PNR-2013.12.31-10K


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-11625
Pentair Ltd.
 
(Exact name of Registrant as specified in its charter)
Switzerland
 
98-1050812
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification number)
 
 
Freier Platz 10, 8200 Schaffhausen, Switzerland
 
 
(Address of principal executive offices)
 
 
Registrant’s telephone number, including area code: 41-52-630-48-00
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Shares, CHF 0.50 par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes þ    No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨    No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes þ    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit to post such files).    Yes þ    No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in PART III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  þ
  
Accelerated filer  o
  
Non-accelerated filer  o
  
Smaller reporting company  o
 
  
 
  
(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 Act).    Yes ¨    No þ
Aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of $57.69 per share as reported on the New York Stock Exchange on June 28, 2013 (the last business day of Registrant’s most recently completed second quarter): $11,254,968,822
The number of shares outstanding of Registrant’s only class of common stock on December 31, 2013 was 197,356,157.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant’s definitive proxy statement for its annual meeting to be held on May 20, 2014, are incorporated by reference in this Form 10-K in response to Part III, ITEM 10, 11, 12, 13 and 14.




Pentair Ltd.
Annual Report on Form 10-K
For the Year Ended December 31, 2013
 
 
 
 
  
Page
PART I
 
 
 
ITEM 1.
 
  
 
 
 
ITEM 1A.
 
  
 
 
 
ITEM 1B.
 
  
 
 
 
ITEM 2.
 
  
 
 
 
 
 
ITEM 3.
 
  
 
 
 
 
 
ITEM 4.
 
  
 
PART II
 
 
 
ITEM 5.
 
  
 
 
 
 
 
ITEM 6.
 
  
 
 
 
ITEM 7.
 
  
 
 
 
ITEM 7A.
 
  
 
 
 
ITEM 8.
 
  
 
 
 
ITEM 9.
 
  
 
 
 
ITEM 9A.
 
  
 
 
 
ITEM 9B.
 
  
 
PART III
 
 
 
ITEM 10.
 
  
 
 
 
ITEM 11.
 
  
 
 
 
ITEM 12.
 
  
 
 
 
ITEM 13.
 
  
 
 
 
ITEM 14.
 
  
 
PART IV
 
 
 
ITEM 15.
 
  
 
 
 
 
 
  




PART I

ITEM 1.    BUSINESS
GENERAL
Pentair Ltd. is a focused diversified industrial manufacturing company comprising four reporting segments: Valves & Controls, Process Technologies, Flow Technologies and Technical Solutions. Valves & Controls designs, manufactures, markets and services valves, fittings, automation and controls and actuators. Process Technologies designs, manufactures, markets and services innovative water system products and solutions to meet filtration, separation and fluid process management challenges in food and beverage, water, wastewater, swimming pools and aquaculture applications. Flow Technologies designs, manufactures and markets products and services designed for the transfer and flow of clean water, wastewater and a variety of industrial applications. Technical Solutions designs, manufactures, markets and services products that guard and protect some of the world’s most sensitive electronics and electronic equipment, as well as heat management solutions designed to provide thermal protection to temperature sensitive fluid applications.
Pentair Strategy
Our strategy is to drive sustainable, profitable growth and return on invested capital improvements through:
building operational excellence through the Pentair Integrated Management System ("PIMS") consisting of lean enterprise, growth and talent management;
driving long-term growth in sales, operating income and cash flows, through growth and productivity initiatives along with acquisitions;
developing new products and enhancing existing products;
penetrating attractive growth markets, particularly outside of the United States;
expanding multi-channel distribution; and
proactively managing our business portfolio for optimal value creation, including consideration of new business platforms.
Unless the context otherwise indicates, references herein to “Pentair,” the “Company,” and such words as “we,” “us,” and “our” include Pentair Ltd. and its consolidated subsidiaries. We are a Swiss corporation limited by shares that was formed in 2000. We are the successor to Pentair, Inc., a Minnesota corporation formed in 1966 and our wholly-owned subsidiary, under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
HISTORY AND DEVELOPMENT
Pentair Ltd. took its current form on September 28, 2012 as a result of a reverse acquisition (the "Merger") involving Pentair, Inc. and an indirect, wholly-owned subsidiary of Flow Control (defined below), with Pentair, Inc. surviving as an indirect, wholly-owned subsidiary of Pentair Ltd. "Flow Control" refers to Pentair Ltd. prior the Merger. Prior to the Merger, Tyco International Ltd. ("Tyco") engaged in an internal restructuring whereby it transferred to Flow Control certain assets related to the flow control business of Tyco, and Flow Control assumed from Tyco certain liabilities related to the flow control business of Tyco. On September 28, 2012 prior to the Merger, Tyco effected a spin-off of Flow Control through the pro-rata distribution of 100% of the outstanding common shares of Flow Control to Tyco’s shareholders (the “Distribution”), resulting in the distribution of approximately 110.9 million of our common shares to Tyco’s shareholders. The Merger was accounted for as a reverse acquisition under the purchase method of accounting with Pentair, Inc. treated as the acquirer. After the Merger, our common shares are traded on the New York Stock Exchange under the symbol PNR.
On December 10, 2013, Pentair Ltd. entered into a Merger Agreement (the “Merger Agreement”) with Pentair plc, a newly-formed Irish public limited company and subsidiary of Pentair (“Pentair-Ireland”). Under the Merger Agreement, and subject to the conditions set forth in the Merger Agreement, Pentair will merge with and into Pentair-Ireland, with Pentair-Ireland being the surviving company (the “Redomicile”), thereby changing the jurisdiction of organization of the publicly-traded parent company from Switzerland to Ireland. Pentair shareholders will receive one ordinary share of Pentair-Ireland for each common share of Pentair held immediately prior to the Redomicile.
Upon completion of the Redomicile, Pentair-Ireland intends to manage its affairs so that it is centrally managed and controlled in the United Kingdom (the “U.K.”) and therefore have its tax residency in the U.K. Pentair-Ireland will continue to own and conduct the same businesses as Pentair owned and conducted prior to the Merger, except that Pentair-Ireland will replace Pentair as the publicly-traded parent company. Pentair-Ireland will remain subject to U.S. Securities and Exchange Commission (“SEC”) reporting requirements and the applicable corporate governance rules of the New York Stock Exchange.

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The Redomicile is subject to Pentair shareholder approval of the Merger Agreement and certain other conditions. Pentair’s shareholders will be asked to vote to approve the Merger Agreement at an extraordinary general meeting of shareholders, which Pentair expects to be held during the second quarter of 2014.
We anticipate that having our publicly-traded parent company incorporated in Ireland and tax resident in the U.K. will provide us the following benefits:
Incorporation of our publicly-traded parent company in Ireland would enable us to benefit by being subject to a legal and regulatory structure in a jurisdiction with a well-developed legal system and corporate law with established standards of corporate governance.
The U.K. has a developed, stable and internationally competitive tax system.
The legal requirements we will be subject to as a company incorporated in Ireland, listed on the NYSE and subject to SEC disclosure and shareholder voting requirements strike the right balance between robust external governance oversight and regulation of our executive and director pay practices and the ability of our compensation committee consisting of independent directors to determine executive compensation to provide incentives to our executive management and to offer competitive salaries and benefits.
Our registered principal office is located at Freier Platz 10, 8200 Schaffhausen, Switzerland. Our management office in the United States is located at 5500 Wayzata Boulevard, Suite 800, Minneapolis, Minnesota.
BUSINESS AND PRODUCTS
Reporting segment and geographical financial information is contained in ITEM 8, Note 15 of the Notes to Consolidated Financial Statements, included in this Form 10-K. During the fourth quarter of 2013, we reorganized our business segments to reflect a new operating structure and management of our Global Business Units, resulting in a change from three reporting segments to four. All prior period amounts related to the segment change have been retrospectively reclassified throughout this Annual Report on Form 10-K to conform to the new presentation. The following is a brief description of each of the Company’s reportable segments and business activities.

VALVES & CONTROLS
The Valves & Controls segment designs, manufactures, markets and services valves, fittings, automation and controls and actuators for the energy and industrial verticals and operates as a stand-alone Global Business Unit ("GBU").
Valve products include a broad range of industrial valves, including on-off valves, safety relief valves and other specialty valves. Actuation products include pneumatic, hydraulic and electric actuators. Control products include limit switches, valve positioners, network systems and accessories.
Valves & Controls products are used in many applications including chemical, petrochemical, oil and gas, power generation, mining, food and beverage, pulp and paper and wastewater. Valves & Controls also provides engineering, design, inspection, maintenance and repair services for its valves and related products. The product line is sold under many trade names, including Biffi, Keystone, Vanessa, Anderson Greenwood and Crosby globally via its internal sales force and in some cases through a network of independent distributors.
Customers
Valves & Controls customers include businesses engaged in a wide range of applications within the energy and industrial verticals. Customers include end-users as well as engineering, procurement and construction companies, contractors, original equipment manufacturers and distributors.
Seasonality
Valves & Controls is not significantly affected by seasonal demand fluctuations.
Competition
The flow control industry is highly fragmented, consisting of many local and regional companies and a few global competitors. We compete against a number of international, national and local manufacturers of industrial valves, as well as against specialized manufacturers on the basis of product capability, product quality, breadth of product line, delivery, service capability and price. Our major competitors vary by region and by industry.


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PROCESS TECHNOLOGIES
The Process Technologies segment designs, manufactures, markets and services innovative water system products and solutions to meet filtration, separation and fluid process management challenges in food and beverage, water, wastewater, swimming pools and aquaculture applications. The Filtration & Process and Aquatic Systems GBUs comprise this segment.
Process Technologies offers a comprehensive product suite that ranges from energy-efficient pumps and point-of-use filtration to automated controls and CO2 recovery systems. Both the Filtration & Process and Aquatic Systems GBUs primarily sell water systems, consisting of pumps, valves and filters. Filtration & Process products are used in the manufacturing of water softeners, filtration and deionization systems, marine and recreational vehicle applications and commercial and residential water filtration applications. Aquatic Systems produces a broad line of leading edge equipment, accessories and water technology solutions, including pumps, filtration equipment, thermal products, automated controls, lights, automatic cleaners, water purification and treatment technology and water features.
Applications for Process Technologies’ products include oil and gas, residential, power generation, chemical, food and beverage, pharmaceutical, foodservice, medical and municipal and industrial desalination, water and wastewater treatment. Brand names for Process Technologies include Pentair, Everpure, Sta-Rite, X-Flow, Haffmans and Südmo.
Customers
Process Technologies customers include businesses engaged in wholesale and retail distribution in the residential & commercial, food & beverage, industrial, infrastructure and energy verticals. Customers in the residential & commercial vertical also include end-users and consumers.
Seasonality
We experience seasonal demand with several end customers and end-users within Process Technologies. End-user demand for pool equipment follows warm weather trends and is at seasonal highs from April to August. The magnitude of the sales increase is partially mitigated by employing some advance sale “early buy” programs (generally including extended payment terms and/or additional discounts).
Competition
Process Technologies faces numerous domestic and international competitors, some of which have substantially greater resources directed to the verticals in which we compete. Competition in Filtration & Process focuses on product performance and design, quality, delivery and price. For Aquatic Systems, competition focuses on brand names, product performance (including energy-efficient offerings), quality and price. We compete by offering a wide variety of innovative and high-quality products, which are competitively priced. We believe our distribution channels and reputation for quality also provide us a competitive advantage.
FLOW TECHNOLOGIES
The Flow Technologies segment designs, manufactures and markets products and services designed for the transfer and flow of clean water, wastewater and a variety of industrial applications. The Flow Technologies segment operates as a stand-alone GBU.
Flow Technologies is involved in the entire fluid system from transmission and distribution, process and control, to pumps, pipes, fittings and couplings. From product selection to installation, maintenance and servicing, Flow Technologies supports a broad range of products and services specifically tailored to address customers' needs for reliable and efficient movement and control of fluids.
Applications for Flow Technologies’ products include agriculture, along with pumps for residential and municipal wells, flood control, water treatment, wastewater solids handling, pressure boosting, engine cooling, fluid delivery, circulation and transfer and energy. Brand names for Flow Technologies products include Aurora, Fairbanks-Nijhuis, Sta-Rite, Hydromatic Hypro, Berkeley and Sintakote.
Customers
Flow Technologies customers include businesses engaged in wholesale and retail distribution in the residential & commercial, infrastructure, food & beverage, industrial and energy verticals. Customers also include end-users and consumers in the residential & commercial vertical.
Seasonality
We experience demand for residential water supply products, infrastructure and agricultural products following warm weather trends, which are at seasonal highs from April to August. Also, we generally experience increased demand during Australia’s prime agricultural seasons. Seasonal effects may vary from year to year and are impacted by weather patterns, particularly by temperatures, heavy flooding and droughts.

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Competition
Flow Technologies faces numerous domestic and international competitors, some of which have substantially greater resources directed to the verticals in which we compete. Competition in Flow Technologies focuses on brand names, product performance (including energy-efficient offerings), quality and price. While home center and national retailers are important for residential lines of water and wastewater pumps, they are not important for commercial pumps. For municipal pumps and pipeline systems, competition focuses on performance to meet required specifications, service and price. We compete by offering a wide variety of innovative and high-quality products, which are competitively priced.
TECHNICAL SOLUTIONS
The Technical Solutions segment designs, manufactures, markets and services products that guard and protect some of the world’s most sensitive electronics and electronic equipment, as well as heat management solutions designed to provide thermal protection to temperature sensitive fluid applications. The Technical Solutions segment operates as a stand-alone GBU.
Technical Solutions products include mild steel, stainless steel, aluminum and non-metallic enclosures, cabinets, cases, subracks, backplanes and thermal management systems including heat tracing, snow melting/de-icing and temperature management equipment. Technical Solutions products are produced globally.
The portfolio of products serves a range of industries, including use in industrial, energy, residential & commercial and infrastructure verticals. Brand names for Technical Solutions offerings include Hoffman, Schroff, Raychem and Tracer. Technical Solutions products are sold largely through a global network of independent distributors and are highly engineered and sold on a project basis via a network of sales and service professionals.
Customers
Technical Solutions customers include electrical distributors, data center contractors, original equipment manufacturers, contractors mainly of greenfield developments and maintenance contractors. Technical Solutions has developed a global installed base of customers.
Seasonality
Technical Solutions generally experiences increased demand for thermal protection products and services during the fall and winter months in the Northern Hemisphere.
Competition
Within Technical Solutions, equipment protection faces significant competition in the verticals it serves, particularly within the communications industry, where product design, prototyping, global supply, price competition and customer service are significant factors. However, consolidation, globalization and outsourcing are visible trends in the marketplace and typically play to the strengths of a large and globally positioned supplier. The industries and verticals served by the thermal management business are highly fragmented, comprising local markets and niches.
INFORMATION REGARDING ALL REPORTABLE SEGMENTS
Backlog of orders by segment
 
December 31
In millions
2013
2012
$ change
% change
Valves & Controls
$
1,353.2

$
1,412.5

$
(59.3
)
(4.2
)%
Process Technologies
298.7

287.7

11.0

3.8

Flow Technologies
352.4

471.2

(118.8
)
(25.2
)
Technical Solutions
218.7

290.4

(71.7
)
(24.7
)
Total
$
2,223.0

$
2,461.8

$
(238.8
)
(9.7
)%
Backlog from Valves & Controls consists of business in the energy and industrial verticals. Generally, backlog from Valves & Controls has a longer manufacturing cycle and products typically ship within six to twelve months of the date on which a customer places an order. Backlog from Process Technologies, Flow Technologies and Technical Solutions typically has a shorter manufacturing cycle and products generally ship within 90 days of the date on which a customer places an order. A substantial portion of our revenues, however, result from orders received and product delivered in the same month. We record as part of our backlog all orders from external customers, which represent firm commitments, and are supported by a purchase order or other legitimate contract. We expect the majority of our backlog from all segments at December 31, 2013 will be filled in 2014.

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Research and development
We conduct research and development activities primarily in our own facilities. These efforts consist primarily of the development of new products, product applications and manufacturing processes. Research and development expenditures during 2013, 2012 and 2011 were $125.8 million, $93.6 million and $78.2 million, respectively.
Environmental
Environmental matters are discussed in ITEM 3, ITEM 7 and ITEM 8, Note 16 of the Notes to Consolidated Financial Statements, included in this Form 10-K.
Raw materials
The principal materials we use in manufacturing our products are electric motors, mild steel, stainless steel, electronic components, plastics (resins, fiberglass, epoxies), copper and paint (powder and liquid). In addition to the purchase of raw materials, we purchase some finished goods for distribution through our sales channels.
We purchase the materials we use in various manufacturing processes on the open market and the majority is available through multiple sources which are in adequate supply. We have not experienced any significant work stoppages to date due to shortages of materials. We have certain long-term commitments, principally price commitments, for the purchase of various component parts and raw materials and believe that it is unlikely that any of these agreements would be terminated prematurely. Alternate sources of supply at competitive prices are available for most materials for which long-term commitments exist and we believe that the termination of any of these commitments would not have a material adverse effect on our financial position, results of operations or cash flows.
Certain commodities, such as metals and resin, are subject to market and duty-driven price fluctuations. We manage these fluctuations through several mechanisms, including long-term agreements with price adjustment clauses for significant commodity market movements in certain circumstances. Prices for raw materials, such as metals and resins, may trend higher in the future.
Intellectual property
Patents, non-compete agreements, proprietary technologies, customer relationships, trademarks, trade names and brand names are important to our business. However, we do not regard our business as being materially dependent upon any single patent, non-compete agreement, proprietary technology, customer relationship, trademark, trade name or brand name.
Patents, patent applications and license agreements will expire or terminate over time by operation of law, in accordance with their terms or otherwise. We do not expect the termination of patents, patent applications or license agreements to have a material adverse effect on our financial position, results of operations or cash flows.
Employees
As of December 31, 2013, we employed 28,600 people worldwide, of which 9,300 were in the United States and 10,900 were covered by collective bargaining agreements or works councils. We believe that our relations with the labor unions have generally been good.
Captive insurance subsidiary
We insure certain general and product liability, property, workers’ compensation and automobile liability risks through our regulated wholly-owned captive insurance subsidiary, Penwald Insurance Company (“Penwald”). Reserves for policy claims are established based on actuarial projections of ultimate losses. Accruals with respect to liabilities insured by third parties, such as liabilities arising from acquired businesses, pre-Penwald liabilities and those of certain Non-U.S. operations are established.
Matters pertaining to Penwald are discussed in ITEM 3 and ITEM 8, Note 1 of the Notes to Consolidated Financial Statements – Insurance Subsidiary, included in this Form 10-K.
Available information
We make available free of charge (other than an investor’s own Internet access charges) through our Internet website (http://www.pentair.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with or furnish it to, the Securities and Exchange Commission. Reports of beneficial ownership filed by our directors and executive officers pursuant to Section 16(a) of the Exchange Act are also available on our website. We are not including the information contained on our website as part of or incorporating it by reference into, this Annual Report on Form 10-K.


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ITEM 1A.    RISK FACTORS
You should carefully consider all of the information in this document and the following risk factors before making an investment decision regarding our securities. Any of the following risks could materially and adversely affect our business, financial condition, results of operations, cash flows and the actual outcome of matters as to which forward-looking statements are made in this document. While we believe we have identified and discussed below the material risks affecting us, there may be additional risks and uncertainties that we do not presently know or that we do not currently believe to be material that may adversely affect our business, financial condition, results of operations and cash flows in the future.

Risks Relating to Our Business
General global economic and business conditions affect demand for our products.
We compete in various geographic regions and product markets around the world. Among these, the most significant are global industrial markets and residential markets. Many of our businesses have experienced periodic economic downturns. Important factors for our businesses and the businesses of our customers include the overall strength of the economy and our customers’ confidence in the economy, industrial and governmental capital spending, the strength of the residential and commercial real estate markets, unemployment rates, availability of consumer and commercial financing, interest rates, and energy and commodity prices. While we attempt to minimize our exposure to economic or market fluctuations by serving a balanced mix of end markets and geographic regions, any of these factors, individually or in the aggregate, or a significant or sustained downturn in a specific end market or geographic region could materially and adversely affect our business, financial condition, results of operations and cash flows.
We compete in attractive markets with a high level of competition, which may result in pressure on our profit margins and limit our ability to maintain or increase the market share of our products.
The markets for our products and services are geographically diverse and highly competitive. We compete against large and well-established national and global companies, as well as regional and local companies and lower cost manufacturers. We compete based on technical expertise, reputation for quality and reliability, timeliness of delivery, previous installation history, contractual terms and price. Some of our competitors, in particular smaller companies, attempt to compete based primarily on price, localized expertise and local relationships, especially with respect to products and applications that do not require a great deal of engineering or technical expertise. In addition, during economic downturns average selling prices tend to decrease as market participants compete more aggressively on price. If we are unable to continue to differentiate our products, services and solutions, or if we are forced to cut prices or to incur additional costs to remain competitive, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Our future growth is dependent upon our ability to continue to adapt our products, services and organization to meet the demands of local markets in both developed and emerging economies and by developing or acquiring new technologies that achieve market acceptance with acceptable margins.
We operate in global markets that are characterized by customer demand that is often global in scope but localized in delivery. We compete with thousands of smaller regional and local companies that may be positioned to offer products produced at lower cost than ours, or to capitalize on highly localized relationships and knowledge that are difficult for us to replicate. Also, in several emerging markets potential customers prefer local suppliers, in some cases because of existing relationships and in other cases because of local legal restrictions or incentives that favor local businesses. Accordingly, our future success depends upon a number of factors, including our ability to adapt our products, services, organization, workforce and sales strategies to fit localities throughout the world, particularly in high growth emerging markets; identify emerging technological and other trends in our target end-markets; and develop or acquire competitive products and services and bring them to market quickly and cost-effectively. We have chosen to focus our growth initiatives in specific end markets and geographies, but we cannot provide assurance that these growth initiatives will be sufficient to offset revenue declines in other markets. The failure to effectively adapt our products or services could materially and adversely affect our business, financial condition, results of operations and cash flows.

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

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diversion of management time and attention from daily operations;
difficulties integrating acquired businesses, technologies and personnel into our business;
difficulties in obtaining and verifying the financial statements and other business information of acquired businesses;
inability to obtain required regulatory approvals and/or required financing on favorable terms;
potential loss of key employees, key contractual relationships or key customers of acquired companies or of ours;
assumption of the liabilities and exposure to unforeseen liabilities of acquired companies, including risks related to the U.S. Foreign Corrupt Practices Act (the “FCPA”); and
dilution of interests of holders of our common shares through the issuance of equity securities or equity-linked securities.
It may be difficult for us to complete transactions quickly and to integrate acquired operations efficiently into our business operations. Any acquisitions or investments may ultimately harm our business, financial condition, results of operations and cash flows, as such acquisitions may not be successful and may ultimately result in impairment charges.
We are exposed to political, regulatory, economic and other risks that arise from operating a multinational business.
Sales outside of the United States for the year ended December 31, 2013 accounted for 54 percent of our net sales. Further, most of our businesses obtain some products, components and raw materials from Non-U.S. suppliers. Accordingly, our business is subject to the political, regulatory, economic and other risks that are inherent in operating in numerous countries. These risks include:
changes in general economic and political conditions in countries where we operate, particularly in emerging markets;
relatively more severe economic conditions in some international markets than in the United States;
the difficulty of enforcing agreements and collecting receivables through foreign legal systems;
the difficulty of communicating and monitoring standards and directives across our global network of after-market service centers and manufacturing facilities;
trade protection measures and import or export licensing requirements and restrictions;
the possibility of terrorist action affecting us or our operations;
the threat of nationalization and expropriation;
the imposition of tariffs, exchange controls or other trade restrictions;
difficulty in staffing and managing widespread operations in non-U.S. labor markets;
changes in tax treaties, laws or rulings that could have an adverse impact on our effective tax rate;
limitations on repatriation of earnings;
the difficulty of protecting intellectual property in foreign countries; and
changes in and required compliance with a variety of Non-U.S. laws and regulations.
Our success depends in part on our ability to anticipate and effectively manage these and other risks. We cannot assure you that these and other factors will not have a material adverse effect on our international operations or on our business as a whole.
Volatility in currency exchange rates may adversely affect our financial condition, results of operations and cash flows.
Sales outside of the United States for the year ended December 31, 2013 accounted for 54 percent of our net sales. Our financial statements reflect translation of items denominated in non-U.S. currencies to U.S. dollars. Therefore, if the U.S. dollar strengthens in relation to the principle non-U.S. currencies from which we derive revenue as compared to a prior period, our U.S. dollar reported revenue and income will effectively be decreased to the extent of the change in currency valuations, and vice-versa. Changes in the relative values of currencies occur regularly and in some instances, may have a significant effect on our financial condition, results of operations and cash flows.

7



Our future revenue depends in part on the existence of and our ability to win new contracts for major capital projects.
A significant portion of our revenue in Technical Solutions and Flow Technologies is derived from major capital projects, including water pipeline and desalination projects in Flow Technologies. The number of such projects we may win in any year fluctuates, and is dependent upon the general availability of such projects and our ability to bid successfully for them. If negative market conditions arise, fewer such projects may be available, and if we fail to secure adequate financial arrangements or required governmental approvals we may not be able to pursue particular projects. Either condition could materially and adversely affect our business, financial condition, results of operations and cash flows.
We maintain a sizable backlog and the timing of our conversion of revenue out of backlog is uncertain. Our inability to convert backlog into revenue, whether due to factors that are within or outside of our control, could adversely affect our revenue and profitability.
The timing of our conversion of revenue out of backlog is subject to a variety of factors that may cause delays, many of which, including fluctuations in our customers’ delivery schedules, are beyond our control. This is especially true with respect to major global capital projects, where the extended timeline for project completion and invoice satisfaction increases the likelihood for delays in the conversion of backlog related to modifications and order cancellations. Such delays may lead to significant fluctuations in results of operations and cash flows from quarter to quarter, making it difficult to predict our financial performance on a quarterly basis. Further, while we believe that historical order cancellations have not been significant, if we were to experience a significant amount of cancellations of or reductions in orders, it would reduce our backlog and, consequently, our future sales and results of operations.
Material cost and other inflation have adversely affected and could continue to affect our results of operations.
In the past, we have experienced material cost and other inflation in a number of our businesses. We strive for productivity improvements and implement increases in selling prices to help mitigate cost increases in raw materials (especially metals and resins), energy and other costs such as pension, health care and insurance. We continue to implement operational initiatives in order to mitigate the impacts of this inflation and continuously reduce our costs. We cannot provide assurance, however, that these actions will be successful in managing our costs or increasing our productivity. Continued cost inflation or failure of our initiatives to generate cost savings or improve productivity would likely negatively impact our results of operations.
We are exposed to liquidated damages in many of our customer contracts.
Many of our customer contracts contain liquidated damages provisions in the event that we fail to perform our obligations thereunder in a timely manner or in accordance with agreed terms, conditions and standards. Liquidated damages provisions typically provide for a payment to be made by us to the customer if we fail to deliver a product or service on time. We generally try to limit our exposure to a maximum penalty within a contract. However, because our products are often components of large and complex systems or capital projects, if we incur liquidated damages they may materially and adversely affect our business, financial condition, results of operations and cash flows.
Certain of our products require certifications by regulators or standards organizations, and our failure to obtain or maintain such certifications could negatively impact our business.
In certain industries and for certain applications, in particular with respect to our pressure relief valves and valves used in the nuclear power generation industry, we must obtain certifications for our products or installations by regulators or standards organizations. As we expand our products offering into emerging markets, we will need to comply with additional and potentially different certification requirements. If we fail to obtain required certifications for our products, or if we fail to maintain such certifications on our products after they have been certified, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Intellectual property challenges may hinder our ability to develop, engineer and market our products.
Patents, non-compete agreements, proprietary technologies, customer relationships, trademarks, trade names and brand names are important to our business. Intellectual property protection, however, may not preclude competitors from developing products similar to ours or from challenging our names or products. Our pending patent applications, and our pending copyright and trademark registration applications, may not be allowed or competitors may challenge the validity or scope of our patents, copyrights or trademarks. In addition, our patents, copyrights, trademarks and other intellectual property rights may not provide us a significant competitive advantage. Over the past few years, we have noticed an increasing tendency for participants in our markets to use conflicts over and challenges to intellectual property as a means to compete. Patent and trademark challenges increase our costs to develop, engineer and market our products. We may need to spend significant resources monitoring our intellectual property rights and we may or may not be able to detect infringement by third parties. If we fail to successfully enforce our intellectual property rights or register new patents, our competitive position could suffer, which could harm our business, financial condition, results of operations and cash flows.

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We have significant goodwill and intangible assets and future impairment of our goodwill and intangible assets could have a material negative impact on our financial results.
We test goodwill and indefinite-lived intangible assets for impairment on an annual basis, by comparing the estimated fair value of each of our reporting units to their respective carrying values on their balance sheets. As of December 31, 2013 our goodwill and intangible assets were $6,910.3 million and represented 59% of our total assets. Long-term declines in projected future cash flows could result in future goodwill and intangible asset impairments. Because of the significance of our goodwill and intangible assets, any future impairment of these assets could have a material adverse effect on our financial results.
In the fourth quarter of each year, we complete our annual goodwill and intangible assets impairment reviews. As a result, we recorded a pre-tax non-cash impairment charge of $11.0 million and $60.7 million for trade name intangibles in the fourth quarter of 2013 and 2012, respectively. These represent impairments of a trade name in Technical Solutions in 2013 and trade names in Flow Technologies, Process Technologies and Technical Solutions in 2012. The impairment charges were the result of rebranding strategies implemented in the fourth quarter of 2013 and 2012. In the fourth quarter of 2011, we recorded a pre-tax non-cash impairment charge of $200.5 million for goodwill in Process Technologies. The goodwill impairment charge resulted from changes in our forecasts in light of economic conditions and due to continued softness in the end-markets served by residential water treatment components.

We may be adversely affected by work stoppages, union negotiations, labor disputes and other matters associated with our labor force.
As of December 31, 2013, 10,900 of our employees were covered by collective bargaining agreements or works councils. Although we believe that our relations with the labor unions and work councils that represent our employees are generally good and we have experienced no material strikes and only minor work stoppages recently, no assurances can be made that we will not experience in the future these and other types of conflicts with labor unions, works councils, other groups representing employees or our employees generally, or that any future negotiations with our labor unions will not result in significant increases in our cost of labor.
Seasonality of sales and weather conditions may adversely affect our financial results.
We experience seasonal demand in a number of markets within Process Technologies, Flow Technologies and Technical Solutions. In Process Technologies, end-user demand for pool equipment in our primary markets follows warm weather trends and is at seasonal highs from April to August. In Flow Technologies, demand for residential water supply products, infrastructure and agricultural products follows warm weather trends and is at seasonal highs from April to August. The magnitude of the sales increase in both Process Technologies and Flow Technologies is partially mitigated by employing some advance sale or “early buy” programs (generally including extended payment terms and/or additional discounts). Also in Flow Technologies, we generally experience increased demand during Australia’s prime agricultural seasons. Seasonal effects may vary from year to year and are impacted by weather patterns, particularly by temperatures, heavy flooding and droughts. Technical Solutions generally experiences increased demand for thermal protection products and services during the fall and winter months in the Northern Hemisphere. We cannot provide assurance that seasonality and weather conditions will not have a material adverse effect on our results of operations.
Our share price may fluctuate significantly.
We cannot predict the prices at which our common shares may trade. The market price of our common shares may fluctuate widely, depending on many factors, some of which may be beyond our control, including:
 
actual or anticipated fluctuations in our operating results due to factors related to our business;
success or failure of our business strategy;
our quarterly or annual earnings, or those of other companies in our industry;
our ability to obtain third-party financing as needed;
announcements by us or our competitors of significant acquisitions or dispositions;
changes in accounting standards, policies, guidance, interpretations or principles;
changes in earnings estimates by us or securities analysts or our ability to meet those estimates;
the operating and share price performance of other comparable companies;
investor perception of us;
natural or other environmental disasters that investors believe may affect us;

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overall market fluctuations;
results from any material litigation, including asbestos claims, government investigations or environmental liabilities;
changes in laws and regulations affecting our business; and
general economic conditions and other external factors.
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of our common shares.
Risks Relating to Legal, Regulatory and Compliance Matters
Our subsidiaries are party to asbestos-related product litigation that could adversely affect our financial condition, results of operations and cash flows.
Our subsidiaries, along with numerous other companies, are named as defendants in a substantial number of lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were attached to or used with asbestos-containing components manufactured by third parties. Each case typically names between dozens to hundreds of corporate defendants. Historically, our subsidiaries have been identified as defendants in asbestos-related claims. We have experienced an increase in the number of asbestos-related lawsuits over the past several years, including lawsuits by plaintiffs with mesothelioma-related claims. A large percentage of these suits have not presented viable legal claims and, as a result, have been dismissed or withdrawn. Our strategy has been, and continues to be, to mount a vigorous defense aimed at having unsubstantiated suits dismissed, and, only where appropriate, settling claims before trial. As of December 31, 2013, there were approximately 2,000 lawsuits pending against our subsidiaries. A lawsuit might include several claims, and we have approximately 2,200 claims outstanding as of December 31, 2013. We cannot predict with certainty the extent to which we will be successful in litigating or otherwise resolving lawsuits in the future and we continue to evaluate different strategies related to asbestos claims filed against us including entity restructuring and judicial relief. Unfavorable rulings, judgments or settlement terms could have a material adverse impact on our business and financial condition, results of operations and cash flows.
We currently record an estimated liability related to pending claims and future claims, including related defense costs, based on a number of key assumptions and estimation methodologies. These assumptions are derived from historical claims experience and reflect our expectations about future claim activities. These assumptions about the future may or may not prove accurate, and accordingly, we may incur additional liabilities in the future. A change in one or more of the inputs or the methodology that we use to estimate the asbestos liability could materially change the estimated liability and associated cash flows for pending and future claims. Although it is possible that we will incur additional costs for asbestos claims filed beyond what we have currently recorded, we do not believe there is a reasonable basis for estimating those costs at this time. On an annual basis, we review, and update as appropriate, such estimated asbestos liabilities and assets and the underlying assumptions. Such an update could result in a material change in such estimated assets and liabilities.
We also record an asset that represents our best estimate of probable recoveries from insurers or other responsible parties for the estimated asbestos liabilities. There are significant assumptions made in developing estimates of asbestos-related recoveries, such as policy triggers, policy or contract interpretation, success in litigation in certain cases, the methodology for allocating claims to policies and the continued solvency of the insurers or other responsible parties. The assumptions underlying the recorded asset may not prove accurate, and as a result, actual performance by our insurers and other responsible parties could result in lower receivables and cash flows expected to reduce our asbestos costs. We believe it is possible that the cost of asbestos claims filed beyond our estimation period, net of expected recoveries, could have a material adverse effect on our financial condition, results of operations and cash flows.

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We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar anti-corruption laws outside the United States.
The FCPA and similar anti-corruption laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials or other persons for the purpose of obtaining or retaining business. Recent years have seen a substantial increase in anti-bribery law enforcement activity, with more frequent and aggressive investigations and enforcement proceedings by both the U.S. Department of Justice (“DOJ”) and the SEC, increased enforcement activity by non-U.S. regulators and increases in criminal and civil proceedings brought against companies and individuals. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that are recognized as having governmental and commercial corruption and in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. Because many of our customers and end users are involved in infrastructure construction and energy production, they are often subject to increased scrutiny by regulators. We cannot assure you that our internal control policies and procedures will always protect us from reckless or criminal acts committed by our employees or third-party intermediaries. In the event that we believe or have reason to believe that our employees or agents have or may have violated applicable anti-corruption laws, including the FCPA we may be required to investigate or have outside counsel investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. Violations of these laws may result in criminal or civil sanctions, which could disrupt our business and result in a material adverse effect on our reputation, business, financial condition, results of operations and cash flows.
Prior to the Merger, the Flow Control business was subject to investigations by the DOJ and the SEC related to allegations that improper payments were made by the Flow Control business and other Tyco subsidiaries and third-party intermediaries in recent years in violation of the FCPA. Tyco reported to the DOJ and the SEC the remedial measures that it had taken in response to the allegations and Tyco’s own internal investigations. As a result of discussions with the DOJ and SEC aimed at resolving these matters, on September 24, 2012, Tyco entered into a settlement with the SEC and a non-prosecution agreement with the DOJ, pursuant to which the Flow Control business is for a three year period subject to yearly reporting to the DOJ concerning its continuing compliance efforts. As a result, the Flow Control business may be subject to investigations in other jurisdictions or suffer other criminal or civil penalties or adverse impacts, including being subject to lawsuits brought by private litigants, each of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our failure to satisfy international trade compliance regulations may adversely affect us.
Our global operations require importing and exporting goods and technology across international borders on a regular basis. Certain of the products we manufacture are “dual use” products, which are products that may have both civil and military applications, or may otherwise be involved in weapons proliferation, and are often subject to more stringent export controls. From time to time, we obtain or receive information alleging improper activity in connection with imports or exports. Our policy mandates strict compliance with U.S. and non-U.S. trade laws applicable to our products. However, even when we are in strict compliance with law and our policies, we may suffer reputational damage if certain of our products are sold through various intermediaries to entities operating in sanctioned countries. When we receive information alleging improper activity, our policy is to investigate that information and respond appropriately, including, if warranted, reporting our findings to relevant governmental authorities. Nonetheless, we cannot provide assurance that our policies and procedures will always protect us from actions that would violate U.S. and/or non-U.S. laws. Any improper actions could subject us to civil or criminal penalties, including material monetary fines, or other adverse actions including denial of import or export privileges, and could damage our reputation and business prospects.
Legislative action by the U.S. Congress could adversely affect us.
Legislative action could be taken by the U.S. Congress which, if ultimately enacted, could override tax treaties, or modify tax statutes or regulation upon which we rely. We cannot predict the outcome of any specific legislative proposals. If proposals were enacted that had the effect of disregarding our incorporation in Switzerland or limiting our ability as a Swiss company to take advantage of the tax treaties between Switzerland and the United States, we could be subject to increased taxation, which could materially adversely affect our financial condition, results of operations, cash flows or our effective tax rate in future reporting periods.
We are exposed to potential environmental and other laws, liabilities and litigation.
We are subject to U.S. federal, state, local and Non-U.S. laws and regulations governing our environmental practices, public and worker health and safety, and the indoor and outdoor environment. Compliance with these environmental, health and safety regulations could require us to satisfy environmental liabilities, increase the cost of manufacturing our products or otherwise adversely affect our business, financial condition and results of operations. Any violations of these laws by us could cause us to incur unanticipated liabilities that could harm our operating results and cause our business to suffer. We are also required to comply with various environmental laws and maintain permits, some of which are subject to discretionary renewal from time to time, for many of our businesses and we could suffer if we are unable to renew existing permits or to obtain any additional

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permits that we may require. Compliance with environmental requirements also could require significant operating or capital expenditures or result in significant operational restrictions. We cannot assure you that we have been or will be at all times in compliance with environmental and health and safety laws. If we violate these laws, we could be fined, criminally charged or otherwise sanctioned by regulators.
We have been named as defendant, target or a potentially responsible party (“PRP”) in a number of environmental clean-ups relating to our current or former business units. We have disposed of a number of businesses in recent years and in certain cases, we have retained responsibility and potential liability for certain environmental obligations. We have received claims for indemnification from certain purchasers. We may be named as a PRP at other sites in the future for existing business units, as well as both divested and acquired businesses. In addition to cleanup actions brought by governmental authorities, private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances.
Certain environmental laws impose liability on current or previous owners or operators of real property for the cost of removal or remediation of hazardous substances at their properties or at properties at which they have disposed of hazardous substances. We have projects underway at several current and former manufacturing facilities to investigate and remediate environmental contamination resulting from our past operations or by other businesses that previously owned or used the properties. The cost of cleanup and other environmental liabilities can be difficult to accurately predict. In addition, environmental requirements change and tend to become more stringent over time. Thus, we cannot provide assurance that our eventual environmental clean-up costs and liabilities will not exceed the amount of our current reserves.
We are exposed to potential regulatory, financial and reputational risks related to certain “conflict minerals."
In 2012, the SEC adopted disclosure requirements related to certain minerals sourced from the Democratic Republic of Congo or adjoining countries, as required by Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rules impose inquiry, diligence and disclosure obligations with respect to “conflict minerals,” defined as tin, tantalum, tungsten and gold, that are necessary to the functionality of a product manufactured, or contracted to be manufactured, by an SEC reporting company. The first disclosure deadline under the final rules is May 31, 2014, and by that date, an SEC reporting company must make disclosures regarding products it sold in calendar 2013. Certain of these minerals are used extensively in components manufactured by our suppliers (or in components incorporated by our suppliers into components supplied to us) for use in our products. Under the final rules, an SEC reporting company must conduct a country of origin inquiry that is reasonably designed to determine whether any of the “conflict minerals” that are necessary to the functionality of a product manufactured, or contracted to be manufactured, by the company originated in the Democratic Republic of the Congo or an adjoining country. If any such “conflict minerals” originated in the Democratic Republic of Congo or an adjoining country, the final rules require the issuer to exercise due diligence on the source of such “conflict minerals” and their chain of custody with the ultimate objective of determining whether the “conflict minerals” directly or indirectly financed or benefited armed groups in the Democratic Republic of the Congo or an adjoining country. The issuer must then prepare and file with the SEC a report regarding its diligence efforts. We have incurred and expect to incur significant costs to conduct our country of origin inquiry and, if necessary, to exercise such due diligence.

We have a very large number of suppliers and our supply chain is very complex and multifaceted. While we have no intention to use minerals sourced from the Democratic Republic of Congo or adjoining countries that are not “conflict free” (meaning that they do not contain “conflict minerals” that directly or indirectly finance or benefit armed groups in the Democratic Republic of the Congo or an adjoining country), a significant number of our suppliers are small businesses, and those small businesses have limited or no resources to track their sources of minerals. As a result, we expect significant difficulty in determining the country of origin or the source and chain of custody for all “conflict minerals” used in our products and disclosing that our products are “conflict free.” We may face reputational challenges if we are unable to verify the country of origin or the source and chain of custody for all “conflict minerals” used in our products or if we are unable to disclose that our products are “conflict free.” Implementation of these rules may also affect the sourcing and availability of some minerals necessary to the manufacture of our products and may affect the availability and price of “conflict minerals” capable of certification as “conflict free.” Accordingly, we may incur significant costs as a consequence of these rules, which may adversely affect our business, financial condition or results of operations.
We are exposed to certain regulatory and financial risks related to climate change.
Climate change is receiving ever increasing attention worldwide. Many scientists, legislators and others attribute global warming to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions. The U.S. Congress and federal and state regulatory agencies have been considering legislation and regulatory proposals that would regulate and limit greenhouse gas emissions. It is uncertain whether, when and in what form a federal mandatory carbon dioxide emissions reduction program may be adopted. Similarly, certain countries have adopted the Kyoto Protocol and this and other existing international initiatives or those under consideration could affect our international operations. To the extent our customers, particularly those involved in the oil and gas, power generation, petrochemical processing or petroleum refining industries, are subject to any of these or other similar

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proposed or newly enacted laws and regulations, we are exposed to risks that the additional costs by customers to comply with such laws and regulations could impact their ability or desire to continue to operate at similar levels in certain jurisdictions as historically seen or as currently anticipated, which could negatively impact their demand for our products and services. In addition, new laws and regulations that might favor the increased use of non-fossil fuels, including nuclear, wind, solar and bio-fuels or that are designed to increase energy efficiency, could dampen demand for oil and gas production or power generation resulting in lower spending by customers for our products and services. These actions could also increase costs associated with our operations, including costs for raw materials and transportation. Because it is uncertain what laws will be enacted, we cannot predict the potential impact of such laws on our future financial condition, results of operations and cash flows.
Increased information technology security threats and more sophisticated computer crime pose a risk to our systems, networks, products and services. We are exposed to potential regulatory, financial and reputational risks relating to the protection of our data.
We rely upon information technology systems and networks in connection with a variety of business activities, some of which are managed by third parties. Additionally, we collect and store data that is sensitive to Pentair and its employees, customers, dealers and suppliers. The secure operation of these information technology systems and networks, and the processing and maintenance of this data is critical to our business operations and strategy. Information technology security threats -- from user error to attacks designed to gain unauthorized access to our systems, networks and data -- are increasing in frequency and sophistication. Attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced persistent threats. These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of the data we process and maintain. Establishing systems and processes to address these threats and changes in legal requirements relating to data collection and storage may increase our costs. We have identified attempts to gain unauthorized access to our information technology systems and networks. To our knowledge, no such attack was ultimately successful in exporting sensitive data or controlling sensitive systems or networks. Should such an attack succeed it could expose us and our employees, customers, dealers and suppliers to misuse of information or systems, the compromising of confidential information, theft of assets, manipulation and destruction of data, defective products, production downtimes and operations disruptions, and breach of privacy, which may require notification under data privacy and other applicable laws. The occurrence of any of these events could adversely affect our reputation, competitive position, business and results of operations. In addition, such breaches in security could result in litigation, regulatory action and potential liability and the costs and operational consequences of implementing further data protection measures.
Our results of operations may be negatively impacted by litigation.
Our businesses expose us to potential litigation, such as product liability claims relating to the design, manufacture and sale of our products. While we currently maintain what we believe to be suitable product liability insurance, we cannot provide assurance that we will be able to maintain this insurance on acceptable terms or that this insurance will provide adequate protection against potential or previously existing liabilities. In addition, we self-insure a portion of product liability claims. Successful claims against us for significant amounts could materially and adversely affect our product reputation, financial condition, results of operations and cash flows.
Risks Relating to the Distribution and the Merger
We may not realize the growth opportunities and cost synergies that are anticipated from the Merger.
The benefits that are expected to result from the Merger will depend, in part, on our ability to realize the anticipated growth opportunities and cost synergies as a result of the Merger. Our success in realizing these growth opportunities and cost synergies, and the timing of this realization, depends on the successful integration of the Pentair, Inc. and Flow Control businesses. Even if we are able to integrate the Pentair, Inc. and Flow Control businesses successfully, this integration may not result in the realization of the full benefits of the growth opportunities and cost synergies that we currently expect from this integration or that these benefits will be achieved within the anticipated time frame or at all. For example, we may not be able to eliminate duplicative costs. Moreover, we may incur substantial expenses in connection with the integration of the Pentair, Inc. and Flow Control businesses. While we anticipate that certain expenses will be incurred, such expenses are difficult to estimate accurately, and may exceed current estimates. Accordingly, the benefits from the Merger may be offset by costs incurred or delays in integrating the businesses.
The integration of the Pentair, Inc. and Flow Control businesses following the Merger may present significant challenges.
There is a significant degree of difficulty and management distraction inherent in the process of integrating the Pentair, Inc. and Flow Control businesses. These difficulties include:
the challenge of integrating the Pentair, Inc. and Flow Control businesses while carrying on the ongoing operations of each entity;
the necessity of coordinating geographically separate organizations;

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the challenge of integrating the business cultures of the Pentair, Inc. and Flow Control businesses, which may prove to be incompatible;
the challenge and cost of integrating the information technology systems of the Pentair, Inc. and Flow Control businesses; and
the potential difficulty in retaining key executives and personnel of the Pentair, Inc. and Flow Control businesses.
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of the Pentair, Inc. and Flow Control businesses. Members of our senior management may be required to devote considerable amounts of time to this integration process, which will decrease the time they will have to manage our company, service existing customers, attract new customers and develop new products or strategies. If senior management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, the Pentair, Inc. and Flow Control businesses could suffer. There can be no assurance that we will successfully or cost-effectively integrate the Pentair, Inc. and Flow Control businesses. The failure to do so could have a material adverse effect on our business, financial condition and results of operations.
We share responsibility for certain income tax liabilities for tax periods prior to and including the date of the Distribution.
In connection with the Distribution, we entered into a tax sharing agreement (the “2012 Tax Sharing Agreement”) with Tyco and The ADT Corporation (“ADT”), which governs the rights and obligations of ADT, Tyco and us for certain pre-Distribution tax liabilities, including Tyco's obligations under a separate tax sharing agreement (the “2007 Tax Sharing Agreement”) entered into by Tyco, Covidien Ltd. (“Covidien”) and TE Connectivity Ltd. (“TE Connectivity”) in connection with the 2007 distributions of Covidien and TE Connectivity by Tyco (the “2007 Separation”).
The 2007 Tax Sharing Agreement governs the rights and obligations of Tyco, Covidien and TE Connectivity with respect to certain pre-2007 Separation tax liabilities and certain tax liabilities arising in connection with the 2007 Separation. More specifically, Tyco, Covidien and TE Connectivity share 27%, 42% and 31%, respectively, of income tax liabilities that arise from adjustments made by tax authorities to Tyco's, Covidien's and TE Connectivity's U.S. and certain non-U.S. 2007 and prior income tax returns. In addition, in the event that the 2007 Separation or certain related transactions are determined to be taxable as a result of actions taken after the 2007 Separation by Tyco, Covidien or TE Connectivity, the party responsible for such failure would be responsible for all taxes imposed on Tyco, Covidien or TE Connectivity as a result thereof. If none of the companies is responsible for such failure, then Tyco, Covidien and TE Connectivity would be responsible for such taxes, in the same manner and in the same proportions as other shared tax liabilities under the 2007 Tax Sharing Agreement. Costs and expenses associated with the management of these shared tax liabilities are generally shared equally among the parties.
The 2012 Tax Sharing Agreement provides that we, Tyco and ADT will share (i) certain pre-Distribution income tax liabilities that arise from adjustments made by tax authorities to our, Tyco's and ADT's U.S. income tax returns, and (ii) payments required to be made by Tyco with respect to the 2007 Tax Sharing Agreement (the liabilities in clauses (i) and (ii) collectively, “Shared Tax Liabilities”). Tyco is responsible for the first $500 million of Shared Tax Liabilities. We and ADT will share 42% and 58%, respectively, of the next $225 million of Shared Tax Liabilities. We, ADT and Tyco will share 20%, 27.5% and 52.5%, respectively, of Shared Tax Liabilities above $725 million. Costs and expenses associated with the management of Shared Tax Liabilities will generally be shared 20% by us, 27.5% by ADT and 52.5% by Tyco.
With respect to years prior to and including the 2007 Separation, tax authorities have raised issues and proposed tax adjustments that are generally subject to the sharing provisions of the 2007 Tax Sharing Agreement and which may require Tyco to make a payment to a taxing authority, Covidien or TE Connectivity. With respect to adjustments raised by the IRS, although Tyco has resolved a substantial number of these adjustments, a few significant items remain open with respect to the audit of the 1997 through 2004 years. As of the date hereof, Tyco has not been able to resolve certain open items, which primarily involve the treatment of certain intercompany debt issued during the period, through the IRS appeals process. The ultimate resolution of these matters is uncertain and could result in Tyco being responsible for a greater amount than it expects under the 2007 Tax Sharing Agreement.
On July 1, 2013, Tyco announced that the Internal Revenue Service (“IRS”) issued Notices of Deficiency (“Tyco IRS Notices”) to Tyco asserting that several of Tyco's former U.S. subsidiaries collectively owe additional taxes in the aggregate amount of $883.3 million plus penalties of $154 million based on audits of the 1997 through 2000 tax years of Tyco and its subsidiaries as they existed at that time. These amounts exclude interest and do not reflect the impact on subsequent periods if the IRS challenge to Tyco's tax filings as described below is ultimately successful. If the IRS should successfully assert its position, our share of the collective liability, if any, would be determined pursuant to the 2007 Tax Sharing Agreement and the 2012 Tax Sharing Agreement. Tyco has filed petitions with the U.S. Tax Court to contest the IRS assessments.
As we have previously disclosed, in connection with U.S. federal tax audits of Tyco and its subsidiaries, the IRS has previously raised issues and proposed tax adjustments for periods beginning with the 1997 tax year. The adjustments now asserted by the

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IRS under the Tyco IRS Notices primarily relate to the treatment of certain intercompany debt transactions. The IRS has asserted in the Tyco IRS Notices that substantially all of the intercompany debt originated during the 1997 - 2000 period should not be treated as debt for U.S. federal income tax purposes, and has therefore disallowed interest and related deductions recognized associated with that intercompany debt on the U.S. income tax returns for those periods totaling approximately $2.9 billion. If the IRS is successful in asserting its claim, it would have an adverse impact on interest deductions related to the same Tyco intercompany debt in subsequent time periods, totaling approximately $6.6 billion, which Tyco has advised us that it expects the IRS to disallow. Under the 2012 Tax Sharing Agreement, Tyco has the right to administer, control, and settle all U.S. income tax audits for periods prior to and including the Distribution. As mentioned above, Tyco has filed petitions with the U.S. Tax Court to contest the IRS assessments.
Any payment that Tyco is required to make under the 2007 Tax Sharing Agreement, including if the IRS were to prevail with respect to the matter set forth above, could result in a material liability for us under the 2012 Tax Sharing Agreement. To the extent we are responsible for any liability under the 2012 Tax Sharing Agreement, and indirectly the 2007 Tax Sharing Agreement, there could be a material adverse impact on our financial condition, results of operations, cash flows or our effective tax rate in future reporting periods.
If the Merger, Distribution or certain internal transactions undertaken in anticipation of the Distribution are determined to be taxable for U.S. federal income tax purposes, we, our shareholders or Tyco could incur significant U.S. federal income tax liabilities.
Pentair, Inc. and Tyco received private letter rulings from the IRS in connection with the Distribution and the Merger regarding the U.S. federal income tax consequences of the Distribution and the Merger to the effect that, for U.S. federal income tax purposes: the Distribution will qualify as tax-free under Sections 355 and 361 of the Internal Revenue Code of 1986, as amended (the “Code”), except for cash received in lieu of fractional shares; certain internal transactions undertaken in anticipation of the Distribution will qualify for favorable treatment under the Code; the Merger will qualify as a reorganization under Section 368(a) of the Code; certain anticipated post-closing transactions will not prevent the tax-free treatment of the Distribution or the Merger; and Section 367(a)(1) of the Code will not cause the Merger to be taxable to Pentair, Inc. shareholders (except for a U.S. shareholder who is or will be a “five-percent transferee shareholder” within the meaning of applicable Treasury Regulations but who does not enter into a “gain recognition agreement with the IRS). In addition, Tyco received a legal opinion confirming the tax-free status of the Distribution for U.S. federal income tax purposes
and Tyco and Pentair, Inc. received legal opinions to the effect that the Merger will qualify as a reorganization under section 368(a) of the Code and that Section 367(a)(1) of the Code will not cause the Merger to be taxable to Pentair, Inc. shareholders (except for a U.S. shareholder who is or will be a “five-percent transferee shareholder” within the meaning of applicable Treasury Regulations but who does not enter into a “gain recognition agreement” with the IRS).
The private letter rulings and opinions relied on certain facts and assumptions, and certain representations and undertakings, from us, Tyco and Pentair, Inc. Notwithstanding the private letter rulings and the opinions, the IRS could determine on audit that the Distribution, the internal transactions or the Merger should be treated as taxable transactions if it determines that any of these facts, assumptions, representations or undertakings is not correct or has been violated, or that the Distribution, the internal transactions or the Merger should be taxable for other reasons, including as a result of significant changes in share or asset ownership after the Merger.
If the Distribution ultimately is determined to be taxable, the Distribution could be treated as a taxable dividend or capital gain to Tyco shareholders for U.S. federal income tax purposes, and Tyco shareholders could incur significant U.S. federal income tax liabilities. In addition, Tyco would recognize a gain in an amount equal to the excess of the fair market value of our common shares distributed to Tyco shareholders on the Distribution date over Tyco’s tax basis in such common shares, but such gain, if recognized, generally would not be subject to U.S. federal income tax. However, Tyco could incur significant U.S. federal income tax liabilities if it is ultimately determined that certain internal transactions undertaken in anticipation of the Distribution are taxable. If the Merger ultimately is determined to be taxable, Pentair, Inc. shareholders would recognize taxable gain or loss on their disposition of Pentair, Inc. common shares in the Merger.
Under the terms of the 2012 Tax Sharing Agreement, in the event the Distribution, the ADT distribution, the internal transactions or the Merger were determined to be taxable as a result of actions taken after the Distribution by us, ADT or Tyco, the party responsible for such failure would be responsible for all taxes imposed as a result thereof. If such failure is not the result of actions taken after the Distribution by us, ADT or Tyco, then we, ADT and Tyco would be responsible for any taxes imposed as a result of such determination in the same manner and in the same proportions as we, ADT and Tyco are responsible for Shared Tax Liabilities. Such tax amounts could be significant. In the event that any party to the 2012 Tax Sharing Agreement defaults in its obligation to pay certain taxes to another party that arise as a result of no party’s fault, each non-defaulting party would be responsible for an equal amount of the defaulting party’s obligation to make a payment to another party in respect of such other party’s taxes. In addition, if another party to the 2012 Tax Sharing Agreement that is responsible for all or a portion of an income tax liability were to default in its payment of such liability to a taxing authority, we could be

15



legally liable under applicable tax law for such liabilities and required to make additional tax payments. Accordingly, under certain circumstances, we may be obligated to pay amounts in excess of our agreed-upon share of our, Tyco’s and ADT’s tax liabilities.
If the Distribution or the Merger are determined to be taxable for Swiss withholding or other tax purposes, we could incur significant Swiss withholding tax or other tax liabilities.
Generally, Swiss withholding tax of 35% is due on dividends and similar distributions to Tyco’s shareholders, regardless of the place of residency of the shareholder. As of January 1, 2011, distributions to shareholders out of qualifying contributed surplus (Kapitaleinlage) accumulated on or after January 1, 1997 are exempt from Swiss withholding tax if certain conditions are met (Kapitaleinlageprinzip). Tyco has obtained a ruling from the Swiss Federal Tax Administration confirming that the Distribution qualifies as payment out of such qualifying contributed surplus and no amount will be withheld by Tyco when making the Distribution.
As a condition to closing of the Merger, Tyco obtained rulings from the Swiss Federal Tax Administration confirming: (i) that the Merger will be a transaction that is generally tax-free for Swiss federal, cantonal, and communal tax purposes (including with respect to Swiss stamp tax and Swiss withholding tax); (ii) the relevant Swiss tax base of an acquisition subsidiary of ours for Swiss tax (including federal and cantonal and communal) purposes; (iii) the relevant amount of capital contribution reserves (Kapitaleinlageprinzip) which will be exempt from Swiss withholding tax in the event of a distribution to our shareholders after the Merger; and (iv) that no Swiss stamp tax will be levied on certain post-Merger restructuring transactions.
These tax rulings rely on certain facts and assumptions, and certain representations and undertakings, from Tyco. Notwithstanding these tax rulings, the Swiss Federal Tax Administration could determine on audit that the Distribution or the Merger or certain internal transactions undertaken in anticipation of the Distribution should be treated as a taxable transaction for withholding tax or other tax purposes if it determines that any of these facts, assumptions, representations or undertakings is not correct or has been violated. If the Distribution or the Merger or certain internal transactions undertaken in anticipation of the Distribution ultimately are determined to be taxable for withholding tax or other tax purposes, we and Tyco could incur material Swiss withholding tax or other tax liabilities that could significantly detract from, or eliminate, the benefits of the Distribution and the Merger. In addition, we could become liable to indemnify Tyco for part of any Swiss withholding tax liabilities to the extent provided under the 2012 Tax Sharing Agreement.
We might not be able to engage in desirable strategic transactions and equity issuances because of restrictions relating to U.S. federal income tax requirements for tax-free distributions.
Our ability to engage in desirable strategic transactions or equity issuances could be significantly limited or restricted in order to preserve, for U.S. federal income tax purposes, the tax-free nature of the Distribution and certain related transactions. Even if the Distribution otherwise qualifies for tax-free treatment under Section 355 of the Code, it may result in corporate-level gain to Tyco under Section 355(e) of the Code if 50% or more, by vote or value, of our shares or Tyco’s shares are acquired or issued as part of a plan or series of related transactions that includes the Distribution. Any acquisitions or issuances of our shares or Tyco’s shares within two years after the Distribution are generally presumed to be part of such a plan, although we or Tyco may be able to rebut that presumption. For purposes of this test, the Merger might be treated as part of such a plan or series of related transactions, but if so would not, by itself, cause the Distribution to be taxable to Tyco since Pentair, Inc. shareholders acquired less than 50% of our common shares in the Merger. The change in ownership resulting from the Merger, if treated as part of a plan or series of related transactions that includes the Distribution, would be aggregated with other acquisitions or issuances of our shares that occur as part of a plan or series of related transactions that include the Distribution in determining whether a 50% change in ownership has occurred. The process for determining whether a change of ownership has occurred under the tax rules is complex, inherently factual and subject to interpretation of the facts and circumstances of a particular case. If we do not carefully monitor our compliance with these rules, we could inadvertently cause or permit a change of ownership to occur, triggering our obligation to indemnify Tyco or ADT pursuant to the 2012 Tax Sharing Agreement.
To preserve the tax-free treatment to Tyco of the Distribution, under the 2012 Tax Sharing Agreement, we are prohibited from taking or failing to take any action that prevents the Distribution and related transactions from being tax-free. Further, for the two-year period following the Distribution, without obtaining the consent of Tyco and ADT, a private letter ruling from the IRS or an unqualified opinion of a nationally recognized law firm, we may be prohibited from, among other things:
approving or allowing any transaction that results in a change in ownership of more than 35% of our common shares, when combined with any other changes in ownership of our common shares,
redeeming equity securities,
selling or otherwise disposing of more than 35% of our assets, or

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engaging in certain internal transactions.
These restrictions may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business. Moreover, the 2012 Tax Sharing Agreement also provides that we are responsible for any taxes imposed on Tyco or any of its affiliates or on ADT or any of its affiliates as a result of the failure of the Distribution or the internal transactions to qualify for favorable treatment under the Code if such failure is attributable to certain actions taken after the Distribution by or in respect of us, any of our affiliates or our shareholders.
Risks Relating to Our Liquidity
Disruptions in the financial markets could adversely affect us, our customers and our suppliers by increasing funding costs or reducing availability of credit.
In the normal course of our business, we may access credit markets for general corporate purposes, which may include repayment of indebtedness, acquisitions, additions to working capital, repurchase of common shares, capital expenditures and investments in our subsidiaries. Although we expect to have sufficient liquidity to meet our foreseeable needs, our access to and the cost of capital could be negatively impacted by disruptions in the credit markets, which have occurred in the past and made financing terms for borrowers unattractive or unavailable. These factors may make it more difficult or expensive for us to access credit markets if the need arises. In addition, these factors may make it more difficult for our suppliers to meet demand for their products or for prospective customers to commence new projects, as customers and suppliers may experience increased costs of debt financing or difficulties in obtaining debt financing. Disruptions in the financial markets have had adverse effects on other areas of the economy and have led to a slowdown in general economic activity that may continue to adversely affect our businesses. These disruptions may have other unknown adverse effects. One or more of these factors could adversely affect our business, financial condition, results of operations or cash flows.

Covenants in our debt instruments may adversely affect us.
Our credit agreements and indentures contain customary financial covenants. Our ability to meet the financial covenants can be affected by events beyond our control, and we cannot provide assurance that we will meet those tests. A breach of any of these covenants could result in a default under our credit agreements or indentures. Upon the occurrence of an event of default under any of our credit facilities or indentures, the lenders or trustees could elect to declare all amounts outstanding thereunder to be immediately due and payable and, in the case of credit facility lenders, terminate all commitments to extend further credit. If the lenders or trustees accelerate the repayment of borrowings, we cannot provide assurance that we will have sufficient assets to repay our credit facilities and our other indebtedness. Furthermore, acceleration of any obligation under any of our material debt instruments will permit the holders of our other material debt to accelerate their obligations, which could have a material adverse effect on our financial condition.
We may increase our debt or raise additional capital in the future, which could affect our financial condition, and may decrease our profitability.
As of December 31, 2013, we had $2.6 billion of total debt outstanding. We may increase our debt or raise additional capital in the future, subject to restrictions in our debt agreements. If our cash flow from operations is less than we anticipate, or if our cash requirements are more than we expect, we may require more financing. However, debt or equity financing may not be available to us on acceptable terms, if at all. If we incur additional debt or raise equity through the issuance of additional capital shares, the terms of the debt or capital shares issued may give the holders rights, preferences and privileges senior to those of holders of our common shares, particularly in the event of liquidation. The terms of the debt may also impose additional and more stringent restrictions on our operations than we currently have. If we raise funds through the issuance of additional equity, the percentage ownership of existing shareholders in our company would decline. If we are unable to raise additional capital when needed, our financial condition could be adversely affected. Also, regardless of the terms of our financings, the amount of our shares that we can issue may be limited because the issuance of our shares may cause the Distribution to be a taxable event for Tyco under Section 355(e) of the Code, and under the 2012 Tax Sharing Agreement, we could be required to indemnify Tyco for that tax. See discussion under “We might not be able to engage in desirable strategic transactions and equity issuances following the Distribution and the Merger because of restrictions relating to U.S. federal income tax requirements for tax-free distributions.”
Our leverage could have a material adverse effect on our business, financial condition or results of operations.
Our ability to make payments on and to refinance our indebtedness, including our existing debt as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are not able to repay or refinance our debt as it becomes due, we may be forced to sell assets or take other disadvantageous actions, including (i) reducing financing in the future for working capital, capital expenditures and general corporate purposes or (ii) dedicating an unsustainable level of our cash flow from operations to the payment of principal and

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interest on our indebtedness. The lenders who hold such debt could also accelerate amounts due, which could potentially trigger a default or acceleration of any of our other debt.
Risks Relating to Our Jurisdiction of Incorporation in Switzerland
Our status as a Swiss corporation may limit our flexibility with respect to certain aspects of capital management and may cause us to be unable to make distributions without subjecting our shareholders to Swiss withholding tax.
Swiss law allows shareholders to authorize share capital that can be issued by the board of directors without additional shareholder approval. This authorization is limited to 50% of the existing registered share capital and must be renewed by the shareholders every two years. Additionally, subject to specified exceptions, Swiss law grants preemptive rights to existing shareholders to subscribe to any new issuance of shares. Swiss law also does not provide as much flexibility in the various terms that can attach to different classes of shares as the laws of some other jurisdictions. Swiss law also reserves for approval by shareholders certain corporate actions over which a board of directors would have authority in some other jurisdictions. These Swiss law requirements relating to our capital management may limit our flexibility, and situations may arise where greater flexibility would have provided substantial benefits to our shareholders.
Under Swiss law, a Swiss corporation may pay dividends only if the corporation has sufficient distributable profits from previous fiscal years, or if the corporation has distributable reserves, each as evidenced by its audited statutory balance sheet. Distributable reserves are generally recorded either as “free reserves” or as “qualifying contributed surplus” (contributions received from shareholders) in “Capital contribution reserve.” Distributions may be made out of registered share capital—the aggregate par value of a company’s registered shares—only by way of a capital reduction. After the Merger, the amount available for future dividends or capital reductions from reserve from capital contributions on a Swiss withholding tax free basis is CHF 8.8 billion. We will not be able to pay dividends or make other distributions to shareholders on a Swiss withholding tax free basis in excess of that amount unless we increase our share capital or our reserves from capital contributions. We would also be able to pay dividends out of distributable profits or freely distributable reserves, but such dividends would be subject to Swiss withholding tax. There can be no assurance that we will have sufficient distributable profits, free reserves, reserves from capital contributions or registered share capital to pay a dividend or effect a capital reduction or that we will be able to meet the other legal requirements for dividend payments or distributions as a result of capital reductions.
Generally, Swiss withholding tax of 35% is due on dividends and similar distributions to our shareholders, regardless of the place of residency of the shareholder, unless the distribution is made to shareholders out of (i) a reduction of par value or (ii) assuming certain conditions are met, qualifying contributed surplus accumulated on or after January 1, 1997. A U.S. holder that qualifies for benefits under the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income (the “U.S.-Swiss Treaty”) may apply for a refund of the tax withheld in excess of the 15% treaty rate (or in excess of the 5% reduced treaty rate for qualifying corporate shareholders with at least 10% participation in our voting shares, or for a full refund in the case of qualified pension funds). There can be no assurance that we will have sufficient qualifying contributed surplus to pay dividends free from Swiss withholding tax or that Swiss withholding rules will not be changed in the future. In addition, there can be no assurance that the current Swiss law with respect to distributions out of qualifying contributed surplus will not be changed or that a change in Swiss law will not adversely affect us or our shareholders, in particular as a result of distributions out of qualifying contributed surplus becoming subject to additional corporate law or other restrictions. There are currently motions pending in the Swiss Parliament that purport to limit the distribution of qualifying contributed surplus. In addition, over the long term, the amount of par value available to us for par value reductions or qualifying contributed surplus available to us to pay out as distributions is limited. If we are unable to make a distribution through a reduction in par value or out of qualifying contributed surplus, we may not be able to make distributions without subjecting our shareholders to Swiss withholding taxes.
Under present Swiss tax laws, repurchases of shares for the purposes of cancellation are treated as a partial liquidation subject to 35% Swiss withholding tax on the difference between the repurchase price and the par value except, since January 1, 2011, to the extent attributable to qualifying contributed surplus (Kapitaleinlagereserven) if any. If, and to the extent that, the repurchase of shares is out of retained earnings or other taxable reserves, the Swiss withholding tax becomes due. No partial liquidation treatment applies and no withholding tax is triggered if the shares are not repurchased for cancellation but held by us as treasury shares. However, should we not resell such treasury shares within six years, the withholding tax becomes due at the end of the six year period.
Although we may follow a share repurchase process for future share repurchases, if any, similar to a “second trading line” on the SIX Swiss Exchange in which Swiss institutional investors sell shares to us and are generally able to receive a refund of the Swiss withholding tax, if we are unable to use this process successfully, we may not be able to repurchase shares for the purposes of capital reduction without triggering Swiss withholding tax if and to the extent that the repurchase of shares is made

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out of retained earnings or other taxable reserves. No withholding tax would be applicable if and to the extent that tax-free qualifying contributed surplus is attributable to the share repurchase.
Changes in the U.S. dollar/Swiss franc exchange rate could limit the amount of dividends authorized on our common shares, and there can be no assurance that we will be able to continue to pay dividends on our common shares.
On April 29, 2013, our shareholders approved at our 2013 annual general meeting of shareholders a proposal to pay quarterly cash dividends through the second quarter of 2014. The authorization provides that a dividend will be made out of our “contributed surplus” equity position in our statutory accounts to our shareholders in the amount of $0.25 for each of the third and fourth quarters of 2013 and the first and second quarters of 2014. The deduction to our contributed surplus in our statutory accounts, which is required to be made in Swiss francs, will be determined based on the aggregate amount of the dividend and will be calculated based on the U.S. dollar/Swiss franc exchange rate in effect on April 29, 2013. The U.S. dollar amount of the dividend will be capped at an amount such that the aggregate reduction to our contributed surplus will not exceed 396 million Swiss francs. To the extent that a dividend payment would exceed the cap, the U.S. dollar per share amount of the current or future dividends will be reduced on a pro rata basis so that the aggregate amount of all dividends paid does not exceed the cap. In addition, the aggregate reduction in contributed surplus will be increased for any shares issued, and decreased for any shares acquired, after April 29, 2013 and before the record date for the applicable dividend payment.
Any future dividends that may be proposed by our board of directors will be subject to approval by our shareholders at our annual general meeting. There can be no assurance that our shareholders will approve dividends. Whether our board of directors exercises its discretion to propose any dividends to holders of our common shares will depend on many factors, including our financial condition, earnings, capital requirements of our business, covenants associated with debt obligations, legal requirements, regulatory constraints, industry practice and other factors that our board of directors deems relevant. There can be no assurance that we will continue to pay any dividend in the future.
Swiss laws differ from the laws in effect in the United States and may afford less protection to holders of our securities.
Because of differences between Swiss law and U.S. state and federal laws and differences between the governing documents of Swiss companies and those incorporated in the U.S., it may not be possible to enforce in Switzerland court judgments obtained in the United States against us based on the civil liability provisions of the federal or state securities laws of the United States. As a result, in a lawsuit based on the civil liability provisions of the U.S. federal or state securities laws, U.S. investors may find it difficult to:
effect service within the United States upon us or our directors and officers located outside the United States;
enforce judgments obtained against those persons in U.S. courts or in courts in jurisdictions outside the United States; and
enforce against those persons in Switzerland, whether in original actions or in actions for the enforcement of judgments of U.S. courts, civil liabilities based solely upon the U.S. federal or state securities laws.
Original actions against persons in Switzerland based solely upon the U.S. federal or state securities laws are governed, among other things, by the principles set forth in the Swiss Federal Act on Private International Law. This statute provides that the application of provisions of non-Swiss law by the courts in Switzerland shall be precluded if the result was incompatible with Swiss public policy. Also, mandatory provisions of Swiss law may be applicable regardless of any other law that would otherwise apply.
Switzerland and the United States do not have a treaty providing for reciprocal recognition of and enforcement of judgments in civil and commercial matters. The recognition and enforcement of a judgment of the courts of the United States in Switzerland is governed by the principles set forth in the Swiss Federal Act on Private International Law. This statute provides in principle that a judgment rendered by a non-Swiss court may be enforced in Switzerland only if:
the non-Swiss court had jurisdiction pursuant to the Swiss Federal Act on Private International Law;
the judgment of such non-Swiss court has become final and non-appealable;
the judgment does not contravene Swiss public policy;
the court procedures and the service of documents leading to the judgment were in accordance with the due process of law; and
no proceeding involving the same position and the same subject matter was first brought in Switzerland, or adjudicated in Switzerland, or that it was earlier adjudicated in a third state and this decision is recognizable in Switzerland.

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Risks Relating to Our Proposed Redomicile
The anticipated benefits of the Redomicile may not be realized.
We may not realize the benefits we anticipate from the Redomicile. Our failure to realize those benefits could have an adverse effect on our business, results of operations or financial condition.
The rights of Pentair shareholders will change as a result of the Redomicile.
The completion of the Redomicile will change the governing law that applies to our shareholders from Swiss law (which applies to the Pentair common shares) to Irish law (which applies to Pentair-Ireland ordinary shares). Many of the principal attributes of Pentair common shares and Pentair-Ireland ordinary shares will be materially similar. However, if the Redomicile is completed, Pentair shareholders’ future rights as shareholders under Irish corporate law will differ from their current rights as a shareholder under Swiss corporate law. In addition, Pentair-Ireland’s proposed articles of association will differ from the Pentair articles of association and organizational regulations.
A change in our tax residency could have a negative effect on our future profitability and taxes on dividends.
Under current Irish legislation, a company is regarded as resident for tax purposes in Ireland if it is centrally managed and controlled in Ireland, or, in certain circumstances, if it is incorporated in Ireland. Under current U.K. legislation, a company that is centrally managed and controlled in the U.K. is regarded as resident in the U.K. for taxation purposes. Where a company is treated as tax resident under the domestic laws of both the U.K. and Ireland then the provisions of article 4(3) of the Double Tax Convention between Ireland and the U.K. provide that such enterprise shall be treated as resident only in the jurisdiction in which its place of effective management is situated. Upon completion of the Redomicile, Pentair-Ireland intends to manage its affairs so that it is centrally managed and controlled in the U.K. and therefore has its tax residency only in the U.K. However, we cannot provide assurance that Pentair-Ireland will continue to be resident only in the U.K. for tax purposes. It is possible that in the future, whether as a result of a change in law or the practice of any relevant tax authority or as a result of any change in the conduct of its affairs, Pentair-Ireland could become, or be regarded as having become resident in a jurisdiction other than the U.K. If Pentair-Ireland was considered to be a tax resident of Ireland, Pentair-Ireland could become liable for Irish corporation tax and any dividends paid by it could be subject to Irish dividend withholding tax.
We will remain subject to changes in law and other factors after the Redomicile that may not allow Pentair-Ireland to maintain a worldwide effective corporate tax rate that is competitive in Pentair’s industry.
While we believe that the Redomicile should not affect our ability to maintain a worldwide effective corporate tax rate that is competitive in our industry, we cannot give any assurance as to what Pentair-Ireland’s effective tax rate will be after the Redomicile because of, among other things, uncertainty regarding tax policies of the jurisdictions where Pentair operates. Also, the tax laws of the U.S., the U.K., Ireland and other jurisdictions could change in the future, and such changes could cause a material change in Pentair-Ireland’s worldwide effective corporate tax rate. In particular, legislative action could be taken by the U.S., the U.K., Ireland or the European Union which could override tax treaties upon which we expect to rely and adversely affect Pentair-Ireland’s effective tax rate. As a result, Pentair-Ireland’s actual effective tax rate may be materially different from our expectations.
We expect to incur transaction costs in connection with the completion of the Redomicile, some of which will be incurred whether or not the Redomicile is completed.
We incurred in 2013 and expect to incur in 2014 a total of approximately $14 million in transaction costs in connection with the Redomicile. A majority of these costs will be incurred regardless of whether the Redomicile is completed and prior to the Extraordinary General Meeting.
Pentair-Ireland will seek Irish High Court approval of the creation of distributable reserves. Pentair-Ireland expects this will be forthcoming but cannot guarantee this.
Under Irish law, dividends may only be paid (and share repurchases and redemptions must generally be funded) out of “distributable reserves,” which Pentair-Ireland will not have immediately following the closing of the Redomicile. The creation of distributable reserves of Pentair-Ireland by way of a capital reduction of Pentair-Ireland requires the approval of the Irish High Court and, in connection with seeking such court approval, we are asking Pentair shareholders to approve the creation of distributable reserves for Pentair-Ireland (through the reduction of the share premium account of Pentair-Ireland) at the Extraordinary General Meeting. The approval of the Irish High Court is expected within approximately six to ten weeks following the closing. We are not aware of any reason why the Irish High Court would not approve the creation of distributable reserves. However, the issuance of the required order is a matter for the discretion of the Irish High Court. There will also be no guarantee that the approval of the creation of distributable reserves for Pentair-Ireland by Pentair shareholders will be obtained. Approval of the creation of distributable reserves by the Irish High Court may also take substantially longer than Pentair-Ireland anticipates. In the event that distributable reserves of Pentair-Ireland are not created, no distributions by way of dividends, share repurchases or otherwise will be permitted under Irish law until such time as the group has created sufficient distributable reserves from its trading activities.

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Transfers of Pentair-Ireland ordinary shares may be subject to Irish stamp duty.
For the majority of transfers of Pentair-Ireland shares, there will not be any Irish stamp duty. However, Irish stamp duty will become payable in respect of certain share transfers occurring after completion of the Redomicile. A transfer of Pentair-Ireland shares from a seller who holds shares beneficially (i.e. through The Depository Trust Company (the "DTC")) to a buyer who holds the acquired shares beneficially will not be subject to Irish stamp duty (unless the transfer involves a change in the nominee that is the record holder of the transferred shares). A transfer of Pentair-Ireland shares by a seller who holds shares directly (i.e. not through the DTC) to any buyer, or by a seller who holds the shares beneficially to a buyer who holds the acquired shares directly, may be subject to Irish stamp duty (currently at the rate of 1% of the price paid or the market value of the shares acquired, if higher) payable by the buyer. A shareholder who directly holds shares may transfer those shares into his or her own broker account to be held through the DTC (or vice versa) without giving rise to Irish stamp duty provided that the shareholder has confirmed to Pentair-Ireland’s transfer agent that there is no change in the ultimate beneficial ownership of the shares as a result of the transfer and the transfer is not in contemplation of a sale of the shares.
Because of the potential Irish stamp duty on transfers of Pentair-Ireland shares, we strongly recommend that all directly registered Pentair shareholders open broker accounts so they can transfer their shares into a broker account as soon as possible, and in any event prior to completion of the Redomicile. We also strongly recommend that any person who wishes to acquire Pentair-Ireland shares after completion of the Redomicile acquire such shares through the DTC or another securities depository.
Pentair-Ireland does not intend to pay any stamp duty on these transactions. However, Pentair-Ireland’s articles of association allow Pentair-Ireland, in its absolute discretion, to create an instrument of transfer and pay any stamp duty payable by a buyer. In the event of such payment, Pentair-Ireland reserves the right to (i) seek reimbursement from the buyer or seller (at its discretion), (ii) set-off the amount of the stamp duty against future dividends payable to the buyer or seller (at its discretion) and/or (iii) claim a lien against the Pentair-Ireland ordinary shares on which it has paid stamp duty. Parties to a share transfer should not assume that any stamp duty arising in respect of a transaction in Pentair-Ireland ordinary shares will be paid by Pentair-Ireland.
Pentair-Ireland ordinary shares, received by means of a gift or inheritance could be subject to Irish capital acquisitions tax.
Irish capital acquisitions tax (“CAT”) could apply to a gift or inheritance of Pentair-Ireland ordinary shares irrespective of the place of residence, ordinary residence or domicile of the parties. This is because Pentair-Ireland shares will be regarded as property situated in Ireland. The person who receives the gift or inheritance has primary liability for CAT. Gifts and inheritances passing between spouses are exempt from CAT. Children have a tax-free threshold of €225,000 per lifetime in respect of taxable gifts or inheritances received from their parents.
If Pentair-Ireland ordinary shares are not eligible for deposit and clearing within the facilities of the DTC, then transactions in Pentair-Ireland’s securities may be disrupted.
The facilities of the DTC are a widely-used mechanism that allow for rapid electronic transfers of securities between the participants in the DTC system, which include many large banks and brokerage firms.
Upon the completion of the Redomicile, Pentair-Ireland ordinary shares will be eligible for deposit and clearing within the DTC system. Pentair-Ireland expects to enter into arrangements with the DTC whereby Pentair-Ireland will agree to indemnify the DTC for any stamp duty and/or Stamp Duty Reserve Tax that may be assessed upon it as a result of its service as a depository and clearing agency for Pentair-Ireland’s ordinary shares.
The DTC is not obligated to accept Pentair-Ireland ordinary shares for deposit and clearing within its facilities at the closing and, even if the DTC does initially accept Pentair-Ireland ordinary shares, it will generally have discretion to cease to act as a depository and clearing agency for Pentair-Ireland ordinary shares. If the DTC determined prior to the completion of the Redomicile that Pentair-Ireland ordinary shares are not eligible for clearance within the DTC system, then we would not expect to complete the transactions contemplated by this proxy statement/prospectus in their current form. However, if the DTC determined at any time after the completion of the Redomicile that Pentair-Ireland ordinary shares were not eligible for continued deposit and clearance within its facilities, then we believe Pentair-Ireland ordinary shares would not be eligible for continued listing on a U.S. securities exchange or inclusion in the Standard & Poor’s 500 Index and trading in Pentair-Ireland ordinary shares would be disrupted. While Pentair-Ireland would pursue alternative arrangements to preserve its listing and maintain trading, any such disruption could have a material adverse effect on the trading price of the Pentair-Ireland ordinary shares.
The U.K.’s controlled foreign company legislation may apply to Pentair-Ireland.
Pentair-Ireland is seeking confirmation from HM Revenue and Customs that either Pentair-Ireland will not be subject to the U.K.’s controlled foreign company (“CFC”) legislation because it does not satisfy the “gateway” test or that the rules have no material effect because any chargeable profits which pass through the “gateway” benefit from an applicable exemption.

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Broadly the U.K.’s CFC rules may subject to U.K. corporation tax profits in non-U.K. tax resident subsidiaries which pass through a “gateway”. Although the rules are complex, profits of a non-U.K. tax resident company should not pass through the “gateway” unless the profits have been artificially diverted from the U.K.
The rules should therefore not apply to ordinary trading activities outside the U.K. In relation to a finance company, if profits pass through the “gateway”, specific exemptions apply including the “matched interest” rules which broadly speaking will exempt profits from the U.K. CFC rules if U.K. members of Pentair-Ireland do not have net finance expenses as determined by the U.K.’s worldwide debt cap rules.
Upon completion of the Redomicile, Pentair-Ireland intends to manage its affairs so that the U.K. CFC rules do not result in any material U.K. corporation tax liability. The treatment is intended to be discussed and agreed with HM Revenue and Customs, but if such agreement is not received and the U.K.’s CFC rules do indeed apply, this may adversely affect Pentair-Ireland’s effective tax rate.
We may choose to abandon the Redomicile.
We may decide to abandon the Redomicile at any time prior to the extraordinary general meeting of Pentair shareholders where we will seek shareholder approval of the Merger Agreement (the “Extraordinary General Meeting”), and in some circumstances, after obtaining shareholder approval at the Extraordinary General Meeting. After the Merger Agreement is approved by our shareholders, we anticipate filing the application to effect the Redomicile, unless one of the conditions to completing the Redomicile fails to be satisfied and such failure would have a material adverse effect on the Redomicile.

ITEM 1B.  UNRESOLVED STAFF COMMENTS
None.
 
ITEM 2.  PROPERTIES
Our principal office is located in leased premises in Schaffhausen, Switzerland, and our management office in the United States is located in leased premises in Minneapolis, Minnesota. Our operations are conducted in facilities throughout the world. These facilities house manufacturing and distribution operations, as well as sales and marketing, engineering and administrative offices.
We carry out our Valves & Controls manufacturing operations at 8 plants located throughout the United States and 34 plants located in 17 other countries. In addition, Valves & Controls has 31 distribution facilities, 57 sales offices and 51 service centers located in numerous countries throughout the world.
We carry out our Process Technologies manufacturing operations at 14 plants located throughout the United States and at 11 plants located in 8 other countries. In addition, Process Technologies has 10 distribution facilities and 22 sales offices located in numerous countries throughout the world.
We carry out our Flow Technologies manufacturing operations at 7 plants located throughout the United States and at 14 plants located in 10 other countries. In addition, Flow Technologies has 40 distribution facilities, 20 sales offices and 11 service centers located in numerous countries throughout the world.
We carry out our Technical Solutions manufacturing operations at 8 plants located throughout the United States and 9 plants located in 8 other countries. In addition, Technical Solutions has 11 distribution facilities and 52 sales offices located in numerous countries throughout the world.
We believe that our production facilities are suitable for their purpose and are adequate to support our businesses. 

ITEM 3.  LEGAL PROCEEDINGS
We have been made parties to a number of actions filed or have been given notice of potential claims relating to the conduct of our business, including those pertaining to commercial disputes, product liability, asbestos, environmental, safety and health, patent infringement and employment matters.
While we believe that a material impact on our consolidated financial position, results of operations or cash flows from any such future claims or potential claims is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future adverse ruling or unfavorable development could result in future charges that could have a material impact. We do and will continue to periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and

22



make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our consolidated financial position, results of operations and cash flows for the proceedings and claims described in the notes to our consolidated financial statements could change in the future.
Asbestos Matters
Our subsidiaries and numerous other companies are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were attached to or used with asbestos-containing components manufactured by third-parties. Each case typically names between dozens to hundreds of corporate defendants. While we have observed an increase in the number of these lawsuits over the past several years, including lawsuits by plaintiffs with mesothelioma-related claims, a large percentage of these suits have not presented viable legal claims and, as a result, have been dismissed by the courts. Our historical strategy has been to mount a vigorous defense aimed at having unsubstantiated suits dismissed, and, where appropriate, settling suits before trial. Although a large percentage of litigated suits have been dismissed, we cannot predict the extent to which we will be successful in resolving lawsuits in the future.
As of December 31, 2013, there were approximately 2,000 lawsuits pending against our subsidiaries. A lawsuit might include several claims, and we have approximately 2,200 claims outstanding as of December 31, 2013. This amount is not adjusted for claims that are not actively being prosecuted, identified incorrect defendants, or duplicated other actions, which would ultimately reflect our current estimate of the number of viable claims made against us, our affiliates, or entities for which we assumed responsibility in connection with acquisitions or divestitures. In addition, the amount does not include certain claims pending against third parties for which we have been provided an indemnification.
Our estimated liability for asbestos-related claims was $254.7 million and $278.9 million as of December 31, 2013 and 2012, respectively, and was recorded in Other non-current liabilities in the Consolidated Balance Sheets for pending and future claims and related defense costs. Our estimated receivable for insurance recoveries was $119.6 million and $131.0 million at December 31, 2013 and 2012, all of which was acquired in the Merger, and was recorded in Other non-current assets in the Consolidated Balance Sheets.
Environmental Matters
We are involved in or have retained responsibility and potential liability for environmental obligations and legal proceedings related to our current business and, including pursuant to certain indemnification obligations, related to certain formerly owned businesses. We are responsible, or alleged to be responsible, for ongoing environmental investigation and/or remediation of sites in several countries. These sites are in various stages of investigation and/or remediation and at some of these sites our liability is considered de minimis. We received notification from the U.S. Environmental Protection Agency and from similar state and non-U.S. environmental agencies that several sites formerly or currently owned and/or operated by us, and other properties or water supplies that may be or may have been impacted from those operations, contain disposed or recycled materials or waste and require environmental investigation and/or remediation. Those sites include instances where we have been identified as a potentially responsible party under U.S. federal, state and/or non-U.S. environmental laws and regulations. For several formerly owned businesses, we have also received claims for indemnification from purchasers of these businesses.
Our accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. It can be difficult to estimate reliably the final costs of investigation and remediation due to various factors. In our opinion, the amounts accrued are appropriate based on facts and circumstances as currently known. Based upon our experience, current information regarding known contingencies and applicable laws, we have recorded reserves for these environmental matters of $39.3 million and $49.2 million as of December 31, 2013 and 2012, respectively. We do not anticipate these environmental conditions will have a material adverse effect on our financial position, results of operations or cash flows. However, unknown conditions, new details about existing conditions or changes in environmental requirements may give rise to environmental liabilities that will exceed the amount of our current reserves and could have a material adverse effect in the future.
Product liability claims
We are subject to various product liability lawsuits and personal injury claims. A substantial number of these lawsuits and claims are insured and accrued for by Penwald, our captive insurance subsidiary. See discussion in ITEM 1 and ITEM 8, Note 1 of the Notes to Consolidated Financial Statements — Insurance subsidiary. Penwald records a liability for these claims based on actuarial projections of ultimate losses. For all other claims, accruals covering the claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are adjusted periodically as additional information becomes available. In 2004, we disposed of the Tools Group and we retained responsibility for certain product claims. We have not experienced significant unfavorable trends in either the severity or frequency of product liability lawsuits or personal injury claims.

23



Compliance Matters
Prior to the Merger, the Flow Control business was subject to investigations by the DOJ and the SEC related to allegations that improper payments were made by the Flow Control business and other Tyco subsidiaries and third-party intermediaries in recent years in violation of the Foreign Corrupt Practices Act. Tyco reported to the DOJ and the SEC the remedial measures that it had taken in response to the allegations and Tyco’s own internal investigations. As a result of discussions with the DOJ and SEC aimed at resolving these matters, on September 24, 2012, Tyco entered into a settlement with the SEC and a non-prosecution agreement with the DOJ, pursuant to which the Flow Control business is for a three year period subject to yearly reporting to the DOJ concerning its continuing compliance efforts.
 
ITEM 4.  MINE SAFETY DISCLOSURES
Not applicable.


24



EXECUTIVE OFFICERS OF THE REGISTRANT
Current executive officers of Pentair Ltd., their ages, current position and their business experience during at least the past five years are as follows:
Name
 
Age
 
Current Position and Business Experience
Randall J. Hogan
 
58

 
Chief Executive Officer since 2001 and Chairman of the Board since 2002; President and Chief Operating Officer, 1999 — 2000; Executive Vice President and President of Pentair’s Electrical and Electronic Enclosures Group, 1998 — 1999; United Technologies Carrier Transicold President, 1995 — 1997; Pratt & Whitney Industrial Turbines Vice President and General Manager, 1994 — 1995; General Electric various executive positions, 1988 — 1994; McKinsey & Company consultant, 1981 — 1987.
John L. Stauch
 
49

 
Executive Vice President and Chief Financial Officer since 2007; Chief Financial Officer of the Automation and Control Systems unit of Honeywell International Inc., 2005 — 2007; Vice President, Finance and Chief Financial Officer of the Sensing and Controls unit of Honeywell International Inc., 2004 — 2005; Vice President, Finance and Chief Financial Officer of the Automation & Control Products unit of Honeywell International Inc., 2002 — 2004; Chief Financial Officer and IT Director of PerkinElmer Optoelectronics, a unit of PerkinElmer, Inc., 2000 — 2002; Various executive, investor relations and managerial finance positions with Honeywell International Inc. and its predecessor AlliedSignal Inc., 1994 — 2000.
Frederick S. Koury
 
53

 
Senior Vice President, Human Resources since 2003; Vice President of Human Resources at Limited Brands, 2000 — 2003; PepsiCo, Inc., various executive positions, 1985 — 2000.
Angela D. Lageson
 
45

 
Senior Vice President, General Counsel and Secretary since 2010; Assistant General Counsel, 2002 — 2010; Shareholder and Officer of the law firm of Henson & Efron, P.A., 2000 — 2002; Associate Attorney in the law firm of Henson & Efron, P.A. 1996 — 2000 and in the law firm of Felhaber Larson Fenlon & Vogt, P.A., 1992 — 1996.
Todd R. Gleason
 
43

 
Senior Vice President, Growth since 2013; President, Integration and Standardization, 2012 — 2013; Vice President, Marketing & Strategy, 2010 — 2012; Vice President, Investor Relations and Business Analysis and Planning, 2007 — 2010; Director of Investor Relations with American Standard (now Ingersoll Rand), 2005 — 2007; Various business leadership positions with Honeywell International Inc. and its predecessor AlliedSignal Inc., 1998 — 2005.
Michael G. Meyer
 
55

 
Vice President, Treasurer since 2012; Vice President of Treasury and Tax, 2004 – 2012; Treasurer, 2002 — 2004; Assistant Treasurer, 1994 — 2001; Various executive positions with Federal-Hoffman, Inc. (former subsidiary of Pentair), 1985 — 1994.
Mark C. Borin
 
46

 
Corporate Controller and Chief Accounting Officer since 2008; Partner in the audit practice of the public accounting firm KPMG LLP, 2000 — 2008; Various positions in the audit practice of KPMG LLP, 1989 — June 2000.
Karl R. Frykman
 
53

 
President, Aquatic Systems Global Business Unit since 2007; President of Aquatic Systems' National Pool Tile group, 1998— 2007; Vice President of Operations for American Products, 1995— 1998; Vice President of Anthony Pools, 1990 — 1995; Vice President of Poolsaver, 1988 — 1990.
Netha N. Johnson
 
43

 
President, Filtration & Process Global Business Unit since 2013; President, Process Technologies business, 2010 — 2013; President and General Manager of Dyneon (wholly owned subsidiary of 3M), 2007 — 2010; Various executive positions with Brooks Automation, Inc., 1999 — 2004.
Alok Maskara
 
42

 
President, Technical Solutions Global Business Unit since 2014; President, Thermal Management business, 2012 — 2014; President, Water Purification business, 2011 — 2012; President, Residential Filtration business, 2008 — 2011; General Manager of the Residential & Commercial water business at General Electric Corporation, 2006 — 2008; Manager Corporate Initiatives, General Electric Corporation, 2004 — 2006; Various executive positions with McKinsey & Company, 2000 — 2004.
Phil Pejovich
 
48

 
President, Flow Technologies Global Business Unit since 2014; President, Equipment Protection business, 2010 - 2014; Various executive positions within Whirlpool Corporation, including Business Strategy, North America Refrigeration, President, Whirlpool Greater China, 1999 — 2010; Various executive positions at TRW, Inc., Electrospace, and E-Systems, (divisions of Raytheon Company) 1987 - 1999.
Christopher Stevens
 
46

 
President, Valves & Controls Global Business Unit since 2014; Vice President of Product Management & Marketing, Valves & Controls business, 2012 — 2014; General Manager of Global Mining for Tyco International's Flow Control business, 2009 — 2012; Vice President of Strategy & Global Marketing for Tyco International's Flow Control business, 2007 — 2009; Director, Strategy & Business Planning, Tyco Engineered Products & Services, 2005 — 2006; Vice President of Worldwide Strategic Sourcing at Fisher Scientific International, 2002 — 2005; Various business positions with McKinsey & Company, CSC Index and Westinghouse Electric, 1990 — 2002.

25



PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common shares are listed for trading on the New York Stock Exchange and trade under the symbol “PNR.” As of December 31, 2013, there were 19,826 shareholders of record.
The high, low and closing sales price for our common shares and the dividends paid for each of the quarterly periods for 2013 and 2012 were as follows:
 
2013
 
2012
  
First  
Second  
Third  
Fourth  
 
First  
Second  
Third  
Fourth  
High
$
54.20

$
60.14

$
66.49

$
77.97

 
$
48.77

$
47.59

$
45.21

$
49.50

Low
49.39

49.67

57.38

62.80

 
33.88

36.31

37.43

40.30

Close
52.75

57.69

65.52

77.67

 
47.61

38.28

44.51

49.15

Dividends paid
0.23

0.23

0.25

0.25

 
0.22

0.22

0.22

0.22

Pentair has paid 152 consecutive quarterly dividends and has increased dividends each year for 37 consecutive years.
Future dividends on our common shares or reductions of registered share capital for distribution to shareholders, if any, must be approved by our shareholders. We expect to obtain shareholder approval of the annual dividend amount out of contributed surplus each year at our annual general meeting, and we expect to distribute the approved dividend amount in four quarterly installments. The timing, declaration and payment of future dividends to holders of our common shares will depend upon many factors, including our financial condition and results of operations, the capital requirements of our businesses, industry practice and any other relevant factors.


26



Share Performance Graph
The following information under the caption “Share Performance Graph” in this ITEM 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934 and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.
The following graph sets forth the cumulative total shareholder return on our common shares for the last five years, assuming the investment of $100 on December 31, 2008 and the reinvestment of all dividends since that date to December 31, 2013. The graph also contains for comparison purposes the S&P 500 Index and the S&P 500 Industrials Index, assuming the same investment level and reinvestment of dividends.
By virtue of our market capitalization, we are a component of the S&P 500 Index. On the basis of our size and diversity of businesses, we believe the S&P 500 Industrials Index is an appropriate published industry index for comparison purposes.
 
Base Period
December
2008
 
INDEXED RETURNS
Years ended December 31
Company / Index
2009
2010
2011
2012
2013
Pentair Ltd.
100
 
140.14

162.03

150.90

227.68

365.87

S&P 500 Index
100
 
126.46

145.51

148.59

172.37

228.19

S&P 500 Industrials Index
100
 
120.93

153.26

152.35

175.73

247.22


27



Purchases of Equity Securities
The following table provides information with respect to purchases we made of our common shares during the fourth quarter of 2013:
 
(a)
(b)
(c)
(d)
 
Total number of
shares
purchased
Average price
paid per share
Total number of
shares
purchased as
part of publicly
announced
plans or
programs
Dollar value
of
shares that may
yet be purchased
under the plans or
programs
September 29 – October 26, 2013
966,101

$
65.58

915,485

$
265,555,373

October 27 – November 23, 2013
1,496,677

68.40

1,496,300

163,164,486

November 24 – December 31, 2013
191,493

71.15

185,200

1,150,014,432

Total
2,654,271

 
2,596,985

 
(a)
The purchases in this column include 50,616 shares for the period September 29 – October 26, 2013, 377 shares for the period October 27 – November 23, 2013, and 6,293 shares for the period November 24 – December 31, 2013 deemed surrendered to us by participants in our 2012 Stock and Incentive Plan (the “2012 Plan”) and earlier stock incentive plans that are now outstanding under the 2012 Plan (collectively “the Plans”) to satisfy the exercise price or withholding of tax obligations related to the exercise of stock options and vesting of restricted shares.
(b)
The average price paid in this column includes shares repurchased as part of our publicly announced plans and shares deemed surrendered to us by participants in the Plans to satisfy 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 plans to repurchase our common shares up to a maximum dollar limit of $2.2 billion.
(d)
Prior to the closing of the Merger, our board of directors, and Tyco as our sole shareholder, authorized the repurchase of our common shares with a maximum aggregate value of $400 million following the closing of the Merger. This authorization does not have an expiration date. On October 1, 2012, our board of directors authorized the repurchase of our common shares with a maximum aggregate value of $800 million. This authorization expires on December 31, 2015 and is in addition to the $400 million share repurchase authorization. In December 2013, our Board of Directors authorized the repurchase of our common shares up to a maximum dollar limit of $1.0 billion. This authorization is in addition to the combined $1.2 billion prior share repurchase authorization. The authorization expires on December 31, 2016.

28



ITEM 6.  SELECTED FINANCIAL DATA
The following table sets forth our selected historical financial data for the five years ended December 31, 2013.
 
 
Years ended December 31
In millions, except per-share data
2013
2012
2011
2010
2009
Consolidated statements of operations and comprehensive income (loss) data
 
 
 
 
 
Net sales
$
7,479.7

$
4,416.1

$
3,456.7

$
3,030.8

$
2,692.5

Operating income (loss)
774.0

(43.1
)
100.2

313.0

219.1

Net income (loss) attributable to Pentair Ltd.
536.8

(107.2
)
(7.5
)
185.5

115.0

Per-share data

 
 
 
 
Basic:

 
 
 
 
Earnings (loss) per share attributable to Pentair Ltd.
$
2.67

$
(0.84
)
$
(0.08
)
$
1.89

$
1.18

Weighted average shares
201.1

127.4

98.2

98.0

97.4

Diluted:

 
 
 
 
Earnings (loss) per share attributable to Pentair Ltd.
$
2.62

$
(0.84
)
$
(0.08
)
$
1.87

$
1.16

Weighted average shares
204.6

127.4

98.2

99.3

98.5

Cash dividends declared and paid per common share
$
0.96

$
0.88

$
0.80

$
0.76

$
0.72

Cash dividends declared and unpaid per common share
0.50

0.46




Consolidated balance sheets data

 
 
 
 
Total assets
$
11,743.3

$
11,882.7

$
4,586.3

$
3,973.5

$
3,911.3

Total debt
2,555.1

2,457.4

1,309.1

707.5

805.6

Total equity
6,217.7

6,487.5

2,047.4

2,205.0

2,126.3

Factors Affecting Comparability of our Selected Financial Data
For periods prior to 2012, the Consolidated Statements of Operations and Comprehensive Income (Loss) and Consolidated Statements of Cash Flows include the historical results of Pentair, Inc. Following the consummation of the Merger on September 28, 2012, the consolidated financial statements include the results of Flow Control.
In May 2011, we acquired as part of Process Technologies, the Clean Process Technologies division of privately held Norit Holding B.V. In the fourth quarter of 2011, we recorded a pre-tax non-cash goodwill impairment charge of $200.5 million.


29



ITEM 7. 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. Without limitation, any statements preceded or followed by or that include the words “targets,” “plans,” “believes,” “expects,” “intends,” “will,” “likely,” “may,” “anticipates,” “estimates,” “projects,” “should,” “would,” “positioned,” “strategy,” “future” or words, phrases or terms of similar substance or the negative thereof, are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors include the ability to successfully complete the Redomicile (as defined below) and achieve the expected benefits from the Redomicile; the ability to successfully integrate Pentair, Inc. and the Flow Control (as defined below) business and achieve expected benefits from the Merger (as defined below); overall global economic and business conditions; competition and pricing pressures in the markets we serve; the strength of housing and related markets; volatility in currency exchange rates and commodity prices; inability to generate savings from excellence in operations initiatives consisting of lean enterprise, supply management and cash flow practices; increased risks associated with operating foreign businesses; the ability to deliver backlog and win future project work; failure of markets to accept new product introductions and enhancements; the impact of changes in laws and regulations, including those that limit U.S. tax benefits; the outcome of litigation and governmental proceedings; and the ability to achieve our long-term strategic operating goals. Additional information concerning these and other factors is contained in our filings with the U.S. Securities and Exchange Commission, including in Item 1A of this Annual Report on Form 10-K. All forward-looking statements speak only as of the date of this report. Pentair Ltd. assumes no obligation, and disclaims any obligation, to update the information contained in this report.
Overview
Pentair Ltd. is a focused diversified industrial manufacturing company comprising four reporting segments: Valves & Controls, Process Technologies, Flow Technologies and Technical Solutions. During the fourth quarter of 2013, we reorganized our business segments to reflect a new operating structure and management of our Global Business Units, resulting in a change from three reporting segments to four. All prior period amounts related to the segment change have been retrospectively reclassified throughout this Annual Report on Form 10-K to conform to the new presentation. We now have four reporting segments: Valves & Controls, Process Technologies, Flow Technologies and Technical Solutions. We classify our operations into business segments based primarily on types of products offered and markets served. For the year ended December 31, 2013, Valves & Controls, Process Technologies, Flow Technologies and Technical Solutions accounted for 33 percent, 23 percent, 22 percent and 22 percent of total revenues, respectively.
Pentair Ltd. took its current form on September 28, 2012 as a result of a reverse acquisition (the "Merger") involving Pentair, Inc. and an indirect, wholly-owned subsidiary of Flow Control (defined below), with Pentair, Inc. surviving as an indirect, wholly-owned subsidiary of Pentair Ltd. "Flow Control" refers to Pentair Ltd. prior the Merger. Prior to the Merger, Tyco International Ltd. ("Tyco") engaged in an internal restructuring whereby it transferred to Flow Control certain assets related to the flow control business of Tyco, and Flow Control assumed from Tyco certain liabilities related to the flow control business of Tyco. On September 28, 2012 prior to the Merger, Tyco effected a spin-off of Flow Control through the pro-rata distribution of 100% of the outstanding common shares of Flow Control to Tyco’s shareholders (the “Distribution”), resulting in the distribution of approximately 110.9 million of our common shares to Tyco’s shareholders. The Merger was accounted for as a reverse acquisition under the purchase method of accounting with Pentair, Inc. treated as the acquirer.
In May 2011, Pentair, Inc. acquired, as part of Process Technologies, 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.
On January 30, 2014, we acquired, as part of Process Technologies, the remaining 19.9 percent ownership interest in two entities, a U.S. entity and an international entity (collectively, Pentair Residential Filtration or “PRF”), from GE Water & Process Technologies (a unit of General Electric Company) (“GE”) for $134.3 million in cash. Prior to the acquisition, we held a 80.1 percent ownership equity interest in PRF, representing our and GE's respective global water softener and residential water filtration businesses.

30



Key Trends and Uncertainties Regarding Our Existing Business
The following trends and uncertainties affected our financial performance in 2013 and 2012, and will likely impact our results in the future:
In September 2012, we completed the Merger. With an acquisition of this magnitude and complexity, there are uncertainties and risks associated with realizing the amount and timing of anticipated growth opportunities and cost and tax synergies as described in ITEM 1A – Risk Factors.
We identified specific market opportunities that we continue to pursue that we find attractive, both within and outside the United States. We are reinforcing our businesses to more effectively address these opportunities through targeted research and development and additional sales and marketing resources. Unless we successfully penetrate these product and geographic markets, our organic growth would likely be limited.
End markets for new home building and new pool starts continue to show signs of rebound from their historically low levels in 2007—2011. New product introductions, expanded distribution, channel penetration and a recovering housing market resulted in volume increases for 2012 and 2013 in these end markets.
Despite the overall strength of our end-markets, we experience differing levels of volatility depending on the end-market and may continue to do so over the medium and longer term. While we believe the general trends are favorable, factors specific to each of our major end-markets may affect the capital spending plans of our customers.
Economic uncertainty in Australia has negatively impacted business results and may continue to do so for the foreseeable future.
Through 2012 and 2013, 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.
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 operating activities less capital expenditures plus proceeds from sale of property and equipment. Our free cash flow for the full year 2013 was $751.3 million, exceeding our goal of 100 percent net income conversion. We expect to generate free cash flow that equals or exceeds 105 percent of our net income in 2014. We are continuing to target reductions in working capital and particularly inventory as a percentage of sales. See the discussion of “Other financial measures” under “Liquidity and Capital Resources—Other financial measures” in this report for a reconciliation of our free cash flow.
In 2014, our operating objectives include the following:
Continued integration of Pentair, Inc. and the Flow Control business;
Increasing our presence in both fast growth and developed regions and vertical focus to grow in those markets in which we have competitive advantages;
Focusing on developing global talent in light of our increased global presence;
Optimizing our technological capabilities to increasingly generate innovative new products; and
Driving operating excellence through lean enterprise initiatives, with specific focus on sourcing and supply management, cash flow management and lean operations.
We may seek to meet our objectives of expanding our geographic reach internationally and expanding our presence in our various channels to market by acquiring technologies and products to broaden our businesses’ capabilities to serve additional markets and through acquisitions. We may also consider the divestiture of discrete business units to further focus our businesses on our most attractive markets.
Proposed Redomicile
On December 10, 2013, Pentair Ltd. entered into a Merger Agreement (the “Merger Agreement”) with Pentair plc, a newly-formed Irish public limited company and subsidiary of Pentair (“Pentair-Ireland”). Under the Merger Agreement, and subject to the conditions set forth in the Merger Agreement, Pentair will merge with and into Pentair-Ireland, with Pentair-Ireland being the surviving company (the “Redomicile”), thereby changing the jurisdiction of organization of the publicly-traded parent

31



company from Switzerland to Ireland. Pentair shareholders will receive one ordinary share of Pentair-Ireland for each common share of Pentair held immediately prior to the Redomicile.
Upon completion of the Redomicile, Pentair-Ireland intends to manage its affairs so that it is centrally managed and controlled in the United Kingdom (the “U.K.”) and therefore have its tax residency in the U.K. Pentair-Ireland will continue to own and conduct the same businesses as Pentair owned and conducted prior to the Merger, except that Pentair-Ireland will replace Pentair as the publicly-traded parent company. Pentair-Ireland will remain subject to U.S. Securities and Exchange Commission (“SEC”) reporting requirements and the applicable corporate governance rules of the New York Stock Exchange.
The Redomicile is subject to Pentair shareholder approval of the Merger Agreement and certain other conditions. Pentair’s shareholders will be asked to vote to approve the Merger Agreement at an extraordinary general meeting of shareholders, which Pentair expects to be held during the second quarter of 2014.
We anticipate that having our publicly-traded parent company incorporated in Ireland and tax resident in the U.K. will provide us the following benefits:
Incorporation of our publicly-traded parent company in Ireland would enable us to benefit by being subject to a legal and regulatory structure in a jurisdiction with a well-developed legal system and corporate law with established standards of corporate governance.
The U.K. has a developed, stable and internationally competitive tax system.
The legal requirements we will be subject to as a company incorporated in Ireland, listed on the NYSE and subject to SEC disclosure and shareholder voting requirements strike the right balance between robust external governance oversight and regulation of our executive and director pay practices and the ability of our compensation committee consisting of independent directors to determine executive compensation to provide incentives to our executive management and to offer competitive salaries and benefits.


32



CONSOLIDATED RESULTS OF OPERATIONS
The consolidated results of operations were as follows:
 
Years ended December 31
 
% / point change
In millions
2013
2012
2011
 
2013 vs. 2012
2012 vs. 2011
Net sales
$
7,479.7

$
4,416.1

$
3,456.7

 
69.4
 %
27.8
 %
Cost of goods sold
5,006.8

3,146.5

2,383.0

 
59.1
 %
32.0
 %
Gross profit
2,472.9

1,269.6

1,073.7

 
94.8
 %
18.2
 %
% of net sales
33.1
%
28.7
 %
31.1
%
 
4.4

(2.4
)
 
 
 
 
 
 
 
Selling, general and administrative
1,562.1

1,158.4

694.8

 
34.8
 %
66.7
 %
% of net sales
21.0
%
26.2
 %
20.1
%
 
(5.2
)
6.1

Research and development
125.8

93.6

78.2

 
34.4
 %
19.7
 %
% of net sales
1.7
%
2.1
 %
2.3
%
 
(0.4
)
(0.2
)
 
 
 
 
 
 
 
Operating income (loss)
774.0

(43.1
)
100.2

 
N.M.

(143.0
)%
% of net sales
10.3
%
(1.0
)%
2.9
%
 
11.3

(3.9
)
 
 
 
 
 
 
 
Gain on sale of businesses
(19.7
)


 
N.M.

 %
Loss on early extinguishment of debt

75.4


 
(100.0
)%
N.M.

Net interest expense
69.1

67.6

58.9

 
2.2
 %
14.8
 %
 
 
 
 
 
 
 
Net income (loss) before income taxes and noncontrolling interest
726.4

(184.0
)
43.2

 
N.M.

N.M.

Provision (benefit) for income taxes
183.8

(79.4
)
46.4

 
N.M.

N.M.

   Effective tax rate
25.3
%
43.1
 %
107.3
%
 
(17.8
)
(64.2
)
N.M. Not Meaningful
Net sales
The components of the consolidated net sales change were as follows:
 
2013 vs. 2012
 
2012 vs. 2011
Volume
7.3
 %
 
(1.0
)%
Acquisition
62.1
 %
 
28.3
 %
Price
1.4
 %
 
1.5
 %
Currency
(1.4
)%
 
(1.0
)%
Total
69.4
 %
 
27.8
 %
The 69.4 percentage point increase in consolidated net sales in 2013 from 2012 was primarily the result of:
sales volume of the Flow Control businesses of $3,725.7 million in 2013, compared to $886.5 million in 2012;
organic sales growth in Process Technologies and Flow Technologies due to higher sales of certain pool products serving the North American residential housing market and increased demand for global food & beverage solutions;
growth in developed regions led by strength in the U.S. and Western Europe;
growth in emerging regions of the Middle East, Africa and Eastern Europe; and
selective increases in selling prices to mitigate inflationary cost increases.
These increases were partially offset by:
lower sales in infrastructure; and

33



unfavorable foreign currency effects.
The 27.8 percentage point increase in consolidated net sales in 2012 from 2011 was primarily the result of:
sales volume of the Flow Control businesses subsequent to the Merger of $886.5 million and higher sales volume related to the May 2011 acquisition of CPT;
organic sales growth in Process Technologies and Flow Technologies primarily due to higher sales of certain pump, pool and filtration products primarily serving the North American residential housing market and other global markets;
continued sales growth in fast growth regions including in Latin America and Eastern Europe; and
selective increases in selling prices to mitigate inflationary cost increases.
These increases were partially offset by:
decreases in Technical Solutions sales volume in Western Europe and in the infrastructure vertical; and
unfavorable foreign currency effects.
Gross profit 
The 4.4 percentage point increase in gross profit as a percentage of sales in 2013 from 2012 was primarily the result of:
lower cost of goods sold as a result of inventory fair value step-up and customer backlog recorded as part of the Merger purchase accounting, which decreased from $179.6 million in 2012 to $86.9 million in 2013;
savings generated from our PIMS initiatives including lean and supply management practices and synergies from the combined operations subsequent to the Merger; and
selective increases in selling prices across all business segments to mitigate inflationary cost increases.
These increases were partially offset by:
inflationary increases related to raw materials and labor costs.
The 2.4 percentage point decrease in gross profit as a percentage of sales in 2012 from 2011 was primarily the result of:
higher cost of goods sold of $179.6 million in 2012 as a result of inventory fair value step-up and customer backlog recorded as part of the Merger purchase accounting; and
inflationary increases related to raw materials and labor costs.
These decreases were partially offset by:
cost savings generated from our PIMS initiatives including lean and supply management practices;
selective increases in selling prices in Process Technologies, Flow Technologies, and Technical Solutions to mitigate inflationary cost increases; and
higher cost of goods sold in 2011 as a result of the inventory fair value step-up and customer backlog recorded as part of the CPT purchase accounting.
Selling, general and administrative ("SG&A") 
The 5.2 percentage point decrease in SG&A expense as a percentage of sales in 2013 from 2012 was primarily the result of:
"mark-to-market" actuarial gains related to pension and other post-retirement benefit plans of $63.2 million in 2013, compared to "mark-to-market" actuarial losses of $146.2 million in 2012;
costs associated with the Merger in 2012 that did not reoccur in 2013, including $23.2 million in transaction advisory fees, $21.8 million of change of control costs and $34.1 million of other transaction costs;
trade name impairment charge of $11.0 million for 2013, compared to $60.7 million in 2012;
sales volume of the Flow Control businesses subsequent to the Merger, which resulted in increased leverage on our fixed operating expenses; and

34



savings generated from back-office consolidation, reduction in personnel and other lean initiatives.
These decreases were partially offset by: 
restructuring costs of $113.5 million in 2013, compared to $66.9 million in 2012;
certain increases for labor and related costs; and
intangible asset amortization associated with the Merger.
The 6.1 percentage point increase in SG&A expense as a percentage of sales in 2012 from 2011 was primarily the result of:
“mark-to-market” actuarial losses related to pension and other post-retirement benefit plans of $146.2 million in 2012, an increase of $80.0 million from 2011;
costs associated with the Merger, including $23.2 million in transaction advisory fees, $21.8 million of change of control costs and $34.1 million of other transaction costs;
restructuring costs of $66.9 million in 2012, compared to $13.0 million in 2011;
trade name impairment charge of $60.7 million;
intangible asset amortization related to the Merger and to the May 2011 acquisition of CPT; and
continued investments in future growth with emphasis on international markets, including personnel and business infrastructure investments.
These increases were partially offset by:
a nonrecurring goodwill impairment charge in 2011 of $200.5 million in Process Technologies; and
sales volume of the Flow Control businesses subsequent to the Merger, which resulted in increased leverage on our fixed operating expenses.
Research and development ("R&D")
The 0.4 percentage point decrease in R&D expense as a percentage of sales in 2013 from 2012 was primarily the result of:
lower R&D expenditures in 2013 versus 2012 as compared to sales volume from the Flow Control businesses.
This decrease was partially offset by:
continued investments in the development of innovative new products for future growth.
The 0.2 percentage point decrease in R&D expense as a percentage of sales in 2012 from 2011 was primarily the result of:
sales volume of the Flow Control businesses subsequent to the Merger, which resulted in increased leverage on the R&D spending; and
higher sales volumes in Process Technologies which resulted in increased leverage on the R&D spending.
These decreases were partially offset by:
continued investments in the development of new products to generate growth.
Net interest expense
The 2.2 percentage point increase in net interest expense in 2013 from 2012 was primarily the result of:
the impact of higher debt levels following the Merger; and
additional interest expense of $2.1 million in the second quarter of 2013 for the working capital and net indebtedness adjustment related to the Merger.
These increases were partially offset by:
reduced overall interest rates in effect on our outstanding debt; and

35



the impact of higher cash balances following the Merger.
The 14.8 percentage point increase in net interest expense in 2012 from 2011 was primarily the result of:
the impact of higher debt levels following the Merger.
This increase was partially offset by:
reduced overall interest rates in effect on our outstanding debt.
Gain on sale of businesses, net
During 2013, we sold businesses that were part of Technical Solutions and Flow Technologies for a cash purchase price of $30.1 million and $13.4 million, respectively, net of transaction costs, resulting in a net gain of $16.8 million and $2.9 million, respectively.
Loss on early extinguishment of debt
In October 2012, we redeemed the remaining outstanding aggregate principal of our 5.65% fixed rate senior notes due 2013-2017 totaling $400 million and our 1.05% floating rate senior notes due 2013 totaling $100 million (the “Fixed/Floating Rate Notes”). The redemptions included make-whole premiums of $65.8 million. Concurrent with the redemption of the Fixed/Floating Rate Notes, we terminated a related interest rate swap that was designated as a cash flow hedge, which resulted in the reclassification of $3.4 million of previously unrecognized variable to fixed swap losses from Accumulated Other Comprehensive Income (Loss) ("AOCI") to earnings in October 2012. All costs associated with the redemption were recorded as a Loss on the early extinguishment of debt including $0.6 million of unamortized deferred financing costs.
In December 2012, Pentair Finance S.A. (“PFSA”), completed an exchange offer pursuant to which it exchanged $373 million in aggregate principal amount of 5.00% Senior Notes due 2021 of Pentair, Inc. a wholly-owned, indirect subsidiary of the Company for a like amount of new 5.00% Senior Notes due 2021 of PFSA, plus $5.6 million in transaction-related costs which were recorded as a Loss on the early extinguishment of debt.
Provision (benefit) for income taxes
The 17.8% percentage point decrease in the effective tax rate in 2013 from 2012 was primarily due to:
the mix of global earnings, including the impact of the Merger; and
the decrease in non-deductible transaction costs during 2013 compared to 2012.
The decreases were partially offset by:
the favorable tax impact related to the 2012 exchange offer that did not occur in 2013; and
the favorable resolution of U.S. federal and state tax audits in 2012 that did not occur in 2013.
The 64.2 percentage point decrease in the effective tax rate in 2012 from 2011 was primarily due to:
the unfavorable tax impact of the $200.5 million goodwill impairment charge in 2011;
the favorable resolution of U.S. federal and state tax audits in 2012 that did not occur in 2011;
the mix of global earnings, including the impact of the Merger and the CPT acquisition; and
the favorable tax impact related to the 2012 exchange offer.
These decreases were partially offset by:
nonrecurring impacts of the Merger, including non-deductible transaction costs and loss of domestic manufacturing deduction tax benefits.

36



SEGMENT RESULTS OF OPERATIONS
This summary that follows provides a discussion of the results of operations of each of our four reportable operating segments (Valves & Controls, Process Technologies, Flow Technologies and Technical Solutions). Each of these segments is comprised of various product offerings that serve multiple end markets.
Valves & Controls
The Valves & Controls segment designs, manufactures, markets and services valves, fittings, automation and controls and actuators for the energy and industrial verticals.
The net sales and operating income (loss) for Valves & Controls were as follows:
 
Years ended December 31
 
% / point change
In millions
2013
2012
2011
 
2013 vs. 2012
2012 vs. 2011
Net sales
$
2,469.2

$
548.6

$

 
350.1
%
%
Operating income (loss)
161.4

(76.8
)

 
310.2
%
%
% of net sales
6.5
%
(14.0
)%
%
 
20.5


Net sales
The components of the change in Valves & Controls net sales were as follows:
 
2013 vs. 2012
Volume
20.7
 %
Acquisition
331.3
 %
Price
1.7
 %
Currency
(3.6
)%
Total
350.1
 %
The 350.1 percentage point increase in Valves & Controls net sales in 2013 from 2012 was primarily the result of:
a full year of sales volume in 2013, compared to one quarter in 2012; and
continued sales growth in the Middle East and the oil & gas industry.
The Valves & Controls net sales in 2012 were the result of:
sales volume of the Flow Control businesses subsequent to the Merger of $548.6 million. Valves & Controls was a new reporting segment, effective with the Merger and as a result, 2012 net sales represents the segment’s sales for the fourth quarter of 2012.
Operating income (loss)
The 20.5 percentage point increase in operating income for Valves & Controls as a percentage of net sales in 2013 from 2012 was primarily the result of:
higher volume related to the acquisition of Flow Control, which resulted in increased leverage of our fixed cost base;
lower cost of goods sold from inventory fair value step-up and customer backlog recorded as part of the Merger purchase accounting, which decreased from $113.5 million in 2012 to $80.6 million in 2013; and
savings generated from our PIMS initiatives, including lean and supply management practices.

37



These increases were partially offset by
costs related to the Merger, including integration and standardization;
restructuring costs of $51.0 million in 2013 compared to $5.1 million in 2012;
low margin on large projects and unfavorable project mix; and
inflationary increases related to raw materials and labor costs.
The operating loss for Valves & Controls in 2012 was the result of:
Valves & Controls operations subsequent to the Merger. Valves & Controls was a new reporting segment, effective with the Merger and as a result, 2012 operating loss represents the segment’s operating results for the fourth quarter of 2012; and
inventory fair value step-up and customer backlog of $113.5 million recorded as part of the Merger purchase accounting.
Process Technologies
The Process Technologies segment designs, manufactures, markets and services innovative water system products and solutions to meet filtration, separation and fluid process management challenges in food and beverage, water, wastewater, swimming pools and aquaculture applications.
The net sales and operating income (loss) for Process Technologies were as follows:
 
Years ended December 31
 
% / point change
In millions
2013
2012
2011
 
2013 vs. 2012
2012 vs. 2011
Net sales
$
1,765.9

$
1,521.1

$
1,345.9

 
16.1
%
13.0
%
Operating income (loss)
243.2

132.5

(40.2
)
 
83.5
%
N.M.

% of net sales
13.7
%
8.7
%
(3.0
)%
 
5.0

11.7

Net sales
The components of the change in Process Technologies net sales were as follows:
 
2013 vs. 2012
 
2012 vs. 2011
Volume
8.2
 %
 
2.5
 %
Acquisition
6.3
 %
 
9.9
 %
Price
1.7
 %
 
1.9
 %
Currency
(0.1
)%
 
(1.3
)%
Total
16.1
 %
 
13.0
 %
The 16.1 percentage point increase in Process Technologies sales in 2013 from 2012 was primarily the result of:
organic sales growth related to higher sales of certain pool products serving the North American Residential housing market and increased demand for global food & beverage solutions;
higher sales volume related to the Merger and other acquisitions in the second half of 2012;
growth in developed regions led by strength in U.S. and Western Europe; and
selective increases in selling prices to mitigate inflationary cost increases.
These increases were partially offset by:
lower sales in India and Eastern Europe.

38



The 13.0 percentage point increase in Process Technologies sales in 2012 from 2011 was primarily the result of:
higher sales volume as a result of the May 2011 acquisition of CPT;
continued sales growth in Latin America, India and emerging markets in the Asia Pacific region;
increased sales in our Aquatics System business driven by pool dealer expansion and continued strong demand for our energy efficient products and solutions; and
selective increases in selling prices to mitigate inflationary cost increases.
These increases were partially offset by:
decreases in sales due to weakness in the European market; and
unfavorable foreign currency effects.
Operating income (loss)
The 5.0 percentage point increase in operating income for Process Technologies as a percentage of net sales in 2013 from 2012 was primarily the result of:
higher sales volume, which resulted in increased leverage on operating expenses;
savings generated from our PIMS initiatives including lean and supply management practices;
decrease in restructuring costs from $23.9 million in 2012 to $8.8 million in 2013;
trade name impairment charges of $23.2 million in 2012 that did not reoccur in 2013; and
selective increases in selling prices to mitigate inflationary cost increases.
These increases were partially offset by:
inflationary costs related to raw materials and labors costs.
The 11.7 percentage point increase in operating income for Process Technologies as a percentage of net sales in 2012 from 2011 was primarily the result of:
goodwill impairment charge of $200.5 million in 2011;
nonrecurring CPT acquisition related charges in 2011;
higher sales volume as a result of the CPT acquisition, which resulted in increased leverage of our fixed cost base;
savings generated from our PIMS initiatives including lean and supply management practices; and
selective increases in selling prices to mitigate inflationary cost increases.
These increases were partially offset by:
cost increases for certain raw materials and labor;
increase in restructuring costs, from $3.9 million in 2011 to $23.9 million in 2012; and
trade name impairment charges of $23.2 million in 2012.

39



Flow Technologies
The Flow Technologies segment designs, manufactures and markets products and services designed for the transfer and flow of clean water, wastewater and a variety of industrial applications.
The net sales and operating income for Flow Technologies were as follows:
 
Years ended December 31
 
% / point change
In millions
2013
2012
2011
 
2013 vs. 2012
2012 vs. 2011
Net sales
$
1,618.5

$
1,136.7

$
1,042.7

 
42.4
%
9.0
 %
Operating income
149.7

35.5

97.9

 
N.M.

(63.7
)%
% of net sales
9.2
%
3.1
%
9.4
%
 
6.1

(6.3
)
Net sales
The components of the change in Flow Technologies net sales were as follows:
 
2013 vs. 2012
 
2012 vs. 2011
Volume
10.0
 %
 
(1.9
)%
Acquisition
35.4
 %
 
10.5
 %
Price
0.8
 %
 
1.0
 %
Currency
(3.8
)%
 
(0.6
)%
Total
42.4
 %
 
9.0
 %
The 42.4 percentage point increase in Flow Technologies sales in 2013 from 2012 was primarily the result of:
sales volume of the Flow Control business of $490.1 million in 2013; compared to $112.1 million in 2012;
selective increases in selling prices to mitigate inflationary cost increases;
organic growth in agriculture sales due to strong new product results and international expansion;
sales growth in the developed markets of the U.S. and Western Europe; and
continued sales growth in fast growth regions, including the Middle East and Southeast Asia.
These increases were partially offset by:
unfavorable foreign currency effects.
The 9.0 percentage point increase in Flow Technologies sales in 2012 from 2011 was primarily the result of:
sales volume of the Flow Control business subsequent to the Merger of $112.1 million;
organic sales growth primarily due to higher sales of certain pump products;
continued sales growth in Latin America and emerging markets in the Asia Pacific region; and
selective increases in selling prices to mitigate inflationary cost increases.

40



These increases were partially offset by:
low flood-related product sales in the U.S. due to unusually dry weather; and
unfavorable foreign currency effects.
Operating income
The 6.1 percentage point increase in operating income for Flow Technologies as a percentage of net sales in 2013 from 2012 was primarily the result of:
higher volume related to the acquisition of Flow Control, which resulted in increased leverage of our fixed cost base;
savings generated from our PIMS initiatives including lean and supply management practices;
trade name impairment charges of $25.9 million in 2012 that did not reoccur in 2013: and
selective increases in selling prices to mitigate inflationary cost increases.
These increases were partially offset by:
inflationary increases for certain raw materials and labor; and
unfavorable foreign currency effects.
The 6.3 percentage point decrease in operating income for Flow Technologies as a percentage of net sales in 2012 from 2011 was primarily the result of:
higher cost of goods sold of $21.9 million as a result of inventory fair value step-up and customer backlog recorded as part of the Merger purchase accounting;
restructuring actions of $25.2 million taken in 2012, compared to $7.1 million in 2011;
cost increases for certain raw materials and labor; and
trade name impairment charges of $25.9 million in 2012.
These decreases were partially offset by:
higher sales volume in Flow Technologies, which resulted in increased leverage of our fixed cost base;
savings generated from our PIMS initiatives including lean and supply management practices; and
selective increases in selling prices to mitigate inflationary cost increases.
Technical Solutions
The Technical Solutions segment designs, manufactures, markets and services products that guard and protect some of the world’s most sensitive electronics and electronic equipment, as well as heat management solutions designed to provide thermal protection to temperature sensitive fluid applications.
The net sales and operating income for Technical Solutions were as follows:
 
Years ended December 31
 
% / point change
In millions
2013
2012
2011
 
2013 vs. 2012
2012 vs. 2011
Net sales
$
1,663.4

$
1,236.4

$
1,086.8

 
34.5
%
13.8
 %
Operating income
285.0

165.0

185.8

 
72.7
%
(11.2
)%
% of net sales
17.1
%
13.3
%
17.1
%
 
3.8

(3.8
)

41



Net sales
The components of the change in Technical Solutions net sales were as follows:
 
2013 vs. 2012
 
2012 vs. 2011
Volume
(2.9
)%
 
(4.7
)%
Acquisition
36.0
 %
 
18.0
 %
Price
1.4
 %
 
1.5
 %
Currency
 %
 
(1.0
)%
Total
34.5
 %
 
13.8
 %
The 34.5 percentage point increase in Technical Solutions sales in 2013 from 2012 was primarily the result of:
sales volume of the Flow Control business of $656.5 million in 2013 compared to $195.7 million in 2012; and
selective increases in selling prices to mitigate inflationary cost increases.
The 13.8 percentage point increase in Technical Solutions sales in 2012 from 2011 was primarily the result of:
sales volume of the Flow Control business subsequent to the Merger of $195.7 million;
sales increases in our enclosures & cabinets businesses in the industrial vertical; and
selective increases in selling prices to mitigate inflationary cost increases.
These increases were partially offset by:
decreases in sales volume in Western Europe and the industrial vertical, including project delays; and
unfavorable foreign currency effects.
Operating income
The 3.8 percentage point increase in operating income for Technical Solutions as a percentage of net sales in 2013 from 2012 was primarily the result of:
higher volume related to the acquisition of Flow Control, which resulted in increased leverage of our fixed cost base;
selective increases in selling prices to mitigate inflationary cost increases; and
savings generated from our PIMS initiatives including lean and supply management practices.
These increases were offset by:
lower margin from higher costs related to the Merger; including integration and standardization;
increase in restructuring costs from $12.7 million in 2012 to $19.4 million in 2013;
intangible asset amortization associated with the Merger; and
inflationary increases related to labor costs and certain raw materials.
The 3.8 percentage point decrease in operating income for Technical Solutions as a percentage of sales in 2012 from 2011 was primarily the result of:
higher cost of goods sold of $42.7 million as a result of inventory fair value step-up and customer backlog recorded as part of the Merger purchase accounting;
trade name impairment charges of $11.6 million in 2012;
restructuring costs of $12.7 million in 2012, compared to $2.0 million in 2011;
inflationary increases related to raw materials and labor related costs; and

42



continued investment in future growth with emphasis on international markets, including personnel and business infrastructure investments.
These decreases were offset by:
savings generated from our PIMS initiatives including lean and supply management practices; and
selective increases in selling prices to mitigate inflationary cost increases.

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 intend to issue commercial paper to fund our financing needs on a short-term basis and to use our revolving credit facility as back-up liquidity to support commercial paper.
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 Process Technologies and Flow Technologies. 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.
Operating activities
Cash provided by operating activities was $915.3 million in 2013, or $847.3 million higher than in 2012. The increase in cash provided by operating activities was due primarily to a $501.3 million increase in Net income (loss) before noncontrolling interest, net of the following non-cash items: depreciation and amortization, gain on sale of businesses, trade name impairment and pension and other post-retirement expense (income). Also attributing to the increase were accelerated contributions of pension and other post-retirement obligations in 2012 that reduced the need for ongoing contributions in 2013.

Cash provided by operating activities was $68.0 million in 2012, or $252.2 million lower than in 2011. The decrease in cash provided by operating activities was due primarily to accelerated contributions of pension and other post-retirement obligations in 2012. Also attributing to the decrease was a $102.3 million increase in Net income (loss) before noncontrolling interest, net of the following non-cash items: depreciation and amortization, goodwill and trade name impairment and pension and other post-retirement expense.
Investing activities
Net cash used for investing activities was $211.2 million in 2013. Net cash provided by investing activities was $375.6 million in 2012. Net cash used for investing activities was $808.1 million in 2011.
Acquisitions
In June 2013, $84.4 million of cash was paid to Tyco in settlement of the working capital and net indebtedness adjustment related to the Merger. In addition, in December 2013 we acquired a business as part of Process Technologies for cash consideration of $8 million, net of cash acquired.
In September 2012, we acquired $691.7 million of cash in conjunction with the Merger. In October 2012, we acquired, as part of Valves & Controls, the remaining 25 percent equity interest in Pentair Middle East Holding S.a.R.L. (“KEF”) for $100.0 million in cash. Additionally, during 2012, we completed other small acquisitions in Process Technologies with purchase prices totaling $121.2 million in cash, net of cash acquired.

43



In May 2011, we acquired as part of Process Technologies, the CPT division of privately held Norit Holdings for $715.3 million. Additionally, during 2011, we completed other small acquisitions in Process Technologies with purchase prices totaling $21.6 million, consisting of $17.8 million in cash and $3.8 million as notes payable.
Divestitures
During 2013, we sold businesses that were part of Technical Solutions and Flow Technologies for a cash purchase price of $30.1 million and $13.4 million, respectively, net of transaction costs, resulting in a net gain of $16.8 million and $2.9 million, respectively.
Capital expenditures
Capital expenditures in 2013, 2012 and 2011 were $170.0 million, $94.5 million and $73.3 million, respectively. The increase in capital expenditures in 2012 from 2011 was primarily due to the Merger. We anticipate capital expenditures for fiscal 2014 to be approximately $175 million, primarily for capacity expansions of manufacturing facilities located in our low-cost countries, developing new products and general maintenance.
Financing activities
Net cash used for financing activities was $719.1 million in 2013. Cash used for financing activities in 2013 included share repurchases and payments of dividends, partially offset by net borrowings of commercial paper and revolving long-term debt to fund our operations in the normal course of business and cash received for shares issued to employees.
Net cash used for financing activities was $232.3 million in 2012. Cash used for financing activities in 2012 included payments of dividends, early debt termination fees and share repurchases, partially offset by net borrowings of long-term debt, as further described below.
Net cash provided by financing activities was $503.6 million in 2011. Cash provided by financing activities in 2011 primarily relates to borrowings used to fund the CPT acquisition in May 2011, partially offset by repayments of long-term debt, dividend payments and share repurchases.
In December 2012, our wholly-owned subsidiary, Pentair Finance S.A. (“PFSA”), completed an exchange offer (the “Exchange Offer”) pursuant to which it exchanged $373 million in aggregate principal amount of 5.00% Senior Notes due 2021 of Pentair, Inc., a wholly-owned, indirect subsidiary of the Company (the “2021 Notes”) for a like amount of new 5.00% Senior Notes due 2021 of PFSA (the “New 2021 Notes”) plus $5.6 million in transaction-related costs. Upon completion of the Exchange Offer, $127 million in aggregate principal amount of 2021 Notes remained outstanding. The remaining 2021 Notes and New 2021 Notes are guaranteed as to payment by Pentair Ltd.
In November 2012, PFSA completed a private offering of $350 million aggregate principal amount of 1.35% Senior Notes due 2015 (the “2015 Notes”) and $250 million aggregate principal amount of 2.65% Senior Notes due 2019 (the “2019 Notes” and, collectively, the “2015/2019 Notes”), which are guaranteed as to payment by Pentair Ltd. In certain circumstances, PFSA may be required to pay additional interest on the 2015/2019 Notes. We used the net proceeds from the sale of the 2015/2019 Notes to repay commercial paper and for general corporate purposes.
In October 2012, we redeemed the remaining outstanding aggregate principal of our 5.65% fixed rate senior notes due 2013-2017 totaling $400 million and our 1.05% floating rate senior notes due 2013 totaling $100 million (the “Fixed/Floating Rate Notes”). The redemptions included make-whole premiums of $65.8 million. Concurrent with the redemption of the Fixed/Floating Rate Notes, we terminated a related interest rate swap that was designated as a cash flow hedge, which resulted in the reclassification of $3.4 million of previously unrecognized variable to fixed swap losses from AOCI to earnings in October 2012. All costs associated with the redemption were recorded as a Loss on the early extinguishment of debt including $0.6 million of unamortized deferred financing costs.
In September 2012, PFSA, completed a private offering of $550 million aggregate principal amount of 3.15% Senior Notes due 2022 (the “2022 Notes”) and $350 million aggregate principal amount of 1.875% Senior Notes due 2017 (the “2017 Notes” and, collectively, the “2017/2022 Notes”), which are guaranteed as to payment by Pentair Ltd. In certain circumstances, PFSA may be required to pay additional interest on the 2017/2022 Notes. The 2017/2022 Notes remained outstanding after the Merger. A portion of the net proceeds from the 2017/2022 Notes offering were used to repay $435 million to Tyco in conjunction with the Distribution and the Merger.
In September 2012, Pentair, Inc. entered into a credit agreement providing for an unsecured, committed revolving credit facility (the “Credit Facility”) with initial maximum aggregate availability of up to $1,450 million. The Credit Facility replaced Pentair, Inc.’s $700 million Former Credit Facility (as defined below). The Credit Facility matures in September 2017. Upon the completion of the Merger, Pentair Ltd. became the guarantor under the Credit Facility and PFSA and certain other of our subsidiaries became affiliate borrowers under the Credit Facility. Borrowings under the Credit Facility generally bear interest at

44



a variable rate equal to the London Interbank Offered Rate (“LIBOR”) plus a specified margin based upon PFSA’s credit ratings. PFSA must also pay a facility fee ranging from 10.0 to 30.0 basis points per annum (based upon PFSA’s credit ratings) on the amount of each lender’s commitment.
In May 2011, Pentair, Inc. completed a public offering of $500 million aggregate principal amount of the 2021 Notes. Pentair, Inc. used the net proceeds from the offering of the 2021 Notes to finance in part the CPT acquisition in 2011. The 2021 Notes which remain outstanding subsequent to the Exchange Offer are guaranteed as to payment by Pentair Ltd.
In April 2011, Pentair, Inc. entered into a Fourth Amended and Restated Credit Agreement that provided for an unsecured, committed revolving credit facility (the “Former Credit Facility”) of up to $700 million, with multi-currency sub-facilities to support investments outside the U.S. Borrowings under the Former Credit Facility bore interest at the rate of LIBOR plus 1.75%. We used borrowings under the Former Credit Facility to fund a portion of the CPT acquisition in 2011 and to repay $105 million of matured senior notes in May 2012. The Former Credit Facility was terminated in September 2012 in connection with the Merger and replaced by the Credit Facility, at which time the subsidiary guarantees in place under the Former Credit Facility ceased to exist.
PFSA is authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. PFSA uses the Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. As of December 31, 2013 and 2012, we had $528.9 million and $424.7 million, respectively, of commercial paper outstanding, all of which was classified as long-term as we have the intent and the ability to refinance such obligations on a long-term basis under the Credit Facility.
We used borrowings under the Credit Facility and proceeds from the 2017/2022 Notes offering, to repay the Former Credit Facility and to pay other fees and expenses in connection with the Merger. Total availability under the Credit Facility was $921.1 million as of December 31, 2013, which was not limited by any covenants contained in the Credit Facility’s credit agreement. Subsequent to the Merger, we used the remaining proceeds from the 2017/2022 Notes offering and issuances of commercial paper to redeem the Fixed/Floating Rate Notes as discussed above, to repurchase shares in conjunction with our share repurchase as discussed in ITEM 8, Note 13 of the Notes to Consolidated Financial Statements and to purchase the remaining 25 percent interest in KEF for $100 million as discussed in ITEM 8, Note 2 of the Notes to Consolidated Financial Statements.
Our debt agreements contain certain financial covenants, the most restrictive of which are in the Credit Facility, including that we may not permit (i) the ratio of our consolidated debt plus synthetic lease obligations to our consolidated net income (excluding, among other things, non-cash gains and losses) before interest, taxes, depreciation, amortization, non-cash share-based compensation expense, and up to $40 million of costs and expenses incurred in connection with the Merger (“EBITDA”) for the four consecutive fiscal quarters then ended (the “Leverage Ratio”) to exceed 3.50 to 1.00 on the last day of each fiscal quarter, and (ii) the ratio of our EBITDA for the four consecutive fiscal quarters then ended to our consolidated interest expense, including consolidated yield or discount accrued as to outstanding securitization obligations (if any), for the same period to be less than 3.00 to 1.00 as of the end of each fiscal quarter. For purposes of the Leverage Ratio, the Credit Facility provides for the calculation of EBITDA giving pro forma effect to the Merger and certain acquisitions, divestitures and liquidations during the period to which such calculation relates. As of December 31, 2013, 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 $86.7 million, of which none was outstanding at December 31, 2013. Borrowings under these credit facilities bear interest at variable rates. Additionally, as part of the Merger and CPT acquisition we assumed certain capital leases with an outstanding balance of $21.5 million and $23.8 million at December 31, 2013 and 2012, respectively.
As of December 31, 2013, we have $113.0 million of cash held in certain countries in which the ability to repatriate is limited due to local regulations or significant potential tax consequences.
We expect to continue to have cash requirements to support working capital needs and capital expenditures, to pay interest and service debt and to pay dividends to shareholders quarterly. We believe we have the ability and sufficient capacity to meet these cash requirements by using available cash and internally generated funds and to borrow under our committed and uncommitted credit facilities.
Dividends
We paid dividends in 2013 of $194.2 million, or $0.96 per common share, compared with $112.4 million, or $0.88 per common share, in 2012 and $79.5 million, or $0.80 per common share in 2011. At our 2013 annual meeting of shareholders held on April 29, 2013, our shareholders approved a proposal to pay quarterly cash dividends through the second quarter of 2014. The authorization provided that dividends of $1.00 per share be made in quarterly installments of $0.25 for each of the third and fourth quarters of 2013 and first and second quarters of 2014 and we expect to continue paying dividends on a quarterly basis.

45



We intend to seek authorization from our shareholders at our 2014 annual general meeting of shareholders to extend the increased dividend or increase the dividend for the remainder of 2014, which will mark the 38th consecutive year we have increased dividends.
Authorized shares
Our authorized share capital consists of 213.0 million common shares with a par value of 0.50 Swiss francs per share. The board of directors is authorized to increase the total share capital until September 14, 2014 by a maximum amount of 106.5 million shares. In addition, our share capital may be increased by:
a maximum of 81.5 million shares upon the exercise of conversion, option, exchange, warrant or similar rights for the subscription of shares granted to third parties or shareholders in connection with bonds, notes, options, warrants or other securities issued by us in national or international capital markets or pursuant to our existing and future contractual obligations (“Rights Bearing Obligations”); and/or
a maximum of 25.0 million shares upon the exercise of rights related to Rights-Bearing Obligations granted to members of the board of directors, members of the executive management, employees, contractors, consultants or other persons providing services for our benefit.
Share repurchases
Prior to the closing of the Merger, our board of directors, and Tyco as our sole shareholder, authorized the repurchase of our common shares with a maximum aggregate value of $400.0 million following the closing of the Merger. This authorization does not have an expiration date. In October 2012, our board of directors authorized the repurchase of our common shares with a maximum aggregate value of $800.0 million. This authorization expires on December 31, 2015 and is in addition to the $400.0 million share repurchase authorization. As of December 31, 2013, we had repurchased 19.6 million of our common shares for $1.05 billion pursuant to these authorizations and had $150.0 million remaining available for repurchases under these authorizations.
In December 2013, the Board of Directors authorized the repurchase of shares of our common stock up to a maximum dollar limit of $1.0 billion. This authorization is in addition to the combined $1.2 billion prior share repurchase authorization. The authorization allows the company to commence share repurchases effective immediately and expires on December 31, 2016. No repurchases were made under this authorization in 2013.
Contractual obligations
The following summarizes our significant contractual obligations that impact our liquidity:
 
Years ended December 31
In millions
2014
2015
2016
2017
2018
Thereafter
Total
Debt obligations
$

$
350.0

$

$
878.9

$

$
1,304.7

$
2,533.6

Capital lease obligations
2.5

5.5

0.5

0.5

0.5

12.0

21.5

Interest obligations on fixed-rate debt
60.2

60.2

55.5

55.5

49.0

138.5

418.9

Operating lease obligations, net of sublease rentals
54.5

39.8

29.4

21.4

13.4

23.4

181.9

Purchase obligations
43.2

7.0

0.4

0.3

0.2

0.2

51.3

Pension and other post-retirement plan contributions
24.6

29.9

41.1

15.4

17.5

168.5

297.0

Total contractual obligations, net
$
185.0

$
492.4

$
126.9

$
972.0

$
80.6

$
1,647.3

$
3,504.2

The majority of the purchase obligations represent commitments for raw materials to be utilized in the normal course of business. For purposes of the above table, arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction.
In addition to the summary of significant contractual obligations, we will incur annual interest expense on outstanding variable rate debt. As of December 31, 2013, variable interest rate debt was $528.9 million at a weighted average interest rate of 0.52%.
The total gross liability for uncertain tax positions at December 31, 2013 is estimated to be $60.8 million. We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Interest expense, respectively, which is consistent with our past practices. As of December 31, 2013, we had recorded $0.9 million for the possible payment of penalties and $8.9 million related to the possible payment of interest.

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Other financial measures
In addition to measuring our cash flow generation or usage based upon operating, investing and financing classifications included in the Consolidated Statements of Cash Flows, we also measure our free cash flow. We have a long-term goal to consistently generate free cash flow that equals or exceeds 100 percent conversion of net income. 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:
 
Years ended December 31
In millions
2013
2012
2011
Net cash provided by operations
$
915.3

$
68.0

$
320.2

Capital expenditures
(170.0
)
(94.5
)
(73.3
)
Proceeds from sale of property and equipment
6.0

5.5

1.3

Free cash flow
$
751.3

$
(21.0
)
$
248.2

Off-balance sheet arrangements
At December 31, 2013, we had no off-balance sheet financing arrangements.

COMMITMENTS AND CONTINGENCIES
We have been made parties to a number of actions filed or have been given notice of potential claims relating to the conduct of our business, including those pertaining to commercial disputes, product liability, asbestos, environmental, safety and health, patent infringement and employment matters.
While we believe that a material impact on our consolidated financial position, results of operations or cash flows from any such future claims or potential claims is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future adverse ruling or unfavorable development could result in future charges that could have a material impact. We do and will continue to periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our consolidated financial position, results of operations and cash flows for the proceedings and claims described in ITEM 8, Note 16 of the Notes to Consolidated Financial Statements could change in the future.
Asbestos Matters
Our subsidiaries and numerous other companies are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were attached to or used with asbestos-containing components manufactured by third-parties. Each case typically names between dozens to hundreds of corporate defendants. While we have observed an increase in the number of these lawsuits over the past several years, including lawsuits by plaintiffs with mesothelioma-related claims, a large percentage of these suits have not presented viable legal claims and, as a result, have been dismissed by the courts. Our historical strategy has been to mount a vigorous defense aimed at having unsubstantiated suits dismissed, and, where appropriate, settling suits before trial. Although a large percentage of litigated suits have been dismissed, we cannot predict the extent to which we will be successful in resolving lawsuits in the future.
As of December 31, 2013, there were approximately 2,000 lawsuits pending against our subsidiaries. A lawsuit might include several claims, and we have approximately 2,200 claims outstanding as of December 31, 2013. This amount is not adjusted for claims that are not actively being prosecuted, identified incorrect defendants, or duplicated other actions, which would ultimately reflect our current estimate of the number of viable claims made against us, our affiliates, or entities for which we assumed responsibility in connection with acquisitions or divestitures. In addition, the amount does not include certain claims pending against third parties for which we have been provided an indemnification.

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Our estimated liability for asbestos-related claims was $254.7 million and $278.9 million as of December 31, 2013 and 2012, respectively, and was recorded in Other non-current liabilities in the Consolidated Balance Sheets for pending and future claims and related defense costs. Our estimated receivable for insurance recoveries was $119.6 million and $131.0 million at December 31, 2013 and 2012, respectively, and was recorded in Other non-current assets in the Consolidated Balance Sheets.
Environmental Matters
We are involved in or have retained responsibility and potential liability for environmental obligations and legal proceedings related to our current business and, including pursuant to certain indemnification obligations, related to certain formerly owned businesses. We are responsible, or alleged to be responsible, for ongoing environmental investigation and/or remediation of sites in several countries. These sites are in various stages of investigation and/or remediation and at some of these sites our liability is considered de minimis. We received notification from the U.S. Environmental Protection Agency and from similar state and non-U.S. environmental agencies, that several sites formerly or currently owned and/or operated by us, and other properties or water supplies that may be or may have been impacted from those operations, contain disposed or recycled materials or waste and require environmental investigation and/or remediation. Those sites include instances where we have been identified as a potentially responsible party under U.S. federal, state and/or non-U.S. environmental laws and regulations. For several formerly owned businesses, we have also received claims for indemnification from purchasers of these businesses.
Our accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. It can be difficult to estimate reliably the final costs of investigation and remediation due to various factors. In our opinion, the amounts accrued are appropriate based on facts and circumstances as currently known. Based upon our experience, current information regarding known contingencies and applicable laws, we have recorded reserves for these environmental matters of $39.3 million and $49.2 million as of December 31, 2013 and 2012, respectively. We do not anticipate these environmental conditions will have a material adverse effect on our financial position, results of operations or cash flows. However, unknown conditions, new details about existing conditions or changes in environmental requirements may give rise to environmental liabilities that will exceed the amount of our current reserves and could have a material adverse effect in the future.
Product liability claims
We are subject to various product liability lawsuits and personal injury claims. A substantial number of these lawsuits and claims are insured and accrued for by Penwald, our captive insurance subsidiary. See discussion in ITEM 1 and ITEM 8, Note 1 of the Notes to Consolidated Financial Statements — Insurance subsidiary. Penwald records a liability for these claims based on actuarial projections of ultimate losses. For all other claims, accruals covering the claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are adjusted periodically as additional information becomes available. In 2004, we disposed of the Tools Group and we retained responsibility for certain product claims. We have not experienced significant unfavorable trends in either the severity or frequency of product liability lawsuits or personal injury claims.
Compliance Matters
Prior to the Merger, the Flow Control business was subject to investigations by the U.S. Department of Justice (“DOJ”) and the SEC related to allegations that improper payments were made by the Flow Control business and other Tyco subsidiaries and third-party intermediaries in recent years in violation of the Foreign Corrupt Practices Act. Tyco reported to the DOJ and the SEC the remedial measures that it had taken in response to the allegations and Tyco’s own internal investigations. As a result of discussions with the DOJ and SEC aimed at resolving these matters, on September 24, 2012, Tyco entered into a settlement with the SEC and a non-prosecution agreement with the DOJ, pursuant to which the Flow Control business is for a three year period subject to yearly reporting to the DOJ concerning its continuing compliance efforts.
Stand-by Letters of Credit, Bank Guarantees and Bonds
In certain situations, Tyco guaranteed Flow Control’s performance to third parties or provided financial guarantees for financial commitments of Flow Control. In situations where Flow Control and Tyco were unable to obtain a release from these guarantees in connection with the spin-off, we will indemnify Tyco for any losses it suffers as a result of such guarantees.
In disposing of assets or businesses, we often provide representations, warranties and indemnities to cover various risks including unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not have the ability to reasonably estimate the potential liability due to the inchoate and unknown nature of these potential liabilities. However, we have no reason to believe that these uncertainties would have a material adverse effect on our financial position, results of operations or cash flows.
In the ordinary course of business, we are required to commit to bonds, letters of credit and bank guarantees that require payments to our customers for any non-performance. The outstanding face value of these instruments fluctuates with the value

48



of our projects in process and in our backlog. In addition, we issue financial stand-by letters of credit primarily to secure our performance to third parties under self-insurance programs.
As of December 31, 2013 and 2012, the outstanding value of bonds, letters of credit and bank guarantees totaled $484.0 million and $493.2 million, respectively.

NEW ACCOUNTING STANDARDS
See ITEM 8, Note 1 of the Notes to Consolidated Financial Statements, included in this Form 10-K, for information pertaining to recently adopted accounting standards or accounting standards to be adopted in the future.

CRITICAL ACCOUNTING POLICIES
We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our significant accounting policies are more fully described in ITEM 8, Note 1 of the Notes to Consolidated Financial Statements. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry and information available from other outside sources, as appropriate. We consider an accounting estimate to be critical if:
it requires us to make assumptions about matters that were uncertain at the time we were making the estimate; and
changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations.
Our critical accounting estimates include the following:
Impairment of goodwill and indefinite-lived intangibles
Goodwill
Goodwill represents the excess of the cost of acquired businesses over the net of the fair value of identifiable tangible net assets and identifiable intangible assets purchased and liabilities assumed.
Goodwill is tested at least annually for impairment and is tested for impairment more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is performed using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. If the estimated fair value is less than the carrying amount of the reporting unit there is an indication that goodwill impairment exists and a second step must be completed in order to determine the amount of the goodwill impairment, if any that should be recorded. In the second step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation.
The fair value of each reporting unit is determined using a discounted cash flow analysis and market approach. Projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital and the appropriate discount rate. Use of the market approach consists of comparisons to comparable publicly-traded companies that are similar in size and industry. Actual results may differ from those used in our valuations.
In developing our discounted cash flow analysis, assumptions about future revenues and expenses, capital expenditures and changes in working capital are based on our annual operating plan and long-term business plan for each of our reporting units. These plans take into consideration numerous factors including historical experience, anticipated future economic conditions, changes in raw material prices and growth expectations for the industries and end markets we participate in. These assumptions are determined over a six year long-term planning period. The six year growth rates for revenues and operating profits vary for each reporting unit being evaluated. Revenues and operating profit beyond 2019 are projected to grow at a perpetual growth rate of 3.0%.
Discount rate assumptions for each reporting unit take into consideration our assessment of risks inherent in the future cash flows of the respective reporting unit and our weighted-average cost of capital. We utilized discount rates ranging from 11.5% to 12.5% in determining the discounted cash flows in our fair value analysis.
In estimating fair value using the market approach, we identify a group of comparable publicly-traded companies for each reporting unit that are similar in terms of size and product offering. These groups of comparable companies are used to develop

49



multiples based on total market-based invested capital as a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”). We determine our estimated values by applying these comparable EBITDA multiples to the operating results of our reporting units. The ultimate fair value of each reporting unit is determined considering the results of both valuation methods.
Impairment charge
We completed step one of our annual goodwill impairment evaluation during the fourth quarter of 2013 and 2012 with each reporting unit’s fair value exceeding its carrying value. Accordingly, step two of the impairment analysis was not required for 2013 or 2012.
In connection with our annual impairment test, we determined that the fair value of our Australian reporting unit within Flow Technologies did not exceed its carrying value by a significant amount. The percentage of excess fair value over carrying value of this reporting unit was approximately 13 percent for 2013. Goodwill for this reporting unit was $304.0 million as of the annual impairment testing date. If cash flow projections decreased by 13.6% or if the discount rate increased by 150 basis points (the discount rate used in the impairment analysis was 12.5%), this reporting unit would have failed the step one test and a step two analysis would have been required.
For the year ended December 31, 2011, we recorded a pre-tax non-cash impairment charge of $200.5 million as a result of our annual goodwill impairment test. This represented impairment of goodwill in Process Technologies. The impairment charge resulted from changes in our forecasts in light of economic conditions and due to continued softness in the end-markets served by residential water treatment components.
Identifiable intangible assets
Our primary identifiable intangible assets include: customer relationships, trade names and trademarks, proprietary technology, backlog and patents. Identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant. We complete our annual impairment test during the fourth quarter each year for those identifiable assets not subject to amortization. Impairment charges of $11.0 million and $60.7 million were recorded in 2013 and 2012, respectively, related to trade names. These charges were recorded in Impairment of trade names and goodwill in our Consolidated Statements of Operations and Comprehensive Income (Loss). There was no impairment charge recorded in 2011 for identifiable intangible assets.
The impairment test consists of a comparison of the fair value of the trade name with its carrying value. Fair value is measured using the relief-from-royalty method. This method assumes the trade name has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. The impairment charges recorded in 2013 and 2012 were the result of a rebranding strategies implemented in the fourth quarters of 2013 and 2012, respectively.
At December 31, 2013 our goodwill and intangible assets were $6,910.3 million and represented 59% of our total assets. If we experience future declines in sales and operating profit or do not meet our operating forecasts, we may be subject to future impairments. Additionally, changes in assumptions regarding the future performance of our businesses, increases in the discount rate used to determine the discounted cash flows of our businesses or significant declines in our share price or the market as a whole could result in additional impairment indicators. Because of the significance of our goodwill and intangible assets, any future impairment of these assets could have a material adverse effect on our financial results.
Impairment of long-lived assets
We review the recoverability of long-lived assets to be held and used, such as property, plant and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced for the cost to dispose of the assets. The measurement of impairment requires us to estimate future cash flows and the fair value of long-lived assets. During 2013, we recorded impairment charges of $20.0 million in conjunction with restructuring activities. There were no material impairment charges recorded related to long-lived assets in 2012 or 2011.
Percentage of completion revenue recognition
Revenue from certain long-term contracts is recognized over the contractual period under the percentage of completion method of accounting. Under this method, sales and gross profit are recognized as work is performed either based on the relationship between the actual costs incurred and the total estimated costs at completion (“the cost-to-cost method”) or based on efforts

50



expended for measuring progress towards completion in situations in which this approach is more representative of the progress on the contract than the cost-to-cost method. Changes to the original estimates may be required during the life of the contract and such estimates are reviewed on a regular basis. Sales and gross profit are adjusted using the cumulative catch-up method for revisions in estimated total contract costs and contract values. These reviews have not resulted in adjustments that were significant to our results of operations. Estimated losses are recorded when identified. Claims against customers are recognized as revenue upon settlement.
Pension and other post-retirement plans
We sponsor U.S. and Non-U.S. defined-benefit pension and other post-retirement plans. The amounts recognized in our consolidated financial statements related to our defined-benefit pension and other post-retirement plans are determined from actuarial valuations. Inherent in these valuations are assumptions, including: expected return on plan assets, discount rates, rate of increase in future compensation levels and health care cost trend rates. These assumptions are updated annually and are disclosed in ITEM 8, Note 12 to the Notes to Consolidated Financial Statements. Differences in actual experience or changes in assumptions may affect our pension and other post-retirement obligations and future expense.
We recognize changes in the fair value of plan assets and net actuarial gains or losses for pension and other post-retirement benefits annually in the fourth quarter each year ("mark-to-market adjustment") and, if applicable, in any quarter in which an interim remeasurement is triggered. Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension and other post-retirement plans or when assumptions change as they may each year. The primary factors contributing to actuarial gains and losses each year are (1) changes in the discount rate used to value pension and other post-retirement benefit obligations as of the measurement date and (2) differences between the expected and the actual return on plan assets. This accounting method also results in the potential for volatile and difficult to forecast mark-to-market adjustments. Mark-to-market adjustments resulted in pre-tax income of $63.2 million in 2013 and pre-tax charges of $146.2 million and $66.2 million in 2012 and 2011, respectively. The remaining components of pension expense, primarily service and interest costs and the expected return on plan assets, are recorded on a quarterly basis as ongoing pension expense.
Discount rate
The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to payments from a stream of bonds available in the marketplace rated AA or higher, adjusted to eliminate the effects of call provisions. This produced a weighted-average discount rate for our U.S. plans of 4.51% in 2013, 3.67% in 2012 and 5.05% in 2011. The discount rates on our Non-U.S. plans ranged from 0.50% to 5.00% in 2013, 0.50% to 4.50% in 2012 and 0.75% to 5.00% in 2011. There are no known or anticipated changes in our discount rate assumption that will impact our pension expense in 2014.
Expected rate of return
Our expected rate of return on plan assets for our U.S. plans was 3.75% for 2013, 7.50% in 2012 and 8.00% in 2011. The expected rate of return on our Non-U.S. plans ranged from 1.00% to 6.50% in 2013, 1.00% to 4.60% in 2012 and 0.25% to 5.20% in 2011. The expected rate of return is designed to be a long-term assumption that may be subject to considerable year-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical returns, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader longer-term market indices.
During 2012, we adopted an investment strategy for our U.S. pension plans with a primary objective of preserving the funded status of the U.S. plans. This is achieved through investments in fixed interest instruments with interest rate sensitivity characteristics closely reflecting the interest rate sensitivity of our benefit obligations. The shifting of allocations away from equities to liability hedging fixed income investments, by reinvesting in fixed income instruments as equity investments were redeemed, was completed during 2013. As of December 31, 2013, the U.S. pension plans have an approximately 92 percent allocation to fixed income investments. As a result of the adoption of this investment strategy, we anticipate the expected rate of return on our U.S. funded pension plans will continue to be consistent with the discount rate.
See ITEM 8, Note 12 of the Notes to Consolidated Financial Statements for further information regarding pension and other post-retirement plans.
Loss contingencies
Accruals are recorded for various contingencies including legal proceedings, self-insurance and other claims that arise in the normal course of business. The accruals are based on judgment, the probability of losses and, where applicable, the consideration of opinions of internal and/or external legal counsel and actuarially determined estimates. Additionally, we record receivables from third party insurers when recovery has been determined to be probable.

51



We recognize asbestos-related liabilities on an undiscounted basis when a loss is probable and can be reasonably estimated. Certain of these liabilities are subject to insurance coverage. Our subsidiaries and numerous other companies are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were attached to or used with asbestos-containing components manufactured by third-parties. The process of estimating asbestos-related liabilities and the corresponding insurance recoveries receivable is complex and dependent primarily on our historical claim experience, estimates of potential future claims, our legal strategy for resolving these claims, the availability of insurance coverage, and the solvency and creditworthiness of insurers.
See ITEM 8, Note 16 of the Notes to Consolidated Financial Statements for further information regarding loss contingencies.
Income taxes
In determining taxable income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.
We currently have recorded valuation allowances that we will maintain until when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Our income tax expense recorded in the future may be reduced to the extent of decreases in our valuation allowances. The realization of our remaining deferred tax assets is primarily dependent on future taxable income in the appropriate jurisdiction. Any reduction in future taxable income including but not limited to any future restructuring activities may require that we record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance could result in additional income tax expense in such period and could have a significant impact on our future earnings.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management records the effect of a tax rate or law change on the Company’s deferred tax assets and liabilities in the period of enactment. Future tax rate or law changes could have a material effect on the Company’s financial condition, results of operations or cash flows.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We perform reviews of our income tax positions on a quarterly basis and accrue for uncertain tax positions. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the tax jurisdictions in which we operate based on our estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. As events change or resolution occurs, these liabilities are adjusted, such as in the case of audit settlements with taxing authorities. The ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential economic loss that may result from adverse changes in the fair value of financial instruments. We are exposed to various market risks, including changes in interest rates and foreign currency rates. Periodically, we use derivative financial instruments to manage or reduce the impact of changes in interest rates. Counterparties to all derivative contracts are major financial institutions. All instruments are entered into for other than trading purposes. The major accounting policies and utilization of these instruments is described more fully in ITEM 8, Note 1 of the Notes to Consolidated Financial Statements.
Interest rate risk
Our debt portfolio as of December 31, 2013, was comprised of debt predominantly denominated in U.S. dollars. This debt portfolio is comprised of 79% fixed-rate debt and 21% variable-rate debt. Changes in interest rates have different impacts on the fixed and variable-rate portions of our debt portfolio. A change in interest rates on the fixed portion of the debt portfolio impacts the fair value but has no impact on interest incurred or cash flows. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows but does not impact the net financial instrument position.

52



Based on the fixed-rate debt included in our debt portfolio, as of December 31, 2013, a 100 basis point increase or decrease in interest rates would result in a $99.1 million decrease or a $106.2 million increase in fair value, respectively.
Based on the variable-rate debt included in our debt portfolio as of December 31, 2013, a 100 basis point increase in interest rates would result in a $5.2 million increase in interest incurred. A decrease in our interest rates on our variable-rate debt of 52.2 basis points (to zero) would result in a decrease in interest incurred of $2.8 million.
Foreign currency risk
We conduct business in various locations throughout the world and are subject to market risk due to changes in the value of foreign currencies in relation to our reporting currency, the U.S. dollar. Periodically, we use derivative financial instruments to manage these risks. The functional currencies of our foreign operating locations are the local currency in the country of domicile. We manage these operating activities at the local level and revenues, costs, assets and liabilities are generally denominated in local currencies, thereby mitigating the risk associated with changes in foreign exchange. However, our results of operations and assets and liabilities are reported in U.S. dollars and thus will fluctuate with changes in exchange rates between such local currencies and the U.S. dollar.
From time to time, we may enter into short duration foreign currency contracts to hedge foreign currency risks. As the majority of our foreign currency contracts have an original maturity date of less than one year, there is no material foreign currency risk. Changes in the fair value of all derivatives are recognized immediately in income unless the derivative qualifies as a hedge of future cash flows. Gains and losses related to a hedge are deferred and recorded in the Consolidated Balance Sheets as a component of AOCI and subsequently recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss) when the hedged item affects net income.

53



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Pentair Ltd. and its subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2013, the Company’s internal control over financial reporting was effective based on those criteria.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2013. That attestation report is set forth immediately following this management report.
 
Randall J. Hogan
 
John L. Stauch
Chairman and Chief Executive Officer
 
Executive Vice President and Chief Financial Officer


54



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Pentair Ltd.
We have audited the internal control over financial reporting of Pentair Ltd. and subsidiaries (the “Company”) as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule listed in the Index at Item 15 as of and for the year ended December 31, 2013 of the Company and our report dated February 25, 2014 expressed an unqualified opinion on those financial statements and financial statement schedule.

Minneapolis, Minnesota
February 25, 2014


55



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Pentair Ltd.
We have audited the accompanying consolidated balance sheets of Pentair Ltd. and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive income (loss), changes in equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Pentair Ltd. and subsidiaries at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2014 expressed an unqualified opinion on the Company’s internal control over financial reporting.

Minneapolis, Minnesota
February 25, 2014


56



Pentair Ltd. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
 
 
Years ended December 31
In millions, except per-share data
2013
2012
2011
Net sales
$
7,479.7

$
4,416.1

$
3,456.7

Cost of goods sold
5,006.8

3,146.5

2,383.0

Gross profit
2,472.9

1,269.6

1,073.7

Selling, general and administrative
1,562.1

1,158.4

694.8

Research and development
125.8

93.6

78.2

Impairment of trade names and goodwill
11.0

60.7

200.5

Operating income (loss)
774.0

(43.1
)
100.2

Other (income) expense
 
 
 
Gain on sale of businesses, net
(19.7
)


Loss on early extinguishment of debt

75.4


Equity income of unconsolidated subsidiaries
(1.8
)
(2.1
)
(1.9
)
Interest income
(7.6
)
(2.9
)
(1.4
)
Interest expense
76.7

70.5

60.3

Income (loss) before income taxes and noncontrolling interest
726.4

(184.0
)
43.2

Provision (benefit) for income taxes
183.8

(79.4
)
46.4

Net income (loss) before noncontrolling interest
542.6

(104.6
)
(3.2
)
Noncontrolling interest
5.8

2.6

4.3

Net income (loss) attributable to Pentair Ltd.
$
536.8

$
(107.2
)
$
(7.5
)
Comprehensive income (loss), net of tax
 
 
 
Net income (loss) before noncontrolling interest
$
542.6

$
(104.6
)
$
(3.2
)
Changes in cumulative translation adjustment
(29.1
)
31.4

(93.7
)
Amortization of pension and other post-retirement prior service cost, net of $0.2, $0.2 and $0 tax, respectively
(0.4
)
(0.3
)

Changes in market value of derivative financial instruments, net of $0.7, $3.7 and $2.9 tax, respectively
(0.3
)
(3.6
)
4.4

Total comprehensive income (loss)
512.8

(77.1
)
(92.5
)
Less: Comprehensive income (loss) attributable to noncontrolling interest
8.0

4.0

2.2

Comprehensive income (loss) attributable to Pentair Ltd.
$
504.8

$
(81.1
)
$
(94.7
)
Earnings (loss) per common share attributable to Pentair Ltd.
 
 
 
Basic
$
2.67

$
(0.84
)
$
(0.08
)
Diluted
$
2.62

$
(0.84
)
$
(0.08
)
Weighted average common shares outstanding
 
 
 
Basic
201.1

127.4

98.2

Diluted
204.6

127.4

98.2

See accompanying notes to consolidated financial statements.

57



Pentair Ltd. and Subsidiaries
Consolidated Balance Sheets
 
 
December 31
In millions, except per-share data
2013
2012
Assets
Current assets
 
 
Cash and cash equivalents
$
265.1

$
261.3

Accounts and notes receivable, net of allowances of $115.1 and $37.5, respectively
1,334.3

1,274.6

Inventories
1,243.3

1,333.9

Other current assets
389.4

334.5

Total current assets
3,232.1

3,204.3

Property, plant and equipment, net
1,170.0

1,188.2

Other assets
 
 
Goodwill
5,134.2

5,111.0

Intangibles, net
1,776.1

1,926.9

Other non-current assets
430.9

452.3

Total other assets
7,341.2

7,490.2

Total assets
$
11,743.3

$
11,882.7

Liabilities and Equity
Current liabilities
 
 
Current maturities of long-term debt and short-term borrowings
$
2.5

$
3.1

Accounts payable
596.6

567.0

Employee compensation and benefits
347.1

296.7

Other current liabilities
664.0

778.3

Total current liabilities
1,610.2

1,645.1

Other liabilities
 
 
Long-term debt
2,552.6

2,454.3

Pension and other post-retirement compensation and benefits
324.8

378.8

Deferred tax liabilities
580.6

421.9

Other non-current liabilities
457.4

495.1

Total liabilities
5,525.6

5,395.2

Equity
 
 
Common shares CHF 0.50 par value, 213.0 authorized and issued at December 31, 2013 and December 31,2012, respectively
113.5

113.5

Common shares held in treasury, 15.6 and 6.9 shares at December 31, 2013 and December 31, 2012, respectively
(875.1
)
(315.5
)
Capital contribution reserve
5,071.4

5,292.4

Retained earnings
1,829.1

1,292.3

Accumulated other comprehensive income (loss)
(43.6
)
(11.6
)
Shareholders’ equity attributable to Pentair Ltd.
6,095.3

6,371.1

Noncontrolling interest
122.4

116.4

Total equity
6,217.7

6,487.5

Total liabilities and equity
$
11,743.3

$
11,882.7

See accompanying notes to consolidated financial statements.

58



Pentair Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
 
Years ended December 31
In millions
2013
2012
2011
Operating activities
 
 
 
Net income (loss) before noncontrolling interest
$
542.6

$
(104.6
)
$
(3.2
)
Adjustments to reconcile net income (loss) before noncontrolling interest to net cash provided by (used for) operating activities
 
 
 
Equity income of unconsolidated subsidiaries
(1.8
)
(2.1
)
(1.9
)
Depreciation
148.9

87.8

66.2

Amortization
137.2

76.0

41.9

Gain on sale of businesses, net
(19.7
)


Deferred income taxes
55.2

(146.9
)
(5.6
)
Share-based compensation
31.1

35.8

19.5

Impairment of trade names and goodwill
11.0

60.7

200.5

Loss on early extinguishment of debt

75.4


Excess tax benefits from share-based compensation
(16.8
)
(5.0
)
(3.3
)
Pension and other post-retirement expense (income)
(31.3
)
167.5

84.3

Pension and other post-retirement contributions
(34.0
)
(238.0
)
(40.3
)
Loss (gain) on sale of assets
3.4

(2.3
)
0.9

Changes in assets and liabilities, net of effects of business acquisitions
 
 
 
Accounts and notes receivable
(91.1
)
55.7

1.3

Inventories
67.7

125.1

18.3

Other current assets
(5.4
)
(6.7
)
10.0

Accounts payable
36.4

(62.0
)
(24.3
)
Employee compensation and benefits
56.7

(81.3
)
(20.5
)
Other current liabilities
(13.3
)
27.2

(8.0
)
Other non-current assets and liabilities
38.5

5.7

(15.6
)
Net cash provided by (used for) operating activities
915.3

68.0

320.2

Investing activities
 
 
 
Capital expenditures
(170.0
)
(94.5
)
(73.3
)
Proceeds from sale of property and equipment
6.0

5.5

1.3

Proceeds from sale of businesses, net
43.5



Acquisitions, net of cash acquired
(92.4
)
470.5

(733.1
)
Other
1.7

(5.9
)
(3.0
)
Net cash provided by (used for) investing activities
(211.2
)
375.6

(808.1
)
Financing activities
 
 
 
Net receipts (repayments) of short-term borrowings

(3.7
)
(1.2
)
Net receipts of commercial paper and revolving long-term debt
104.2

253.8

74.5

Proceeds from long-term debt
0.7

594.3

515.3

Repayment of long-term debt
(7.4
)
(617.2
)
(0.3
)
Debt issuance costs
(1.4
)
(9.7
)
(9.0
)
Debt extinguishment costs

(74.8
)

Excess tax benefits from share-based compensation
16.8

5.0

3.3

Shares issued to employees, net of shares withheld
80.0

68.2