Pentair (PNR) 10-Q 2007 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2007

OR

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

Commission file number 1-11625

Pentair, Inc.

(Exact name of Registrant as specified in its charter)

Minnesota	41-0907434
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification number)
5500 Wayzata Blvd, Suite 800, Golden Valley, Minnesota	55416
(Address of principal executive offices)	(Zip code)

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large accelerated filerþ Accelerated filero Non-accelerated filero

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

On April 27, 2007, 99,789,104 shares of the Registrant’s common stock were outstanding.

Pentair, Inc. and Subsidiaries

		Page(s)
PART I FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Condensed Consolidated Statements of Income for the three months ended March 31, 2007 and April 1, 2006		3
	Condensed Consolidated Balance Sheets as of March 31, 2007, December 31, 2006 and April 1, 2006		4
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and April 1, 2006		5
	Notes to Condensed Consolidated Financial Statements		6 – 21
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22 – 29
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk		29
ITEM 4.	Controls and Procedures		30
	Report of Independent Registered Public Accounting Firm		31
PART II OTHER INFORMATION
ITEM 1.	Legal Proceedings		32
ITEM 1A.	Risk Factors		32
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		33
ITEM 6.	Exhibits		34
	Signature		35
Third Restated Articles of Incorporation
Fourth Amended and Superseding By-Laws
Letter Regarding Unaudited Interim Financial Information
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

2

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

	Three months ended
	March 31		April 1
In thousands, except per-share data	2007		2006
Net sales	$	807,995	$	771,389
Cost of goods sold		570,592		548,881
Gross profit		237,403		222,508
Selling, general and administrative		142,300		129,089
Research and development		14,950		14,863
Operating income		80,153		78,556
Net interest expense		15,120		13,284
Income from continuing operations before income taxes		65,033		65,272
Provision for income taxes		22,903		22,201
Income from continuing operations		42,130		43,071
Gain (loss) on disposal of discontinued operations, net of tax		143		(1,451	)
Net income	$	42,273	$	41,620
Earnings (loss) per common share
Basic
Continuing operations	$	0.43	$	0.43
Discontinued operations		—		(0.01	)
Basic earnings per common share	$	0.43	$	0.42
Diluted
Continuing operations	$	0.42	$	0.42
Discontinued operations		—		(0.01	)
Diluted earnings per common share	$	0.42	$	0.41
Weighted average common shares outstanding
Basic		98,966		100,493
Diluted		100,271		102,492
Cash dividends declared per common share	$	0.15	$	0.14

See accompanying notes to condensed consolidated financial statements.

3

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

	March 31		December 31		April 1
In thousands, except share and per-share data	2007		2006		2006
Assets
Current assets
Cash and cash equivalents	$	64,230	$	54,820	$	50,237
Accounts and notes receivable, net		532,792		422,134		520,968
Inventories		413,178		398,857		375,619
Deferred tax assets		52,198		50,578		44,432
Prepaid expenses and other current assets		41,907		31,239		28,921
Total current assets		1,104,305		957,628		1,020,177
Property, plant and equipment, net		351,211		330,372		314,164
Other assets
Goodwill		1,830,359		1,718,771		1,723,952
Intangibles, net		384,933		287,011		262,829
Other		69,505		71,197		67,561
Total other assets		2,284,797		2,076,979		2,054,342
Total assets	$	3,740,313	$	3,364,979	$	3,388,683
Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings	$	16,003	$	14,563	$	—
Current maturities of long-term debt		8,257		7,625		4,246
Accounts payable		208,713		206,286		206,528
Employee compensation and benefits		85,741		88,882		75,536
Current pension and post-retirement benefits		7,918		7,918		—
Accrued product claims and warranties		42,766		44,093		42,238
Income taxes		13,525		22,493		27,195
Accrued rebates and sales incentives		31,293		39,419		23,353
Other current liabilities		91,402		90,003		94,418
Total current liabilities		505,618		521,282		473,514
Other liabilities
Long-term debt		1,056,495		721,873		888,015
Pension and other retirement compensation		213,512		207,676		158,535
Post-retirement medical and other benefits		47,401		47,842		73,812
Long-term income taxes payable		14,412		—		—
Deferred tax liabilities		111,106		109,781		123,663
Other non-current liabilities		85,912		86,526		76,452
Total liabilities		2,034,456		1,694,980		1,793,991
Commitments and contingencies
Shareholders’ equity
Common shares par value $0.162/3; 99,777,660, 99,777,165 and 101,642,814 shares issued and outstanding, respectively		16,629		16,629		16,940
Additional paid-in capital		484,376		488,540		524,904
Retained earnings		1,172,459		1,148,126		1,048,374
Accumulated other comprehensive income		32,393		16,704		4,474
Total shareholders’ equity		1,705,857		1,669,999		1,594,692
Total liabilities and shareholders’ equity	$	3,740,313	$	3,364,979	$	3,388,683

See accompanying notes to condensed consolidated financial statements.

4

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Three months ended
	March 31			April 1
In thousands	2007			2006
Operating activities
Net income	$	42,273		$	41,620
Adjustments to reconcile net income to net cash used for operating activities
(Gain) loss on disposal of discontinued operations		(143	)		1,451
Depreciation		15,523			15,230
Amortization		4,900			4,258
Deferred income taxes		(355	)		2,483
Stock compensation		6,218			6,646
Excess tax benefits from stock-based compensation		(1,063	)		(2,532	)
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable		(99,387	)		(95,541	)
Inventories		(6,381	)		(25,379	)
Prepaid expenses and other current assets		(8,770	)		(4,258	)
Accounts payable		7,886			(4,041	)
Employee compensation and benefits		(13,081	)		(23,528	)
Accrued product claims and warranties		(1,403	)		(1,363	)
Income taxes		(1,448	)		10,717
Other current liabilities		(7,638	)		(26,140	)
Pension and post-retirement benefits		4,033			4,477
Other assets and liabilities		1,167			3,550
Net cash used for continuing operations		(57,669	)		(92,350	)
Net cash provided by operating activities of discontinued operations		—			48
Net cash used for operating activities		(57,669	)		(92,302	)
Investing activities
Capital expenditures		(18,865	)		(9,054	)
Proceeds from sale of property and equipment		1,329			79
Acquisitions, net of cash acquired		(230,581	)		(2,158	)
Divestitures		—			(24,007	)
Other		—			(2,150	)
Net cash used for investing activities		(248,117	)		(37,290	)
Financing activities
Net short-term borrowings		1,234			—
Proceeds from long-term debt		345,190			272,906
Repayment of long-term debt		(10,250	)		(133,051	)
Proceeds from exercise of stock options		1,762			2,577
Repurchases of common stock		(9,280	)		—
Excess tax benefits from stock-based compensation		1,063			2,532
Dividends paid		(15,022	)		(14,224	)
Net cash provided by financing activities		314,697			130,740
Effect of exchange rate changes on cash and cash equivalents		499			589
Change in cash and cash equivalents		9,410			1,737
Cash and cash equivalents, beginning of period		54,820			48,500
Cash and cash equivalents, end of period	$	64,230		$	50,237

See accompanying notes to condensed consolidated financial statements.

5

Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

1. Basis of Presentation and Responsibility for Interim Financial Statements

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

We are responsible for the unaudited financial statements included in this document. The financial statements include all normal recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. As these are condensed financial statements, one should also read our consolidated financial statements and notes thereto, which are included in our 2006 Annual Report on Form 10-K for the year ended December 31, 2006.

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

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

2. New Accounting Standards

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48Accounting for Uncertainty in Income Taxes–an interpretation of FASB Statement 109(“FIN 48”). FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file a tax return in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006 and we adopted it on January 1, 2007. The adoption of FIN 48 increased total liabilities by $2.9 million and decreased total shareholders’ equity by $2.9 million. The adoption of FIN 48 had no impact on our consolidated results of operations.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of adopting SFAS 157 on our consolidated results of operations and financial condition.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of adopting SFAS 159 on our consolidated results of operations and financial condition.

In March 2007, the FASB ratified the Emerging Issues Task Force (“EITF”) Issue No. 06-11,Accounting for Income Tax Benefits of Dividends on Share Based Payment Awards(“EITF 06-11”). EITF 06-11 requires companies to recognize the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for nonvested equity-classified employee share-based awards as an increase to additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after September 15, 2007. We are currently evaluating the impact of adopting EITF 06-11 on our consolidated results of operations and financial condition.

3. Stock-based Compensation

Total stock-based compensation expense for the first quarter of 2007 and 2006 was $6.2 million and $6.6 million, respectively.

Non-vested shares of our common stock were granted during the first quarter of 2007 and 2006 to eligible employees with a vesting period of two to five years after issuance. Non-vested share awards are valued at market value on the date of grant and are typically expensed over the vesting period. Total compensation expense for non-vested share awards during the first quarter of 2007 and 2006 was $2.8 million and $2.3 million, respectively.

During the first quarter of 2007, option awards were granted under the Omnibus Stock Incentive Plan and the Outside Directors Nonqualified Stock Option Plan (together the “Plans”), each with an exercise price equal to the market price of our common stock on the date of grant. Prior to 2006, option grants under the Plans typically had a reload feature when shares were 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 Plans do not have a reload feature attached to the option. The options vest one-third each year over a three-year period and have a ten-year contractual term. Compensation expense equal to the grant date fair value is recognized for these awards typically over the vesting period. No option grants were reloaded during the quarter for individuals retiring shares to pay the exercise price of options granted prior to 2006. Reload options are vested and expensed immediately. Total compensation expense for stock option awards was $3.4 and $4.3 million for the first quarter of 2007 and 2006, respectively.

6

Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

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

	March 31			April 1
	2007			2006
Expected stock price volatility		28.5	%		31.5	%
Expected life	4.8 yrs.			4.5 yrs.
Risk-free interest rate		4.66	%		4.56	%
Dividend yield		1.95	%		1.44	%

The weighted-average fair value of options granted during the first quarter of 2007 and 2006 was $8.29 and $11.49 per share, respectively.

These estimates require us to make assumptions based on historical results, observance of trends in our stock price, changes in option exercise behavior, future expectations, and other relevant factors. If other assumptions had been used, stock-based compensation expense, as calculated and recorded under SFAS No. 123R, could have been affected.

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

4. Earnings Per Common Share

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

	Three months ended
	March 31		April 1
In thousands, except per-share data	2007		2006
Earnings (loss) per common share — basic
Continuing operations	$	42,130	$	43,071
Discontinued operations		143		(1,451	)
Net income	$	42,273	$	41,620
Continuing operations	$	0.43	$	0.43
Discontinued operations		—		(0.01	)
Basic earnings per common share	$	0.43	$	0.42
Earnings (loss) per common share — diluted
Continuing operations	$	42,130	$	43,071
Discontinued operations		143		(1,451	)
Net income	$	42,273	$	41,620
Continuing operations	$	0.42	$	0.42
Discontinued operations		—		(0.01	)
Diluted earnings per common share	$	0.42	$	0.41
Weighted average common shares outstanding — basic		98,966		100,493
Dilutive impact of stock options and restricted stock		1,305		1,999
Weighted average common shares outstanding — diluted		100,271		102,492
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		3,675		2,079

7

Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

5. Acquisitions

On April 30, 2007, we acquired as part of our Water Group all of the capital interests in Porous Media, a privately held filtration and separation technologies business, for $225.0 million, excluding transaction costs and subject to a post-closing net asset value adjustment. Porous Media’s product portfolio includes high-performance filter media, membranes and related filtration products and purification systems for liquids, gases and solids for general industrial, petrochemical, refining and healthcare market segments among others. We announced the Porous Media acquisition on March 6, 2007.

On February 2, 2007, we acquired as part of our Water Group all the outstanding shares of capital stock of Jung Pumpen GmbH (“Jung”) for $230.2 million, including a cash payment of $239.9 million and transaction costs of $0.7 million, less cash acquired of $10.4 million. The purchase price is subject to a post-closing net asset value adjustment. Jung is a leading German manufacturer of wastewater products for municipal and residential markets. Jung brings us its strong application engineering expertise and a complementary product offering, including a new line of water re-use products, submersible wastewater and drainage pumps, wastewater disposal units and tanks. Jung also brings to Pentair its well-established European presence, a state-of-the-art training facility in Germany, and sales offices in Germany, Austria, France, Hungary, Poland and Slovakia. Goodwill recorded as part of the initial purchase price allocation was $103.2 million, of which approximately $53 million is tax deductible. We continue to evaluate the purchase price allocation for the Jung acquisition, including intangible assets, contingent liabilities, and property, plant and equipment. We expect to revise the purchase price allocation as better information becomes available.

On April 12, 2006, we acquired as part of our Water Group the assets of Geyer’s Manufacturing & Design Inc. and FTA Filtration, Inc. (together “Krystil Klear”), two privately-held companies, for $15.5 million in cash. Krystil Klear expands our industrial filtration product offering to include a full range of steel and stainless steel tanks which house filtration solutions. Goodwill recorded as part of the purchase price allocation was $9.5 million, all of which is tax deductible.

During 2006, we completed several other small acquisitions totaling $14.2 million in cash and notes payable, adding to both our Water and Technical Products Groups. Total goodwill recorded as part of the initial purchase price allocations was $7.9 million, of which $2.9 million is tax deductible. We continue to evaluate the purchase price allocations for these acquisitions and expect to revise the purchase price allocations as better information becomes available.

The following pro forma condensed financial results of operations are presented as if the acquisitions described above (with the exception of Porous Media) had been completed at the beginning of each period.

	Three months ended
	March 31		April 1
In thousands, except per-share data	2007		2006
Pro forma net sales from continuing operations	$	814,171	$	795,334
Pro forma net income from continuing operations		42,403		43,933
Pro forma earnings per common share — continuing operations
Basic	$	0.43	$	0.44
Diluted	$	0.42	$	0.43
Weighted average common shares outstanding
Basic		98,966		100,493
Diluted		100,271		102,492

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

6. Discontinued Operations

Effective after the close of business on October 2, 2004, we completed the sale of our former Tools Group to The Black & Decker Corporation (“BDK”). In January 2006, pursuant to the purchase agreement for the sale of our former Tools Group, we completed the repurchase of a manufacturing facility in Suzhou, China from BDK for approximately $5.7 million. We recorded no gain or loss on the repurchase. In March 2006, we completed an outstanding net asset value arbitration with BDK relating to the purchase price for the sale of our former Tools Group. The decision by the arbitrator constituted a final resolution of all disputes between BDK and us regarding the net asset value. We paid the final net asset value purchase price adjustment pursuant to the purchase agreement of $16.1 million plus interest of $1.1 million in March 2006, resulting in an incremental pre-tax loss on disposal of discontinued operations of $3.4 million or $1.6 million net of tax.

8

Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

In 2001, we completed the sale of our former Service Equipment businesses (Century Mfg. Co./Lincoln Automotive Company) to Clore Automotive, LLC. In the fourth quarter of 2003, we reported an additional loss from discontinued operations of $2.9 million related to exiting the remaining two facilities. In March 2006, we exited a leased facility from our former Service Equipment business resulting in a net cash outflow of $2.2 million and an immaterial gain from disposition.

Operating results of the discontinued operations for the first quarter of 2007 and 2006 are summarized below:

	Three months ended
	March 31			April 1
In thousands	2007			2006
Gain (loss) on disposal of discontinued operations	$	225		$	(3,254	)
Income tax (expense) benefit		(82	)		1,803
Gain (loss) on disposal of discontinued operations, net of tax	$	143		$	(1,451	)

7. Inventories

Inventories were comprised of:

	March 31		December 31		April 1
In thousands	2007		2006		2006
Raw materials and supplies	$	193,049	$	186,508	$	162,274
Work-in-process		56,978		55,141		49,590
Finished goods		163,151		157,208		163,755
Total inventories	$	413,178	$	398,857	$	375,619

8. Comprehensive Income

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

	Three months ended
	March 31			April 1
In thousands	2007			2006
Net income	$	42,273		$	41,620
Changes in cumulative foreign currency translation adjustment		15,926			3,897
Changes in market value of derivative financial instruments classified as cash flow hedges		(237	)		1,563
Comprehensive income	$	57,962		$	47,080

9. Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the three months ended March 31, 2007 by segment were as follows:

			Technical
In thousands	Water		Products			Consolidated
Balance at December 31, 2006	$	1,449,460	$	269,311		$	1,718,771
Acquired		100,841		—			100,841
Purchase accounting adjustments		748		(198	)		550
Foreign currency translation		5,584		4,613			10,197
Balance at March 31, 2007	$	1,556,633	$	273,726		$	1,830,359

The acquired goodwill relates to the Jung acquisition. The purchase accounting adjustments recorded during the first quarter of 2007 related to the Krystil Klear acquisition and other small acquisitions. We finalized our purchase price allocation for the Krystil Klear acquisition during the first quarter of 2007.

9

Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Intangible assets, other than goodwill, were comprised of:

	March 31, 2007							December 31, 2006							April 1, 2006
	Gross							Gross							Gross
	carrying		Accum.					carrying		Accum.					carrying		Accum.
In thousands	amount		amort			Net		amount		amort			Net		amount		amort			Net
Finite-life intangibles
Patents	$	15,437	$	(6,475	)	$	8,962	$	15,433	$	(6,001	)	$	9,432	$	15,455	$	(4,589	)	$	10,866
Non-compete agreements		4,022		(3,031	)		991		4,343		(3,091	)		1,252		3,940		(2,276	)		1,664
Proprietary technology		45,834		(9,056	)		36,778		45,755		(8,240	)		37,515		51,378		(6,195	)		45,183
Customer relationships		157,992		(18,403	)		139,589		110,616		(15,924	)		94,692		87,525		(10,077	)		77,448
Total finite-life intangibles	$	223,285	$	(36,965	)	$	186,320	$	176,147	$	(33,256	)	$	142,891	$	158,298	$	(23,137	)	$	135,161
Indefinite-life intangibles
Brand names	$	198,613	$	—		$	198,613	$	144,120	$	—		$	144,120	$	127,668	$	—		$	127,668
Total intangibles, net						$	384,933						$	287,011						$	262,829

Intangible asset amortization expense for the three months ended March 31, 2007 and April 1, 2006 was approximately $3.7 million and $3.2 million, respectively. The estimated future amortization expense for identifiable intangible assets during the remainder of 2007 and the next five years is as follows:

In thousands	2007 Q2 - Q4		2008		2009		2010		2011		2012
Estimated amortization expense	$	12,301	$	15,417	$	15,172	$	14,660	$	14,451	$	13,538

10. Debt

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

	Average
	interest rate			Maturity		March 31			December 31			April 1
In thousands	March 31, 2007			(Year)		2007			2006			2006
Commercial paper, maturing within 54 days		5.75	%			$	243,267		$	208,882		$	166,261
Revolving credit facilities		5.78	%		2010		325,673			25,000			230,600
Private placement — fixed rate		5.50	%		2007 - 2013		135,000			135,000			135,000
Private placement — floating rate		5.96	%		2013		100,000			100,000			100,000
Senior notes		7.85	%		2009		250,000			250,000			250,000
Other		4.17	%		2007 - 2016		23,900			21,972			6,318
Total contractual debt obligations							1,077,840			740,854			888,179
Interest rate swap monetization deferred income							2,915			3,207			4,082
Total debt, including current portion per balance sheet							1,080,755			744,061			892,261
Less: Current maturities							(8,257	)		(7,625	)		(4,246	)
Short-term borrowings							(16,003	)		(14,563	)		—
Long-term debt						$	1,056,495		$	721,873		$	888,015

We have a multi-currency revolving Credit Facility (the “Credit Facility”) of $800 million expiring on March 4, 2010. The interest rate on the loans under the Credit Facility is LIBOR plus 0.625%. Interest rates and fees on the Credit Facility vary based on our credit ratings.

We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We use the Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. As of March 31, 2007, we had $243.3 million of commercial paper outstanding that matures within 54 days. All of the commercial paper 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.

10

Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

We were in compliance with all debt covenants as of March 31, 2007.

We have $35 million of outstanding private placement debt maturing in May 2007. We classified this debt as long-term as of March 31, 2007 as we have the intent and ability to refinance such obligation on a long-term basis under the Credit Facility.

In addition to the Credit Facility, we have $25 million of uncommitted credit facilities, under which we had $16.0 million outstanding as of March 31, 2007.

Debt outstanding at March 31, 2007 matures on a calendar year basis as follows:

In thousands	2007 Q2-Q4		2008		2009		2010		2011		2012		Thereafter		Total
Contractual debt obligation maturities	$	22,050	$	1,290	$	250,255	$	604,135	$	75	$	6	$	200,029	$	1,077,840
Other maturities		874		1,166		875		—		—		—		—		2,915
Total maturities	$	22,924	$	2,456	$	251,130	$	604,135	$	75	$	6	$	200,029	$	1,080,755

11. Derivatives and Financial Instruments

Cash-flow hedges

In September 2005, we entered into a $100 million interest rate swap agreement with several major financial institutions to exchange variable rate interest payment obligations for fixed rate obligations without the exchange of the underlying principle amounts in order to manage interest rate exposures. The effective date of the fixed rate swap was April 25, 2006. The swap agreement has a fixed interest rate of 4.68% and expires in July 2013. The fixed interest rate of 4.68% plus the .60% interest rate spread over LIBOR, results in an effective fixed interest rate of 5.28%. The fair value of the swap was an asset of $1.4 million at March 31, 2007 and is recorded inOther assets.

The variable to fixed interest rate swap is designated as and is effective as a cash-flow hedge. The fair value of this swap is recorded on the Condensed Consolidated Balance Sheets, with changes in fair value included in other comprehensive income (OCI). Derivative gains and losses included in OCI are reclassified into earnings at the time the related interest expense is recognized or the settlement of the related commitment occurs.

In anticipation of issuing new debt in the second quarter of 2007 and to partially hedge the risk of future increases to the treasury rate, we entered into an agreement on March 30, 2007 to lock in existing ten-year rates on $200 million. The treasury rate was fixed at 4.64% and the agreement was settled on May 3, 2007.

The treasury rate lock agreement was designated as and was effective as a cash-flow hedge. The treasury rate lock agreement was settled at an interest rate of 4.67% and the corresponding settlement benefit of $0.5 million will be included in OCI in our Condensed Consolidated Balance Sheets, and will be recognized in earnings over the life of the debt after issuance. The agreement had no value at March 31, 2007.

12. Income Taxes

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

The effective income tax rate for the three months ended March 31, 2007 was 35.2% compared to 34.0% for the three months ended April 1, 2006. The first quarter 2006 effective tax included a $0.9 million favorable adjustment related to a prior year tax return. We expect the effective tax rate for the remainder of 2007 to be between 35.0% and 35.5%, resulting in a full year effective income tax rate of between 35.0% and 35.5%. However, we continue to actively pursue initiatives to reduce our effective tax rate. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.

We adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, we recorded an adjustment to decrease retained earnings by $2.9 million.

Subsequent to the adjustment to retained earnings of $2.9 million, our total liability for unrecognized tax benefits as of January 1, 2007, the date of adoption, was $15.0 million, which if recognized, would affect our effective tax rate. Included in the total liability for unrecognized tax benefits of $15.0 million at the date of adoption was $1.8 million related to discontinued operations, which, if recognized, would affect the effective tax rate for discontinued operations.

We record penalties and interest related to unrecognized tax benefits inProvision for income taxes andNet interest expense, respectively, which is consistent with our past practices. As of January 1, 2007, we had recorded approximately $.3 million for the possible payment of penalties and $1.5 million related to the possible payment of interest.

11

Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

We or one of our subsidiaries files income tax returns in the United States (“U.S.”) federal jurisdiction, various U.S. state jurisdictions and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2002. The Internal Revenue Service (IRS) has audited us through 2003, and has completed a tax return survey of our 2004 federal income tax return.

During the first quarter of 2007, our total liability for unrecognized tax benefits did not materially increase or decrease. It is reasonably possible that this gross liability for unrecognized tax benefits will decrease by $2.0 million during the next twelve months as a result of audits and the expiration of statutes of limitations in various jurisdictions.

13. Benefit Plans

Components of net periodic benefit cost for the three months ended March 31, 2007 and April 1, 2006 were as follows:

	Three months ended
	Pension benefits						Post-retirement
	March 31			April 1			March 31			April 1
In thousands	2007			2006			2007			2006
Service cost	$	4,331		$	4,512		$	146		$	184
Interest cost		7,891			7,343			746			799
Expected return on plan assets		(7,133	)		(6,974	)		—			—
Amortization of transition obligation		35			31			—			—
Amortization of prior year service cost (benefit)		40			77			(62	)		(59	)
Recognized net actuarial loss		799			1,009			(355	)		(212	)
Net periodic benefit cost	$	5,963		$	5,998		$	475		$	712

14. Business Segments

Financial information by reportable segment for the three months ended March 31, 2007 and April 1, 2006 is shown below:

	Three months ended
	March 31			April 1
In thousands	2007			2006
Net sales to external customers
Water	$	555,412		$	517,169
Technical Products		252,583			254,220
Consolidated	$	807,995		$	771,389
Intersegment sales
Water	$	214		$	50
Technical Products		896			889
Other		(1,110	)		(939	)
Consolidated	$	—		$	—
Operating income (loss)
Water	$	60,879		$	55,587
Technical Products		31,631			37,704
Other		(12,357	)		(14,735	)
Consolidated	$	80,153		$	78,556

Other operating loss is primarily composed of unallocated corporate expenses, costs related to our captive insurance subsidiary and our intermediate finance companies, and intercompany eliminations.

12

Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

15. Warranty

The changes in the carrying amount of service and product warranties for the three months ended March 31, 2007 and April 1, 2006 were as follows:

	March 31			April 1
In thousands	2007			2006
Balance at beginning of the year	$	34,093		$	33,551
Service and product warranty provision		12,233			9,415
Payments		(14,752	)		(10,777	)
Acquired		1,116			—
Translation		76			49
Balance at end of the period	$	32,766		$	32,238

16. Commitments and Contingencies

Environmental and Litigation

There have been no further material developments from the disclosures contained in our 2006 Annual Report on Form 10-K.

Horizon Litigation

Twenty-eight separate lawsuits involving 29 primary plaintiffs, a class action, and claims for indemnity by Celebrity Cruise Lines, Inc. (“Celebrity”) were brought against Essef Corporation (“Essef”) and certain of its subsidiaries prior to our acquisition of Essef in August 1999. The claims against Essef and its involved subsidiaries were based upon the allegation that Essef designed, manufactured, and marketed two sand swimming pool filters that were installed as a part of the spa system on the Horizon cruise ship, and allegations that the spa and filters contained Legionnaire’s disease bacteria that infected certain passengers on cruises from April 1994 through July 1994.

The individual and class claims by passengers were tried and resulted in an adverse jury verdict finding liability on the part of the Essef defendants (70%) and Celebrity and its sister company, Fantasia (together 30%). After expiration of post-trial appeals, we paid all outstanding punitive damage awards of $7.0 million in the Horizon cases, plus interest of approximately $1.6 million, in January 2004. All of the personal injury cases have now been resolved through either settlement or judgment.

The only remaining unresolved claims in this case were those brought by Celebrity for damages resulting from the outbreak. Celebrity filed an amended complaint seeking attorney fees and costs for prior litigation as well as out-of-pocket losses, lost profits, and loss of business enterprise value. On June 28, 2006, a jury returned a verdict against the Essef defendants in the total amount of $193.0 million for its claims for out-of-pocket expenses ($10.4 million), lost profits ($47.6 million) and lost enterprise value ($135.0 million). The verdict was exclusive of pre-judgment interest and attorneys’ fees.

On January 17, 2007, the Court ruled on our post-trial motions, granting judgment in our favor as a matter of law with respect to Celebrity’s claim for lost enterprise value ($135.0 million). The Court also granted a new trial with respect to lost profits ($47.6 million). In addition, the Court denied without prejudice our claim for contribution to reduce Celebrity’s recovery by 30% to account for its contributory negligence, with leave to renew the motion following retrial. The trial of this matter has been scheduled for June 2007.

Celebrity’s claim for lost profits at trial amounted to approximately $60 million. We believe that actual lost profits suffered, if any, are substantially less. In a new trial, there remain questions of causation, contribution and proof of damages to be determined. We intend to vigorously defend against Celebrity’s claims. We cannot predict whether Celebrity will appeal the ruling on lost enterprise value, nor whether and to what extent Essef may eventually be found liable on Celebrity’s claims.

Several issues have not been decided by the Court, including whether Celebrity is entitled to recovery of its attorneys’ fees and related costs in the passenger claims phase of the case ($4.1 million), and, with respect to pre-judgment interest, the length of the interest period and the rate of interest on any eventual judgment. We have assessed the impact of the ruling on our previously established reserves for this matter and, based on information available at this time, have not changed our reserves following this ruling, except to take into account quarterly interest accruals.

We believe that any judgment we pay in this matter would be tax-deductible in the year paid or in subsequent years. In addition to the impact of any loss on this matter on our earnings per share when recognized, we may need to borrow funds from our banks or other sources to pay any judgment finally determined after exhaustion of all appeals. We expect that we would have available adequate funds to allow us to do so, based on discussions with our lending sources and our estimates of the results of our business operations over the foreseeable future.

13

Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

17. Financial Statements of Subsidiary Guarantors

The $250 million Senior Notes due 2009 are jointly and severally guaranteed by domestic subsidiaries (the “Guarantor Subsidiaries”), each of which is directly or indirectly wholly-owned by Pentair (the “Parent Company”). The following supplemental financial information sets forth the condensed consolidated balance sheets as of March 31, 2007, December 31, 2006 and April 1, 2006, the related condensed consolidated statements of income for the three-months ended March 31, 2007 and April 1, 2006, and statements of cash flows for the three-months ended March 31, 2007 and April 1, 2006, for the Parent Company, the Guarantor Subsidiaries, the non-guarantor subsidiaries and total consolidated Pentair and subsidiaries.

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
For the three months ended March 31, 2007

	Parent			Guarantor		Non-Guarantor
In thousands	Company			Subsidiaries		Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	639,591	$	212,432		$	(44,028	)	$	807,995
Cost of goods sold		—			457,197		157,015			(43,620	)		570,592
Gross profit		—			182,394		55,417			(408	)		237,403
Selling, general and administrative		4,204			99,249		39,255			(408	)		142,300
Research and development		—			11,507		3,443			—			14,950
Operating (loss) income		(4,204	)		71,638		12,719			—			80,153
Net interest (income) expense		(14,044	)		29,715		(551	)		—			15,120
Income from continuing operations before income taxes		9,840			41,923		13,270			—			65,033
Provision for income taxes		3,416			15,009		4,478			—			22,903
Income from continuing operations		6,424			26,914		8,792			—			42,130
Gain on disposal of discontinued operations, net of tax		143			—		—			—			143
Net income	$	6,567		$	26,914	$	8,792		$	—		$	42,273

14

Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
March 31, 2007

	Parent			Guarantor		Non-Guarantor
In thousands	Company			Subsidiaries		Subsidiaries		Eliminations			Consolidated
Assets
Current assets
Cash and cash equivalents	$	6,980		$	4,830	$	52,420	$	—		$	64,230
Accounts and notes receivable, net		174			405,288		173,584		(46,254	)		532,792
Inventories		—			290,739		122,439		—			413,178
Deferred tax assets		97,313			34,212		6,232		(85,559	)		52,198
Prepaid expenses and other current assets		16,047			12,571		28,845		(15,556	)		41,907
Total current assets		120,514			747,640		383,520		(147,369	)		1,104,305
Property, plant and equipment, net		4,500			208,644		138,067		—			351,211
Other assets
Investments in subsidiaries		2,224,447			61,357		386,539		(2,672,343	)		—
Goodwill		—			1,469,309		361,050		—			1,830,359
Intangibles, net		—			258,108		126,825		—			384,933
Other		74,651			13,631		6,603		(25,380	)		69,505
Total other assets		2,299,098			1,802,405		881,017		(2,697,723	)		2,284,797
Total assets	$	2,424,112		$	2,758,689	$	1,402,604	$	(2,845,092	)	$	3,740,313
Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings	$	—		$	—	$	16,003	$	—		$	16,003
Current maturities of long-term debt		1,167			257		284,178		(277,345	)		8,257
Accounts payable		4,956			153,312		102,185		(51,740	)		208,713
Employee compensation and benefits		9,942			39,559		36,240		—			85,741
Current pension and retirement medical benefits		7,918			—		—		—			7,918
Accrued product claims and warranties		—			27,225		15,541		—			42,766
Income taxes		327			8,628		4,570		—			13,525
Accrued rebates and sales incentives		—			25,898		5,395		—			31,293
Other current liabilities		22,516			48,764		29,456		(9,334	)		91,402
Total current liabilities		46,826			303,643		493,568		(338,419	)		505,618
Other liabilities
Long-term debt		1,017,017			1,786,863		57,081		(1,804,466	)		1,056,495
Pension and other retirement compensation		124,496			28,245		60,771		—			213,512
Post-retirement medical and other benefits		22,795			49,986		—		(25,380	)		47,401
Long-term income taxes payable		14,412			—		—		—			14,412
Deferred tax liabilities		3,123			161,359		32,183		(85,559	)		111,106
Due to / (from) affiliates		(540,814	)		102,947		525,319		(87,452	)		—
Other non-current liabilities		30,400			7,157		48,355		—			85,912
Total liabilities		718,255			2,440,200		1,217,277		(2,341,276	)		2,034,456
Shareholders’ equity		1,705,857			318,489		185,327		(503,816	)		1,705,857
Total liabilities and shareholders’ equity	$	2,424,112		$	2,758,689	$	1,402,604	$	(2,845,092	)	$	3,740,313

15

Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 2007

	Parent			Guarantor			Non-Guarantor
In thousands	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Operating activities
Net income	$	6,567		$	26,914		$	8,792		$	—		$	42,273
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Gain on disposal of discontinued operations		(143	)		—			—			—			(143	)
Depreciation		300			10,234			4,989			—			15,523
Amortization		931			2,942			1,027			—			4,900
Deferred income taxes		(498	)		—			143			—			(355	)
Stock compensation		6,218			—			—			—			6,218
Excess tax benefit from stock-based compensation		(1,063	)		—			—			—			(1,063	)
Intercompany dividends		(24	)		24			—			—			—
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable		11,062			(88,833	)		(23,553	)		1,937			(99,387	)
Inventories		—			(7,051	)		670			—			(6,381	)
Prepaid expenses and other current assets		16,481			7,984			(26,213	)		(7,022	)		(8,770	)
Accounts payable		(9,300	)		(2,133	)		21,290			(1,971	)		7,886
Employee compensation and benefits		(5,312	)		(8,943	)		1,174			—			(13,081	)
Accrued product claims and warranties		—			(1,729	)		326			—			(1,403	)
Income taxes		(1,806	)		6,942			(6,584	)		—			(1,448	)
Other current liabilities		(10,134	)		(12,625	)		8,060			7,061			(7,638	)
Pension and post-retirement benefits		2,468			681			884			—			4,033
Other assets and liabilities		(1,348	)		1,412			1,103			—			1,167
Net cash provided by (used for) continuing operations		14,399			(64,181	)		(7,892	)		5			(57,669	)
Net cash provided by (used for) operating activities of discontinued operations		(143	)		—			143			—			—
Net cash provided by (used for) operating activities		14,256			(64,181	)		(7,749	)		5			(57,669	)
Investing activities
Capital expenditures		(46	)		(8,411	)		(10,408	)		—			(18,865	)
Proceeds from sale of property and equipment		—			747			582			—			1,329
Acquisitions, net of cash acquired		(229,903	)		—			(678	)		—			(230,581	)
Investment in subsidiaries		(98,247	)		70,464			27,788			(5	)		—
Net cash (used for) provided by investing activities		(328,196	)		62,800			17,284			(5	)		(248,117	)
Financing activities
Net short-term borrowings (repayments)		—			(51	)		1,285			—			1,234
Proceeds from long-term debt		345,190			—			—			—			345,190
Repayment of long-term debt		(10,250	)		—			—			—			(10,250	)
Proceeds from exercise of stock options		1,762			—			—			—			1,762
Repurchases of common stock		(9,280	)		—			—			—			(9,280	)
Excess tax benefits from stock-based compensation		1,063			—			—			—			1,063
Dividends paid		(15,022	)		—			—			—			(15,022	)
Net cash provided by financing activities		313,463			(51	)		1,285			—			314,697
Effect of exchange rate changes on cash		(1,353	)		(288	)		2,140			—			499
Change in cash and cash equivalents		(1,830	)		(1,720	)		12,960			—			9,410
Cash and cash equivalents, beginning of period		8,810			6,550			39,460			—			54,820
Cash and cash equivalents, end of period	$	6,980		$	4,830		$	52,420		$	—		$	64,230

16

Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
For the three months ended April 1, 2006

	Parent			Guarantor		Non-Guarantor
In thousands	Company			Subsidiaries		Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	633,060	$	181,285		$	(42,956	)	$	771,389
Cost of goods sold		125			459,223		132,073			(42,540	)		548,881
Gross profit		(125	)		173,837		49,212			(416	)		222,508
Selling, general and administrative		6,221			93,541		29,743			(416	)		129,089
Research and development		—			11,784		3,079			—			14,863
Operating (loss) income		(6,346	)		68,512		16,390			—			78,556
Net interest (income) expense		(15,532	)		29,786		(970	)		—			13,284
Income from continuing operations before income taxes		9,186			38,726		17,360			—			65,272
Provision for income taxes		3,192			13,036		5,973			—			22,201
Income from continuing operations		5,994			25,690		11,387			—			43,071
Loss on disposal of discontinued operations, net of tax		(1,451	)		—		—			—			(1,451	)
Net income	$	4,543		$	25,690	$	11,387		$	—		$	41,620

17

Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
April 1, 2006

	Parent			Guarantor		Non-Guarantor
In thousands	Company			Subsidiaries		Subsidiaries		Eliminations			Consolidated
Assets
Current assets
Cash and cash equivalents	$	5,070		$	5,276	$	39,891	$	—		$	50,237
Accounts and notes receivable, net		444			431,959		137,145		(48,580	)		520,968
Inventories		—			284,297		91,322		—			375,619
Deferred tax assets		71,648			33,455		4,592		(65,263	)		44,432
Prepaid expenses and other current assets		7,679			10,381		15,647		(4,786	)		28,921
Total current assets		84,841			765,368		288,597		(118,629	)		1,020,177
Property, plant and equipment, net		5,281			224,224		84,659		—			314,164
Other assets
Investments in subsidiaries		1,982,627			43,937		90,489		(2,117,053	)		—
Goodwill		—			1,490,950		233,002		—			1,723,952
Intangibles, net		—			240,062		22,767		—			262,829
Other		55,077			6,517		5,967		—			67,561
Total other assets		2,037,704			1,781,466		352,225		(2,117,053	)		2,054,342
Total assets	$	2,127,826		$	2,771,058	$	725,481	$	(2,235,682	)	$	3,388,683
Liabilities and Shareholders’ Equity
Current liabilities
Current maturities of long-term debt	$	1,166		$	231	$	22,783	$	(19,934	)	$	4,246
Accounts payable		1,289			163,160		89,954		(47,875	)		206,528
Employee compensation and benefits		9,203			39,137		27,196		—			75,536
Accrued product claims and warranties		—			27,398		14,840		—			42,238
Income taxes		8,594			7,496		11,105		—			27,195
Accrued rebates and sales incentives		—			21,558		1,795		—			23,353
Other current liabilities		21,902			54,829		22,450		(4,763	)		94,418
Total current liabilities		42,154			313,809		190,123		(72,572	)		473,514
Other liabilities
Long-term debt		884,777			1,786,622		13,146		(1,796,530	)		888,015
Pension and other retirement compensation		78,471			29,390		50,674		—			158,535
Post-retirement medical and other benefits		23,807			50,005		—		—			73,812
Deferred tax liabilities		—			162,860		26,066		(65,263	)		123,663
Due to / (from) affiliates		(527,961	)		205,621		242,104		80,236			—
Other non-current liabilities		31,886			2,682		41,884		—			76,452
Total liabilities		533,134			2,550,989		563,997		(1,854,129	)		1,793,991
Shareholders’ equity		1,594,692			220,069		161,484		(381,553	)		1,594,692
Total liabilities and shareholders’ equity	$	2,127,826		$	2,771,058	$	725,481	$	(2,235,682	)	$	3,388,683

18

Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the three months ended April 1, 2006

	Parent			Guarantor			Non-Guarantor
In thousands	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Operating activities
Net income	$	4,543		$	25,690		$	11,387		$	—		$	41,620
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Loss on disposal of discontinued operations		1,451			—			—			—			1,451
Depreciation		400			11,299			3,531			—			15,230
Amortization		1,025			2,989			244			—			4,258
Deferred income taxes		3,024			(4,100	)		3,559			—			2,483
Stock compensation		3,124			2,990			532			—			6,646
Excess tax benefit from stock-based compensation		(1,190	)		(1,139	)		(203	)		—			(2,532	)
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable		(370	)		(93,520	)		(16,198	)		14,547			(95,541	)
Inventories		—			(17,290	)		(8,089	)		—			(25,379	)
Prepaid expenses and other current assets		10,546			(1,583	)		(12,946	)		(275	)		(4,258	)
Accounts payable		744			(6,669	)		16,455			(14,571	)		(4,041	)
Employee compensation and benefits		(7,662	)		(17,869	)		2,003			—			(23,528	)
Accrued product claims and warranties		—			(1,266	)		(97	)		—			(1,363	)
Income taxes		(3,625	)		15,934			(1,592	)		—			10,717
Other current liabilities		(7,354	)		(27,192	)		8,107			299			(26,140	)
Pension and post-retirement benefits		2,342			1,354			781			—			4,477
Other assets and liabilities		(3,407	)		(676	)		7,633			—			3,550
Net cash provided by (used for) continuing operations		3,591			(111,048	)		15,107			—			(92,350	)
Net cash provided by (used for) operating activities of discontinued operations		1,451			—			(1,403	)		—			48
Net cash provided by (used for) operating activities		5,042			(111,048	)		13,704			—			(92,302	)
Investing activities
Capital expenditures		—			(4,679	)		(4,375	)		—			(9,054	)
Proceeds from sale of property and equipment		—			31			48			—			79
Acquisitions, net of cash acquired		(1,941	)		(217	)		—			—			(2,158	)
Investment in subsidiaries		(109,439	)		115,768			(6,329	)		—			—
Divestitures		(18,246	)		—			(5,761	)		—			(24,007	)
Other		(1,750	)		(400	)		—			—			(2,150	)
Net cash (used for) provided by investing activities		(131,376	)		110,503			(16,417	)		—			(37,290	)
Financing activities
Proceeds from long-term debt		272,906			—			—			—			272,906
Repayment of long-term debt		(133,051	)		—			—			—			(133,051	)
Proceeds from exercise of stock options		2,577			—			—			—			2,577
Excess tax benefits from stock-based compensation		1,190			1,139			203			—			2,532
Dividends paid		(14,224	)		—			—			—			(14,224	)
Net cash provided by financing activities		129,398			1,139			203			—			130,740
Effect of exchange rate changes on cash		(998	)		320			1,267			—			589
Change in cash and cash equivalents		2,066			914			(1,243	)		—			1,737
Cash and cash equivalents, beginning of period		3,004			4,362			41,134			—			48,500
Cash and cash equivalents, end of period	$	5,070		$	5,276		$	39,891		$	—		$	50,237

19

Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
December 31, 2006

	Parent			Guarantor		Non-Guarantor
In thousands	Company			Subsidiaries		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	8,810		$	6,550	$	39,460	$	—		$	54,820
Accounts and notes receivable, net		190			316,157		150,103		(44,316	)		422,134
Inventories		—			283,687		115,170		—			398,857
Deferred tax assets		96,566			66,255		5,359		(117,602	)		50,578
Prepaid expenses and other current assets		16,766			20,555		16,496		(22,578	)		31,239
Total current assets		122,332			693,204		326,588		(184,496	)		957,628
Property, plant and equipment, net		4,753			214,709		110,910		—			330,372
Other assets
Investments in subsidiaries		1,978,466			61,351		134,204		(2,174,021	)		—
Goodwill		—			1,466,536		252,235		—			1,718,771
Intangibles, net		—			261,050		25,961		—			287,011
Other		76,076			15,078		5,423		(25,380	)		71,197
Total other assets		2,054,542			1,804,015		417,823		(2,199,401	)		2,076,979
Total assets	$	2,181,627		$	2,711,928	$	855,321	$	(2,383,897	)	$	3,364,979
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Short-term borrowings	$	—		$	—	$	14,563	$	—		$	14,563
Current maturities of long-term debt		1,167			258		34,649		(28,449	)		7,625
Accounts payable		3,053			158,294		94,709		(49,770	)		206,286
Employee compensation and benefits		12,388			48,447		28,047		—			88,882
Current pension and post-retirement benefits		7,918			—		—		—			7,918
Accrued product claims and warranties		—			28,955		15,138		—			44,093
Income taxes		48,462			1,685		4,389		(32,043	)		22,493
Accrued rebates and sales incentives		—			35,185		4,234		—			39,419
Other current liabilities		16,408			51,858		38,132		(16,395	)		90,003
Total current liabilities		89,396			324,682		233,861		(126,657	)		521,282
Other liabilities
Long-term debt		695,924			1,786,914		40,987		(1,801,952	)		721,873
Pension and other retirement compensation		121,680			27,470		58,526		—			207,676
Post-retirement medical and other benefits		23,143			50,079		—		(25,380	)		47,842
Deferred tax liabilities		3,200			161,360		30,780		(85,559	)		109,781
Due to / (from) affiliates		(453,623	)		65,884		270,531		117,208			—
Other non-current liabilities		31,908			7,322		47,296		—			86,526
Total liabilities		511,628			2,423,711		681,981		(1,922,340	)		1,694,980
Shareholders’ equity		1,669,999			288,217		173,340		(461,557	)		1,669,999
Total liabilities and shareholders’ equity	$	2,181,627		$	2,711,928	$	855,321	$	(2,383,897	)	$	3,364,979

20

Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

18. Subsequent Event

On April 9, 2007, we entered into a $250 million 364-day Term Loan Agreement (the “Facility”) with Bank of America, N.A., and JPMorgan Chase Bank, N.A. Each lender has made $125 million available to us under the Facility. On April 30, 2007, we used $225.0 million of borrowings under the Facility to pay the cash purchase price of the Porous Media acquisition and the balance of the funds under the Facility were drawn for other corporate purposes. We announced the Porous Media acquisition on March 6, 2007.

On April 30, 2007, we acquired as part of our Water Group all of the capital interests in Porous Media, a privately held filtration and separation technologies business, for $225.0 million, excluding transaction costs and subject to a post-closing net asset value adjustment. Porous Media’s product portfolio includes high-performance filter media, membranes and related filtration products and purification systems for liquids, gases and solids for general industrial, petrochemical, refining and healthcare market segments among others.

On May 3, 2007, we settled a treasury rate lock agreement that we entered into on March 30, 2007 to lock in existing ten-year rates on $200 million of anticipated new debt. Under this agreement, the treasury rate on such debt was fixed at 4.64%. The agreement was settled at an interest rate of 4.67% and the corresponding settlement benefit of $0.5 million will be included in OCI in our Condensed Consolidated Balance Sheets, and will be recognized in earnings over the life of the debt after issuance.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” or the negative thereof or similar words. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results. They can be affected by assumptions we might make or by known or unknown risks or uncertainties. Consequently, 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, included in our 2006 Annual Report on Form 10-K may impact the achievement of forward-looking statements:

• changes in general economic and industry conditions, such as:

§	the strength of product demand and the markets we serve;
§	the intensity of competition, including that from foreign competitors;
§	pricing pressures;
§	market acceptance of 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;
§	our ability to source components from third parties, in particular from foreign manufacturers, without interruption and at reasonable prices; and
§	the financial condition of our customers;

• our ability to successfully limit damages arising out of the Horizon litigation;

• 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;

• domestic and foreign governmental and regulatory policies;

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

• 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 overseas;

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

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

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

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

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

Overview

We are a focused diversified industrial manufacturing company comprised of two operating segments: Water and Technical Products. Our Water Group is a global leader in providing innovative products and systems used worldwide in 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 protect sensitive electronics and electrical components; thermal management products; and accessories. In 2007, we expect our Water Group and Technical Products Group to generate approximately 70% and 30% of total revenues, respectively.

Our Water Group has progressively become a more important part of our business portfolio with sales increasing from approximately $125 million in 1995 to approximately $2.2 billion in 2006. We believe the water industry is structurally attractive as a result of a growing demand for clean water and the large global market size (of which we have identified a target market totaling $60 billion). Our vision is to be a leading global provider of innovative products and systems used in the movement, storage, treatment, and enjoyment of water.

Our Technical Products Group operates in a large global market with significant potential for growth in industry segments such as defense, security, medical, and networking. We believe we have the largest enclosures industrial and commercial distribution network in North America and the highest enclosures brand recognition in the industry in North America. From mid-2001 through 2003, the Technical Products Group experienced significantly lower sales volumes as a result of severely reduced capital spending in the industrial and

22

commercial markets and over-capacity and weak demand in the datacommunication and telecommunication markets. From 2004 through 2006, sales volumes increased due to the addition of new distributors, new products, and higher demand in targeted markets.

Key Trends and Uncertainties

The following trends and uncertainties affected our financial performance in the first three months of 2007 and will likely impact our results in the future:

• The housing market and new pool starts slowed dramatically in the first quarter of 2007 and also shrank in the last three quarters of 2006. We believe that construction of new homes and new pools starts in North America affects approximately 25% of the sales of our Water Group, especially for our pool and spa businesses. This downturn will likely have an adverse impact on our revenues for the remainder of 2007.

• The telecommunication equipment market, particularly in North America, has slowed over the past three quarters and impacted our North American electronics sales within our Technical Products Group. In the first quarter of 2007, North American electronics sales declined approximately 25% from the year earlier period. The revenue decrease is attributable to telecommunication industry consolidation (which has delayed enclosure product sales) and some datacommunication OEM programs reaching end-of-life. This weakness is anticipated to continue into our second quarter.

• We experience seasonal demand in a number of markets within our Water Group. End-user demand for pool 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 sales “early buy” programs (generally including extended payment terms and/or additional discounts). Demand for residential and agricultural water systems is also impacted by economic conditions and weather patterns, particularly by heavy flooding and droughts.

• We expect our operations to continue to benefit from our PIMS initiatives, which include strategy deployment; lean enterprise with special focus on sourcing and supply management, cash flow management, and lean operations; and IGNITE, our process to drive organic growth.

• We are experiencing material cost and other inflation in a number of our businesses. We are striving for greater productivity improvements and implementing selective increases in selling prices to help mitigate cost increases in base materials such as stainless steel and carbon steel and other costs such as health care and other employee benefit costs.

• We have a long-term goal to consistently generate free cash flow that equals or exceeds 100% conversion of our net income. Free cash flow, which we define as cash flow from operating activities less capital expenditures plus proceeds from sale of property and equipment, exceeded $200 million for the fourth consecutive year in 2005 and was $181 million in 2006. See our discussion ofOther financial measuresunder the caption “Liquidity and Capital Resources” of this report.

• We experienced favorable foreign currency effects on net sales in the first three months of 2007. Our currency effect is primarily for the U.S. dollar against the euro, which may or may not trend favorably in the future.

• The effective tax rate for the first three months of 2007 was 35.2%. We estimate our effective income tax rate for the remainder of 2007 to be between 35.0% and 35.5%, resulting in a full year effective income tax rate of between 35.0% and 35.5%. We continue to actively pursue initiatives to reduce our effective tax rate. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.

Outlook

In 2007, our operating objective is to increase our return on invested capital by:

• Continuing to drive operating excellence through lean enterprise initiatives, with special focus on sourcing and supply management, cash flow management, and lean operations;

• Continuing the integration of acquisitions and realizing identified synergistic opportunities;

• Continuing proactive talent development, particularly in international management and other key functional areas;

• Achieving organic sales growth (in excess of market growth rates), particularly in international markets; and

• Continuing to make strategic acquisitions to grow and expand our existing platforms in our Water and Technical Products Groups.

The ability to achieve our operating objectives will depend, to a certain extent, on factors outside our control. See “Forward-looking statements” in this report and “Risk Factors” under ITEM 1A in our 2006 Annual Report on Form 10-K.

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RESULTS OF OPERATIONS

Net sales

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

	Three months ended
	March 31		April 1
In thousands	2007		2006		$ change		% change
Net sales	$	807,995	$	771,389	$	36,606		4.7	%

The components of the net sales change in 2007 from 2006 were as follows:

	% Change from 2006
Percentages	First quarter
Volume		0.9
Price		2.3
Currency		1.5
Total		4.7

Consolidated net sales

The 4.7 percent increase in consolidated net sales in the first quarter of 2007 from 2006 was primarily driven by:

• an increase in sales volume due to our February 2, 2007 acquisition of Jung Pumpen GmbH (“Jung”); and

• organic sales growth of approximately 2 percent (excluding acquisitions and foreign currency exchange), which included selective increases in selling prices to mitigate inflationary cost increases:

§ higher sales of North American pool equipment due to shipments of fourth quarter 2006 early-buy program orders;

       This increase was partially offset by:

§	lower Technical Products sales into electronics markets driven by mergers in the telecommunication equipment industry which have delayed buying activity and by datacommunication projects reaching end-of-life; and
§	lower sales of pump and filtration products related to the downturn in the North American residential housing market; and

• favorable foreign currency effects.

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

	Three months ended
	March 31		April 1
In thousands	2007		2006		$ change			% change
Water	$	555,412	$	517,169	$	38,243			7.4	%
Technical Products		252,583		254,220		(1,637	)		(0.6	%)
Total	$	807,995	$	771,389	$	36,606			4.7	%

Water

The 7.4 percent increase in Water Group net sales in the first quarter of 2007 from 2006 was primarily driven by:

• organic sales growth of approximately 4 percent (excluding acquisitions and foreign currency exchange), which included selective increases in selling prices to mitigate inflationary cost increases:

§	an increase in sales of North American pool equipment driven by new products and a carryover of fourth quarter 2006 early-buy program orders into the first quarter;
§	continued growth in China and in other emerging markets in Asia-Pacific as well as continued success in penetrating markets in Europe and the Middle East;

24

             These increases were partially offset by:

§ lower sales of pump and filtration products related to the downturn in the North American residential housing market;

• an increase in sales volume driven by our February 2, 2007 acquisition of Jung; and

• favorable foreign currency effects.

Technical Products

The 0.6 percent decrease in Technical Product Group net sales in the first quarter 2007 from 2006 was primarily driven by:

• lower sales into electronics markets driven by mergers in the telecommunication equipment industry which have delayed buying activity and by datacommunication projects reaching end-of-life.

These decreases were partially offset by:

• an increase in sales into electrical markets, which includes selective increases in selling prices to mitigate inflationary cost increases;

• a strong sales performance in Asia driven by continued penetration in China; and

• favorable foreign currency effects.

Gross profit

	Three months ended
	March 31		% of			April 1		% of
In thousands	2007		sales			2006		sales
Gross profit	$	237,403		29.4	%	$	222,508		28.8	%
Percentage Point Change				0.6pts

The 0.6 percent increase in gross profit as a percentage of sales in the first quarter of 2007 from 2006 was primarily the result of:

• selective increases in selling prices in our Water and Technical Products Groups to mitigate inflationary cost increases; and

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

These increases were partially offset by:

• inflationary increases related to raw materials and labor; and

• higher cost as a result of a fair market value inventory step-up related to the Jung acquisition.

Selling, general and administrative (SG&A)

	Three months ended
	March 31		% of			April 1		% of
In thousands	2007		sales			2006		sales
SG&A	$	142,300		17.6	%	$	129,089		16.7	%
Percentage Point Change				0.9pts

The 0.9 percentage point increase in SG&A expense as a percentage of sales in the first quarter of 2007 from 2006 was primarily due to:

• proportionately higher SG&A spending in the acquired Jung business;

• exit costs related to a previously announced 2001 French facility closure;

• higher selling and general expense to fund investments in future growth with emphasis on growth in the international markets, including personnel and business infrastructure investments; and

25

• an increase in amortization expense related to the intangible assets from the Jung acquisition.

Research and development (R&D)

	Three months ended
	March 31		% of			April 1		% of
In thousands	2007		sales			2006		sales
R&D	$	14,950		1.9	%	$	14,863		1.9	%
Percentage Point Change				0.0pts

R&D expense as a percentage of sales in the first quarter of 2007 was consistent with the first quarter of 2006.

Operating income

Water

	Three months ended
	March 31		% of			April 1		% of
In thousands	2007		sales			2006		sales
Operating income	$	60,879		11.0	%	$	55,587		10.8	%
Percentage Point Change				0.2pts

The 0.2 percentage point increase in Water Group operating income as a percentage of sales in the first quarter of 2007 from 2006 was primarily the result of:

• selective increases in selling prices to mitigate inflationary cost increases; and

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

These increases were partially offset by:

• inflationary increases related to raw materials and labor; and

• higher cost as a result of a fair market value inventory step-up related to the Jung acquisition.

Technical Products

	Three months ended
	March 31		% of			April 1		% of
In thousands	2007		sales			2006		sales
Operating income	$	31,631		12.5	%	$	37,704		14.8	%
Percentage Point Change			(2.3) pts

The 2.3 percentage point decrease in Technical Products Group operating income as a percentage of sales in the first quarter of 2007 from 2006 was primarily the result of:

• inflationary increases related to raw materials such as stainless steel and labor costs;

• lower sales into electronics markets driven by mergers in the telecommunication equipment industry which have delayed buying activity and by datacommunication projects reaching end-of-life; and

• exit costs related to a previously announced 2001 French facility closure.

These decreases were partially offset by:

• selective increases in selling prices to mitigate inflationary cost increases; and

• savings realized from the continued success of PIMS, including lean and supply management activities.

26

Net interest expense

	Three months ended
	March 31		April 1
In thousands	2007		2006		Difference		% change
Net interest expense	$	15,120	$	13,284	$	1,836		13.8	%

The 13.8 percentage point increase in interest expense in the first quarter of 2007 from 2006 was primarily the result of:

• an increase in outstanding debt primarily related to the Jung acquisition; and

• an increase in interest rates in the first quarter of 2007 compared to the same period in 2006.

Provision for income taxes from continuing operations

	Three months ended
	March 31			April 1
In thousands	2007			2006
Income before income taxes	$	65,033		$	65,272
Provision for income taxes		22,903			22,201
Effective tax rate		35.2	%		34.0	%

The 1.2 percentage point increase in the effective tax rate in the first quarter of 2007 from 2006 was primarily the result of:

• a favorable adjustment in the first quarter of 2006 related to a prior year tax return.

We estimate our effective income tax rate for the remaining quarters of this year will be between 35.0% and 35.5% resulting in a full year effective income tax rate of between 35.0% and 35.5%.

LIQUIDITY AND CAPITAL RESOURCES

Cash requirements for working capital, capital expenditures, equity investments, acquisitions, debt repayments, share repurchases, and dividend payments are generally funded from cash generated from operations, availability under existing committed revolving credit facilities, and in certain instances, public and private debt and equity offerings.

We experience seasonal cash flows primarily due to seasonal demand in a number of markets within our Water Group. End-user demand for pool 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 sales “early buy” programs (generally including extended payment terms and/or additional discounts). Demand for residential and agricultural water systems is also impacted by weather patterns, particularly by heavy flooding and droughts.

The following table presents selected working capital measurements calculated from our monthly operating results based on a 13-month moving average:

	March 31		December 31		April 1
Days	2007		2006		2006
Days of sales in accounts receivable		54		54		55
Days inventory on hand		77		76		71
Days in accounts payable		56		56		56

Operating activities

Cash used for operating activities was $57.7 million in the first three months of 2007 compared with cash used for operating activities of $92.3 million in the prior year comparable period. The decrease in cash used for operating activities was due primarily to lower cash used for working capital in the first quarter of 2007 versus the same period of last year. In the future, we expect our working capital ratios to improve as we are able to capitalize on our PIMS initiatives.

Investing activities

Capital expenditures in the first three months of 2007 were $18.9 million compared with $9.1 million in the prior year period. We currently anticipate capital expenditures for fiscal 2007 will be approximately $70 to $80 million, primarily for capacity expansions in our low cost country manufacturing facilities, implementation of a unified business systems infrastructure in Europe, new product development, and general maintenance capital.

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On February 2, 2007, we acquired as part of our Water Group all the outstanding shares of capital stock of Jung Pumpen GmbH (“Jung”) for $230.2 million, including a cash payment of $239.9 million and transaction costs of $0.7 million, less cash acquired of $10.4 million. The purchase price is subject to a post-closing net asset value adjustment. Jung is a leading German manufacturer of wastewater products for municipal and residential markets. Jung brings us its strong application engineering expertise and a complementary product offering, including a new line of water re-use products, submersible wastewater and drainage pumps, wastewater disposal units and tanks. Jung also brings to Pentair its well-established European presence, a state-of-the-art training facility in Germany, and sales offices in Germany, Austria, France, Hungary, Poland and Slovakia. Goodwill recorded as part of the initial purchase price allocation was $103.2 million, of which approximately $53 million is tax deductible. We continue to evaluate the purchase price allocation for the Jung acquisition, including intangible assets, contingent liabilities, and property, plant and equipment. We expect to revise the purchase price allocation as better information becomes available.

Divestiture activities during 2006 relate to the following: In January 2006, pursuant to the purchase agreement for the sale of our former Tools Group, we completed the repurchase of a manufacturing facility in Suzhou, China from The Black and Decker Corporation (“BDK”) for approximately $5.7 million. We recorded no gain or loss on the repurchase. In March 2006, we completed an outstanding net asset value arbitration with BDK relating to the purchase price for the sale of our former Tools Group. The decision by the arbitrator constituted a final resolution of all disputes between BDK and us regarding the net asset value. We paid the final net asset value purchase price adjustment pursuant to the purchase agreement of $16.1 million plus interest of $1.1 million in March 2006, resulting in an incremental pre-tax loss on disposal of discontinued operations of $3.4 million or $1.6 million net of tax. Also in March 2006, we exited a leased facility from our former Service Equipment business resulting in a net cash outflow of $2.2 million and an immaterial gain from disposition.

Financing activities

Net cash provided by financing activities was $314.7 million in the first three months of 2007 compared with $130.7 million provided by financing activities in the prior year period. The increase primarily relates to the additional borrowings to fund the Jung acquisition. 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 used to repurchase Company stock, cash received from stock option exercises, and tax benefits related to stock-based compensation.

We have a multi-currency revolving Credit Facility (the “Credit Facility”) of $800 million expiring on March 4, 2010. We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We use the Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. As of March 31, 2007, we had $243.3 million of commercial paper outstanding that matures within 54 days. All of the commercial paper 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 were in compliance with all debt covenants as of March 31, 2007.

In addition to the Credit Facility, we have $25 million of uncommitted credit facilities, under which we had $16.0 million outstanding as of March 31, 2007.

On April 9, 2007, we entered into a $250 million 364-day Term Loan Agreement (the “Facility”) with Bank of America, N.A., and JPMorgan Chase Bank, N.A. Each lender has made $125 million available to us under the Facility. On April 30, 2007, we used $225.0 million of borrowings under the Facility to pay the cash purchase price of the Porous Media acquisition and the balance of the funds under the Facility were drawn for other corporate purposes. We announced the Porous Media acquisition on March 6, 2007.

Our current credit ratings are as follows:

Rating Agency	Long-Term Debt Rating	Current Rating Outlook
Standard & Poor’s Moody’s	BBB Baa3	Negative Stable

On March 7, 2007, Standard & Poor’s Ratings Services revised its current rating outlook on us from stable to negative. At the same time, Standard & Poor’s affirmed its long-term debt rating of ‘BBB’. Standard & Poor’s stated that the outlook revision reflects the additional leverage and stress on credit metrics that will result from the announced acquisition of Porous Media. The negative outlook indicates the rating could be lowered if financial policies become more aggressive or if operating results are weaker than expected.

As of March 31, 2007, our capital structure consisted of $1,080.8 million in total indebtedness and $1,705.9 million in shareholders’ equity. The ratio of debt-to-total capital at March 31, 2007 was 38.8 percent, compared with 30.8 percent at December 31, 2006 and 35.9 percent at April 1, 2006. Our targeted debt-to-total capital ratio is approximately 40 percent. We will exceed this target ratio from time to time as needed for operational purposes and/or acquisitions.

In anticipation of issuing new debt in the second quarter of 2007 and to partially hedge the risk of future increases to the treasury rate, we entered into an agreement on March 30, 2007 to lock in existing ten-year rates on $200 million. The treasury rate was fixed at 4.64% and the agreement was settled on May 3, 2007.

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The treasury rate lock agreement was designated as and was effective as a cash-flow hedge. The treasury rate lock agreement was settled at an interest rate of 4.67% and the corresponding settlement benefit of $0.5 million will be included in OCI in our Condensed Consolidated Balance Sheets, and will be recognized in earnings over the life of the debt after issuance.

We expect to continue to have cash requirements to support working capital needs and capital expenditures, to pay interest and service debt, to pay dividends to shareholders, and to repurchase Company stock. In order to meet these cash requirements, we intend to use available cash and internally generated funds, and to borrow under our committed and uncommitted credit facilities.

Dividends paid in the first three months of 2007 were $15.0 million, or $0.15 per common share, compared with $14.2 million, or $0.14 per common share, in the prior year period. We have increased dividends every year for the last 31 years and expect to continue paying dividends on a quarterly basis.

During 2006, the Board of Directors authorized the repurchase of shares of our common stock up to a maximum dollar limit of $100 million. As of December 31, 2006, we had purchased 1,986,026 shares for $59.4 million pursuant to this authorization during 2006. In December 2006, the Board of Directors authorized the continuation of the repurchase program in 2007 with a maximum dollar limit of $40.6 million. This authorization expires on December 31, 2007. As of March 31, 2007, we had repurchased an additional 312,400 shares for $9.3 million pursuant to this plan and, accordingly, we have the authority to repurchase additional shares up to a maximum dollar limit of $31.4 million for the remainder of 2007.

There have been no material changes with respect to the contractual obligations, other than noted above, or off-balance sheet arrangements described in our 2006 Annual Report on Form 10-K.

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 and our conversion of net income. We have a long-term goal to consistently generate free cash flow that equals or exceeds 100% conversion of net income. Free cash flow and conversion of net income are non-GAAP financial measures that we use to assess our cash flow performance. We believe free cash flow and conversion of net income are important measures of operating performance because they provide us and our investors a measurement of cash generated from operations that is available to pay dividends and repay debt. In addition, free cash flow and conversion of net income are used as a criterion to measure and pay compensation-based incentives. Our measure of free cash flow and conversion of net income may not be comparable to similarly titled measures reported by other companies. The following table is a reconciliation of free cash flow and a calculation of the conversion of net income with cash flows from continuing and discontinued operating activities:

	Three months ended
	March 31			April 1
In thousands	2007			2006
Net cash used for operating activities	$	(57,669	)	$	(92,302	)
Capital expenditures		(18,865	)		(9,054	)
Proceeds from sale of property and equipment		1,329			79
Free cash flow		(75,205	)		(101,277	)
Net income		42,273			41,620
Conversion of net income		(177.9	%)		(243.3	%)

In 2007, our objective is to generate free cash flow that equals or exceeds 100% conversion of net income.

NEW ACCOUNTING STANDARDS

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

CRITICAL ACCOUNTING POLICIES

In our 2006 Annual Report on Form 10-K, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements. We have not changed these policies from those previously disclosed in our Annual Report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material changes in our market risk during the quarter ended March 31, 2007. For additional information, refer to Item 7A of our 2006 Annual Report on Form 10-K.

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ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

	We maintain a system of disclosure controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter ended March 31, 2007 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon their evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the quarter ended March 31, 2007 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.
(b)	Changes in Internal Controls
	There was no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders of Pentair, Inc.

We have reviewed the accompanying condensed consolidated balance sheets of Pentair, Inc. and Subsidiaries (the “Company”) as of March 31, 2007 and April 1, 2006, and the related condensed consolidated statements of income and cash flows for the three month periods ended March 31, 2007 and April 1, 2006. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2006, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 26, 2007, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2006 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

DELOITTE & TOUCHE LLP

Minneapolis, Minnesota
May 4, 2007

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PART II OTHER INFORMATION

ITEM 1. Legal Proceedings

Environmental and Litigation

There have been no further material developments from the disclosures contained in our 2006 Annual Report on Form 10-K, other than those matters identified below.

Horizon Litigation

Twenty-eight separate lawsuits involving 29 primary plaintiffs, a class action, and claims for indemnity by Celebrity Cruise Lines, Inc. (“Celebrity”) were brought against Essef Corporation (“Essef”) and certain of its subsidiaries prior to our acquisition of Essef in August 1999. The claims against Essef and its involved subsidiaries were based upon the allegation that Essef designed, manufactured, and marketed two sand swimming pool filters that were installed as a part of the spa system on the Horizon cruise ship, and allegations that the spa and filters contained Legionnaire’s disease bacteria that infected certain passengers on cruises from April 1994 through July 1994.

The individual and class claims by passengers were tried and resulted in an adverse jury verdict finding liability on the part of the Essef defendants (70%) and Celebrity and its sister company, Fantasia (together 30%). After expiration of post-trial appeals, we paid all outstanding punitive damage awards of $7.0 million in the Horizon cases, plus interest of approximately $1.6 million, in January 2004. All of the personal injury cases have now been resolved through either settlement or judgment.

The only remaining unresolved claims in this case were those brought by Celebrity for damages resulting from the outbreak. Celebrity filed an amended complaint seeking attorney fees and costs for prior litigation as well as out-of-pocket losses, lost profits, and loss of business enterprise value. On June 28, 2006, a jury returned a verdict against the Essef defendants in the total amount of $193.0 million for its claims for out-of-pocket expenses ($10.4 million), lost profits ($47.6 million) and lost enterprise value ($135.0 million). The verdict was exclusive of pre-judgment interest and attorneys’ fees.

On January 17, 2007, the Court ruled on our post-trial motions, granting judgment in our favor as a matter of law with respect to Celebrity’s claim for lost enterprise value ($135.0 million). The Court also granted a new trial with respect to lost profits ($47.6 million). In addition, the Court denied without prejudice our claim for contribution to reduce Celebrity’s recovery by 30% to account for its contributory negligence, with leave to renew the motion following retrial. The trial of this matter has been scheduled for June 2007.

Celebrity’s claim for lost profits at trial amounted to approximately $60 million. We believe that actual lost profits suffered, if any, are substantially less. In a new trial, there remain questions of causation, contribution and proof of damages to be determined. We intend to vigorously defend against Celebrity’s claims. We cannot predict whether Celebrity will appeal the ruling on lost enterprise value, nor whether and to what extent Essef may eventually be found liable on Celebrity’s claims.

Several issues have not been decided by the Court, including whether Celebrity is entitled to recovery of its attorneys’ fees and related costs in the passenger claims phase of the case ($4.1 million), and, with respect to pre-judgment interest, the length of the interest period and the rate of interest on any eventual judgment. We have assessed the impact of the ruling on our previously established reserves for this matter and, based on information available at this time, have not changed our reserves following this ruling, except to take into account quarterly interest accruals.

We believe that any judgment we pay in this matter would be tax-deductible in the year paid or in subsequent years. In addition to the impact of any loss on this matter on our earnings per share when recognized, we may need to borrow funds from our banks or other sources to pay any judgment finally determined after exhaustion of all appeals. We expect that we would have available adequate funds to allow us to do so, based on discussions with our lending sources and our estimates of the results of our business operations over the foreseeable future.

ITEM 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in ITEM 1A. of our 2006 Annual Report on Form 10-K.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information with respect to purchases we made of our common stock during the first quarter of 2007:

	(a)		(b)		(c)		(d)
					Total Number of Shares		Dollar Value of Shares
	Total Number		Average Price		Purchased as Part of		that May Yet Be
	of Shares		Paid per		Publicly Announced Plans		Purchased Under the
Period	Purchased		Share		or Programs		Plans or Programs
January 1 - January 27, 2007		87,740	$	30.08		—	$	40,640,979
January 28 - February 24, 2007		18,170	$	30.78		—	$	40,640,979
February 25 - March 31, 2007		335,898	$	29.82		312,400	$	31,361,482
Total		441,808				312,400

(a)	The purchases in this column include shares repurchased as part of our publicly announced programs and in addition, 87,740 shares for the period January 1 — January 27, 2007, 18,170 shares for the period January 28 — February 24, 2007, and 23,498 shares for the period February 25 — March 31, 2007 deemed surrendered to us by participants in our Omnibus Stock Incentive Plan and the Outside Directors Nonqualified Stock Option Plan (the “Plans”) to satisfy the exercise price or withholding of tax obligations related to the exercise of stock options and non-vested shares.
(b)	The average price paid in this column includes shares repurchased as part of our publicly announced programs and shares deemed surrendered to us by participants in the Plans to satisfy the exercise price or withholding of tax obligations related to the exercise price of stock options and non-vested shares.
(c)	The number of shares in this column represents the number of shares repurchased as part of publicly announced programs to repurchase up to $100 million of our common stock.
(d)	During 2006, the Board of Directors authorized the repurchase of shares of our common stock up to a maximum dollar limit of $100 million. As of December 31, 2006, we had purchased 1,986,026 shares for $59.4 million pursuant to this authorization during 2006. In December 2006, the Board of Directors authorized the continuation of the repurchase program in 2007 with a maximum dollar limit of $40.6 million. This authorization expires on December 31, 2007. As of March 31, 2007, we had repurchased an additional 312,400 shares for $9.3 million pursuant to this plan. As of April 27, 2007, we had not repurchased any additional shares under this plan and, accordingly, we have the authority to repurchase additional shares up to a maximum dollar limit of $31.4 million for the remainder of 2007.

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ITEM 6. Exhibits

(a) Exhibits

3.1	Third Restated Articles of Incorporation as amended through May 3, 2007.
3.2	Fourth Amended and Superseding By-Laws as amended through May 3, 2007.
4.1	Form of Term Loan Agreement for $250 million among Pentair, Inc., Bank of America, N.A. and JPMorgan Chase Bank, N.A. dated April 9, 2007 (incorporated by reference to Exhibit 99.1 to Pentair’s Current Report on Form 8-K dated April 9, 2007).
15	Letter Regarding Unaudited Interim Financial Information.
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 4, 2007.

PENTAIR, INC. Registrant
By	/s/ John L. Stauch
	John L. Stauch
	Executive Vice President and Chief Financial Officer (Chief Accounting Officer)

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Exhibit Index to Form 10-Q for the Period Ended March 31, 2007

3.1	Third Restated Articles of Incorporation as amended through May 3, 2007.
3.2	Fourth Amended and Superseding By-Laws as amended through May 3, 2007.
4.1	Form of Term Loan Agreement for $250 million among Pentair, Inc., Bank of America, N.A. and JPMorgan Chase Bank, N.A. dated April 9, 2007 (incorporated by reference to Exhibit 99.1 to Pentair’s Current Report on Form 8-K dated April 9, 2007).
15	Letter Regarding Unaudited Interim Financial Information
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.