UNITED STATES

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, 2007

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

Pentair, Inc.

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)

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 o

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

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

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

On July 27, 2007, 99,954,568 shares of the Registrant’s common stock were outstanding.

 

 

Pentair, Inc. and Subsidiaries

		Page(s)
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Statements of Income for the three and six months ended June 30, 2007 and July 1, 2006			3
Condensed Consolidated Balance Sheets as of June 30, 2007, December 31, 2006 and July 1, 2006			4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and July 1, 2006			5
Notes to Condensed Consolidated Financial Statements			6 – 22
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23 – 31
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk			31
ITEM 4. Controls and Procedures			32
Report of Independent Registered Public Accounting Firm			33
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings			34
ITEM 1A. Risk Factors			34
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			35
ITEM 4. Submission of Matters to a Vote of Security Holders			36
ITEM 6. Exhibits			37
Signature			38
Letter Regarding Unaudited Interim Financial Information
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Pentair, Inc. and Subsidiaries

		Three months ended								Six months ended
		June 30				July 1				June 30				July 1
In thousands, except per-share data		2007				2006				2007				2006
Net sales		$	922,645			$	862,022			$	1,730,640			$	1,633,411
Cost of goods sold			639,200				599,333				1,209,792				1,148,214
Gross profit			283,445				262,689				520,848				485,197
Selling, general and administrative			153,792				139,831				296,092				268,920
Research and development			14,808				14,883				29,758				29,746
Operating income			114,845				107,975				194,998				186,531
Net interest expense			18,885				12,553				34,005				25,837
Income from continuing operations before income taxes			95,960				95,422				160,993				160,694
Provision for income taxes			33,959				26,789				56,862				48,990
Income from continuing operations			62,001				68,633				104,131				111,704
Gain (loss) on disposal of discontinued operations, net of tax			64				—				207				(1,451	)
Net income		$	62,065			$	68,633			$	104,338			$	110,253
Earnings (loss) per common share
Basic
Continuing operations		$	0.63			$	0.68			$	1.05			$	1.11
Discontinued operations			—				—				—				(0.01	)
Basic earnings per common share		$	0.63			$	0.68			$	1.05			$	1.10
Diluted
Continuing operations		$	0.62			$	0.67			$	1.04			$	1.09
Discontinued operations			—				—				—				(0.01	)
Diluted earnings per common share		$	0.62			$	0.67			$	1.04			$	1.08
Weighted average common shares outstanding
Basic			98,874				100,509				98,915				100,498
Diluted			100,371				102,429				100,294				102,457
Cash dividends declared per common share		$	0.15			$	0.14			$	0.30			$	0.28

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries

		June 30				December 31				July 1
In thousands, except share and per-share data		2007				2006				2006
Assets
Current assets
Cash and cash equivalents		$	52,016			$	54,820			$	48,331
Accounts and notes receivable, net			533,144				422,134				502,982
Inventories			416,008				398,857				380,219
Deferred tax assets			52,642				50,578				45,922
Prepaid expenses and other current assets			42,453				31,239				27,659
Total current assets			1,096,263				957,628				1,005,113
Property, plant and equipment, net			354,322				330,372				312,146
Other assets
Goodwill			1,941,014				1,718,771				1,729,179
Intangibles, net			503,823				287,011				263,600
Other			77,822				71,197				80,167
Total other assets			2,522,659				2,076,979				2,072,946
Total assets		$	3,973,244			$	3,364,979			$	3,390,205
Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings		$	10,202			$	14,563			$	4,869
Current maturities of long-term debt			4,622				7,625				6,970
Accounts payable			219,151				206,286				224,237
Employee compensation and benefits			96,651				88,882				83,071
Current pension and post-retirement benefits			7,918				7,918				—
Accrued product claims and warranties			48,867				44,093				41,346
Income taxes			20,459				22,493				22,533
Accrued rebates and sales incentives			42,185				39,419				35,723
Other current liabilities			94,873				90,003				83,937
Total current liabilities			544,928				521,282				502,686
Other liabilities
Long-term debt			1,173,527				721,873				801,898
Pension and other retirement compensation			218,420				207,676				164,480
Post-retirement medical and other benefits			46,806				47,842				73,723
Long-term income taxes payable			14,705				—				—
Deferred tax liabilities			112,615				109,781				125,418
Other non-current liabilities			87,949				86,526				79,838
Total liabilities			2,198,950				1,694,980				1,748,043
Commitments and contingencies
Shareholders’ equity
Common shares par value $0.16 2/3; 99,969,848, 99,777,165 and 101,122,243 shares issued and outstanding, respectively			16,662				16,629				16,854
Additional paid-in capital			493,114				488,540				512,356
Retained earnings			1,219,555				1,148,126				1,102,773
Accumulated other comprehensive income			44,963				16,704				10,179
Total shareholders’ equity			1,774,294				1,669,999				1,642,162
Total liabilities and shareholders’ equity		$	3,973,244			$	3,364,979			$	3,390,205

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries

		Six months ended
		June 30				July 1
In thousands		2007				2006
Operating activities
Net income		$	104,338			$	110,253
Adjustments to reconcile net income to net cash provided by operating activities
(Gain) loss on disposal of discontinued operations			(207	)			1,451
Depreciation			30,185				30,386
Amortization			12,972				9,476
Deferred income taxes			(6,476	)			181
Stock compensation			12,626				12,484
Excess tax benefits from stock-based compensation			(2,213	)			(2,605	)
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable			(86,949	)			(74,193	)
Inventories			2,673				(28,032	)
Prepaid expenses and other current assets			(3,542	)			(2,809	)
Accounts payable			15,065				12,382
Employee compensation and benefits			(4,982	)			(16,832	)
Accrued product claims and warranties			4,561				(1,793	)
Income taxes			5,477				6,443
Other current liabilities			3,192				(19,933	)
Pension and post-retirement benefits			7,730				8,722
Other assets and liabilities			3,466				1,565
Net cash provided by continuing operations			97,916				47,146
Net cash provided by operating activities of discontinued operations			—				48
Net cash provided by operating activities			97,916				47,194
Investing activities
Capital expenditures			(30,068	)			(20,217	)
Proceeds from sale of property and equipment			1,536				221
Acquisitions, net of cash acquired			(482,885	)			(19,694	)
Divestitures			—				(24,007	)
Other			(779	)			(4,273	)
Net cash used for investing activities			(512,196	)			(67,970	)
Financing activities
Net short-term (repayments) borrowings			(4,708	)			4,763
Proceeds from long-term debt			1,121,402				414,233
Repayment of long-term debt			(673,341	)			(358,141	)
Debt issuance costs			(1,782	)			—
Proceeds from exercise of stock options			4,922				2,939
Repurchases of common stock			(9,280	)			(18,330	)
Excess tax benefits from stock-based compensation			2,213				2,605
Dividends paid			(29,991	)			(28,458	)
Net cash provided by financing activities			409,435				19,611
Effect of exchange rate changes on cash and cash equivalents			2,041				996
Change in cash and cash equivalents			(2,804	)			(169	)
Cash and cash equivalents, beginning of period			54,820				48,500
Cash and cash equivalents, end of period		$	52,016			$	48,331

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

1. Basis of Presentation and Responsibility for Interim Financial Statements

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

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

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

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

2. New Accounting Standards

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

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

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

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

In June 2007, the FASB ratified EITF Issue No. 07-03, Accounting for Nonrefundable Advance Payments for Goods and Services Received for Use in Future Research and Development Activities (“EITF 07-03”). EITF 07-03 requires companies to defer nonrefundable advance payments for goods and services and to expense that advance payment as the goods are delivered or services are rendered. If the company does not expect to have the goods delivered or services performed, the advance should be expensed. EITF 07-03 is effective for fiscal years beginning after December 15, 2007. We are currently evaluating the impact of adopting EITF 07-03 on our consolidated results of operations and financial condition.

3. Stock-based Compensation

Total stock-based compensation expense was $6.4 million and $5.9 million for the three months ended June 30, 2007 and July 1, 2006, respectively, and was $12.6 million and $12.5 million for the six months ended June 30, 2007 and July 1, 2006, respectively.

Non-vested shares of our common stock were granted during the first half of 2007 and 2006 to eligible employees with a vesting period of two to five years after issuance. Non-vested share awards are valued at market value on the date of grant and are typically expensed over the vesting period. Total compensation expense for non-vested share awards was $2.6 million and $2.5 million for the three months ended June 30, 2007 and July 1, 2006, respectively, and was $5.4 million and $4.8 million for the six months ended June 30, 2007 and July 1, 2006, respectively.

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

During the first half of 2007, option awards were granted under the Omnibus Stock Incentive Plan and the Outside Directors Nonqualified Stock Option Plan (together the “Plans”), each with an exercise price equal to the market price of our common stock on the date of grant. Prior to 2006, option grants under the Plans typically had a reload feature when shares were retired to pay the exercise price, allowing individuals to receive additional options upon exercise equal to the number of shares retired. Option awards granted after 2005 under the Plans do not have a reload feature attached to the option. The options vest one-third each year over a three-year period and have a ten-year contractual term. Compensation expense equal to the grant date fair value is recognized for these awards typically over the vesting period. Reload options are vested and expensed immediately. Total compensation expense for stock option awards was $3.8 million and $3.4 million for the three months ended June 30, 2007 and July 1, 2006, respectively, and was $7.2 million and $7.7 million for the six months ended June 30, 2007 and July 1, 2006, respectively.

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

		June 30				July 1
		2007				2006
Expected stock price volatility			28.5	%			31.5	%
Expected life		4.8		yrs.		4.5		yrs.
Risk-free interest rate			4.76	%			4.99	%
Dividend yield			1.74	%			1.54	%

The weighted-average fair value of options granted during the first half of 2007 and 2006 was $8.34 and $10.94 per share, respectively.

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

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

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

4. Earnings Per Common Share

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

		Three months ended								Six months ended
		June 30				July 1				June 30				July 1
In thousands, except per-share data		2007				2006				2007				2006
Earnings (loss) per common share — basic
Continuing operations		$	62,001			$	68,633			$	104,131			$	111,704
Discontinued operations			64				—				207				(1,451	)
Net income		$	62,065			$	68,633			$	104,338			$	110,253
Continuing operations		$	0.63			$	0.68			$	1.05			$	1.11
Discontinued operations			—				—				—				(0.01	)
Basic earnings per common share		$	0.63			$	0.68			$	1.05			$	1.10
Earnings (loss) per common share — diluted
Continuing operations		$	62,001			$	68,633			$	104,131			$	111,704
Discontinued operations			64				—				207				(1,451	)
Net income		$	62,065			$	68,633			$	104,338			$	110,253
Continuing operations		$	0.62			$	0.67			$	1.04			$	1.09
Discontinued operations			—				—				—				(0.01	)
Diluted earnings per common share		$	0.62			$	0.67			$	1.04			$	1.08
Weighted average common shares outstanding — basic			98,874				100,509				98,915				100,498
Dilutive impact of stock options and restricted stock			1,497				1,920				1,379				1,959
Weighted average common shares outstanding — diluted			100,371				102,429				100,294				102,457
Stock options excluded from the calculation of diluted earnings per share because the exercise price was greater than the average market price of the common shares			2,163				2,410				3,150				2,382

5. Acquisitions

On May 7, 2007, we acquired as part of our Technical Products Group the assets of Calmark Corporation (“Calmark”), a privately held business, for $28.4 million, including a cash payment of $29.3 million and transaction costs of $0.1 million, less cash acquired of $1.0 million. Calmark’s results of operations have been included in our condensed consolidated financial statements since the date of acquisition. Calmark’s product portfolio includes enclosures, guides, card locks, retainers, extractors, card pullers and other products for the aerospace, medical, telecommunications and military market segments, among others. Goodwill recorded as part of the purchase price allocation was $11.4 million, all of which is tax deductible. We continue to evaluate the purchase price allocation for the Calmark acquisition, including intangible assets, contingent liabilities and property, plant and equipment. We expect to revise the purchase price allocation as better information becomes available.

On April 30, 2007, we acquired as part of our Water Group all of the capital interests in Porous Media Corporation and Porous Media, Ltd. (together, “Porous Media”), two privately held filtration and separation technologies businesses, for $224.9 million, including a cash payment of $225.0 million and transaction costs of $0.4 million, less cash acquired of $0.5 million. Porous Media’s results of operations have been included in our condensed consolidated financial statements since the date of acquisition. Porous Media’s product portfolio includes high-performance filter media, membranes and related filtration products and purification systems for liquids, gases and solids for the general industrial, petrochemical, refining and healthcare market segments, among others. Goodwill recorded as part of the purchase price allocation was $110.4 million, all of which is tax deductible. We continue to evaluate the purchase price allocation for the Porous Media acquisition, including intangible assets, contingent liabilities and property, plant and equipment. We expect to revise the purchase price allocation as better information becomes available.

On February 2, 2007, we acquired as part of our Water Group all the outstanding shares of capital stock of Jung Pumpen GmbH (“Jung”) for $229.2 million, including a cash payment of $239.6 million and transaction costs of $1.0 million, less cash acquired of $11.4 million. The purchase price is subject to a post-closing net asset value adjustment. Jung’s results of operations have been included in our condensed consolidated financial statements since the date of acquisition. Jung is a leading German manufacturer of wastewater products for municipal and residential markets. Jung brings us its strong application engineering expertise and a complementary product offering, including a new line of water re-use products, submersible wastewater and drainage pumps, wastewater disposal units and tanks. Jung also brings to Pentair its well-

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

established European presence, a state-of-the-art training facility in Germany, and sales offices in Germany, Austria, France, Hungary, Poland and Slovakia. Goodwill recorded as part of the purchase price allocation was $90.2 million, of which approximately $53 million is tax deductible. We continue to evaluate the purchase price allocation for the Jung acquisition, including intangible assets, contingent liabilities, and property, plant and equipment. We expect to revise the purchase price allocation as better information becomes available.

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

During 2006, we completed several other small acquisitions totaling $14.2 million in cash and notes payable, adding to both our Water and Technical Products Groups. Total goodwill recorded as part of the initial purchase price allocations was $8.1 million, of which $2.9 million is tax deductible. We continue to evaluate the purchase price allocations for these acquisitions and expect to revise the purchase price allocations as better information becomes available.

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

		Three months ended								Six months ended
		June 30				July 1				June 30				July 1
In thousands, except per-share data		2007				2006				2007				2006
Pro forma net sales from continuing operations		$	928,577			$	902,701			$	1,760,543			$	1,715,830
Pro forma net income from continuing operations			61,871				68,916				103,815				112,251
Pro forma earnings per common share — continuing operations
Basic		$	0.63			$	0.69			$	1.05			$	1.12
Diluted		$	0.62			$	0.67			$	1.04			$	1.10
Weighted average common shares outstanding
Basic			98,874				100,509				98,915				100,498
Diluted			100,371				102,429				100,294				102,457

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

6. Discontinued Operations

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

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

Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

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

		Three months ended								Six months ended
		June 30				July 1				June 30				July 1
In thousands		2007				2006				2007				2006
Gain (loss) on disposal of discontinued operations		$	100			$	(683	)		$	325			$	(3,937	)
Income tax (expense) benefit			(36	)			683				(118	)			2,486
Gain (loss) on disposal of discontinued operations, net of tax		$	64			$	—			$	207			$	(1,451	)

7. Inventories

Inventories were comprised of:

		June 30				December 31				July 1
In thousands		2007				2006				2006
Raw materials and supplies		$	198,651			$	186,508			$	173,432
Work-in-process			55,133				55,141				50,761
Finished goods			162,224				157,208				156,026
Total inventories		$	416,008			$	398,857			$	380,219

8. Comprehensive Income

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

		Three months ended								Six months ended
		June 30				July 1				June 30				July 1
In thousands		2007				2006				2007				2006
Net income		$	62,065			$	68,633			$	104,338			$	110,253
Changes in cumulative foreign currency translation adjustment			11,021				4,594				26,947				8,491
Changes in market value of derivative financial instruments classified as cash flow hedges			1,549				1,111				1,312				2,674
Comprehensive income		$	74,635			$	74,338			$	132,597			$	121,418

9. Goodwill and Other Intangible Assets

In thousands		Water				Technical Products				Consolidated
Balance at December 31, 2006		$	1,449,460			$	269,311			$	1,718,771
Acquired			197,225				11,212				208,437
Purchase accounting adjustments			(245	)			209				(36	)
Foreign currency translation			7,453				6,389				13,842
Balance at June 30, 2007		$	1,653,893			$	287,121			$	1,941,014

Changes in the carrying amount of goodwill for the six months ended June 30, 2007 by segment were as follows: for our Water Group, the acquired goodwill relates to the Jung and Porous Media acquisitions; and for our Technical Products Group, the acquired goodwill relates to the Calmark acquisition. The purchase accounting adjustments recorded during the first half of 2007 related to the Krystil Klear acquisition and other small acquisitions. We finalized our purchase price allocation for the Krystil Klear acquisition during the first quarter of 2007.

Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Intangible assets, other than goodwill, were comprised of:

		June 30, 2007													December 31, 2006										July 1, 2006
		Gross												Gross												Gross
		carrying				Accum.								carrying				Accum.								carrying				Accum.
In thousands		amount				amort				Net				amount				amort				Net				amount				amort				Net
Finite-life intangibles
Patents		$	15,443			$	(6,949	)		$	8,494			$	15,433			$	(6,001	)		$	9,432			$	18,711			$	(5,123	)		$	13,588
Non-compete agreements			4,922				(3,362	)			1,560				4,343				(3,091	)			1,252				4,129				(2,520	)			1,609
Proprietary technology			53,538				(9,997	)			43,541				45,755				(8,240	)			37,515				51,493				(7,302	)			44,191
Customer relationships			256,316				(23,449	)			232,867				110,616				(15,924	)			94,692				87,741				(11,539	)			76,202
Total finite-life intangibles		$	330,219			$	(43,757	)		$	286,462			$	176,147			$	(33,256	)		$	142,891			$	162,074			$	(26,484	)		$	135,590
Indefinite-life intangibles
Brand names		$	217,361			$	—			$	217,361			$	144,120			$	—			$	144,120			$	128,010			$	—			$	128,010
Total intangibles, net										$	503,823											$	287,011											$	263,600

Intangible asset amortization expense was approximately $7.1 million and $3.4 for the three months ended June 30, 2007 and July 1, 2006, respectively, and was approximately $10.9 million and $6.6 million for the six months ended June 30, 2007 and July 1, 2006, respectively. The estimated future amortization expense for identifiable intangible assets during the remainder of 2007 and the next five years is as follows:

In thousands		2007 Q3 - Q4				2008				2009				2010				2011				2012
Estimated amortization expense		$	13,669			$	23,485			$	22,941			$	22,278			$	22,094			$	21,155

10. Debt

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

		Average
		interest rate				Maturity				June 30				December 31				July 1
In thousands		June 30, 2007				(Year)				2007				2006				2006
Commercial paper, maturing within 50 days			5.72	%						$	215,019			$	208,882			$	217,287
Revolving credit facilities			5.34	%			2012				98,453				25,000				95,900
Private placement — fixed rate			5.65	%			2013 - 2017				400,000				135,000				135,000
Private placement — floating rate			5.91	%			2012 - 2013				205,000				100,000				100,000
Senior notes			7.85	%			2009				250,000				250,000				250,000
Other			4.19	%			2007 - 2016				16,785				21,972				11,760
Total contractual debt obligations											1,185,257				740,854				809,947
Interest rate swap monetization deferred income											3,094				3,207				3,790
Total debt, including current portion per balance sheet											1,188,351				744,061				813,737
Less: Current maturities											(4,622	)			(7,625	)			(6,970	)
Short-term borrowings											(10,202	)			(14,563	)			(4,869	)
Long-term debt										$	1,173,527			$	721,873			$	801,898

In June 2007, we entered into an amended and restated multi-currency revolving credit facility (the “Credit Facility”). The Credit Facility creates an unsecured, committed revolving credit facility of up to $800 million, with multi-currency sub-facilities to support investments outside the U.S. The Credit Agreement expires June 4, 2012. Initially, borrowings under the Credit Facility will bear interest at the rate of LIBOR plus 0.50%. Interest rates and fees under the Credit Facility vary based on our credit ratings.

We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We use the Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. As of June 30, 2007, we had $215.0 million of commercial paper outstanding that matures within 50 days. All of the commercial paper was classified as long-term as we have the intent and the ability to refinance such obligations on a long-term basis under the Credit Facility.

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

In addition to the Credit Facility, we have $25 million of uncommitted credit facilities, under which we had $10.2 million outstanding as of June 30, 2007.

In May 2007, we entered into a Note Purchase Agreement with various institutional investors (the “Agreement”) for the sale of $300 million aggregate principal amount of our 5.87% Senior Notes (“Fixed Notes”) and $105 million aggregate principal amount of our Floating Rate Senior Notes (“Floating Notes” and with the Fixed Notes, the “Notes”). The Fixed Notes are due in May 2017. The Floating Notes are due in May 2012 and bear interest equal to the 3 month LIBOR plus 0.50%. The Agreement contains customary events of default.

We used $250 million of the proceeds from the sale of the Notes to retire the $250 million 364-day Term Loan Agreement that we entered into in April 2007, which we used in part to pay the cash purchase price of our Porous Media acquisition which closed in April 2007.

We were in compliance with all debt covenants as of June 30, 2007.

Debt outstanding at June 30, 2007 matures on a calendar year basis as follows:

In thousands		2007 Q3-Q4				2008				2009				2010				2011				2012				Thereafter				Total
Contractual debt obligation maturities		$	12,405			$	1,401			$	250,254			$	185			$	66			$	420,917			$	500,029			$	1,185,257
Other maturities			583				1,237				922				48				48				48				208				3,094
Total maturities		$	12,988			$	2,638			$	251,176			$	233			$	114			$	420,965			$	500,237			$	1,188,351

11. Derivatives and Financial Instruments

Cash-flow hedges

In September 2005, we entered into a $100 million interest rate swap agreement with several major financial institutions to exchange variable rate interest payment obligations for fixed rate obligations without the exchange of the underlying principle amounts in order to manage interest rate exposures. The effective date of the fixed rate swap was April 25, 2006. The swap agreement has a fixed interest rate of 4.68% and expires in July 2013. The fixed interest rate of 4.68% plus the .60% interest rate spread over LIBOR results in an effective fixed interest rate of 5.28%. The fair value of the swap was an asset of $3.9 million at June 30, 2007 and is recorded in Other assets.

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

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

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

12. Income Taxes

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

The effective income tax rate for the six months ended June 30, 2007 was 35.3% compared to 30.5% for the six months ended July 1, 2006. The tax rate for the first half of 2006 included a favorable adjustment in the second quarter primarily related to the resolution of Internal Revenue Service (“IRS”) examinations for the periods of 2002-2003 and a favorable adjustment in the first quarter related to a prior year tax return. We expect the effective tax rate for the remainder of 2007 to be between 35.0% and 35.5%, resulting in a full year effective income tax rate of between 35.0% and 35.5%. However, we continue to actively pursue initiatives to reduce our effective tax rate. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.

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

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

Subsequent to the adjustment to retained earnings of $2.9 million, our total liability for unrecognized tax benefits as of January 1, 2007, the date of adoption of FIN 48, was $15.0 million, which, if recognized, would affect our effective tax rate. Included in the total liability for unrecognized tax benefits of $15.0 million at the date of adoption of FIN 48 was $1.8 million related to discontinued operations, which, if recognized, would affect the effective tax rate for discontinued operations.

We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Net interest expense, respectively, which is consistent with our past practices. As of January 1, 2007, we had recorded approximately $0.3 million for the possible payment of penalties and $1.5 million related to the possible payment of interest.

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

During the first half of 2007, our total liability for unrecognized tax benefits did not materially increase or decrease. It is reasonably possible that this gross liability for unrecognized tax benefits will decrease by $1.7 million during the next twelve months as a result of audits and the expiration of statutes of limitations in various jurisdictions.

13. Benefit Plans

Components of net periodic benefit cost for the three and six months ended June 30, 2007 and July 1, 2006 were as follows:

		Three months ended
		Pension benefits								Post-retirement
		June 30				July 1				June 30				July 1
In thousands		2007				2006				2007				2006
Service cost		$	4,331			$	4,512			$	146			$	184
Interest cost			7,891				7,343				746				799
Expected return on plan assets			(7,133	)			(6,974	)			—				—
Amortization of transition obligation			36				31				—				—
Amortization of prior year service cost (benefit)			40				77				(62	)			(59	)
Recognized net actuarial loss (gains)			798				1,009				(355	)			(212	)
Net periodic benefit cost		$	5,963			$	5,998			$	475			$	712

		Six months ended
		Pension benefits								Post-retirement
		June 30				July 1				June 30				July 1
In thousands		2007				2006				2007				2006
Service cost		$	8,662			$	9,024			$	292			$	368
Interest cost			15,782				14,686				1,492				1,598
Expected return on plan assets			(14,266	)			(13,948	)			—				—
Amortization of transition obligation			72				62				—				—
Amortization of prior year service cost (benefit)			80				154				(124	)			(118	)
Recognized net actuarial loss (gains)			1,596				2,018				(710	)			(424	)
Net periodic benefit cost		$	11,926			$	11,996			$	950			$	1,424

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

14. Business Segments

Financial information by reportable segment for the three and six months ended June 30, 2007 and July 1, 2006 is shown below:

		Three months ended								Six months ended
		June 30				July 1				June 30				July 1
In thousands		2007				2006				2007				2006
Net sales to external customers
Water		$	665,495			$	605,516			$	1,220,907			$	1,122,685
Technical Products			257,150				256,506				509,733				510,726
Consolidated		$	922,645			$	862,022			$	1,730,640			$	1,633,411
Intersegment sales
Water		$	46			$	55			$	260			$	105
Technical Products			1,689				1,312				2,585				2,201
Other			(1,735	)			(1,367	)			(2,845	)			(2,306	)
Consolidated		$	—			$	—			$	—			$	—
Operating income (loss)
Water		$	90,978			$	84,191			$	151,857			$	139,778
Technical Products			36,140				39,678				67,771				77,382
Other			(12,273	)			(15,894	)			(24,630	)			(30,629	)
Consolidated		$	114,845			$	107,975			$	194,998			$	186,531

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

15. Warranty

The changes in the carrying amount of service and product warranties for the six months ended June 30, 2007 and July 1, 2006 were as follows:

		June 30				July 1
In thousands		2007				2006
Balance at beginning of the year		$	34,093			$	33,551
Service and product warranty provision			35,004				20,576
Payments			(31,559	)			(22,910	)
Acquired			1,116				—
Translation			213				129
Balance at end of the period		$	38,867			$	31,346

16. Commitments and Contingencies

Environmental and Litigation

Except as provided below, there have been no further material developments from the disclosures contained in our 2006 Annual Report on Form 10-K.

Horizon Litigation

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

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

The only remaining unresolved claims in this case were those brought by Celebrity for damages resulting from the outbreak. Celebrity filed an amended complaint seeking attorney fees and costs for prior litigation as well as out-of-pocket losses, lost profits, and loss of business

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

enterprise value. The first trial in 2006 resulted in a verdict against the Essef defendants for Celebrity’s out-of-pocket expenses of $10.4 million. Verdicts for lost profits ($47.6 million) and lost enterprise value ($135 million) were reversed in January 2007. In the retrial in June 2007, the jury awarded Celebrity damages for lost profits for 1994 and 1995 of $15.2 million (after netting for amounts taken into account by the earlier verdict for out-of-pocket expenses). The verdict was exclusive of pre-judgment interest and attorneys’ fees. We cannot predict whether Celebrity will appeal from the verdicts rendered in the trials or the dismissal of Celebrity’s claim for lost enterprise value.

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

We believe that any judgment we pay in this matter would be tax-deductible in the year paid or in subsequent years. In addition to the impact of any loss on this matter on our earnings per share when recognized, we may need to borrow funds from our banks or other sources to pay any judgment finally determined after exhaustion of all appeals.

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

17. Financial Statements of Subsidiary Guarantors

The $250 million Senior Notes due 2009 are jointly and severally guaranteed by domestic subsidiaries (the “Guarantor Subsidiaries”), each of which is directly or indirectly wholly-owned by Pentair (the “Parent Company”). The following supplemental financial information sets forth the condensed consolidated balance sheets as of June 30, 2007, December 31, 2006 and July 1, 2006, the related condensed consolidated statements of income for the three and six months ended June 30, 2007 and July 1, 2006, and statements of cash flows for the six months ended June 30, 2007 and July 1, 2006, for the Parent Company, the Guarantor Subsidiaries, the non-guarantor subsidiaries and total consolidated Pentair and subsidiaries.

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
For the three months ended June 30, 2007

		Parent				Guarantor				Non-Guarantor
In thousands		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Net sales		$	—			$	745,357			$	229,987			$	(52,699	)		$	922,645
Cost of goods sold			—				526,287				165,516				(52,603	)			639,200
Gross profit			—				219,070				64,471				(96	)			283,445
Selling, general and administrative			3,696				121,528				28,664				(96	)			153,792
Research and development			—				11,127				3,681				—				14,808
Operating (loss) income			(3,696	)			86,415				32,126				—				114,845
Net interest (income) expense			(10,371	)			29,622				(366	)			—				18,885
Income from continuing operations before income taxes			6,675				56,793				32,492				—				95,960
Provision for income taxes			2,263				20,805				10,891				—				33,959
Income from continuing operations			4,412				35,988				21,601				—				62,001
Gain on disposal of discontinued operations, net of tax			64				—				—				—				64
Net income		$	4,476			$	35,988			$	21,601			$	—			$	62,065

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
For the six months ended June 30, 2007

		Parent				Guarantor				Non-Guarantor
In thousands		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Net sales		$	—			$	1,384,948			$	442,419			$	(96,727	)		$	1,730,640
Cost of goods sold			—				983,484				322,531				(96,223	)			1,209,792
Gross profit			—				401,464				119,888				(504	)			520,848
Selling, general and administrative			7,900				220,777				67,919				(504	)			296,092
Research and development			—				22,634				7,124				—				29,758
Operating (loss) income			(7,900	)			158,053				44,845				—				194,998
Net interest (income) expense			(24,415	)			59,337				(917	)			—				34,005
Income from continuing operations before income taxes			16,515				98,716				45,762				—				160,993
Provision for income taxes			5,679				35,814				15,369				—				56,862
Income from continuing operations			10,836				62,902				30,393				—				104,131
Gain on disposal of discontinued operations, net of tax			207				—				—				—				207
Net income		$	11,043			$	62,902			$	30,393			$	—			$	104,338

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

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
June 30, 2007

		Parent				Guarantor				Non-Guarantor
In thousands		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets
Current assets
Cash and cash equivalents		$	5,842			$	6,507			$	39,667			$	—			$	52,016
Accounts and notes receivable, net			118				396,353				189,405				(52,732	)			533,144
Inventories			—				293,082				122,926				—				416,008
Deferred tax assets			92,809				34,212				5,368				(79,747	)			52,642
Prepaid expenses and other current assets			7,577				11,945				36,584				(13,653	)			42,453
Total current assets			106,346				742,099				393,950				(146,132	)			1,096,263
Property, plant and equipment, net			4,282				219,224				130,816				—				354,322
Other assets
Investments in subsidiaries			2,228,747				89,906				526,528				(2,845,181	)			—
Goodwill			—				1,589,798				351,216				—				1,941,014
Intangibles, net			—				353,784				150,039				—				503,823
Other			76,363				14,368				12,471				(25,380	)			77,822
Total other assets			2,305,110				2,047,856				1,040,254				(2,870,561	)			2,522,659
Total assets		$	2,415,738			$	3,009,179			$	1,565,020			$	(3,016,693	)		$	3,973,244
Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings		$	—			$	—			$	10,202			$	—			$	10,202
Current maturities of long-term debt			8,166				262				305,950				(309,756	)			4,622
Accounts payable			319				168,959				103,632				(53,759	)			219,151
Employee compensation and benefits			12,059				48,603				35,989				—				96,651
Current pension and retirement medical benefits			7,918				—				—				—				7,918
Accrued product claims and warranties			—				33,539				15,328				—				48,867
Income taxes			2,292				6,239				11,928				—				20,459
Accrued rebates and sales incentives			—				36,315				5,870				—				42,185
Other current liabilities			17,190				53,151				36,428				(11,896	)			94,873
Total current liabilities			47,944				347,068				525,327				(375,411	)			544,928
Other liabilities
Long-term debt			1,131,347				1,786,778				59,767				(1,804,365	)			1,173,527
Pension and other retirement compensation			127,350				28,176				62,894				—				218,420
Post-retirement medical and other benefits			22,458				49,728				—				(25,380	)			46,806
Long-term income taxes payable			14,705				—				—				—				14,705
Deferred tax liabilities			—				161,360				31,002				(79,747	)			112,615
Due to / (from) affiliates			(733,308	)			279,143				638,175				(184,010	)			—
Other non-current liabilities			30,948				7,097				49,904				—				87,949
Total liabilities			641,444				2,659,350				1,367,069				(2,468,913	)			2,198,950
Shareholders’ equity			1,774,294				349,829				197,951				(547,780	)			1,774,294
Total liabilities and shareholders’ equity		$	2,415,738			$	3,009,179			$	1,565,020			$	(3,016,693	)		$	3,973,244