Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the Quarterly Period Ended June 30, 2012

OR

 

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

Commission file number 000-04689

Pentair, Inc.

 

(Exact name of Registrant as specified in its charter)

 

Minnesota

  

41-0907434

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

5500 Wayzata Blvd, Suite 800, Golden Valley, Minnesota

  

55416

(Address of principal executive offices)    (Zip code)

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

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

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

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

 

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

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

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


Table of Contents

Pentair, Inc. and Subsidiaries

 

 

     Page (s)  

PART I FINANCIAL INFORMATION

  
ITEM 1.    Financial Statements (unaudited)   
   Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and July 2, 2011      3   
   Condensed Consolidated Balance Sheets as of June 30, 2012, December 31, 2011 and July 2, 2011      4   
   Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and July 2, 2011      5   
   Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2012 and July 2, 2011      6   
   Notes to Condensed Consolidated Financial Statements      7 –28   
ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      29 –39   
ITEM 3.    Quantitative and Qualitative Disclosures about Market Risk      39   
ITEM 4.    Controls and Procedures      39   

PART II OTHER INFORMATION

  
ITEM 1.    Legal Proceedings      40   
ITEM 1A.    Risk Factors      40   
ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds      44   
ITEM 5.    Other Information      45   
ITEM 6.    Exhibits      47   
   Signatures      48   

 

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Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

Pentair, Inc. and Subsidiaries

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

 

                                                                                                   
     Three months ended     Six months ended  
  

 

 

   

 

 

 
In thousands, except per-share data     

 

June 30,

2012

  

 

   

 

July 2,

2011

  

 

   

 

June 30,

2012

  

 

   

 

July 2,

2011

  

 

 

 

Net sales

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

Cost of goods sold

     629,397       622,439       1,206,855       1,163,653   
   

Gross profit

     312,128       287,736       592,847       536,795   

Selling, general and administrative

     173,445       158,432       348,455       303,192   

Research and development

     20,891       19,882       41,648       38,004   
   

Operating income

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

Other (income) expense:

        

Equity income of unconsolidated subsidiaries

     (636     (672     (1,685     (907)   

Net interest expense

     16,079       14,613       30,847       23,938   
   

Income before income taxes and noncontrolling interest

     102,349       95,481       173,582       172,568   

Provision for income taxes

     28,864       27,344       37,943       52,397   
   

Net income before noncontrolling interest

     73,485       68,137       135,639       120,171   

Noncontrolling interest

     1,655       1,425       2,995       2,918   
   

Net income attributable to Pentair, Inc.

   $ 71,830     $ 66,712     $ 132,644     $ 117,253   

 

 

Comprehensive income (loss)

   $ (10,430   $ 92,306     $ 93,808     $ 187,119   

Less: Comprehensive income (loss) attributable to noncontrolling interest

     (223 )     2,216       2,020       5,621   
   

Comprehensive income (loss) attributable to Pentair, Inc.

   $ (10,207   $ 90,090     $ 91,788     $ 181,498   

 

 

Earnings per common share attributable to Pentair, Inc.

        

Basic

   $ 0.73     $ 0.68     $ 1.34     $ 1.19   

Diluted

   $ 0.71     $ 0.67     $ 1.32     $ 1.17   

Weighted average common shares outstanding

        

Basic

     99,047       98,333       98,856       98,190   

Diluted

     101,165       100,065       100,785       99,825   

Cash dividends declared per common share

   $ 0.22     $ 0.20     $ 0.44     $ 0.40   

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

 

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

Current assets

      

Cash and cash equivalents

   $ 60,598     $ 50,077     $ 68,972   

Accounts and notes receivable, net of allowances of $32,958, $39,111 and $41,120, respectively

     572,144       569,204       595,407   

Inventories

     460,039       449,863       484,795   

Deferred tax assets

     58,899       60,899       60,833   

Prepaid expenses and other current assets

     124,345       107,792       124,632   
   

Total current assets

     1,276,025       1,237,835       1,334,639   

Property, plant and equipment, net

     381,063       387,525       410,547   

Other assets

      

Goodwill

     2,255,134       2,273,918       2,573,430   

Intangibles, net

     570,503       592,285       654,908   

Other

     103,544       94,750       78,788   
   

Total other assets

     2,929,181       2,960,953       3,307,126   
   

Total assets

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

 

 

 

Liabilities and Shareholders’ Equity

      

Current liabilities

      

Short-term borrowings

   $ 222     $ 3,694     $ 21,451   

Current maturities of long-term debt

     1,193       1,168       1,289   

Accounts payable

     288,265       294,858       315,403   

Employee compensation and benefits

     89,514       109,361       108,836   

Current pension and post-retirement benefits

     9,052       9,052       8,733   

Accrued product claims and warranties

     44,935       42,630       47,259   

Income taxes

     32,228       14,547       21,498   

Accrued rebates and sales incentives

     45,870       37,009       42,567   

Other current liabilities

     150,437       129,522       144,366   
   

Total current liabilities

     661,716       641,841       711,402   

Other liabilities

      

Long-term debt

     1,233,794       1,304,225       1,384,167   

Pension and other retirement compensation

     247,324       248,615       217,021   

Post-retirement medical and other benefits

     29,921       31,774       27,954   

Long-term income taxes payable

     13,294       26,470       23,832   

Deferred tax liabilities

     190,173       188,957       235,422   

Other non-current liabilities

     92,175       97,039       85,660   
   

Total liabilities

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

Commitments and contingencies

      

Shareholders’ equity

      

Common shares par value $0.16 2/3; 99,204,048, 98,622,564 and 98,766,335 shares issued and outstanding, respectively

     16,534       16,437       16,460   

Additional paid-in capital

     509,558       488,843       488,873   

Retained earnings

     1,667,794       1,579,290       1,702,119   

Accumulated other comprehensive income (loss)

     (192,097     (151,241     41,902   

Noncontrolling interest

     116,083       114,063       117,500   
   

Total shareholders’ equity

     2,117,872       2,047,392       2,366,854   
   

Total liabilities and shareholders’ equity

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

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

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

Operating activities

    

Net income before noncontrolling interest

   $ 135,639     $ 120,171   

Adjustments to reconcile net income to net cash provided by (used for) operating activities

    

Equity income of unconsolidated subsidiaries

     (1,685     (907)   

Depreciation

     32,666       32,685   

Amortization

     19,677       17,180   

Deferred income taxes

     3,654       3,012   

Stock compensation

     10,075       10,527   

Excess tax benefits from stock-based compensation

     (1,740     (1,465)   

Loss (gain) on sale of assets

     (3,106     229   

Changes in assets and liabilities, net of effects of business acquisitions and dispositions

    

Accounts and notes receivable

     (5,531     (1,111)   

Inventories

     (12,276     2,425   

Prepaid expenses and other current assets

     (983     (2,696)   

Accounts payable

     (4,271     (22,878)   

Employee compensation and benefits

     (18,686     (22,675)   

Accrued product claims and warranties

     2,466       2,901   

Income taxes

     17,709       12,780   

Other current liabilities

     10,209       25,481   

Pension and post-retirement benefits

     (553     (853)   

Other assets and liabilities

     (16,503     (22,195)   
   

Net cash provided by (used for) operating activities

     166,761       152,611   

Investing activities

    

Capital expenditures

     (31,312     (35,221)   

Proceeds from sale of property and equipment

     4,868       89   

Acquisitions, net of cash acquired

     (19,905     (733,105)   

Other

     (3,073     119   
   

Net cash provided by (used for) investing activities

     (49,422     (768,118)   

Financing activities

    

Net short-term borrowings

     (3,472     16,518   

Proceeds from long-term debt

     352,463       1,320,957   

Repayment of long-term debt

     (420,810     (661,422)   

Debt issuance costs

            (8,721)   

Excess tax benefits from stock-based compensation

     1,740       1,465   

Stock issued to employees, net of shares withheld

     16,163       9,551   

Repurchases of common stock

            (287)   

Dividends paid

     (44,140     (39,739)   
   

Net cash provided by (used for) financing activities

     (98,056     638,322   

Effect of exchange rate changes on cash and cash equivalents

     (8,762     101   
   

Change in cash and cash equivalents

     10,521       22,916   

Cash and cash equivalents, beginning of period

     50,077       46,056   
   

Cash and cash equivalents, end of period

   $ 60,598     $ 68,972   

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Pentair, Inc. and Subsidiaries

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

 

                                                                                                                                                       
In thousands, except share    Common shares    

Additional  

paid-in     

    Retained        

  Accumulated

  other

  comprehensive

       Total     Noncontrolling        
and per-share data    Number           Amount           capital          earnings           income (loss)        Pentair, Inc.       interest     Total  
   

Balance - December 31, 2011

     98,622,564     $ 16,437     $ 488,843     $ 1,579,290     $ (151,241   $ 1,933,329     $ 114,063     $ 2,047,392   

Net income

           132,644         132,644       2,995       135,639   

Change in cumulative translation adjustment

             (44,006     (44,006     (975     (44,981)   

Changes in market value of derivative financial instruments, net of $1,436 tax

             3,150       3,150         3,150   

Cash dividends - $0.44 per common share

           (44,140       (44,140       (44,140)   

Exercise of stock options, net of 35,570 shares tendered for payment

     492,777       82       14,973           15,055         15,055   

Issuance of restricted shares, net of cancellations

     154,536       26       3,532           3,558         3,558   

Amortization of restricted shares

         352           352         352   

Shares surrendered by employees to pay taxes

     (65,829     (11     (2,439         (2,450       (2,450)   

Stock compensation

         4,297           4,297         4,297   
   

Balance - June 30, 2012

     99,204,048     $ 16,534     $ 509,558     $ 1,667,794     $ (192,097   $ 2,001,789     $ 116,083     $ 2,117,872  

 

 
                

Additional  

paid-in     

capital     

   

Retained    

earnings

   

  Accumulated

  other

  comprehensive

  income (loss)

   

   Total

   Pentair, Inc.

   

Noncontrolling

  interest

   

Total

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

Balance - December 31, 2010

     98,409,192     $ 16,401     $ 474,489     $ 1,624,605     $ (22,342   $ 2,093,153     $ 111,879     $ 2,205,032   

Net income

           117,253         117,253       2,918       120,171   

Change in cumulative translation adjustment

             62,456       62,456       2,703       65,159   

Changes in market value of derivative financial instruments, net of $1,249 tax

             1,788       1,788         1,788   

Cash dividends - $0.40 per common share

           (39,739       (39,739       (39,739)   

Share repurchase

     (7,826     (1     (286         (287       (287)   

Exercise of stock options, net of 3,266 shares tendered for payment

     408,637       68       10,741           10,809         10,809   

Issuance of restricted shares, net of cancellations

     29,131       5       1,432           1,437         1,437   

Amortization of restricted shares

         480           480         480   

Shares surrendered by employees to pay taxes

     (72,799     (13     (2,683         (2,696       (2,696)   

Stock compensation

         4,700           4,700         4,700   
   

Balance - July 2, 2011

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

 

 

See accompanying notes to condensed consolidated financial statements

 

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Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

1. Basis of Presentation and Responsibility for Interim Financial Statements

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

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

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

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

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

 

2. New Accounting Standards

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

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

 

3. Stock-based Compensation

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

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

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

 

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Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

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

 

                                                             
     June 30,    
2012    
     July 2,      
2011      
 

 

 

Expected stock price volatility

     36.5%         35.5%   

Expected life

     5.7 yrs         5.5 yrs   

Risk-free interest rate

     0.90%         2.12%   

Dividend yield

     2.29%         2.16%   

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

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

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

 

4.     Earnings Per Common Share

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

 

                                                                                                                           
         Three months ended              Six months ended      
  

 

 

    

 

 

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

 

 

Weighted average common shares outstanding — basic

     99,047        98,333        98,856        98,190        

Dilutive impact of stock options and restricted stock

     2,118        1,732        1,929        1,635        

 

 

Weighted average common shares outstanding — diluted

     101,165        100,065        100,785        99,825        

 

 

Stock options excluded from the calculation of diluted earnings per share because the exercise price was greater than the average market price of the common shares

     443        1,776        2,010        2,001        

 

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Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

5. Restructuring

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

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

 

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

 

 

Severance and related costs

   $ 9,660      $ 11,500      $ —    

Asset impairment and other restructuring costs

     710        1,500        —    

 

 

Total restructuring costs

   $ 10,370      $ 13,000      $ —    

 

 

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

 

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

 

 

Beginning balance

   $ 12,805     $ 3,994     $ 3,994   

Costs incurred

     9,660       11,500       —    

Cash payments and other

     (8,570     (2,689     (909)    

 

 

Ending balance

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

 

 

 

6.         Acquisitions

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

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

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

 

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Notes to condensed consolidated financial statements (unaudited)

 

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

 

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

 

 

Pro forma net sales

   $ 953,375      $ 1,822,224  

Pro forma income before noncontrolling interest

     66,075        115,517  

Pro forma net income attributable to Pentair, Inc.

     64,650        112,599  

Pro forma earnings per common share

     

Basic

   $ 0.66      $ 1.15  

Diluted

   $ 0.65      $ 1.13  

Weighted average common shares outstanding

     

Basic

     98,333        98,190  

Diluted

     100,065        99,825  

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

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

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

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

 

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Notes to condensed consolidated financial statements (unaudited)

 

7.     Supplemental Balance Sheet Disclosures

 

                                                                                            

In thousands

 

Inventories

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

 

 

Raw materials and supplies

   $ 227,780      $ 219,487      $ 246,414   

Work-in-process

     50,860        47,707        49,515   

Finished goods

     181,399        182,669        188,866   

 

 

Total inventories

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

 

 

Property, plant and equipment

        

Land and land improvements

   $ 40,519      $ 41,111      $ 43,322   

Buildings and leasehold improvements

     251,977        244,246        255,317   

Machinery and equipment

     713,819        692,930        697,802   

Construction in progress

     34,699        40,251        41,066   

 

 

Total property, plant and equipment

     1,041,014        1,018,538        1,037,507   

Less accumulated depreciation and amortization

     659,951        631,013        626,960   

 

 

Property, plant and equipment, net

   $ 381,063      $ 387,525      $ 410,547   

 

 

 

8.     Goodwill and Other Identifiable Intangible Assets

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

 

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

 

 

Water & Fluid Solutions

   $ 1,994,781      $ 8,768      $ (25,034   $ 1,978,515   

Technical Products

     279,137                (2,518     276,619   

 

 

Consolidated Total

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

 

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

 

 

Water & Fluid Solutions

   $ 1,784,100      $ 466,182      $ 35,686     $ 2,285,968   

Technical Products

     281,944                5,518       287,462   

 

 

Consolidated Total

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

 

 

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

 

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Notes to condensed consolidated financial statements (unaudited)

 

The detail of acquired intangible assets consisted of the following:

 

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

 

 

 

 
Finite-life intangibles                  

Patents

  $ 5,895     $ (4,298   $ 1,597     $ 5,896     $ (4,038   $ 1,858     $ 15,485     $ (13,306   $ 2,179   
Proprietary technology     129,748       (45,994     83,754       128,841       (39,956     88,885       136,737       (34,423     102,314   
Customer relationships     356,814       (120,738     236,076       358,410       (109,887     248,523       380,263       (97,232     283,031   

Trade names

    1,501       (600     901       1,515       (530     985       1,569       (467     1,102   

 

 

Total finite-life intangibles

  $ 493,958     $ (171,630   $ 322,328     $ 494,662     $ (154,411   $ 340,251     $ 534,054     $ (145,428   $ 388,626   

 

 

Indefinite-life intangibles

                 

Trade names

    248,175       —         248,175       252,034       —         252,034       266,282       —         266,282   

 

 

Total intangibles, net

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

 

 

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

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

 

                                                                                                                                                                                         
     Q3-Q4                                     
In thousands    2012      2013      2014      2015      2016      2017  

 

 

Estimated amortization expense

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

 

9. Debt

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

 

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

 

 

Commercial paper

   1.22%   2016    $ 6,993     $ 3,497     $ —    

Revolving credit facilities

   1.99%   2016      205,600       168,500       262,064   

Private placement - fixed rate

   5.65%   2013-2017      400,000       400,000       400,000   

Private placement - floating rate

   1.07%   2013      100,000       205,000       205,000   

Public - fixed rate

   5.00%   2021      500,000       500,000       500,000   

Capital lease obligations

   3.72%   2025      14,671       15,788       18,362   

Other

   3.10%   2012-2016      7,945       16,302       21,481   

 

 
Total debt           1,235,209       1,309,087       1,406,907   

Less: Current maturities

          (1,193     (1,168     (1,289)    

          Short-term borrowings

          (222     (3,694     (21,451)    

 

 

Long-term debt

        $ 1,233,794     $ 1,304,225     $ 1,384,167   

 

 

 

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Notes to condensed consolidated financial statements (unaudited)

 

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

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

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

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

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

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

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

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

In addition to the Credit Facility, we have various other credit facilities with an aggregate availability of $73.1 million, of which $7.6 million was outstanding at June 30, 2012. Borrowings under these credit facilities bear interest at variable rates.

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

 

                                                                                                                                       
         Q3 -Q4                                                   
In thousands   

 

      2012

          2013           2014          2015          2016          2017      Thereafter           Total  

 

 

Contractual debt obligation maturities

   $ 246      $ 200,057      $ 17      $       $ 220,218      $ 300,000      $ 500,000      $ 1,220,538  

Capital lease obligations

     585        1,169        1,169        1,169        1,169        1,170        8,240        14,671  

 

 

Total maturities

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

 

 

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

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

 

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Notes to condensed consolidated financial statements (unaudited)

 

10.       Derivatives and Financial Instruments

Fair value measurements

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

 

Level 1:    Valuation is based on observable inputs such as quoted market prices (unadjusted) for identical assets or liabilities in active markets.
Level 2:    Valuation is based on inputs such as quoted market prices for similar assets or liabilities in active markets or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3:    Valuation is based upon other unobservable inputs that are significant to the fair value measurement.

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

Cash-flow Hedges

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

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

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

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

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

 

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Notes to condensed consolidated financial statements (unaudited)

 

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

Foreign currency contract

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

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

Fair value of financial information

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

 

                                                                                           
Recurring fair value measurements    As of June 30, 2012          
In thousands   

 

Fair value

   

 

(Level 1)

    

 

(Level 2)

   

 

(Level 3)

 

 

 

Cash-flow hedges

   $ (4,519   $       $ (4,519   $ —    

Foreign currency contract

     (1,425             (1,425     —    

Deferred compensation plan (1)

     26,327       26,327               —    

 

 

Total recurring fair value measurements

   $ 20,383     $ 26,327      $ (5,944   $ —    

 

 
Recurring fair value measurements    As of December 31, 2011          
In thousands   

 

Fair value

   

 

(Level 1)

    

 

(Level 2)

   

 

(Level 3)

 

 

   

 

 

 

Cash-flow hedges

   $ (8,034   $       $ (8,034   $ —    

Foreign currency contract

     (99             (99     —    

Deferred compensation plan (1)

     22,987       22,987               —    

 

 

Total recurring fair value measurements

   $ 14,854     $ 22,987      $ (8,133   $ —    

 

 

Nonrecurring fair value measurements

         

 

 

Goodwill (2)

   $ 242,800     $       $      $ 242,800   

 

 

Total nonrecurring fair value measurement

   $ 242,800     $       $      $ 242,800   

 

 
Recurring fair value measurements    As of July 2, 2011          
In thousands   

 

Fair value

   

 

(Level 1)

    

 

(Level 2)

   

 

(Level 3)

 

 

 

Cash-flow hedges

   $ (12,486   $       $ (12,486   $ —    

Foreign currency contract

                           —    

Deferred compensation plan (1)

     24,967       24,967               —    

 

 

Total recurring fair value measurements

   $ 12,481     $ 24,967      $ (12,486   $ —    

 

 

 

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Notes to condensed consolidated financial statements (unaudited)

 

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

 

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

 

11.         Income Taxes

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

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

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

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

 

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Notes to condensed consolidated financial statements (unaudited)

 

12.     Benefit Plans

Components of net periodic benefit cost were as follows:

 

                                                                                                           
     Three months ended  
  

 

 

 
     Pension benefits     Post-retirement  
  

 

 

   

 

 

 

In thousands

  

June 30,

2012

   

July 2,

2011

   

June 30,

2012

   

July 2,

2011

 
        

 

 

Service cost

   $ 3,761     $ 3,131     $ 55     $ 45   

Interest cost

     8,087       8,225       422       472   

Expected return on plan assets

     (7,844     (7,964              

Amortization of prior year service cost (benefit)

                   (6     (7)   

Recognized net actuarial loss (gains)

     2,577       972       (602     (827)   

 

 

Net periodic benefit cost (income)

   $ 6,581     $ 4,364     $ (131   $ (317)   

 

 
     Six months ended  
  

 

 

 
     Pension benefits     Post-retirement  
  

 

 

   

 

 

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

 

 

Service cost

   $ 7,522     $ 6,261     $ 110     $ 90   

Interest cost

     16,174       16,450       844       944   

Expected return on plan assets

     (15,688     (15,927              

Amortization of prior year service cost (benefit)

                   (12     (14)   

Recognized net actuarial loss (gains)

     5,154       1,943       (1,204     (1,653)   

 

 

Net periodic benefit cost (income)

   $ 13,162     $ 8,727     $ (262   $ (633)   

 

 

 

13.         Business Segments

Financial information by reportable segment is shown below:

 

                                                                                                           
     Three months ended     Six months ended  
  

 

 

   

 

 

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

 

 

Net sales to external customers

        

Water & Fluid Solutions

   $ 675,522     $ 631,994     $ 1,262,500     $ 1,147,362   

Technical Products

     266,003       278,181       537,202       553,086   

 

 

Consolidated

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

 

 

Intersegment sales

        

Water & Fluid Solutions

   $ (116   $ 316     $ (43   $ 771   

Technical Products

     1,535       1,559       2,894       2,558   

Other

     (1,419     (1,875     (2,851     (3,329)   

 

 

Consolidated

   $      $      $      $   

 

 

Operating income (loss)

        

Water & Fluid Solutions

   $ 91,989     $ 84,521     $ 155,666     $ 141,049   

Technical Products

     50,624       48,261       101,083       96,348   

Other

     (24,821     (23,360     (54,005     (41,798)   

 

 

Consolidated

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

 

 

 

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Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

14.         Warranty

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

 

                                                              

In thousands

  

June 30,

2012

   

December 31,

2011

   

July 2,

2011

 
      

 

 

Balance at beginning of the year

   $ 29,355     $ 30,050     $ 30,050   

Service and product warranty provision

     26,579       50,096       26,035   

Payments

     (24,025     (53,937     (25,040)   

Acquired

     156       3,575       3,623   

Translation

     (222     (429     343   

 

 

Balance at end of the period

   $ 31,843     $ 29,355     $ 35,011   

 

 

 

15.         Commitments and Contingencies

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

 

18


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Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

16.   Financial Statements of Subsidiary Guarantors

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

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

For the three months ended June 30, 2012

 

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

 

 

Net sales

   $      $ 628,860     $ 392,347     $ (79,682   $ 941,525   

Cost of goods sold

            421,655       287,437       (79,695     629,397   

 

 

Gross profit

            207,205       104,910       13       312,128   

Selling, general and administrative

     11,905       85,781       75,746       13       173,445   

Research and development

     245       10,958       9,688              20,891   

 

 

Operating income (loss)

     (12,150     110,466       19,476              117,792   

Earnings from investment in subsidiaries

     (62,199     (527     600       62,126       —    

Other (income) expense:

          

Equity income of unconsolidated subsidiaries

            (636                   (636)   

Net interest (income) expense

     (27,676     38,301       5,454              16,079   

 

 

Income before income taxes and noncontrolling interest

     77,725       73,328       13,422       (62,126     102,349   

Provision for income taxes

     5,895       23,935       (966            28,864   

 

 

Net income before noncontrolling interest

     71,830       49,393       14,388       (62,126     73,485   

Noncontrolling interest

                   1,655              1,655   

 

 

Net income attributable to Pentair, Inc.

   $ 71,830     $ 49,393     $ 12,733     $ (62,126   $ 71,830   

 

 

Comprehensive income (loss)

   $ (10,207   $ 22,945     $ (42,332   $ 19,164     $ (10,430)   

Less: Comprehensive income attributable to noncontrolling interest

                   (223            (223)  

 

 

Comprehensive income (loss) attributable to Pentair, Inc.

   $ (10,207   $ 22,945     $ (42,109   $ 19,164     $ (10,207)   

 

 

 

 

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Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

For the six months ended June 30, 2012

 

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

 

 

Net sales

   $      $ 1,186,928     $ 778,524     $ (165,750   $ 1,799,702   

Cost of goods sold

            807,713       564,599       (165,457     1,206,855   

 

 

Gross profit

            379,215       213,925       (293     592,847   

Selling, general and administrative

     28,789       174,144       145,815       (293     348,455   

Research and development

     468       21,568       19,612              41,648   

 

 

Operating income (loss)

     (29,257     183,503       48,498              202,744   

Earnings from investment in subsidiaries

     (115,592     (1,325     (364     117,281       —    

Other (income) expense:

          

Equity income of unconsolidated subsidiaries

            (1,544     (141            (1,685)   

Net interest (income) expense

     (56,710     76,484       11,073              30,847   

 

 

Income before income taxes and noncontrolling interest

     143,045       109,888       37,930       (117,281     173,582   

Provision for income taxes

     10,401       24,242       3,300              37,943   

 

 

Net income before noncontrolling interest

     132,644       85,646       34,630       (117,281     135,639   

Noncontrolling interest

                   2,995              2,995   

 

 

Net income attributable to Pentair, Inc.

   $ 132,644     $ 85,646     $ 31,635     $ (117,281   $ 132,644   

 

 

Comprehensive income (loss)

   $ 91,788     $ 59,198     $ 16,435      $ (73,613   $ 93,808   

Less: Comprehensive income attributable to noncontrolling interest

                   2,020              2,020   

 

 

Comprehensive income (loss) attributable to Pentair, Inc.

   $ 91,788     $ 59,198     $ 14,415      $ (73,613   $ 91,788   

 

 

 

20


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Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

June 30, 2012

 

                                                                                                                  
In thousands   

Parent

company

   

Guarantor

subsidiaries

   

Non-guarantor

subsidiaries

    Eliminations     Consolidated   

 

 
Assets   

Current assets

          

Cash and cash equivalents

   $ 6,135     $ 14,339     $ 40,124     $      $ 60,598   

Accounts and notes receivable, net

     736       348,556       281,087       (58,235     572,144   

Inventories

            241,629       218,410              460,039   

Deferred tax assets

     130,151       40,698       12,674       (124,624     58,899   

Prepaid expenses and other current assets

     44,061       12,282       107,023       (39,021     124,345   

 

 

Total current assets

     181,083       657,504       659,318       (221,880     1,276,025   

Property, plant and equipment, net

     17,953       132,314       230,796              381,063   

Other assets

          

Investments in/advances to subsidiaries

     2,911,498       1,414,260       85,952       (4,411,710     —    

Goodwill

            1,330,265       924,869              2,255,134   

Intangibles, net

            243,431       327,072              570,503   

Other

     65,638       8,931       48,115       (19,140     103,544   

 

 

Total other assets

     2,977,136       2,996,887       1,386,008       (4,430,850     2,929,181   

 

 

Total assets

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

 

 

 

Liabilities and Shareholders’ Equity

  

Current liabilities

          

Short-term borrowings

   $      $      $ 222     $      $ 222   

Current maturities of long-term debt

                   1,193              1,193   

Accounts payable

     5,334       188,673       152,549       (58,291     288,265   

Employee compensation and benefits

     15,771       19,855       53,888              89,514   

Current pension and post-retirement benefits

     9,052                            9,052   

Accrued product claims and warranties

     165       24,385       20,385              44,935   

Income taxes

     35,498       (1,801     (1,469            32,228   

Accrued rebates and sales incentives

            36,212       9,658              45,870   

Other current liabilities

     30,824       64,436       94,191       (39,014     150,437   

 

 

Total current liabilities

     96,644       331,760       330,617       (97,305     661,716   

Other liabilities

          

Long-term debt

     1,245,055       2,417,922       520,265       (2,949,448     1,233,794   

Pension and other retirement compensation

     185,513       (10,541     72,352              247,324   

Post-retirement medical and other benefits

     17,512       31,549              (19,140     29,921   

Long-term income taxes payable

     13,294                            13,294   

Deferred tax liabilities

            229,962       84,835       (124,624     190,173   

Due to (from) affiliates

     (442,406     675,455       601,727       (834,776     —    

Other non-current liabilities

     58,771       1,323       32,081              92,175   

 

 

Total liabilities

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

 

 

Shareholders’ equity attributable to Pentair, Inc.

     2,001,789       109,275       518,162       (627,437     2,001,789   

Noncontrolling interest

                   116,083              116,083   

 

 

Total shareholders’ equity

     2,001,789       109,275       634,245       (627,437     2,117,872   

 

 

Total liabilities and shareholders’ equity

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

 

 

 

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Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the six months ended June 30, 2012

 

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

 

 

Net cash provided by (used for) operating activities

   $ 10,612     $ 108,550     $ 47,599     $       $ 166,761   

Investing activities

           

Capital expenditures

     (1,980     (14,562     (14,770             (31,312)   

Proceeds from sale of property and equipment

            1,538       3,330               4,868   

Acquisitions, net of cash acquired

                   (19,905             (19,905)   

Other

                   (3,073             (3,073)   

 

 

Net cash provided by (used for) investing activities

     (1,980     (13,024     (34,418             (49,422)   

Financing activities

           

Net short-term borrowings

     (3,472                           (3,472)   

Proceeds from long-term debt

     352,463                             352,463   

Repayment of long-term debt

     (420,810                           (420,810)   

Net change in advances to subsidiaries

     98,720       (84,519     (14,201             —    

Excess tax benefits from stock-based compensation

     1,740                             1,740   

Stock issued to employees, net of shares withheld

     16,163                             16,163   

Dividends paid

     (43,628            (512             (44,140)   

 

 

Net cash provided by (used for) financing activities

     1,176       (84,519     (14,713             (98,056)   

Effect of exchange rate changes on cash and cash equivalents

     (6,770            (1,992             (8,762)   

 

 

Change in cash and cash equivalents

     3,038       11,007       (3,524             10,521   

Cash and cash equivalents, beginning of period

     3,097       3,332       43,648               50,077   

 

 

Cash and cash equivalents, end of period

   $ 6,135     $ 14,339     $ 40,124     $       $ 60,598   

 

 

 

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Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

For the three months ended July 2, 2011

 

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

 

 

Net sales

   $      $ 586,395      $ 398,634     $ (74,854   $ 910,175   

Cost of goods sold

            399,270        297,830       (74,661     622,439   

 

 

Gross profit

            187,125        100,804       (193     287,736   

Selling, general and administrative

     6,664       83,632        68,329       (193     158,432   

Research and development

     435       10,509        8,938              19,882   

 

 

Operating (loss) income

     (7,099     92,984        23,537              109,422   

Earnings from investment in subsidiaries

     (53,988                    53,988       —    

Other (income) expense:

           

Equity income of unconsolidated subsidiaries

     (607             (65            (672)   

Net interest (income) expense

     (26,636     38,107        3,142              14,613   

 

 

Income before income taxes and noncontrolling interest

     74,132       54,877        20,460       (53,988     95,481   

Provision for income taxes

     7,420       18,301        1,623              27,344   

 

 

Net income before noncontrolling interest

     66,712       36,576        18,837       (53,988     68,137   

Noncontrolling interest

                    1,425              1,425   

 

 

Net income attributable to Pentair, Inc.

   $ 66,712     $ 36,576      $ 17,412     $ (53,988   $ 66,712   

 

 

Comprehensive income (loss)

   $ 90,090     $ 41,534      $ 29,491     $ (68,809   $ 92,306   

Less: Comprehensive income attributable to noncontrolling interest

                    2,216              2,216   

 

 

Comprehensive income (loss) attributable to Pentair, Inc.

   $ 90,090     $ 41,534      $ 27,275     $ (68,809   $ 90,090   

 

 

 

23


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

For the six months ended July 2, 2011

 

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

 

 

Net sales

   $      $ 1,101,449      $ 740,212     $ (141,213   $ 1,700,448   

Cost of goods sold

            754,831        549,560       (140,738     1,163,653   

 

 

Gross profit

            346,618        190,652       (475     536,795   

Selling, general and administrative

     13,272       168,751        121,644       (475     303,192   

Research and development

     605       21,355        16,044              38,004   

 

 

Operating (loss) income

     (13,877     156,512        52,964              195,599   

Earnings from investment in subsidiaries

     (91,295                    91,295       —    

Other (income) expense:

           

Equity income of unconsolidated subsidiaries

     (783             (124            (907)   

Net interest (income) expense

     (54,016     76,593        1,361              23,938   

 

 

Income before income taxes and noncontrolling interest

     132,217       79,919        51,727       (91,295     172,568   

Provision for income taxes

     14,964       26,782        10,651              52,397   

 

 

Net income before noncontrolling interest

     117,253       53,137        41,076       (91,295     120,171   

Noncontrolling interest

                    2,918              2,918   

 

 

Net income attributable to Pentair, Inc.

   $ 117,253     $ 53,137      $ 38,158     $ (91,295   $ 117,253   

 

 

Comprehensive income (loss)

   $ 181,498     $ 63,306      $ 67,508     $ (125,193   $ 187,119   

Less: Comprehensive income attributable to noncontrolling interest

                    5,621              5,621   

 

 

Comprehensive income (loss) attributable to Pentair, Inc.

   $         181,498     $           63,306      $             61,887       $        (125,193)      $         181,498    

 

 

 

24


Table of Contents

Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

July 2, 2011

 

                                                                                              
In thousands    Parent
company
    Guarantor
subsidiaries
   

Non-

guarantor
subsidiaries

     Eliminations     Consolidated  

 

 
Assets   

Current assets

           

Cash and cash equivalents

   $ 4,836     $ 4,651     $ 59,485      $      $ 68,972   

Accounts and notes receivable, net

     796       317,365       375,242        (97,996     595,407   

Inventories

            203,998       280,797               484,795   

Deferred tax assets

     113,205       40,363       13,247        (105,982     60,833   

Prepaid expenses and other current assets

     8,958       14,973       118,638        (17,937     124,632   

 

 

Total current assets

     127,795       581,350       847,409        (221,915     1,334,639   

Property, plant and equipment, net

     20,172       110,551       279,824               410,547   

Other assets

           

Investments in/advances to subsidiaries

     2,856,562       599,056       686,070        (4,141,688     —    

Goodwill

            1,471,582       1,101,848               2,573,430   

Intangibles, net

            217,311       437,597               654,908   

Other

     75,538       4,821       23,477        (25,048     78,788   

 

 

Total other assets

     2,932,100       2,292,770       2,248,992        (4,166,736     3,307,126   

 

 

Total assets

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

 

 

 

Liabilities and Shareholders’ Equity

  

Current liabilities

           

Short-term borrowings

   $      $      $ 21,451      $      $ 21,451   

Current maturities of long-term debt

     2,905              29,220        (30,836     1,289   

Accounts payable

     5,781       160,537       247,182        (98,097     315,403   

Employee compensation and benefits

     32,294       22,791       53,751               108,836   

Current pension and post-retirement benefits

     8,733                             8,733   

Accrued product claims and warranties

     12,248       22,574       12,437               47,259   

Income taxes

     9,106       5,720       6,672               21,498   

Accrued rebates and sales incentives

            32,219       10,348               42,567   

Other current liabilities

     14,874       37,558       110,149        (18,215     144,366   

 

 

Total current liabilities

     85,941       281,399       491,210        (147,148     711,402   

Other liabilities

           

Long-term debt

     1,265,400       2,417,890       1,033,600        (3,332,723     1,384,167   

Pension and other retirement compensation

     136,901       38       80,082               217,021   

Post-retirement medical and other benefits

     17,679       35,323               (25,048     27,954   

Long-term income taxes payable

     23,832                             23,832   

Deferred tax liabilities

     10       213,201       128,192        (105,981     235,422   

Due to (from) affiliates

     (743,661     (261,361     1,024,935        (19,913     —    

Other non-current liabilities

     44,611       1,701       39,348               85,660   

 

 

Total liabilities

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

 

 

Shareholders’ equity attributable to Pentair, Inc.

     2,249,354       296,480       461,358        (757,838     2,249,354   

Noncontrolling interest

                   117,500               117,500   

 

 

Total shareholders’ equity

     2,249,354       296,480       578,858        (757,838     2,366,854   

 

 

Total liabilities and shareholders’ equity

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

 

 

 

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Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the six months ended July 2, 2011

 

                                                                                                                  
In thousands    Parent
company
    Guarantor
subsidiaries
   

Non-

guarantor
subsidiaries

    Eliminations      Consolidated    

 

 
Net cash provided by (used for) operating activities    $ (12,254   $ 190,161     $ (25,296   $       $ 152,611   

Investing activities

           

Capital expenditures

     (5,368     (13,584     (16,269             (35,221)   

Proceeds from sale of property and equipment

            42       47               89   

Acquisitions, net of cash acquired

                   (733,105             (733,105)   

Other

     902       (783                    119   

 

 

Net cash provided by (used for) investing activities

     (4,466     (14,325     (749,327             (768,118)   

Financing activities

           

Net short-term borrowings

     16,518       (29     29               16,518   

Proceeds from long-term debt

     1,320,957                             1,320,957   

Repayment of long-term debt

     (661,422                           (661,422)   

Debt issuance costs

     (8,721                           (8,721)   

Net change in advances to subsidiaries

     (670,522     (174,560     845,082               —    

Excess tax benefits from stock-based compensation

     1,465                             1,465   

Stock issued to employees, net of shares withheld

     9,551                             9,551   

Repurchases of common stock

     (287                           (287)   

Dividends paid

     (39,730            (9             (39,739)   

 

 

Net cash provided by (used for) financing activities

     (32,191     (174,589     845,102               638,322   

Effect of exchange rate changes on cash and cash equivalents

     50,546              (50,445             101   

 

 

Change in cash and cash equivalents

     1,635       1,247       20,034               22,916   

Cash and cash equivalents, beginning of period

     3,201       3,404       39,451               46,056   

 

 

Cash and cash equivalents, end of period

   $         4,836     $         4,651     $         59,485     $         —       $         68,972   

 

 

 

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Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

December 31, 2011

 

                                                                          
In thousands    Parent
company
    Guarantor
subsidiaries
   

Non-

guarantor
subsidiaries

     Eliminations     Consolidated  

 

 
Assets   

Current assets

           

Cash and cash equivalents

   $ 3,097     $ 3,332     $ 43,648      $      $ 50,077   
Accounts and notes receivable, net      828       360,027       263,201        (54,852     569,204   

Inventories

            227,472       222,391               449,863   
Deferred tax assets      134,240       40,698       13,382        (127,421     60,899   

Prepaid expenses and other current assets

     28,937       (6,886     107,121        (21,380     107,792   

 

 
Total current assets      167,102       624,643       649,743        (203,653     1,237,835   

Property, plant and equipment, net

     19,693       136,102       231,730               387,525   
Other assets            

Investments in/advances to subsidiaries

     2,910,927       1,447,522       92,396        (4,450,845     —    
Goodwill             1,330,265       943,653               2,273,918   

Intangibles, net

            250,792       341,493               592,285   
Other      63,508       27,337       23,045        (19,140     94,750   

 

 

Total other assets

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

 

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

 

 

 

Liabilities and Shareholders’ Equity

  

Current liabilities

           

Short-term borrowings

   $      $      $ 3,694      $      $ 3,694   
Current maturities of long-term debt      2,585              1,168        (2,585     1,168   

Accounts payable

     5,036       189,355       152,065        (51,598     294,858   
Employee compensation and benefits      24,466       30,015       54,880               109,361   

Current pension and post-retirement benefits

     9,052                             9,052   
Accrued product claims and warranties      165       22,037       20,428               42,630   

Income taxes

     40,999       (28,717     2,265               14,547   
Accrued rebates and sales incentives             25,612       11,397               37,009   

Other current liabilities

     25,050       53,960       71,890        (21,378     129,522   

 

 
Total current liabilities      107,353       292,262       317,787        (75,561     641,841   

Other liabilities

           
Long-term debt      1,312,053       2,417,922       542,411        (2,968,161     1,304,225   

Pension and other retirement compensation

     182,556       (7,701     73,760               248,615   
Post-retirement medical and other benefits      17,024       33,890               (19,140     31,774   

Long-term income taxes payable

     26,470                             26,470   
Deferred tax liabilities             229,962       86,416        (127,421     188,957   

Due to (from) affiliates

     (479,943     751,145       711,705        (982,907     —    
Other non-current liabilities      62,388       1,508       33,143               97,039   

 

 

Total liabilities

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

 

 
Shareholders’ equity attributable to Pentair, Inc.      1,933,329       97,673       402,775        (500,448     1,933,329   

Noncontrolling interest

                   114,063               114,063   

 

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

 

 

Total liabilities and shareholders’ equity

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

 

 

 

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Pentair, Inc. and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

17. Proposed Merger

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

 

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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. All statements, other than statements of historical fact are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” or similar words or the negative thereof or variations thereon. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Consequently, we cannot guarantee any forward-looking statements. Investors are cautioned not to place undue reliance on any forward-looking statements. The risks and uncertainties that may impact achievement of forward-looking statements include, but are not limited to:

 

 

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

 

 

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

 

   

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

 

   

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

 

   

the strength of product demand and the markets we serve;

 

   

the intensity of competition, including that from foreign competitors;

 

   

pricing pressures;

 

   

the financial condition of our customers;

 

   

market acceptance of our new product introductions and enhancements;

 

   

the introduction of new products and enhancements by competitors;

 

   

our ability to maintain and expand relationships with large customers;

 

   

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

 

   

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

 

 

increased risks associated with operating foreign businesses;

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

domestic and foreign governmental and regulatory policies;

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

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

Overview

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

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

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

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

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

On April 4, 2012, we acquired, as part of Water & Fluid Solutions, all of the outstanding shares of capital stock of Sibrape Indústria E Comércio de Artigos Para Lazer Ltda. and its subsidiary Hidrovachek Ltda. (collectively “Sibrape”) for $19.9 million, net of cash acquired. The Sibrape results have been included in our consolidated financial statements since the date of acquisition. Sibrape offers a complete line of pool products and is a market leader in pool liner sales throughout Brazil. Goodwill recorded as part of the purchase price allocation was $8.8 million, none of which is tax deductible. Identified intangible assets acquired as part of the acquisition were $4.8 million and were comprised entirely of customer lists, which have an estimated life of 11 years.

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

 

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

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

Additionally, during 2011, we completed other small acquisitions with purchase prices totaling $4.6 million, consisting of $2.9 million in cash and $1.7 million as a note payable, adding to Water & Fluid Solutions. Total goodwill recorded as part of the purchase price allocation was $4.3 million, none of which is tax deductible.

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

Key Trends and Uncertainties Regarding Our Existing Business

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

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

In 2012, our operating objectives include the following:

 

 

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

 

 

Optimizing our technological capabilities to increasingly generate innovative new products;

 

 

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

 

 

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

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

RESULTS OF OPERATIONS

Net Sales

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

 

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

 

 

Net sales

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

 

 

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

 

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

 

 

Volume

     1.1       (3.9     (0.4     0.5       (2.6     (0.5

Acquisition

     6.4       —          4.4       9.4       —          6.3  

Price

     2.4       2.4       2.4       2.1       1.7       2.0  

Currency

     (3.0     (2.9     (3.0     (2.0     (2.0     (2.0

 

 

Total

     6.9       (4.4     3.4       10.0       (2.9     5.8  

 

 

Consolidated net sales

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

 

 

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

 

 

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

 

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selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

 

 

unfavorable foreign currency effects; and

 

 

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

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

 

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

 

 

Water & Fluid Solutions

   $ 675,522      $ 631,994      $ 43,528       6.9   $ 1,262,500      $ 1,147,362      $ 115,138       10.0

Technical Products

     266,003        278,181        (12,178     (4.4 %)      537,202        553,086        (15,884     (2.9 %) 

 

 

Net sales

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

 

 

Water & Fluid Solutions

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

 

 

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

 

 

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

 

 

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

 

 

selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

 

 

unfavorable foreign currency effects.

Technical Products

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

 

 

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

 

 

unfavorable foreign currency effects

These decreases were partially offset by:

 

 

selective increases in selling prices to mitigate inflationary cost increases.

 

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Gross Profit

                                                                                                                       
     Three months ended      Six months ended  
  

 

 

    

 

 

 
In thousands   

      June 30,

      2012

    

%of    

sales    

    

July 2,

2011

    

%of     

sales     

    

      June 30,

      2012

    

%of    

sales    

    

July 2,

2011

    

%of     

sales     

 

 

 

Gross Profit

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

 

 

Percentage point change

        1.6 pts                 1.3 pts        

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

 

 

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

 

 

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

 

 

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

These increases were partially offset by:

 

 

inflationary increases related to raw materials and labor costs.

Selling, general and administrative (SG&A)

 

                                                                                                                                       
     Three months ended      Six months ended  
  

 

 

    

 

 

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

%of

sales

           July 2,
      2011
     %of     
sales     
 

 

 

SG&A

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

 

 

Percentage point change

        1.0 pts                 1.6 pts        

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

 

 

costs associated with the proposed transaction with Tyco Flow Control;

 

 

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

 

 

restructuring actions taken in 2012; and

 

 

certain increases in labor and related costs.

Research and development (R&D)

 

                                                                                                                                       
     Three months ended      Six months ended  
  

 

 

    

 

 

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

 

 

R&D

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

 

 

Percentage point change

        0.1 pts                 (0.1)pts         

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

Increases were primarily due to:

 

 

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

 

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

Decreases were primarily due to:

 

 

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

Operating income

Water & Fluid Solutions

 

                                                       
     Three months ended      Six months ended  
  

 

 

    

 

 

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

 

 

Operating Income

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

 

 

Percentage point change

        0.2 pts                 — pts         

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

 

 

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

 

 

selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

 

 

restructuring actions taken in 2012.

Technical Products

 

                                                       
     Three months ended      Six months ended  
  

 

 

    

 

 

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

 

 

Operating Income

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

 

 

Percentage point change

        1.7 pts                 1.4 pts         

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

 

 

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

 

 

selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

 

 

restructuring actions taken in 2012.

 

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Net interest expense

 

                                                       
     Three months ended     Six months ended  
  

 

 

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

 

 

Net interest expense

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

 

 

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

 

   

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

These increases were partially offset by:

 

   

interest benefits related to tax adjustments in 2012.

Provision for income taxes

 

                                           
     Three months ended      Six months ended  
  

 

 

    

 

 

 
In thousands          June 30,      
      2012       
    

July 2,

2011

           June 30,      
      2012       
    

July 2,

2011

 

 

 

Income before income taxes and noncontrolling interest

       $ 102,349                $     95,481                $ 173,582                $     172,568   

Provision for income taxes

     28,864              27,344              37,943              52,397   

Effective tax rate

     28.2%               28.6%               21.9%               30.4%    

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

 

 

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

 

 

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

 

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Operating activities

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

Investing activities

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

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

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

Financing activities

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

Impact of Tyco Flow Control merger

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

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

 

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Table of Contents

Other financial measures

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

 

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

 

 

Net cash provided by (used for) operating activities

   $ 166,761     $ 152,611  

Capital expenditures

     (31,312     (35,221

Proceeds from sale of property and equipment

     4,868       89  

 

 

Free cash flow

   $ 140,317     $ 117,479  

 

 

NEW ACCOUNTING STANDARDS

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

CRITICAL ACCOUNTING POLICIES

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls

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

 

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Table of Contents

PART II OTHER INFORMATION

ITEM 1. Legal Proceedings

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

 

ITEM 1A.   Risk Factors

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

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

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

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

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

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

 

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

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

 

 

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

 

 

the necessity of coordinating geographically separate organizations;

 

 

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

 

 

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

 

 

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

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

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

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

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

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

 

 

the operating and stock price performance of other comparable companies;

 

 

investor perception of New Pentair;

 

 

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

 

 

overall market fluctuations;

 

 

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

 

 

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

 

 

general economic conditions and other external factors.

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

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

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

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

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

 

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

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

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

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

 

 

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

 

 

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

 

 

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

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

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

 

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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 second quarter of 2012:

 

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

 

 

April 1 — April 28, 2012

     2,191      $44.10              $25,000,000   

April 29 — May 26, 2012

     5,586      $41.73              $25,000,000   

May 27 — June 30, 2012

     439      $40.05              $25,000,000   

 

 

Total

     8,216                

 

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

 

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

 

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

 

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

 

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ITEM 5. OTHER INFORMATION

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

Pentair, Inc and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

 

                                                                                            
     Year Ended December 31,  
In thousands    2011     2010     2009  

 

 

Net income before noncontrolling interest

   $ 38,521     $ 202,321     $ 116,200  
   

Other comprehensive income (loss), net of tax

      

Cumulative translation adjustment

     (93,706     (32,706     35,528  

Change in market value of derivative financial instruments, net of taxes of $2,884, $229 and ($2,323), respectively

     4,375       310       3,585  

Adjustment in retirement liability, net of taxes of ($26,650), ($8,159) and $164, respectively

     (41,683     (12,762     256  
   

Other comprehensive income (loss), net of tax

     (131,014     (45,158     39,369  
   

Comprehensive income (loss)

     (92,493     157,163       155,569  

Less: Comprehensive income (loss) attributable to noncontrolling interest

     2,184       2,274       (7,136
   

Comprehensive income (loss) attributable to Pentair, Inc.

   $ (94,677   $ 154,889     $ 162,705  

 

 

 

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

Pentair, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

Year Ended

(in thousands)

 

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

 

 

Comprehensive income (loss)

   $ (94,677   $ 57,225      $ (141,403   $ 86,362     $ (92,493)   

Less: Comprehensive income attributable to noncontrolling interest

                    2,184              2,184   

 

 

Comprehensive income (loss) attributable to Pentair, Inc.

   $ (94,677   $ 57,225      $ (143,587   $ 86,362     $ (94,677)   

 

 

December 31, 2010

           

 

 

Comprehensive income (loss)

   $ 154,889     $ 66,662      $ 60,202     $ (124,590   $ 157,163   

Less: Comprehensive income attributable to noncontrolling interest

                    2,274              2,274   

 

 

Comprehensive income (loss) attributable to Pentair, Inc.

   $ 154,889     $ 66,662      $ 57,928     $ (124,590   $ 154,889   

 

 

December 31, 2009

           

 

 

Comprehensive income (loss)

   $ 162,705     $ 12,384      $ 68,317     $ (87,837   $ 155,569   

Less: Comprehensive loss attributable to noncontrolling interest

                    (7,136            (7,136)   

 

 

Comprehensive income (loss) attributable to Pentair, Inc.

   $ 162,705     $ 12,384      $ 75,453     $ (87,837   $ 162,705   

 

 

 

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ITEM 6. Exhibits

(a) Exhibits

 

   2.1    Merger Agreement, dated as of March 27, 2012, among Tyco International Ltd., Tyco Flow Control International Ltd., Panthro Acquisition Co., Panthro Merger Sub, Inc. and Pentair, Inc. (Incorporated by reference to Exhibit 2.1 contained in Pentair’s Current Report on Form 8-K dated March 30, 2012).
   2.2    Separation and Distribution Agreement, dated as of March 27, 2012, by and among Tyco International Ltd., Tyco Flow Control International Ltd. and The ADT Corporation. (Incorporated by reference to Exhibit 2.2 contained in Pentair’s Current Report on Form 8-K dated March 30, 2012).
   31.1    Certification of Chief Executive Officer.
   31.2    Certification of Chief Financial Officer.
   32.1    Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   32.2    Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  101    The following materials from Pentair, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and July 2, 2011, (ii) the Condensed Consolidated Balance Sheets as of June 30, 2012, December 31, 2011 and July 2, 2011, (iii) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and July 2, 2011, (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2012 and July 2, 2011, and (v) Notes to Condensed Consolidated Financial Statements.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on July 24, 2012.

 

  PENTAIR, INC.  
  Registrant  
  By  

/s/ John L. Stauch

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

/s/ Mark C. Borin

 
    Mark C. Borin  
    Corporate Controller and Chief Accounting Officer  

 

 

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

 

   2.1    Merger Agreement, dated as of March 27, 2012, among Tyco International Ltd., Tyco Flow Control International Ltd., Panthro Acquisition Co., Panthro Merger Sub, Inc. and Pentair, Inc. (Incorporated by reference to Exhibit 2.1 contained in Pentair’s Current Report on Form 8-K dated March 30, 2012).
   2.2    Separation and Distribution Agreement, dated as of March 27, 2012, by and among Tyco International Ltd., Tyco Flow Control International Ltd. and The ADT Corporation. (Incorporated by reference to Exhibit 2.2 contained in Pentair’s Current Report on Form 8-K dated March 30, 2012).
   31.1    Certification of Chief Executive Officer.
   31.2    Certification of Chief Financial Officer.
   32.1    Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   32.2    Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  101    The following materials from Pentair, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and July 2, 2011, (ii) the Condensed Consolidated Balance Sheets as of June 30, 2012, December 31, 2011 and July 2, 2011, (iii) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and July 2, 2011, (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2012 and July 2, 2011, and (v) Notes to Condensed Consolidated Financial Statements.

 

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