, $1.9$4.1 million and $2.0$2.8 million for the years ended December 31, 2012, 2011 and 2010, 2009respectively.

Restricted shares and 2008, respectively.


70

restricted stock units


Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
Restricted Share Awards
The following table summarizes restricted share awardand restricted stock activity under all plans:
         
     Weighted Average
 
     Grant Date
 
Restricted Shares Outstanding Shares  Fair Value 
  
 
Balance January 1, 2010
  1,278,054  $28.81 
Granted  476,840   33.66 
Vested  (376,219)  33.39 
Forfeited  (69,272)  27.49 
 
 
Balance December 31, 2010
  1,309,403  $29.33 
 
 
plans for the year ended December 31, 2012:

Restricted shares and restricted stock units outstanding  Shares  Weighted average
grant date fair
value
 

Beginning balance

   1,250,082  $30.49 

Grants assumed in Merger

   978,756   38.85 

Granted

   863,310   41.56 

Vested

   (1,420,511  33.17 

Forfeited

   (78,359  37.22 

 

 

Ending balance

   1,593,278  $38.97 

 

 

As of December 31, 2010,2012, there was $17.1$31.6 million of unrecognized compensation cost related to restricted share compensation arrangements granted under the 20042012 Plan and the 2008 Plan.previous plans. That cost is expected to be recognized over a weighted-average period of 2.32.5 years. The total fair value of shares vested during the years ended December 31, 2012, 2011 and 2010, 2009 and 2008, was $12.7$58.0 million, $5.5$10.2 million and $7.7$12.7 million, respectively. The actual tax benefitbenefits realized for the tax deductions fromrelated to restricted share compensation arrangements totaled $3.4$18.8 million, $2.2$3.6 million and $3.0$3.4 million for the years ended December 31, 2012, 2011 and 2010, 2009 and 2008, respectively.

17.
15. Business SegmentsSegment Information

We classify our continuing operations into the following business segments based primarily on types of products offered and markets served:

Water & Fluid Solutions— The Water & Fluid Solutions segment designs, manufactures, markets and markets essentialservices innovative water management and fluid processing products and systems used in the movement, storage, treatmentsolutions. In select geographies, Water & Fluid Solutions offers a wide variety of pumps, valves and enjoyment of water.pipes for water transmission applications. The Flow Technologies, Filtration & Process, Aquatic Systems and Water segment products include water and wastewater pumps; filtration and purification components and systems; storage tanks and pressure vessels; and pool and spa equipment and accessories.& Environmental Systems Global Business Units (“GBUs”) comprise this segment.

 

Valves & Controls— The Valves & Controls segment designs, manufactures, markets and services valves, fittings, automation and controls and actuators and operates as a stand-alone GBU.

102


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

 

Technical ProductsSolutions The Technical Solutions segment designs, manufactures and markets standard, modifiedproducts that guard and custom enclosures that house and protect some of the world’s most sensitive electronics and electrical componentselectronic equipment, as well as heat management solutions designed to provide thermal protection to temperature sensitive fluid applications. Within Technical Solutions are the Equipment Protection and protect the people that use them. Applications served include industrial machinery, data communications, networking, telecommunications, test and measurement, automotive, medical, security, defense and general electronics. Products include metallic and composite enclosures, cabinets, cases, subracks, backplanes and associated thermal management systems.Thermal Management GBUs.

 

Other Other is primarily composed of unallocated corporate expenses, our captive insurance subsidiary, intermediate finance companies, merger-related costs and divested operations.

The accounting policies of our operatingreporting segments are the same as those described in the summary of significant accounting policies. We evaluate performance based on the sales and operating income of the segments and use a variety of ratios to measure performance. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented.


71


Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
Financial information by reportable business segment is included in the following summary:
                         
In thousands 2010  2009  2008  2010  2009  2008 
     
  Net sales to external customers  Operating income (loss) 
 
Water Group $2,041,281  $1,847,764  $2,206,142  $231,588  $163,745  $206,357 
Technical Products Group  989,492   844,704   1,145,834   151,533   100,355   169,315 
Other           (48,966)  (44,152)  (50,987)
   
   
Consolidated $3,030,773  $2,692,468  $3,351,976  $334,155  $219,948  $324,685 
   
   
                         
  Identifiable assets(1)  Depreciation 
 
Water Group $3,409,556  $3,205,774  $3,271,039  $37,449  $44,063  $39,237 
Technical Products Group  728,969   716,092   697,577   17,544   19,035   19,131 
Other(1)
  (164,992)  (10,532)  84,597   3,002   1,725   1,305 
   
   
Consolidated $3,973,533  $3,911,334  $4,053,213  $57,995  $64,823  $59,673 
   
   
                         
  Amortization  Capital expenditures 
 
Water Group $22,981  $34,919  $22,062  $39,631  $36,513  $32,916 
Technical Products Group  2,610   2,687   2,980   8,336   15,388   15,995 
Other  593   3,051   2,566   11,556   2,236   4,178 
   
   
Consolidated $26,184  $40,657  $27,608  $59,523  $54,137  $53,089 
   
   
The following table presents certain geographic information:
                         
In thousands 2010  2009  2008  2010  2009  2008 
     
  Net sales to external customers  Long-lived assets 
 
U.S.  $2,222,856  $1,964,138  $2,467,698  $196,440  $203,206  $219,013 
Europe  470,879   439,312   571,164   77,000   87,880   89,300 
Asia and other  337,038   289,018   313,114   55,995   42,602   35,568 
   
   
Consolidated $3,030,773  $2,692,468  $3,351,976  $329,435  $333,688  $343,881 
   
   

In thousands 2012  2011  2010  2012  2011  2010 
  Net sales to external customers  Operating income (loss) 

Water & Fluid Solutions

 $2,638,403  $2,369,804  $2,041,281  $168,043  $58,311  $231,588 

Valves & Controls

  546,707         (76,843      

Technical Solutions

  1,231,036   1,086,882   989,492   165,017   185,240   151,533 

Other

           (299,336  (143,348  (70,138

 

 

Consolidated

 $4,416,146  $3,456,686  $3,030,773  $(43,119 $100,203  $312,983 

 

 
  Identifiable assets(1)  Depreciation 

Water & Fluid Solutions

 $4,734,992  $3,792,188  $3,409,556  $45,736  $42,419  $37,449 

Valves & Controls

  4,283,521         15,119       

Technical Solutions

  2,128,375   651,693   728,969   18,950   17,826   17,544 

Other

  648,423   142,432   (164,992  8,030   5,990   3,002 

 

 

Consolidated

 $11,795,311  $4,586,313  $3,973,533  $87,835  $66,235  $57,995 

 

 
  Amortization  Capital expenditures 

Water & Fluid Solutions

 $38,159  $39,451  $22,981  $49,890  $49,241  $39,631 

Valves & Controls

  21,696         21,992       

Technical Solutions

  16,102   2,446   2,610   13,565   15,806   8,336 

Other

        593   9,085   8,301   11,556 

 

 

Consolidated

 $75,957  $41,897  $26,184  $94,532  $73,348  $59,523 

 

 

(1)All cash and cash equivalents are included in Other“Other.”

103


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

The following tables present certain geographic information:

In thousands  2012   2011   2010 
   Net sales to external customers 

U.S.

  $2,624,338   $2,336,845   $2,222,856 

Europe

   912,642    701,865    470,879 

Asia and other

   879,166    417,976    337,038 

 

 

Consolidated

  $4,416,146   $3,456,686   $3,030,773 

 

 
   Long-lived assets 

U.S.

  $389,463   $195,631   $196,440 

Europe

   403,156    140,290    77,000 

Australia

   170,714    461    772 

Asia and other

   261,155    51,143    55,223 

 

 

Consolidated

  $1,224,488   $387,525   $329,435 

 

 

Net sales are based on the location in which the sale originated. Long-lived assets represent property, plant and equipment, net of related depreciation.

We offer a broad array of products and systems to multiple markets and customers for which we do not have the information systems to track revenues by primary product category. However, our net sales by segment are representative of our sales by major product category.

We sell our products through various distribution channels including wholesale and retail distributors, original equipment manufacturers and home centers. In our Water segment, one customer accounted for approximately 10% of segment sales in 2010,& Fluid Solutions, no single customer accounted for more than 10% of segment sales in 20092012 and one customer accounted for just over 10% of segment sales in 2008.201l and 2010. In our Technical Products segment,Solutions and Valves & Controls, no single customer accounted for more than 10% of segment sales in 2010, 20092012, 2011 or 2008.


72

2010.


Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
18.
16.  Commitments and Contingencies

Operating lease commitments

Net rental expense under operating leases for the years ended December 31 was as follows:

             
In thousands 2010  2009  2008 
  
 
Gross rental expense $32,662  $32,799  $37,519 
Sublease rental income  (225)  (74)  (172)
 
 
Net rental expense $32,437  $32,725  $37,347 
 
 

In thousands  2012  2011  2010 

Gross rental expense

  $45,327  $39,808  $32,662 

Sublease rental income

   (499  (455  (225

 

 

Net rental expense

  $44,828  $39,353  $32,437 

 

 

Future minimum lease commitments under non-cancelable operating leases, principally related to facilities, machinery, equipment and vehicles and machinery and equipment areas of December 31, 2012 were as follows:

                             
In thousands 2011  2012  2013  2014  2015  Thereafter  Total 
  
 
Minimum lease payments $21,697  $17,673  $12,404  $9,421  $7,465  $11,865  $80,525 
Minimum sublease rentals  (609)  (152)  (154)�� (84)  (7)     (1,006)
 
 
Net future minimum lease commitments $21,088  $17,521  $12,250  $9,337  $7,458  $11,865  $79,519 
 
 

In thousands  2013  2014  2015  2016  2017  Thereafter   Total 

Minimum lease payments

  $52,566  $40,454  $28,883  $20,800  $16,409  $31,831   $190,943 

Minimum sublease rentals

   (260  (264  (98  (85  (87  -    (794

 

 

Net future minimum lease commitments

  $52,306  $40,190  $28,785  $20,715  $16,322  $31,831   $190,149 

 

 

104


EnvironmentalPentair Ltd. and Subsidiaries

We have been

Notes to consolidated financial statements

Asbestos Matters

Our subsidiaries and numerous other companies are named as defendants targets,in personal injury lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or PRPsdistribution of industrial products that either contained asbestos or were attached to or used with asbestos-containing components manufactured by third-parties. Each case typically names between dozens to hundreds of corporate defendants. While we have observed an increase in a smallthe number of environmentalclean-ups,these lawsuits over the past several years, including lawsuits by plaintiffs with mesothelioma-related claims, a large percentage of these suits have not presented viable legal claims and, as a result, have been dismissed by the courts. Our historical strategy has been to mount a vigorous defense aimed at having unsubstantiated suits dismissed, and, where appropriate, settling suits before trial. Although a large percentage of litigated suits have been dismissed, we cannot predict the extent to which we will be successful in resolving lawsuits in the future.

As of December 31, 2012, there were approximately 1,900 lawsuits pending against our subsidiaries. A lawsuit might include several claims, and we have approximately 2,300 claims outstanding as of December 31, 2012. This amount is not adjusted for claims that are not actively being prosecuted, identified incorrect defendants, or duplicated other actions, which would ultimately reflect our current estimate of the number of viable claims made against us, our affiliates, or former business unitsentities for which we assumed responsibility in connection with acquisitions or divestitures. In addition, the amount does not include certain claims pending against third parties for which we have generally been givende minimisstatus. To date, noneprovided an indemnification.

Periodically, we perform an analysis with the assistance of outside counsel and other experts to update our estimated asbestos-related assets and liabilities. Our estimate of the liability and corresponding insurance recovery for pending and future claims and defense costs is based on our historical claim experience and estimates of the number and resolution cost of potential future claims that may be filed. Our legal strategy for resolving claims also impacts these estimates.

Our estimate of asbestos-related insurance recoveries represents estimated amounts due to us for previously paid and settled claims have resulted inclean-up costs, fines, penalties, or damages in an amount materialand the probable reimbursements relating to our financial position or resultsestimated liability for pending and future claims. In determining the amount of operations. We have disposed ofinsurance recoverable, we consider a number of businessesfactors, including available insurance, allocation methodologies and the solvency and creditworthiness of insurers.

Our estimated liability for asbestos-related claims was $234.6 million and $0.6 million as of December 31, 2012 and 2011, respectively, and was recorded inOther non-current liabilities in the pastConsolidated Balance Sheets for pending and future claims and related defense costs. Our estimated receivable for insurance recoveries was $157.4 million at December 31, 2012, all of which was acquired in certain cases, suchthe Merger, and was recorded inOther non-current assets in the Consolidated Balance Sheets. We had no estimated receivable for insurance recoveries as of December 31, 2011.

The amounts recorded by us for asbestos-related liabilities and insurance-related assets are based on our strategies for resolving our asbestos claims and currently available information as well as estimates and assumptions. Key variables and assumptions include the dispositionnumber and type of new claims filed each year, the average cost of resolution of claims, the resolution of coverage issues with insurance carriers, the amounts of insurance and the related solvency risk with respect to our insurance carriers, and the indemnifications we have provided to third parties. Furthermore, predictions with respect to these variables are subject to greater uncertainty in the latter portion of the Cross Pointe Paper Corporation uncoated paper business in 1995,projection period. Other factors that may affect our liability and cash payments for asbestos-related matters include uncertainties surrounding the dispositionlitigation process from jurisdiction to jurisdiction and from case to case, reforms of the Federal Cartridge Company ammunition business in 1997, the disposition of Lincoln Industrial in 2001state or federal tort legislation and the dispositionapplicability of the Tools Groupinsurance policies among subsidiaries. As a result, actual liabilities or insurance recoveries could be significantly higher or lower than those recorded if assumptions used in 2004, weour calculations vary significantly from actual results.

105


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

Environmental Matters

We are involved in or have retained responsibility and potential liability for environmental obligations and legal proceedings related to our current business and, including pursuant to certain indemnification obligations, related to certain formerly owned businesses. We are responsible, or alleged to be responsible, for ongoing environmental obligations.investigation and/or remediation of sites in several countries. These sites are in various stages of investigation and/or remediation and at some of these sites our liability is considered de minimis. We received notification from the U.S. Environmental Protection Agency and from similar state and non-U.S. environmental agencies, that several sites formerly or currently owned and/or operated by us, and other properties or water supplies that may be or may have been impacted from those operations, contain disposed or recycled materials or waste and require environmental investigation and/or remediation. Those sites include instances where we have been identified as a potentially responsible party under U.S. federal, state and/or non-U.S. environmental laws and regulations. For several formerly owned businesses, we have also received claims for indemnification from purchasers of these businesses and have established what we believe to be adequatebusinesses.

Our accruals for potential liabilities arising out of retained responsibilities. We settled some of the claims in prior years; to date our recorded accruals have been adequate.

In addition, there are ongoing environmental issues at a limited number of sites, including one site acquired in the acquisition of Essef Corporation in 1999, which relates to operations no longer carried out at the sites. We have established what we believe to be adequate accruals for remediation costs at these sites. We do not believe that projected response costs will result in a material liability.
We may be named as a PRP at other sites in the future, for both divested and acquired businesses. When the outcome of the matter is probable and it is possible to provide reasonable estimates of our liability with respect to environmental sites, provisions have been made in accordance with GAAP. As of December 31, 2010 and 2009, our undiscounted reserves for such environmental liabilities were approximately $1.3 million and $2.3 million, respectively. We cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmentalclean-up costs and liabilities will not exceed the amount of our current reserves.
Litigation
We have been made parties to a number of actions filed or have been given notice of potential claims relating to the conduct of our business, including those pertaining to commercial disputes, product liability, environmental, safety and health, patent infringement and employment matters.


73


Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
We record liabilities for an estimated loss from a loss contingency where the outcome of the matter is probable and can be reasonably estimated. Factors that are considered when determining whether the conditions for accrual have been met include the (a) nature of the litigation, claim, or assessment, (b) progress of the case, including progress after the date of the financial statements but before the issuance date of the financial statements, (c) opinions of legal counsel and (d) management’s intended response to the litigation, claim, or assessment. Where the reasonable estimate of the probable loss is a range, we record the most likely estimate of the loss. When no amount within the range is a better estimate than any other amount, however, the minimum amount in the range is accrued. Gain contingencies are not recorded until realized.
While we believe that a material adverse impact on our consolidated financial position, results of operations, or cash flows from any such future charges is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future adverse ruling or unfavorable development could result in future charges that could have a material adverse impact. We do and will continue to periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our consolidated financial position, results of operations and cash flows for the proceedings and claims could change in the future.
Product liability claims
We are subject to various product liability lawsuits and personal injury claims. A substantial number of these lawsuits and claims are insured and accrued for by Penwald, our captive insurance subsidiary. Penwald records a liability for these claims based on actuarial projections of ultimate losses. For all other claims, accruals covering the claimsmatters are recorded on an undiscounteda site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing information. The accrualstechnologies. It can be difficult to estimate reliably the final costs of investigation and remediation due to various factors. In our opinion, the amounts accrued are adjusted periodicallyappropriate based on facts and circumstances as additionalcurrently known. Based upon our experience, current information becomes available. In 2004,regarding known contingencies and applicable laws, we disposedhave recorded reserves for these environmental matters of $35.9 million and $1.5 million as of December 31, 2012 and 2011, respectively. We do not anticipate these environmental conditions will have a material adverse effect on our financial position, results of operations or cash flows. However, unknown conditions, new details about existing conditions or changes in environmental requirements may give rise to environmental liabilities that will exceed the amount of our current reserves and could have a material adverse effect in the future.

Compliance Matters

Prior to the Merger, the Flow Control business was subject to investigations by the U.S. Department of Justice (“DOJ”) and the SEC related to allegations that improper payments were made by the Flow Control business and other Tyco subsidiaries and third-party intermediaries in recent years in violation of the Tools GroupForeign Corrupt Practices Act. Tyco reported to the DOJ and we retained responsibility for certain product claims. We have not experienced significant unfavorable trendsthe SEC the remedial measures that it had taken in eitherresponse to the severity or frequency of product liability lawsuits or personal injury claims.

Horizon Litigation
The Horizon litigation against our subsidiary Essef Corporationallegations and certain of its subsidiaries by Celebrity Cruise Lines, Inc. (“Celebrity”) was settled by payment of $35 million to Celebrity in August 2008, a portion of which was covered by insurance.Tyco’s own internal investigations. As a result of discussions with the DOJ and SEC aimed at resolving these matters, on September 24, 2012, Tyco entered into a settlement with the SEC and a non-prosecution agreement with the DOJ, pursuant to which the Flow Control business is for a three year period subject to yearly reporting to the DOJ concerning its continuing compliance efforts.

Other Matters

In addition to the matters described above, from time to time, we recordedare subject to disputes, administrative proceedings and other claims arising out of the normal conduct of our business. These matters generally relate to disputes arising out of the use or installation of our products, product liability litigation, personal injury claims, commercial and contract disputes and employment related matters. On the basis of information currently available to it, management does not believe that existing proceedings and claims will have a charge of $20.4 million in 2008 whichmaterial impact on our Consolidated Financial Statements. However, litigation is shown on the lineLegal settlementin the Consolidated Statements of Income.

unpredictable, and we could incur judgments or enter into settlements for current or future claims that could adversely affect our financial statements.

Warranties and guarantees

In connection with the disposition of our businesses or product lines, we may agree to indemnify purchasers for various potential liabilities relating to the sold business, such as pre-closing tax, product liability, warranty, environmental, or other obligations. The subject matter, amounts and duration of any such indemnification obligations vary for each type of liability indemnified and may vary widely from transaction to transaction.

106


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

Generally, the maximum obligation under such indemnifications is not explicitly stated and as a result, the overall amount of these obligations cannot be reasonably estimated. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial condition or results of operations.

We recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.

We provide service and warranty policies on our products. Liability under service and warranty policies is based upon a review of historical warranty and service claim experience. Adjustments are made to accruals as claim data and historical experience warrant.


74


Pentair, Inc. and Subsidiaries
Notes to consolidated financial statements — (continued)
The changes in the carrying amount of service and product warranties for the years ended December 31, 20102012 and 20092011 were as follows:
         
In thousands 2010  2009 
  
 
Balance at beginning of the year $24,288  $31,559 
Service and product warranty provision  56,553   55,232 
Payments  (50,729)  (62,672)
Acquired     23 
Translation  (62)  146 
 
 
Balance at end of the period $30,050  $24,288 
 
 

     Years ended December 31 
In thousands    2012  2011 

Beginning balance

    $29,355  $30,050 

Service and product warranty provision

     55,710   50,096 

Payments

     (53,328  (53,937

Acquired

     21,529   3,575 

Translation

     430   (429

 

 

Ending balance

    $53,696  $29,355 

 

 

Stand-by lettersLetters of creditCredit, Bank Guarantees and bondsBonds

In certain situations, Tyco guaranteed Flow Control’s performance to third parties or provided financial guarantees for financial commitments of Flow Control. In situations where Flow Control and Tyco were unable to obtain a release from these guarantees in connection with the spin-off, we will indemnify Tyco for any losses it suffers as a result of such guarantees.

In disposing of assets or businesses, we often provide representations, warranties and indemnities to cover various risks including unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not have the ability to reasonably estimate the potential liability due to the inchoate and unknown nature of these potential liabilities. However, we have no reason to believe that these uncertainties would have a material adverse effect on our financial position, results of operations or cash flows.

In the ordinary course of business, we are required to commit to bonds, letters of credit and bank guarantees that require payments to our customers for any non-performance. The outstanding face value of the bondsthese instruments fluctuates with the value of our projects in process and in our backlog. In addition, we issue financial stand-by letters of credit primarily to secure our performance to third parties under self-insurance programs.

As of December 31, 20102012 and December 31, 2009,2011, the outstanding value of these instrumentsbonds, letters of credit and bank guarantees totaled $116.5$493.2 million and $51.2$136.2 million, respectively.

107


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

19.
17. Selected Quarterly Financial Data (Unaudited)
The following table represents the 2010

2012 and 2011 quarterly financial information:

                     
  2010 
In thousands, except per-share data First  Second  Third  Fourth  Year 
  
 
Net sales $707,013  $796,167  $773,735  $753,858  $3,030,773 
Gross profit  213,702   248,168   236,542   232,228   930,640 
Operating income  63,601   100,126   90,823   79,605   334,155 
Income from continuing operations  36,029   61,612   55,729   49,577   202,947 
Gain (loss) on disposal of discontinued operations, net of tax  524   593   549   (2,292)  (626)
Net income from continuing operations attributable to Pentair, Inc.   34,797   60,488   54,501   48,668   198,454 
Earnings per common share attributable to Pentair, Inc.(1)
                    
Basic
                    
Continuing operations $0.35  $0.61  $0.55  $0.50  $2.02 
Discontinued operations  0.01   0.01   0.01   (0.02)  (0.01)
 
 
Basic earnings per common share $0.36  $0.62  $0.56  $0.48  $2.01 
 
 
Diluted
                    
Continuing operations $0.35  $0.61  $0.55  $0.49  $2.00 
Discontinued operations  0.01         (0.02)  (0.01)
 
 
Diluted earnings per common share $0.36  $0.61  $0.55  $0.47  $1.99 
 
 

   2012 
In thousands, except per-share data  First   Second   Third   Fourth  Year 

Net sales

  $858,177   $941,525   $865,512   $1,750,932  $4,416,146 

Gross profit

   280,719    312,128    278,077    398,668   1,269,592 
Operating income (loss)   86,474    119,314    55,199    (304,106  (43,119
Net income (loss) before noncontrolling interest   63,099    74,430    32,595    (274,736  (104,612
Net income (loss) attributable to Pentair Ltd.   61,759    72,775    31,363    (273,083  (107,186
Earnings (loss) per common share attributable to Pentair Ltd. (1)         
Basic  $0.63   $0.73   $0.31   $(1.31 $(0.84
Diluted   0.62    0.72    0.31    (1.31  (0.84
   2011 
In thousands, except per-share data  First   Second   Third   Fourth  Year 
Net sales  $790,273   $910,175   $890,546   $865,692  $3,456,686 
Gross profit   249,059    287,736    272,062    264,865   1,073,722 
Operating income (loss)   85,469    108,714    92,195    (186,175  100,203 
Net income (loss) before noncontrolling interest   51,602    67,705    51,610    (174,068  (3,151
Net income (loss) attributable to Pentair Ltd.   50,109    66,280    50,648    (174,487  (7,450
Earnings (loss) per common share attributable to Pentair Ltd. (1)         
Basic  $0.51   $0.67   $0.51   $(1.77 $(0.08

Diluted

   0.50    0.66    0.50    (1.77  (0.08

(1)Amounts may not total to annual earnings because each quarter and year are calculated separately based on basic and diluted weighted-average common shares outstanding during that period.


75Third quarter 2012 includes a decrease in operating income of $52.7 million due to costs and expenses related to the Merger.

Fourth quarter 2012 includes the results of the operations acquired in the Merger. Flow Control’s net sales and net loss from continuing operations for the period from the acquisition date to December 31, 2012 were $886.5 million and $117.0 million, respectively. Fourth quarter 2012 also includes decreases in operating income related to the changes in accounting for pension and post-retirement benefit plans of $146.3 million, inventory step-up and customer backlog related to the Merger of $179.6 million, loss on early extinguishment of debt of $75.4 million, a pre-tax non-cash impairment charge of $60.7 million related to trade name intangibles, restructuring costs of $55.3 million and acquisition costs and expenses of $12.0 million.

Fourth quarter 2011 includes decreases in operating income related to the changes in accounting for our pension and post-retirement benefit plans of $66.2 million and a pre-tax non-cash impairment charge of $200.5 million related to goodwill.

108


Pentair Inc.Ltd. and Subsidiaries

Notes to consolidated financial statements — (continued)

Our operating income (loss), net income (loss) before noncontrolling interest, net income (loss) attributable to Pentair Ltd., and earnings (loss) per share have all been revised for the retrospective application of our changes in accounting policy for recognizing the expense associated with our pension and other post-retirement benefit plans. See Note 3 for additional information. The following table representsimpact of these accounting policy changes revised our previously reported information by the 2009following:

Increase (reduction) to previously reported quarterly financial information:

                     
  2009 
In thousands, except per-share data First  Second  Third  Fourth  Year 
  
 
Net sales $633,840  $693,712  $662,665  $702,251  $2,692,468 
Gross profit  169,232   196,479   206,967   212,457   785,135 
Operating income  37,214   63,560   66,682   52,492   219,948 
Income from continuing operations  17,721   32,427   38,677   27,394   116,219 
Gain (loss) on disposal of discontinued operations, net of tax  10   (78)  (85)  134   (19)
Net income from continuing operations attributable to to Pentair, Inc.   17,255   32,006   37,033   29,218   115,512 
Earnings per common share attributable to Pentair, Inc.(1)
                    
Basic
                    
Continuing operations $0.18  $0.33  $0.38  $0.30  $1.19 
Discontinued operations               
 
 
Basic earnings per common share $0.18  $0.33  $0.38  $0.30  $1.19 
 
 
Diluted
                    
Continuing operations $0.18  $0.33  $0.38  $0.29  $1.17 
Discontinued operations               
 
 
Diluted earnings per common share $0.18  $0.33  $0.38  $0.29  $1.17 
 
 
information (or for the fourth quarter of 2012, what would have been reported absent the changes in accounting principle):

  2012 
In thousands, except per-share data First  Second  Third  Fourth  Year 
Operating income (loss) $1,522  $1,522  $1,522  $(146,304 $(141,738
Net income (loss) before noncontrolling interest  945   945   945   (89,296  (86,461
Net income (loss) attributable to Pentair Ltd.  945   945   945   (89,296  (86,461
Earnings (loss) per common share attributable to Pentair Ltd. (1)     
Basic $0.01  $0.01  $0.01  $(0.43 $(0.68
Diluted  0.01   0.01   0.01   (0.43  (0.68
  2011 
In thousands, except per-share data First  Second  Third  Fourth  Year 
Operating income (loss) $(708 $(708 $(708 $(66,190 $(68,314
Net income (loss) before noncontrolling interest  (432  (432  (432  (40,376  (41,672
Net income (loss) attributable to Pentair Ltd.  (432  (432  (432  (40,376  (41,672
Earnings (loss) per common share attributable to Pentair Ltd. (1)     

Basic

 $(0.01 $(0.01 $(0.01 $(0.41 $        (0.42

Diluted

  (0.01  (0.01  (0.01  (0.41  (0.42

(1)Amounts may not total to annual earnings because each quarter and year are calculated separately based on basic and diluted weighted-average common shares outstanding during that period.


76

20.Financial Statements of Parent Company Guarantor

Pentair Ltd. (the “Parent Company Guarantor”), fully and unconditionally, guarantees the 1.35% Senior Notes due 2015, 1.875% Senior Notes due 2017, 2.65% Senior Notes due 2019, 5.00% Senior Notes due 2021 and 3.15% Senior Notes due 2022 (collectively, the “Notes”) of Pentair Finance S.A. (the “Subsidiary Issuer”). The Subsidiary Issuer is a Luxembourg public limited liability company formed in January 2012 and 100 percent-owned subsidiary of the Parent Company Guarantor.

The following supplemental financial information sets forth the financial information of:

Parent Company Guarantor;

Subsidiary Issuer;

Non-guarantor Subsidiaries of Pentair Ltd. on a combined basis;

109


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

Consolidating entries and eliminations representing adjustments to:

a.eliminate intercompany transactions between or among the Parent Company Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries;
b.eliminate the investments in subsidiaries; and
c.record consolidating entries.

Pentair Ltd. and subsidiaries on a consolidated basis.

Each entity in the consolidating financial information follows the same accounting policies as described in Note 2.

The following present the Company’s Condensed Consolidating Statement of Operations and Comprehensive Income (Loss), Condensed Consolidating Balance Sheet and Condensed Consolidating Statement of Cash Flows as of and for the year ended December 31, 2012. Since the Parent Company Guarantor and the Subsidiary Issuer were acquired in the Merger, there was no guarantee of the Notes in effect in prior periods. The historical consolidated financial statements of Pentair Ltd. prior to the Merger include all non-guarantor subsidiaries. Consequently, no consolidating financial information for the years ended December 31, 2011 and 2010 is presented.

110


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

Pentair Ltd. and Subsidiaries

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

Year ended December 31, 2012

In thousands  Parent
Company
Guarantor
  Subsidiary
Issuer
  Non-guarantor
Subsidiaries
  Eliminations  Pentair Ltd.
and
Subsidiaries
Consolidated
 
Net sales  $  $  $4,416,146  $  $4,416,146 
Cost of goods sold         3,146,554      3,146,554 

 

 
Gross profit         1,269,592      1,269,592 
Selling, general and administrative   5,017   (3,792  1,157,211      1,158,436 
Research and development         93,557      93,557 
Impairment of trade names and goodwill         60,718      60,718 

 

 
Operating (loss) income   (5,017  3,792   (41,894     (43,119
Loss (earnings) from investment in subsidiaries   101,400   102,344      (203,744   

Other (income) expense:

      
Loss on early extinguishment of debt         75,367      75,367 
Equity income of unconsolidated subsidiaries         (2,156     (2,156
Net interest (income) expense   81   971   66,583      67,635 

 

 
Income (loss) from continuing operations before income taxes and noncontrolling interest   (106,498  (99,523  (181,688  203,744   (183,965
Provision (benefit) for income taxes   688   1,101   (81,142     (79,353

 

 
Net income (loss) before noncontrolling interest   (107,186  (100,624  (100,546  203,744   (104,612
Noncontrolling interest         2,574      2,574 

 

 
Net income (loss) attributable to Pentair Ltd.  $(107,186 $(100,624 $(103,120 $203,744  $(107,186

 

 
Comprehensive income (loss), net of tax      
Net income (loss) before noncontrolling interest  $(107,186 $(100,624 $(100,546 $203,744  $(104,612
Changes in cumulative translation adjustment   34,416   34,416   35,830   68,832    35,830 
Amortization of pension and other post-retirement prior service cost   (253  (253  (253  506   (253
Changes in market value of derivative financial instruments   (3,630  (3,630  (3,630  7,260   (3,630

 

 
Total comprehensive income (loss)   (76,653  (70,091  (68,599  142,678   (72,665
Less: Comprehensive income (loss) attributable to noncontrolling interest         3,988      3,988 

 

 
Comprehensive income (loss) attributable to Pentair Ltd.  $(76,653 $(70,091 $(72,587 $142,678  $(76,653

 

 

111


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

Pentair Ltd. and Subsidiaries

Condensed Consolidating Balance Sheet

December 31, 2012

In thousands  Parent
Company
Guarantor
   Subsidiary
Issuer
   Non-guarantor
Subsidiaries
   Eliminations  Pentair Ltd.
and
Subsidiaries
Consolidated
 
Assets  

Current assets

         

Cash and cash equivalents

  $   $30   $261,311   $  $261,341 
Accounts and notes receivable, net   20,197    1,458,341    1,348,698    (1,534,588  1,292,648 

Inventories

           1,380,271       1,380,271 

Other current assets

   1,425        324,683       326,108 

 

 

Total current assets

   21,622    1,458,371    3,314,963    (1,534,588  3,260,368 

Property, plant and equipment, net

           1,224,488       1,224,488 

Other assets

         

Investments in subsidiaries

   6,496,081    7,471,843        (13,967,924   

Goodwill

           4,894,512       4,894,512 

Intangibles, net

           1,909,656       1,909,656 

Other non-current assets

   13,300    8,988    497,299    (13,300  506,287 

 

 

Total other assets

   6,509,381    7,480,831    7,301,467    (13,981,224  7,310,455 

 

 

Total assets

  $6,531,003   $8,939,202   $11,840,918   $(15,515,812 $    11,795,311 

 

 
Liabilities and Equity  

Current liabilities

         
Current maturities of long-term debt and short-term borrowings  $   $   $3,096   $  $3,096 

Accounts payable

   54,263    1,787    589,793    (76,247  569,596 
Employee compensation and benefits           295,067       295,067 

Other current liabilities

   96,580    11,297    562,285       670,162 

 

 

Total current liabilities

   150,843    13,084    1,450,241    (76,247  1,537,921 

Other liabilities

         

Long-term debt

       2,297,710    1,614,909    (1,458,341  2,454,278 
Pension and other post-retirement compensation and benefits           378,066       378,066 

Deferred tax liabilities

           488,102       488,102 

Other non-current liabilities

   13,300        453,587    (13,300  453,587 

 

 

Total liabilities

   164,143    2,310,794    4,384,905    (1,547,888  5,311,954 

Equity

         
Shareholders’ equity attributable to Pentair Ltd. and subsidiaries   6,366,860    6,628,408    7,339,516    (13,967,924  6,366,860 

Noncontrolling interest

           116,497       116,497 

 

 

Total equity

   6,366,860    6,628,408    7,456,013    (13,967,924  6,483,357 

 

 

Total liabilities and equity

  $  6,531,003   $  8,939,202   $11,840,918   $  (15,515,812 $11,795,311 

 

 

112


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

Pentair Ltd. and Subsidiaries

Condensed Consolidating Statement of Cash Flows

Year ended December 31, 2012

In thousands Parent
Company
Guarantor
  Subsidiary
Issuer
  Non-guarantor
Subsidiaries
  Eliminations  Pentair Ltd.
and
Subsidiaries
Consolidated
 

Operating activities

  

    

Net cash provided by (used for) operating activities

 $(108,944 $(88,253 $61,413  $203,744  $67,960 

Investing activities

     

Capital expenditures

        (94,532     (94,532
Proceeds from sale of property and equipment        5,508      5,508 

Acquisitions, net of cash acquired

     300,061   170,398      470,459 

Other

        (5,858     (5,858

 

 

Net cash provided by (used for) investing activities

     300,061   75,516      375,577 

Financing activities

     

Net short-term borrowings

        (3,700     (3,700

Proceeds from long-term debt

     1,397,710   138,436      1,536,146 

Repayment of long-term debt

        (1,305,339     (1,305,339

Debt issuance costs

     (8,722  (982     (9,704

Debt extinguishment costs

        (74,752     (74,752
Net change in advances to subsidiaries  156,977   (1,600,766  1,647,533   (203,744   
Excess tax benefits from share-based compensation        4,976      4,976 
Shares issued to employees, net of shares withheld        68,177      68,177 

Repurchases of common shares

        (334,159     (334,159

Dividends paid

  (48,033     (64,364     (112,397
Distributions to noncontrolling interest        (1,554     (1,554

 

 

Net cash provided by (used for) financing activities

  108,944   (211,778  74,272   (203,744  (232,306
Effect of exchange rate changes on cash and cash equivalents        33      33 

 

 
Change in cash and cash equivalents     30   211,234      211,264 
Cash and cash equivalents, beginning of year        50,077      50,077 

 

 
Cash and cash equivalents, end of year $  $30  $261,311  $  $261,341 

 

 

113


Pentair Ltd. and Subsidiaries

Notes to consolidated financial statements

21.Disclosures Required by Swiss Law

We are subject to statutory reporting requirements in Switzerland. The following disclosures are presented in accordance with, and are based on definitions contained in, the Swiss Code of Obligations.

Personnel expenses

Total personnel expenses were $1,233.7 million and $941.4 million in 2012 and 2011, respectively.

Fire insurance value

The fire insurance values of property, plant, and equipment was $4,684.1 million at December 31, 2012.

Risk assessment

Our board of directors is responsible for assessing our major risks and overseeing that appropriate risk management and control procedures are in place. The audit committee of the board meets to review and discuss, as determined to be appropriate, our major financial and accounting risk exposures and related policies and practices with management, the internal auditors and the independent registered public accountants to assess and control such exposures and assist the board in fulfilling its oversight responsibilities regarding our policies and guidelines with respect to risk assessment and risk management. Our risk assessment process was in place during fiscal 2012 and 2011 and followed by the board of directors.

114


ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.  CONTROLSCONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the year ended December 31, 2010,2012, pursuant toRule 13a-15(b) of the Securities Exchange Act of 1934 (“the Exchange Act”). Based upon their evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the year ended December 31, 20102012 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.

Management’s Annual Report on Internal Control Over Financial Reporting

The report of management required under this ITEM 9A is contained in ITEM 8 of this Annual Report onForm 10-K under the caption “Management’s Report on Internal Control Over Financial Reporting.”

Our report includes a scope exception for the acquired Flow Control business because it is a significant acquisition for which our management would otherwise have had only three months to evaluate and implement internal controls over financial reporting.

Attestation Report of Independent Registered Public Accounting Firm

The attestation report required under this ITEM 9A is contained in ITEM 8 of this Annual Report onForm 10-K under the caption “Report of Independent Registered Public Accounting Firm.”

Changes in Internal Control over Financial Reporting

On September 28, 2012, we completed the Merger. As part of our ongoing integration activities after the Merger, we are continuing to incorporate our controls and procedures into the Flow Control business and to augment our company-wide controls to reflect the risks inherent in an acquisition of this magnitude and complexity. There was no other change in our internal control over financial reporting that occurred during the quarter ended December 31, 20102012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.  OTHEROTHER INFORMATION

None.


77

115


PART III

ITEM
ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required under this item with respect to directors is contained in our Proxy Statement for our 20112013 annual general meeting of shareholders under the captions “Corporate Governance Matters”,Matters,” “Proposal 1 ElectionRe-election of Certain Directors”Three Directors with Terms Expiring at the 2016 Annual General Meeting of Shareholders” and “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference.

Information required under this item with respect to executive officers is contained in Part I of thisForm 10-K under the caption “Executive Officers of the Registrant.”

Our Board of Directors has adopted Pentair’s Code of Business Conduct and Ethics and designated it as the code of ethics for the Company’s Chief Executive Officer and senior financial officers. The Code of Business Conduct and Ethics also applies to all employees and directors in accordance with New York Stock Exchange Listing Standards. We have posted a copy of Pentair’s Code of Business Conduct and Ethics on our website atwww.pentair.com/code.htmlhttp://pentair.com/about-us/our-approach/code-of-conduct.html. We intend to satisfy the disclosure requirements under Item 5.05 ofForm 8-K regarding amendments to or waivers from, Pentair’s Code of Business Conduct and Ethics by posting such information on our website atwww.pentair.com/code.htmlhttp://pentair.com/about-us/our-approach/code-of-conduct.html.

We are not including the information contained on our website as part of, or incorporating it by reference into, this report.

ITEM
ITEM 11.  EXECUTIVE COMPENSATION

Information required under this item is contained in our Proxy Statement for our 20112013 annual general meeting of shareholders under the captions “Corporate Governance Matters — Committees of the Board — Compensation Committee,” “Corporate Governance Matters — Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation” and “Director Compensation” and is incorporated herein by reference.

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information required under this item with respect to security ownership is contained in our Proxy Statement for our 20112013 annual general meeting of shareholders under the captionscaption “Security Ownership” and is incorporated herein by reference.

116


The following table summarizes, as of December 31, 2010,2012, information about compensation plans under which our equity securities are authorized for issuance:

             
  Number of
       
  Securities to be
     Number of Securities
 
  Issued Upon
  Weighted-average
  Remaining Available for
 
  Exercise of
  Exercise Price
  Future Issuance Under
 
  Outstanding
  of Outstanding
  Equity Compensation Plans
 
  Options, Warrants
  Options, Warrants
  (Excluding Securities
 
  and Rights
  and Rights
  Reflected in Column (a))
 
Plan category (a)  (b)  (c) 
  
 
Equity compensation plans approved by security holders:            
2008 Omnibus Stock Incentive Plan  2,654,797  $29.00   5,773,901(1)
2004 Omnibus Stock Incentive Plan  4,804,131  $32.46   (2)
Outside Directors Non-qualified Stock Option Plan  508,488  $33.01   (2)
 
 
Total  7,967,416  $31.34   5,773,901 
 
 

Plan category

Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights

(a)

Weighted-average
exercise price of
outstanding options,
warrants and rights

(b)

Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))

(c)

Equity compensation plans approved by security holders:

2012 Stock and Incentive Plan (1)

3,916,474 (1)$ 34.22 (2)8,490,872 (3)

2008 Omnibus Stock Incentive Plan (2)

7,232,714 (4) 32.50 (2)— (5)

2004 Omnibus Stock Incentive Plan (2)

2,758,387  34.53 — (5)
Outside Directors Non-qualified Stock Option Plan (2)282,259  35.43 — (5)

Total14,189,834 $ 33.43 (2)8,490,872 

(1)Consists of 2,403,609 shares subject to stock options and 922,302 shares subject to restricted stock units that were assumed in connection with the Merger and 3,151 shares subject to other stock options and 587,412 shares subject to other restricted stock units.

(2)Represents the weighted average exercise price of outstanding stock options and does not take into account outstanding restricted stock units.

(3)Represents securities remaining available for issuance under the 2012 Stock and Incentive Plan.

(4)Consists of 3,322,651 shares subject to stock options and 3,910,063 shares subject to restricted stock units.

(5)The 2008 Omnibus Plan.
(2)Stock Incentive Plan was terminated in connection with the Merger. The 2004 Omnibus Plan and the Directors Plan were terminated in 2008. Options previously granted remain outstanding under these plans and restricted stock units granted under the 2008 Omnibus Stock Incentive Plan remain outstanding, but no further options or shares may be granted or issued under either plan.


78

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE


All share numbers and per share amounts described in this section have been adjusted to reflect our2-for-1 stock split in 2004.
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information required under this item is contained in our Proxy Statement for our 20112013 annual general meeting of shareholders under the captions “Corporate Governance Matters — Board Governance,” “Corporate Governance Matters — Independent Directors,” and “Corporate Governance Matters — Policies and Procedures Regarding Related Person Transactions” and is incorporated herein by reference.
ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

Information required under this item is contained in our Proxy Statement for our 20112013 annual general meeting of shareholders under the caption “Audit Committee Disclosure”“Proposal 4 Election of Auditors – Service Fees Paid to the Independent Registered Public Accounting Firm” and is incorporated herein by reference.


79

117


PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

ITEM 15.  

EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) List of documents filed as part of this report:
(1)  Financial Statements

(1)    FinancialStatements

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Endedyears ended December 31, 2010, 20092012, 2011 and 2008

2010

Consolidated Balance Sheets as of December 31, 20102012 and 2009

2011

Consolidated Statements of Cash Flows for the Years Endedyears ended December 31, 2010, 20092012, 2011 and 2008

2010

Consolidated Statements of Changes in Shareholders’ Equity for the Years Endedyears ended December 31, 2010, 20092012, 2011 and 2008

2010

Notes to Consolidated Financial Statements

(2)  Financial Statement Schedule

(2)    FinancialStatement Schedule

Schedule II — Valuation and Qualifying Accounts

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

 (3)    ExhibitsExhibits

The exhibits of this Annual Report onForm 10-K included herein are set forth on the attached Exhibit Index.


80

118


SIGNATURES

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 22, 2011.
26, 2013.

PENTAIR, INC.
PENTAIR LTD.
By

/s/  John L. Stauch

John L. Stauch

Executive Vice President and Chief

Financial Officer

John L. Stauch
Executive Vice President and Chief
Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on February 22, 2011.

26, 2013.

Signature

  

Title

Signature
Title

/s/  Randall J. Hogan


Randall J. Hogan

  Chairman and Chief Executive Officer
Randall J. Hogan  

/s/  John L. Stauch

John L. Stauch

  Executive Vice President and Chief Financial Officer
John L. Stauch  

/s/  Mark C. Borin

Mark C. Borin

  Corporate Controller and Chief Accounting Officer
Mark C. Borin  

*

Leslie Abi-Karam

  Director
Leslie Abi-Karam  

*

Director
Glynis A. Bryan  

*

Director
*

Jerry W. Burris
  

*

Director
Carol Anthony (John) Davidson  

*

Director
T. Michael Glenn  

*

Director
*

Charles A. Haggerty
  

*

Director
*

David H. Y. Ho
  

*

Director
*

David A. Jones
  

*

Director
*

Ronald L. Merriman
  

*

Director
*

William T. Monahan
  Director

*By 

/s/  Angela D. Lageson


Angela D. Lageson
Attorney-in-fact
 Attorney-in-fact


81

119


Schedule II — Valuation and Qualifying Accounts

Pentair IncLtd. and subsidiariesSubsidiaries

                     
    Additions
      
  Balance
 Charged to
   Other
 Balance
  Beginning
 Costs and
   Changes
 End
in thousands in Period Expenses Deductions Add (deduct) of Period
 
 
Allowances for doubtful accounts
                    
Year ended December 31, 2010 $14,154  $4,300  $1,152(1) $(183)(2) $17,119 
Year ended December 31, 2009 $8,925  $6,832  $2,449(1) $846(2) $14,154 
Year ended December 31, 2008 $8,073  $3,044  $1,629(1) $(563)(2) $8,925 

In thousands  Beginning
balance
   Additions
charged to costs
and expenses
   Deductions (1)   Other
changes (2)
   Ending
balance
 

Allowances for doubtful accounts

  

Year ended December 31, 2012

   $ 16,000     $ 1,615     $ 4,040     $    420     $ 13,995  

Year ended December 31, 2011

   $ 17,119     $ 4,447     $ 4,724     $ (842)     $ 16,000  

Year ended December 31, 2010

   $ 14,154     $ 4,300     $ 1,152     $ (183)     $ 17,119  

(1)Uncollectible accounts written off, net of expenserecoveries
 
(2)Result of acquisitions and foreign currency effects


82

120


EXHIBIT INDEX

Exhibit Index
     
Exhibit
  
Number
 
Exhibit
 
 3.1 Third Restated Articles of Incorporation as amended through May 3, 2007 (Incorporated by reference to Exhibit 3.1 contained in Pentair’s Quarterly Report onForm 10-Q for the quarterly period ended March 31, 2007).
 3.2 Fourth Amended and Superseding By-Laws as amended through May 3, 2007 (Incorporated by reference to Exhibit 3.2 contained in Pentair’s Quarterly Report onForm 10-Q for the quarterly period ended March 31, 2007).
 3.3 Statement of Resolution of the Board of Directors Establishing the Series and Fixing the Relative Rights and Preferences of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 3.1 contained in Pentair’s Current Report onForm 8-K dated December 10, 2004).
 4.1 Rights Agreement dated as of December 10, 2004 between Pentair, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 4.1 contained in Pentair’s Registration Statement onForm 8-A, dated as of December 31, 2004).
 4.2 Note Purchase Agreement dated as of July 25, 2003 for $50,000,000 4.93% Senior Notes, Series A, due July 25, 2013, $100,000,000 Floating Rate Senior Notes, Series B, due July 25, 2013 and $50,000,000 5.03% Senior Notes, Series C, due October 15, 2013 (Incorporated by reference to Exhibit 10.22 contained in Pentair’s Current Report onForm 8-K dated July 25, 2003).
 4.3 Third Amended and Restated Credit Agreement dated June 4, 2007 by and among Pentair, Inc. and a consortium of financial institutions including Bank of America, N.A., as Administrative Agent and Issuing Bank, JPMorgan Chase Bank, N.A., as Syndication Agent and The Bank of Tokyo-Mitsubishi UFJ, Ltd., U.S. Bank N.A. and Wells Fargo Bank, N.A., as Co-Documentation Agents (Incorporated by reference to Exhibit 4.1 contained in Pentair’s Current Report onForm 8-K dated June 4, 2007).
 4.4 First Amendment to Note Purchase agreement dated July 19, 2005 by and among Pentair, Inc. and the undersigned holders (Incorporated by reference to Exhibit 4 contained in Pentair’s Quarterly Report onForm 10-Q for the quarterly period ended July 2, 2005).
 4.5 Form of Note Purchase Agreement, dated May 17, 2007, by and among Pentair, Inc. and various institutional investors, for the sale of $300 million aggregate principal amount of Pentair’s 5.87% Senior Notes, Series D, due May 17, 2017 and $105 million aggregate principal amount of Pentair’s Floating Rate Senior Notes, Series E, due May 17, 2012 (Incorporated by reference to Exhibit 4.1 contained in Pentair’s Current Report onForm 8-K dated May 17, 2007).
 10.1 Pentair’s 1999 Supplemental Executive Retirement Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Current Report onForm 8-K filed September 21, 2000).*
 10.2 Pentair’s 1999 Supplemental Executive Retirement Plan as Amended and Restated effective January 1, 2009 (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 2008).*
 10.3 Pentair’s Restoration Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.3 contained in Pentair’s Current Report onForm 8-K filed September 21, 2000).*
 10.4 Pentair’s Restoration Plan as Amended and Restated effective January 1, 2009 (Incorporated by reference to Exhibit 10.4 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 2008).*
 10.5 Pentair, Inc. Non-Qualified Deferred Compensation Plan effective January 1, 1996 (Incorporated by reference to Exhibit 10.17 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 2005).*
 10.6 Trust Agreement for Pentair, Inc. Non-Qualified Deferred Compensation Plan between Pentair, Inc. and Fidelity Management Trust Company (Incorporated by reference to Exhibit 10.18 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 1995).*
 10.7 Amendment effective August 23, 2000 to Pentair’s Non-Qualified Deferred Compensation Plan effective January 1, 1996 (Incorporated by reference to Exhibit 10.8 contained in Pentair’s Current Report onForm 8-K filed September 21, 2000).*
 10.8 Pentair, Inc. Non-Qualified Deferred Compensation Plan effective January 1, 2009, as Amended and Restated Through July 29, 2009 (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Quarterly Report onForm 10-Q for the year ended September 26, 2009).*


83


     
Exhibit
  
Number
 
Exhibit
 
 10.9 Pentair, Inc. Executive Officer Performance Plan as Amended and Restated, effective January 1, 2009 (Incorporated by reference to Appendix B contained in Pentair’s Proxy Statement for its 2009 annual meeting of shareholders).*
 10.10 Form of Key Executive Employment and Severance Agreement for Randall J. Hogan (Incorporated by reference to Exhibit 10.10 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 2008).*
 10.11 Form of Key Executive Employment and Severance Agreement for Michael V. Schrock, Frederick S. Koury and Michael G. Meyer (Incorporated by reference to Exhibit 10.11 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 2008).*
 10.12 Form of Key Executive Employment and Severance Agreement for John L. Stauch, Mark C. Borin and Angela D. Lageson (Incorporated by reference to Exhibit 10.12 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 2008).*
 10.13 Pentair, Inc. International Stock Purchase and Bonus Plan, as Amended and Restated, effective May 1, 2004 (Incorporated by reference to Appendix I contained in Pentair’s Proxy Statement for its 2004 annual meeting of shareholders).*
 10.14 Pentair, Inc. Compensation Plan for Non-Employee Directors, as Amended and Restated Through December 16, 2009 (Incorporated by reference to Exhibit 10.14 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 2009).*
 10.15 Pentair, Inc. Omnibus Stock Incentive Plan, as Amended and Restated, effective December 12, 2007 (Incorporated by reference to Exhibit 10.14 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 2007).*
 10.16 Pentair, Inc. Employee Stock Purchase and Bonus Plan, as Amended and Restated, effective May 1, 2004 (Incorporated by reference to Appendix H contained in Pentair’s Proxy Statement for its 2004 annual meeting of shareholders).*
 10.17 Letter Agreement, dated January 6, 2005, between Pentair, Inc. and Michael Schrock (Incorporated by reference to Exhibit 10.1 contained in Pentair’s Current Report onForm 8-K dated January 6, 2005).*
 10.18 Confidentiality and Non-Competition Agreement, dated January 6, 2005, between Pentair, Inc. and Michael Schrock (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Current Report onForm 8-K dated January 6, 2005).*
 10.19 Pentair, Inc. 2008 Omnibus Stock Incentive Plan, as Amended and Restated (Incorporated by reference to Appendix A contained in Pentair’s Proxy Statement for its 2010 annual meeting of shareholders filed on March 18, 2010).*
 10.20 Form of award letter for executive officers under the Pentair, Inc. 2008 Omnibus Stock Incentive Plan, as amended (Incorporated by reference to Exhibit 10.1 contained in Pentair’s Current Report onForm 8-K filed January 8, 2009).*
 10.21 Form of award letter for directors under the Pentair, Inc. 2008 Omnibus Stock Incentive Plan, as amended (Incorporated by reference to Exhibit 10.21 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 2009).*
 10.22 Amended and Restated Pentair, Inc. Outside Directors Nonqualified Stock Option Plan as amended through February 27, 2002 (Incorporated by reference to Exhibit 10.7 contained in Pentair’s Annual Report onForm 10-K for the year ended December 31, 2001).*
 21  List of Pentair subsidiaries.
 23  Consent of Independent Registered Public Accounting Firm — Deloitte & Touche LLP.
 24  Power of Attorney.
 31.1 Certification of Chief Executive Officer required byRule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
 31.2 Certification of Chief Financial Officer required byRule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
 32.1 Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


84


     
Exhibit
  
Number
 
Exhibit
 
 32.2 Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 101  The following materials from Pentair, Inc.’s Annual Report onForm 10-K for the year ended December 31, 2010 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Income for the three years ended December 31, 2010, 2009 and 2008, (ii) the Consolidated Balance Sheets as of December 31, 2010 and December 31, 2009, (iii) the Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008, (iv) the Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2010, 2009 and 2008 and (v) the Notes to the Consolidated Financial Statements.
*2.1Merger Agreement, dated as of March 27, 2012, among Tyco International Ltd., Pentair Ltd. (formerly Tyco Flow Control International Ltd.), Panthro Acquisition Co., Panthro Merger Sub, Inc. and Pentair, Inc. (Incorporated by reference to Exhibit 2.1 in the Current Report on Form 8-K of Pentair, Inc. filed with the Commission on March 30, 2012 (File No. 000-04689)).
2.2Amendment No. 1, dated as of July 25, 2012, to the Merger Agreement, dated as of March 27, 2012, among Tyco International Ltd., Pentair Ltd. (formerly Tyco Flow Control International Ltd.), Panthro Acquisition Co., Panthro Merger Sub, Inc. and Pentair, Inc. (Incorporated by reference to Exhibit 2.1 in the Current Report on Form 8-K of Pentair, Inc. filed with the Commission on July 31, 2012 (File No. 000-04689)).
2.3Amended and Restated Separation and Distribution Agreement, dated September 27, 2012 among Tyco International Ltd., Pentair Ltd. and The ADT Corporation (Incorporated by reference to Exhibit 2.3 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on September 28, 2012 (File No. 001-11625)).
3.1Amended and Restated Articles of Association of Pentair Ltd. (Incorporated by reference to Exhibit 3.1 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on September 28, 2012 (File No. 001-11625)).
3.2Organizational Regulations of Pentair Ltd. (Incorporated by reference to Exhibit 3.2 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on September 28, 2012 (File No. 001-11625)).
4.1Indenture, dated as of September 24, 2012, among Pentair Finance S.A. (formerly Tyco Flow Control International Finance S.A.) (as Issuer), Pentair Ltd. (as Guarantor) and Wells Fargo Bank, National Association (as Trustee) (Incorporated by reference to Exhibit 4.1 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on September 28, 2012 (File No. 001-11625)).
4.2First Supplemental Indenture, dated as of September 24, 2012, among Pentair Finance S.A. (formerly Tyco Flow Control International Finance S.A.) (as Issuer), Pentair Ltd. (as Guarantor), Pentair, Inc. and Wells Fargo Bank, National Association (as Trustee) (Incorporated by reference to Exhibit 4.2 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on September 28, 2012 (File No. 001-11625)).
4.3Second Supplemental Indenture, dated as of September 24, 2012, among Pentair Finance S.A. (formerly Tyco Flow Control International Finance S.A.) (as Issuer), Pentair Ltd. (as Guarantor), Pentair, Inc. and Wells Fargo Bank, National Association (as Trustee) (Incorporated by reference to Exhibit 4.3 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on September 28, 2012 (File No. 001-11625)).
4.4Third Supplemental Indenture, dated as of November 26, 2012, among Pentair Finance S.A. (as Issuer), Pentair Ltd. (as Guarantor) and Wells Fargo Bank, National Association (as Trustee) (Incorporated by reference to Exhibit 4.1 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on November 28, 2012 (File No. 001-11625)).
4.5Fourth Supplemental Indenture, dated as of November 26, 2012, among Pentair Finance S.A. (as Issuer), Pentair Ltd. (as Guarantor) and Wells Fargo Bank, National Association (as Trustee) (Incorporated by reference to Exhibit 4.2 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on November 28, 2012 (File No. 001-11625)).

121


A
4.6Fifth Supplemental Indenture, dated as of December 18, 2012, among Pentair Finance S.A. (as Issuer), Pentair Ltd. (as Guarantor) and Wells Fargo Bank, National Association (as Trustee) (Incorporated by reference to Exhibit 4.1 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on December 18, 2012 (File No. 001-11625)).
4.7Exchange and Registration Rights Agreement, among Pentair Finance S.A. (formerly Tyco Flow Control International Finance S.A.), Pentair Ltd., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and U.S. Bancorp Investments, Inc. (as representatives of the several Purchasers), dated as of September 24, 2012 (Incorporated by reference to Exhibit 4.4 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on September 28, 2012 (File No. 001-11625)).
4.8Exchange and Registration Rights Agreement among Pentair Finance S.A., Pentair Ltd. and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and U.S. Bancorp Investments, Inc. (as representatives of the several Purchasers), dated as of November 26, 2012 (Incorporated by reference to Exhibit 4.3 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on November 28, 2012 (File No. 001-11625)).
4.9Exchange and Registration Rights Agreement among Pentair Finance S.A., Pentair Ltd. and the dealer managers named therein, dated as of December 18, 2012 (Incorporated by reference to Exhibit 4.3 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on December 18, 2012 (File No. 001-11625)).
4.10Senior Indenture, dated May 2, 2011 by and among Pentair, Inc. and Wells Fargo Bank, National Association (Incorporated by reference to Exhibit 4.5 to Pentair, Inc.’s Registration Statement on Form S-3 (Registration 333-173829)).
4.11First Supplemental Indenture, dated as of May 9, 2011, among Pentair, Inc., the guarantors named therein and Wells Fargo Bank, National Association (Incorporated by reference to Exhibit 4.2 in the Current Report on Form 8-K of Pentair, Inc. filed with the Commission on May 9, 2011 (File No. 000-04689)).
4.12Third Supplemental Indenture, dated October 1, 2012, among Pentair Ltd., Pentair, Inc. and Wells Fargo Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.1 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on October 1, 2012 (File No. 001-11625)).
4.13Fourth Supplemental Indenture, dated as of December 17, 2012, among Pentair, Inc. (as Issuer), Pentair Ltd. (as Guarantor) and Wells Fargo Bank, National Association (as Trustee) (Incorporated by reference to Exhibit 4.2 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on December 18, 2012 (File No. 001-11625)).
4.14Credit Agreement, dated as of September 21, 2012 among Pentair, Inc., certain of its affiliates and the lenders and agents party thereto (Incorporated by reference to Exhibit 4.1 in the Current Report on Form 8-K of Pentair, Inc. filed with the Commission on September 24, 2012 (File No. 000-04689)).
10.1Tax Sharing Agreement, dated September 28, 2012 by and among Pentair Ltd., Tyco International Ltd. and The ADT Corporation (Incorporated by reference to Exhibit 10.1 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on September 28, 2012 (File No. 001-11625)).
10.2Form of Indemnification Agreement for directors and executive officers of Pentair Ltd. (Incorporated by reference to Exhibit 10.1 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on October 1, 2012 (File No. 001-11625)).

122


10.3Pentair Ltd. 2012 Stock and Incentive Plan (Incorporated by reference to Exhibit 4.3 in the Registration Statement on Form S-3 of Pentair Ltd. filed with the Commission on September 28, 2012 (Reg. No. 333-184149)).*
10.4Form of Executive Officer Stock Option Grant Agreement (Incorporated by reference to Exhibit 10.4 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on October 1, 2012 (File No. 001-11625)).*
10.5Form of Executive Officer Restricted Stock Unit Grant Agreement (Incorporated by reference to Exhibit 10.5 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on October 1, 2012 (File No. 001-11625)).*
10.6Form of Executive Officer Performance Unit Grant Agreement (Incorporated by reference to Exhibit 10.6 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on October 1, 2012 (File No. 001-11625)).*
10.7Form of Non-Employee Director Stock Option Grant Agreement (Incorporated by reference to Exhibit 10.7 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on October 1, 2012 (File No. 001-11625)).*
10.8Form of Non-Employee Director Restricted Stock Unit Grant Agreement (Incorporated by reference to Exhibit 10.8 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on October 1, 2012 (File No. 001-11625)).*
10.9Pentair Ltd. 2008 Omnibus Stock Incentive Plan, as amended (Incorporated by reference to Exhibit 10.9 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on October 1, 2012 (File No. 001-11625)).*
10.10Pentair Ltd. Omnibus Stock Incentive Plan, as amended (Incorporated by reference to Exhibit 10.10 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on October 1, 2012 (File No. 001-11625)).*
10.11Pentair Ltd. Outside Directors Nonqualified Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.11 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on October 1, 2012 (File No. 001-11625)).*
10.12Form of Assignment and Assumption Agreement, among Pentair, Inc., Pentair Ltd. and the executive officers of Pentair Ltd. relating to Key Executive Employment and Severance Agreement (Incorporated by reference to Exhibit 10.12 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on October 1, 2012 (File No. 001-11625)).*
10.13Form of Key Executive Employment and Severance Agreement for Randall J. Hogan (Incorporated by reference to Exhibit 10.10 in the Annual Report on Form 10-K of Pentair, Inc. for the year ended December 31, 2008 (File No. 000-04689)).*
10.14Form of Key Executive Employment and Severance Agreement for Michael V. Schrock, Frederick S. Koury and Michael G. Meyer (Incorporated by reference to Exhibit 10.11 in the Annual Report on Form 10-K of Pentair, Inc. for the year ended December 31, 2008 (File No. 000-04689)).*
10.15Form of Key Executive Employment and Severance Agreement for John L. Stauch, Mark C. Borin and Angela D. Lageson (Incorporated by reference to Exhibit 10.12 in the Annual Report on Form 10-K of Pentair, Inc. for the year ended December 31, 2008 (File No. 000-04689)).*

123


10.16Form of Letter regarding RSU Grants and Waiver of Certain KEESA Rights, between Pentair, Inc. and certain executives of Pentair, Inc., dated March 27, 2012 (Incorporated by reference to Exhibit 10.1 in the Current Report on Form 8-K of Pentair, Inc. filed with the Commission on March 30, 2012 (File No. 000-04689)).*
10.17Form of Restricted Stock Unit Grant Agreement (Incorporated by reference to Exhibit 10.2 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on October 1, 2012 (File No. 001-11625)).*
10.18Pentair Ltd. Compensation Plan for Non-Employee Directors, as amended (Incorporated by reference to Exhibit 10.13 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on October 1, 2012 (File No. 001-11625)).*
10.19Pentair Ltd. Employee Stock Purchase and Bonus Plan (Incorporated by reference to Exhibit 10.14 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on October 1, 2012 (File No. 001-11625)).*
10.20Pentair, Inc. Non-Qualified Deferred Compensation Plan effective January 1, 1996 (Incorporated by reference to Exhibit 10.17 in the Annual Report on Form 10-K of Pentair, Inc. for the year ended December 31, 2005 (File No. 000-04689)).*
10.21Trust Agreement for Pentair, Inc. Non-Qualified Deferred Compensation Plan between Pentair, Inc. and Fidelity Management Trust Company (Incorporated by reference to Exhibit 10.18 contained in the Annual Report on Form 10-K of Pentair, Inc. for the year ended December 31, 1995 (File No. 000-04689)).*
10.22Amendment effective August 23, 2000 to Pentair, Inc. Non-Qualified Deferred Compensation Plan effective January 1, 1996 (Incorporated by reference to Exhibit 10.8 in the Current Report on Form 8-K of Pentair, Inc. filed with the Commission on September 21, 2000 (File No. 000-04689)).*
10.23Pentair, Inc. Non-Qualified Deferred Compensation Plan effective January 1, 2009, as amended and restated as of September 28, 2012 (Incorporated by reference to Exhibit 10.15 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on October 1, 2012 (File No. 001-11625)).*
10.24Pentair, Inc. 1999 Supplemental Executive Retirement Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.2 in the Current Report on Form 8-K of Pentair, Inc. filed with the Commission on September 21, 2000 (File No. 000-04689)).*
10.25Pentair, Inc. Supplemental Executive Retirement Plan effective January 1, 2009, as amended and restated as of September 28, 2012 (Incorporated by reference to Exhibit 10.16 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on October 1, 2012 (File No. 001-11625)).*
10.26Pentair, Inc. Restoration Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.3 in the Current Report on Form 8-K of Pentair, Inc. filed with the Commission on September 21, 2000 (File No. 000-04689)).*
10.27Pentair, Inc. Restoration Plan effective January 1, 2009, as amended and restated as of September 28, 2012 (Incorporated by reference to Exhibit 10.17 in the Current Report on Form 8-K of Pentair Ltd. filed with the Commission on October 1, 2012 (File No. 001-11625)).*
10.28Confidentiality and Non-Competition Agreement, dated January 6, 2005, between Pentair, Inc. and Michael Schrock (Incorporated by reference to Exhibit 10.2 in the Current Report on Form 8-K of Pentair, Inc. filed with the Commission on January 10, 2005 (File No. 000-04689)).*

124


18Letter on Change in Accounting Principles.
21List of Pentair Ltd. subsidiaries.
23Consent of Independent Registered Public Accounting Firm — Deloitte & Touche LLP.
24Power of attorney.
31.1Certification of Chief Executive Officer.
31.2Certification of Chief Financial Officer.
32.1Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101The following materials from Pentair Ltd.’s Annual Report on Form 10-K for the year ended December 31, 2012 are filed herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2012, 2011 and 2010, (ii) the Consolidated Balance Sheets as of December 31, 2012 and 2011, (iii) the Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010, (iv) the Consolidated Statements of Changes in Equity for the years ended December 31, 2012, 2011 and 2010 and (v) the Notes to the Consolidated Financial Statements.

*Denotes a management contract or compensatory contract.plan or arrangement.


85

125