UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

Commission file number 000-04689

Pentair,Inc.

(Exact name of Registrant as specified in its charter)

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

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

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

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

Large accelerated filer þ		Accelerated filer 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 Exchange Act). Yes o No þ

On April 3, 2010, 98,650,967 shares of Registrant’s common stock were outstanding.

 

 

Pentair, Inc. and Subsidiaries

		Page(s)
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Income for the three months ended April 3, 2010 and March 28, 2009			3
Condensed Consolidated Balance Sheets as of April 3, 2010, December 31, 2009 and March 28, 2009			4
Condensed Consolidated Statements of Cash Flows for the three months ended April 3, 2010 and March 28, 2009			5
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended April 3, 2010 and March 28, 2009			6
Notes to Condensed Consolidated Financial Statements			7 - 12
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13 - 21
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk			21
ITEM 4. Controls and Procedures			21
Report of Independent Registered Public Accounting Firm			22
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings			23
ITEM 1A. Risk Factors			23
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			23
ITEM 6. Exhibits			24
Signatures			25
EX-15
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

		Three months ended
		April 3,				March 28,
In thousands, except per-share data		2010				2009
Net sales		$	707,013			$	633,840
Cost of goods sold			493,311				464,608
Gross profit			213,702				169,232
Selling, general and administrative			132,890				117,275
Research and development			17,211				14,743
Operating income			63,601				37,214
Other (income) expense:
Equity (income) losses of unconsolidated subsidiary			(84	)			277
Net interest expense			9,527				11,784
Income from continuing operations before income taxes and noncontrolling interest			54,158				25,153
Provision for income taxes			18,129				7,432
Income from continuing operations			36,029				17,721
Gain on disposal of discontinued operations, net of tax			524				10
Net income before noncontrolling interest			36,553				17,731
Noncontrolling interest			1,232				466
Net income attributable to Pentair, Inc.		$	35,321			$	17,265
Net income from continuing operations attributable to Pentair, Inc.		$	34,797			$	17,255
Earnings per common share attributable to Pentair, Inc.
Basic
Continuing operations		$	0.35			$	0.18
Discontinued operations			0.01				—
Basic earnings per common share		$	0.36			$	0.18
Diluted
Continuing operations		$	0.35			$	0.18
Discontinued operations			0.01				—
Diluted earnings per common share		$	0.36			$	0.18
Weighted average common shares outstanding
Basic			98,030				97,375
Diluted			99,568				97,966
Cash dividends declared per common share		$	0.19			$	0.18

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

		April 3,				December 31,				March 28,
In thousands, except share and per-share data		2010				2009				2009
Assets
Current assets
Cash and cash equivalents		$	46,783			$	33,396			$	34,708
Accounts and notes receivable, net			550,830				455,090				505,196
Inventories			363,667				360,627				393,201
Deferred tax assets			49,665				49,609				51,268
Prepaid expenses and other current assets			43,580				47,576				47,848
Total current assets			1,054,525				946,298				1,032,221
Property, plant and equipment, net			330,201				333,688				337,898
Other assets
Goodwill			2,067,836				2,088,797				2,092,825
Intangibles, net			472,398				486,407				504,921
Other			56,224				56,144				56,964
Total other assets			2,596,458				2,631,348				2,654,710
Total assets		$	3,981,184			$	3,911,334			$	4,024,829
Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings		$	3,731			$	2,205			$	7,404
Current maturities of long-term debt			51				81				630
Accounts payable			229,502				207,661				196,767
Employee compensation and benefits			77,496				74,254				75,664
Current pension and post-retirement benefits			8,948				8,948				8,890
Accrued product claims and warranties			37,803				34,288				38,639
Income taxes			8,571				5,659				4,312
Accrued rebates and sales incentives			24,653				27,554				20,754
Other current liabilities			86,763				85,629				98,919
Total current liabilities			477,518				446,279				451,979
Other liabilities
Long-term debt			862,351				803,351				991,807
Pension and other retirement compensation			231,733				234,948				270,443
Post-retirement medical and other benefits			30,630				31,790				34,299
Long-term income taxes payable			25,720				26,936				28,076
Deferred tax liabilities			145,777				146,630				145,565
Other non-current liabilities			95,399				95,060				97,260
Total liabilities			1,869,128				1,784,994				2,019,429
Commitments and contingencies
Shareholders’ equity
Common shares par value $0.16 2/3; 98,650,967, 98,655,506 and 98,280,976 shares issued and outstanding, respectively			16,441				16,442				16,380
Additional paid-in capital			475,135				472,807				454,736
Retained earnings			1,518,726				1,502,242				1,457,231
Accumulated other comprehensive income (loss)			(11,801	)			20,597				(44,835	)
Noncontrolling interest			113,555				114,252				121,888
Total shareholders’ equity			2,112,056				2,126,340				2,005,400
Total liabilities and shareholders’ equity		$	3,981,184			$	3,911,334			$	4,024,829

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

		Three months ended
		April 3,				March 28,
In thousands		2010				2009
Operating activities
Net income before noncontrolling interest		$	36,553			$	17,731
Adjustments to reconcile net income to net cash provided by (used for) operating activities
Gain on disposal of discontinued operations			(524	)			(10	)
Equity (income) losses of unconsolidated subsidiary			(84	)			277
Depreciation			14,564				15,170
Amortization			6,746				7,233
Deferred income taxes			1,617				7
Stock compensation			6,802				4,720
Excess tax benefits from stock-based compensation			(980	)			(64	)
(Gain) loss on sale of assets			(147	)			19
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable			(99,054	)			(47,021	)
Inventories			(5,525	)			21,069
Prepaid expenses and other current assets			2,826				15,008
Accounts payable			22,479				(18,052	)
Employee compensation and benefits			1,694				(15,470	)
Accrued product claims and warranties			3,647				(2,797	)
Income taxes			3,446				(922	)
Other current liabilities			(1,584	)			(13,337	)
Pension and post-retirement benefits			(426	)			1,801
Other assets and liabilities			(2,363	)			(2,415	)
Net cash provided by (used for) continuing operations			(10,313	)			(17,053	)
Investing activities
Capital expenditures			(12,059	)			(15,979	)
Proceeds from sale of property and equipment			127				280
Other			292				(40	)
Net cash provided by (used for) investing activities			(11,640	)			(15,739	)
Financing activities
Net short-term borrowings			1,526				7,494
Proceeds from long-term debt			200,000				135,000
Repayment of long-term debt			(141,025	)			(96,679	)
Excess tax benefits from stock-based compensation			980				64
Stock issued to employees, net of shares withheld			(1,938	)			680
Dividends paid			(18,837	)			(17,710	)
Net cash provided by (used for) financing activities			40,706				28,849
Effect of exchange rate changes on cash and cash equivalents			(5,366	)			(693	)
Change in cash and cash equivalents			13,387				(4,636	)
Cash and cash equivalents, beginning of period			33,396				39,344
Cash and cash equivalents, end of period		$	46,783			$	34,708

See accompanying notes to condensed consolidated financial statements.

Pentair Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

																		Accumulated																Comprehensive
										Additional								other																income
In thousands, except share		Common shares								paid-in				Retained				comprehensive				Total				Noncontrolling								attributable
and per-share data		Number				Amount				capital				earnings				income (loss)				Pentair, Inc.				interest				Total				to Pentair, Inc.
Balance — December 31, 2009			98,655,506			$	16,442			$	472,807			$	1,502,242			$	20,597			$	2,012,088			$	114,252			$	2,126,340
Net income															35,321								35,321				1,232				36,553			$	35,321
Change in cumulative translation adjustment																			(31,827	)			(31,827	)			(1,929	)			(33,756	)			(31,827	)
Changes in market value of derivative financial instruments, net of ($357) tax																			(571	)			(571	)							(571	)			(571	)
Comprehensive income																																		$	2,923
Cash dividends — $0.19 per common share															(18,837	)							(18,837	)							(18,837	)
Share repurchases
Exercise of stock options, net of 19,141 shares tendered for payment			107,672				18				1,523												1,541								1,541
Issuance of restricted shares, net of cancellations			6,648				1				508												509								509
Amortization of restricted shares											1,171												1,171								1,171
Shares surrendered by employees to pay taxes			(118,859	)			(20	)			(3,970	)											(3,990	)							(3,990	)
Stock compensation											3,096												3,096								3,096
Balance — April 3, 2010			98,650,967			$	16,441			$	475,135			$	1,518,726			$	(11,801	)		$	1,998,501			$	113,555			$	2,112,056

																		Accumulated																Comprehensive
										Additional								other																income
In thousands, except share		Common shares								paid-in				Retained				comprehensive				Total				Noncontrolling								attributable
and per-share data		Number				Amount				capital				earnings				income (loss)				Pentair, Inc.				interest				Total				to Pentair, Inc.
Balance — December 31, 2008			98,276,919			$	16,379			$	451,241			$	1,457,676			$	(26,615	)		$	1,898,681			$	121,388			$	2,020,069
Net income															17,265								17,265				466				17,731			$	17,265
Change in cumulative translation adjustment																			(18,600	)			(18,600	)			34				(18,566	)			(18,600	)
Changes in market value of derivative financial instruments, net of ($250) tax																			380				380								380				380
Comprehensive income																																		$	(955	)
Cash dividends — $0.18 per common share															(17,710	)							(17,710	)							(17,710	)
Exercise of stock options			29,178				5				675												680								680
Issuance of restricted shares, net of cancellations			41,884				6				456												462								462
Amortization of restricted shares											1,903												1,903								1,903
Shares surrendered by employees to pay taxes			(67,005	)			(10	)			(1,527	)											(1,537	)							(1,537	)
Stock compensation											1,988												1,988								1,988
Balance — March 28, 2009			98,280,976			$	16,380			$	454,736			$	1,457,231			$	(44,835	)		$	1,883,512			$	121,888			$	2,005,400

Pentair, Inc and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

1. Basis of Presentation and Responsibility for Interim Financial Statements

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

We are responsible for the unaudited financial statements included in this document. The financial statements include all normal recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. As these are condensed financial statements, one should also read our consolidated financial statements and notes thereto, which are included in our 2009 Annual Report on Form 10-K for the year ended December 31, 2009.

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

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

In connection with preparing the unaudited condensed consolidated financial statements for the three months ended April 3, 2010, we have evaluated subsequent events for potential recognition and disclosure through the date of this filing.

2. New Accounting Standards

In June 2009, the Financial Accounting Standards Board issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities. The guidance affects the overall consolidation analysis and requires enhanced disclosures on involvement with variable interest entities. The guidance is effective for fiscal years beginning after November 15, 2009. We adopted the new guidance as of January 1, 2010, which did not have a material effect on our condensed consolidated financial statements.

No other new accounting pronouncements issued or effective during the first three months of 2010 have had or are expected to have a material impact on the Consolidated Financial Statements.

3. Stock-based Compensation

Total stock-based compensation expense was $6.8 million and $4.7 million for the first quarter of 2010 and 2009, respectively.

During the first quarter of 2010, restricted shares and restricted stock units of our common stock were granted under the 2008 Omnibus Stock Incentive Plan to eligible employees with a vesting period of three to four years after issuance. Restricted share awards and restricted stock units are valued at market value on the date of grant and are typically expensed over the vesting period. Total compensation expense for restricted share awards and restricted stock units during the first quarter of 2010 and 2009 was $3.7 million and $2.7 million, respectively.

During the first quarter of 2010, option awards were granted under the 2008 Omnibus Stock Incentive Plan with an exercise price equal to the market price of our common stock on the date of grant. Option awards are typically expensed over the vesting period. Total compensation expense for stock option awards was $3.1 million and $2.0 million for the first quarter of 2010 and 2009, respectively.

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

		April 3,				March 28,
		2010				2009
Expected stock price volatility			35.0	%			32.5	%
Expected life		5.5 yrs				5.2 yrs
Risk-free interest rate			2.47	%			1.77	%
Dividend yield			2.30	%			3.20	%

The weighted-average fair value of options granted during the first quarter of 2010 and 2009 was $7.84 and $5.09 per share, respectively.

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

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

Pentair, Inc and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

4. Earnings Per Common Share

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

		Three months ended
		April 3,				March 28,
In thousands		2010				2009
Weighted average common shares outstanding — basic			98,030				97,375
Dilutive impact of stock options and restricted stock			1,538				591
Weighted average common shares outstanding — diluted			99,568				97,966
Stock options excluded from the calculation of diluted earnings per share because the exercise price was greater than the average market price of the common shares			4,821				8,601

5. Restructuring

During 2009 and 2008, we announced and initiated certain business restructuring initiatives aimed at reducing our fixed cost structure and rationalizing our manufacturing footprint. These initiatives included the closure of certain manufacturing facilities as well as the reduction in hourly and salaried headcount. These actions were generally completed by the end of 2009.

Restructuring related costs included in Selling, general and administrative expenses on the Condensed Consolidated Statements of Income include costs for severance and related benefits of $2.8 million in the first three months of 2009.

Restructuring accrual activity recorded on the Condensed Consolidated Balance Sheets is summarized as follows for the three months ended April 3, 2010 and March 28, 2009:

		Three months ended
		April 3,				March 28,
In thousands		2010				2009
Beginning balance		$	14,509			$	34,174
Costs incurred			—				2,820
Cash payments and other			(5,286	)			(14,274	)
Ending balance		$	9,223			$	22,720

6. Inventories

     Inventories were comprised of:

		April 3,				December 31,				March 28,
In thousands		2010				2009				2009
Raw materials and supplies		$	198,737			$	200,931			$	206,348
Work-in-process			39,985				38,338				50,088
Finished goods			124,945				121,358				136,765
Total inventories		$	363,667			$	360,627			$	393,201

7. Goodwill and Other Identifiable Intangible Assets

     The changes in the carrying amount of goodwill for the three months ended April 3, 2010 and March 28, 2009 by segment were as follows:

						Acquisitions/				Foreign Currency
In thousands		December 31, 2009				Divestitures				Translation/Other				April 3, 2010
Water Group		$	1,802,913			$	—			$	(17,388	)		$	1,785,525
Technical Products Group			285,884				—				(3,573	)			282,311
Consolidated Total		$	2,088,797			$	—			$	(20,961	)		$	2,067,836

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

						Acquisitions/				Foreign Currency
In thousands		December 31, 2008				Divestitures				Translation/Other				March 28, 2009
Water Group		$	1,818,470			$	(227	)		$	(7,312	)		$	1,810,931
Technical Products Group			283,381				—				(1,487	)			281,894
Consolidated Total		$	2,101,851			$	(227	)		$	(8,799	)		$	2,092,825
The detail of acquired intangible assets consisted of the following:

		April 3, 2010												December 31, 2009												March 28, 2009
		Gross												Gross												Gross
		carrying				Accumulated								carrying				Accumulated								carrying				Accumulated
In thousands		amount				amortization				Net				amount				amortization				Net				amount				amortization				Net
Finite-life intangibles
Patents		$	15,455			$	(11,796	)		$	3,659			$	15,458			$	(11,502	)		$	3,956			$	15,424			$	(10,256	)		$	5,168
Non-compete agreements			—				—				—				4,522				(4,522	)			—				4,522				(4,479	)			43
Proprietary technology			72,965				(25,255	)			47,710				73,244				(23,855	)			49,389				72,199				(19,097	)			53,102
Customer relationships			283,577				(69,910	)			213,667				288,122				(66,091	)			222,031				280,723				(51,132	)			229,591
Trade names			1,537				(269	)			1,268				1,562				(235	)			1,327				1,520				(113	)			1,407
Total finite-life intangibles		$	373,534			$	(107,230	)		$	266,304			$	382,908			$	(106,205	)		$	276,703			$	374,388			$	(85,077	)		$	289,311
Indefinite-life intangibles
Trade names		$	206,094			$	—			$	206,094			$	209,704			$	—			$	209,704			$	215,610			$	—			$	215,610
Total intangibles, net		$	579,628			$	(107,230	)		$	472,398			$	592,612			$	(106,205	)		$	486,407			$	589,998			$	(85,077	)		$	504,921

Intangible asset amortization expense was approximately $5.5 million and $7.2 million for the three months ended April 3, 2010 and March 28, 2009, respectively.

The estimated future amortization expense for identifiable intangible assets during the remainder of 2010 and the next five years is as follows:

In thousands		2010 Q2-Q4				2011				2012				2013				2014				2015
Estimated amortization expense		$	18,773			$	25,040			$	24,228			$	23,856			$	23,531			$	23,233

8. Debt

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

		Average
		interest rate				Maturity				April 3,				December 31,				March 28,
In thousands		April 3, 2010				(Year)				2010				2009				2009
Revolving credit facilities			0.87	%			2012			$	257,300			$	198,300			$	252,800
Private placement — fixed rate			5.65	%			2013-2017				400,000				400,000				400,000
Private placement — floating rate			0.80	%			2012-2013				205,000				205,000				205,000
Senior notes			7.85	%			2009				—				—				133,900
Other			4.34	%			2010-2016				3,833				2,337				7,829
Total contractual debt obligations											866,133				805,637				999,529
Deferred income related to swaps											—				—				312

Pentair, Inc and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

		Average
		interest rate				Maturity				April 3,				December 31,				March 28,
In thousands		April 3, 2010				(Year)				2010				2009				2009
Total debt, including current portion per balance sheet											866,133				805,637				999,841
Less: Current maturities											(51	)			(81	)			(630	)
Short-term borrowings											(3,731	)			(2,205	)			(7,404	)
Long-term debt										$	862,351			$	803,351			$	991,807

We have a multi-currency revolving Credit Facility (“Credit Facility”). The Credit Facility creates an unsecured, committed revolving credit facility of up to $800 million, with multi-currency sub facilities to support investments outside the U.S. The Credit Facility expires on June 4, 2012. Borrowings under the Credit Facility bear interest at the rate of LIBOR plus 0.625%. Interest rates and fees on the Credit Facility vary based on our credit ratings.

We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We use the Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. Our use of commercial paper as a funding vehicle depends upon the relative interest rates for our paper compared to the cost of borrowing under our Credit Facility. As of April 3, 2010, we had no commercial paper outstanding.

Total availability under our existing Credit Facility was $542.7 million as of April 3, 2010, which would have been limited to $424.1 million based on the credit agreement’s leverage ratio covenant.

In addition to the Credit Facility, we have $40.0 million of uncommitted credit facilities, under which we had $3.7 million of borrowings as of April 3, 2010.

Our debt agreements contain certain financial covenants, the most restrictive of which is a leverage ratio (total consolidated indebtedness, as defined, over consolidated EBITDA, as defined) that may not exceed 3.5 to 1.0. We were in compliance with all financial covenants in our debt agreements as of April 3, 2010.

On March 16, 2009, we announced the redemption of all of our remaining outstanding $133.9 million aggregate principal 7.85% Senior Notes due 2009 (the “Notes”). The Notes were redeemed on April 15, 2009 at a redemption price of $1,035.88 per $1,000 of principal outstanding plus accrued interest thereon. As a result of this transaction, we recognized a loss of $4.8 million on early extinguishment of debt in the second quarter of 2009. The loss included the write off of $0.1 million in unamortized deferred financing fees in addition to recognition of $0.3 million in previously unrecognized swap gains, and cash paid of $5.0 million related to the redemption and other costs associated with the purchase.

Debt outstanding at April 3, 2010 matures on a calendar year basis as follows:

In thousands		2010 Q2 -Q4				2011				2012				2013				2014				2015				Thereafter				Total
Contractual debt
obligation maturities		$	3,782			$	15			$	362,306			$	200,007			$	8			$	8			$	300,007			$	866,133

9. Derivatives and Financial Instruments

Fair value measurements

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

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

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

Pentair, Inc and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Cash-flow Hedges

In August 2007, we entered into a $105 million interest rate swap agreement with a major financial institution to exchange variable rate interest payment obligations for a fixed rate obligation without the exchange of the underlying principal amounts in order to manage interest rate exposures. The effective date of the swap was August 30, 2007. The swap agreement has a fixed interest rate of 4.89% and expires in May 2012. The fixed interest rate of 4.89% plus the .50% interest rate spread over LIBOR results in an effective fixed interest rate of 5.39%. The fair value of the swap was a liability of $8.2 million, $8.1 million and $10.4 million at April 3, 2010, December 31, 2009 and March 28, 2009, respectively, and was recorded in Other non-current liabilities.

In September 2005, we entered into a $100 million interest rate swap agreement with several major financial institutions to exchange variable rate interest payment obligations for fixed rate obligations without the exchange of the underlying principal amounts in order to manage interest rate exposures. The effective date of the fixed rate swap was April 25, 2006. The swap agreement has a fixed interest rate of 4.68% and expires in July 2013. The fixed interest rate of 4.68% plus the .60% interest rate spread over LIBOR results in an effective fixed interest rate of 5.28%. The fair value of the swap was a liability of $9.0 million, $8.3 million and $11.3 million at April 3, 2010, December 31, 2009 and March 28, 2009, respectively, and was recorded in Other non-current liabilities.

The variable to fixed interest rate swaps are designated as cash-flow hedges. The fair value of these swaps are recorded as assets or liabilities on the Condensed Consolidated Balance Sheets. Unrealized income/expense is included in Accumulated other comprehensive income (“OCI”) and realized income/expense and amounts due to/from swap counterparties, are included in earnings. We realized incremental expense resulting from the swaps of $2.3 million and $1.5 million for the three months ended April 3, 2010 and March 28, 2009, respectively.

The variable to fixed interest rate swaps are designated as and are effective as cash-flow hedges. The fair value of these swaps are recorded as assets or liabilities on the Condensed Consolidated Balance Sheets, with changes in their fair value included in OCI. Derivative gains and losses included in OCI are reclassified into earnings at the time the related interest expense is recognized or the settlement of the related commitment occurs.

Failure of one or more of our swap counterparties would result in the loss of any benefit to us of the swap agreement. In this case, we would continue to be obligated to pay the variable interest payments per the underlying debt agreements which are at variable interest rates of 3 month LIBOR plus .50% for $105 million of debt and 3 month LIBOR plus .60% for $100 million of debt. Additionally, failure of one or all of our swap counterparties would not eliminate our obligation to continue to make payments under our existing swap agreements if we continue to be in a net pay position.

At April 3, 2010, our interest rate swaps are carried at fair value measured on a recurring basis. Fair values are determined through the use of models that consider various assumptions, including time value, yield curves, as well as other relevant economic measures, which are inputs that are classified as Level 2 in the valuation hierarchy defined by the accounting guidance.

10. Income Taxes

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

The effective income tax rate for the three months ended April 3, 2010 was 33.5% compared to 29.5% for the three months ended March 28, 2009. We expect the effective tax rate for the remainder of 2010 to be between 33% and 34%, resulting in a full year effective income tax rate of between 33% and 34%. We continue to actively pursue initiatives to reduce our effective tax rate. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.

The total gross liability for uncertain tax positions at April 3, 2010 was $28.7 million. We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Net interest expense, respectively, which is consistent with our past practices.

11. Benefit Plans

Components of net periodic benefit cost for the three months ended April 3, 2010 and March 28, 2009 were as follows:

Pentair, Inc and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

		Three months ended
		Pension benefits								Post-retirement
		April 3,				March 28,				April 3,				March 28,
In thousands		2010				2009				2010				2009
Service cost		$	2,886			$	3,067			$	50			$	54
Interest cost			7,887				8,115				503				594
Expected return on plan assets			(7,710	)			(7,563	)			—				—
Amortization of transition obligation			6				14				—				—
Amortization of prior year service cost (benefit)			8				6				(7	)			(10	)
Recognized net actuarial loss (gains)			406				18				(823	)			(832	)
Net periodic benefit cost		$	3,483			$	3,657			$	(277	)		$	(194	)

12. Business Segments

Financial information by reportable segment for the three months ended April 3, 2010 and March 28, 2009 is shown below:

		Three months ended
		April 3,				March 28,
In thousands		2010				2009
Net sales to external customers
Water Group		$	478,038			$	423,932
Technical Products Group			228,975				209,908
Consolidated		$	707,013			$	633,840
Intersegment sales
Water Group		$	517			$	289
Technical Products Group			703				233
Intercompany sales eliminations			(1,220	)			(522	)
Consolidated		$	—			$	—
Operating income (loss)
Water Group		$	42,138			$	26,976
Technical Products Group			33,098				20,462
Unallocated corporate expenses and intercompany eliminations			(11,635	)			(10,224	)
Consolidated		$	63,601			$	37,214

13. Warranty

The changes in the carrying amount of service and product warranties for the three months ended April 3, 2010 and March 28, 2009 and the year ended December 31, 2009 were as follows:

		April 3,				December 31,				March 28,
In thousands		2010				2009				2009
Balance at beginning of the year		$	24,288			$	31,559			$	31,559
Service and product warranty provision			14,924				55,232				11,644
Payments			(11,276	)			(62,672	)			(14,441	)
Acquired			—				23				—
Translation			(133	)			146				(123	)
Balance at end of the period		$	27,803			$	24,288			$	28,639

14. Commitments and Contingencies

There have been no further material developments from the disclosures contained in our 2009 Annual Report on Form 10-K.

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

This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” or similar words or the negative thereof . From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results. They can be affected by assumptions we might make or by known or unknown risks or uncertainties. Consequently, we cannot guarantee any forward-looking statements. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties.

The following factors and those discussed in ITEM 1A, Risk Factors, included in our 2009 Annual Report on Form 10-K, may impact the achievement of forward-looking statements:

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

	•		magnitude, timing and scope of global economic recovery;
	•		continued deterioration in or stabilization of the North American and Western European housing markets;
	•		the strength of product demand and the markets we serve;
	•		the intensity of competition, including that from foreign competitors;
	•		pricing pressures;
	•		the financial condition of our customers;
	•		market acceptance of our new product introductions and enhancements;
	•		the introduction of new products and enhancements by competitors;
	•		our ability to maintain and expand relationships with large customers;
	•		our ability to source raw material commodities from our suppliers without interruption and at reasonable prices; and
	•		our ability to source components from third parties, in particular from foreign manufacturers, without interruption and at reasonable prices;

•		our ability to access capital markets and obtain anticipated financing under favorable terms;
•		our ability to identify, complete and integrate acquisitions successfully and to realize expected synergies on our anticipated timetable;
•		changes in our business strategies, including acquisition, divestiture and restructuring activities;
•		any impairment of goodwill and indefinite-lived intangible assets as a result of deterioration in our markets;
•		domestic and foreign governmental and regulatory policies;
•		changes in operating factors, such as continued improvement in manufacturing activities and the achievement of related efficiencies, cost reductions and inventory risks due to shifts in market demand and costs associated with moving production to lower-cost locations;
•		our ability to generate savings from our excellence in operations initiatives consisting of lean enterprise, supply management and cash flow practices;
•		our ability to generate benefits from our restructuring and other cost actions;
•		unanticipated developments that could occur with respect to contingencies such as litigation, intellectual property matters, product liability exposures and environmental matters; and
•		our ability to accurately evaluate the effects of contingent liabilities such as tax, product liability, environmental and other claims.

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

Overview

We are a focused diversified industrial manufacturing company comprised of two operating segments: Water and Technical Products. Our Water Group is a global leader in providing innovative products and systems used worldwide in the movement, storage, treatment and enjoyment of water. Our Technical Products Group is a leader in the global enclosures and thermal management markets, designing and manufacturing standard, modified and custom enclosures that house and protect sensitive electronics and electrical components and protect the people that use them. In 2010, we expect our Water Group and Technical Products Group to generate approximately 2/3 and 1/3 of our total revenues, respectively.

Our Water Group has progressively become a more important part of our business portfolio with sales increasing from approximately $125 million in 1995 to approximately $1.8 billion in 2009. We believe the water industry is structurally attractive as a result of a growing demand for clean water and the large global market size (of which we have identified a target market totaling $60 billion). Our vision is to be a leading global provider of innovative products and systems used in the movement, storage, treatment and enjoyment of water.

Our Technical Products Group operates in a large global market with significant potential for growth in industry segments such as energy, medical and security and defense. We believe we have the largest industrial and commercial distribution network in North America for enclosures and the highest brand recognition in the industry in North America. From mid-2001 through 2003, the Technical Products Group experienced significantly lower sales volumes as a result of severely reduced capital spending in the industrial and commercial markets and over-capacity and weak demand in the data communication and telecommunication markets. From 2004 through 2008, sales volumes increased due to the addition of new distributors,

new products, price increases and higher demand in targeted markets. In 2009, sales revenues in our Technical Products Group declined significantly due to the impact of the global recession.

Key Trends and Uncertainties

The following trends and uncertainties affected our financial performance in 2009 and the first quarter of 2010 and will likely impact our results in the future:

•		Most markets we serve slowed dramatically in late 2008 and throughout 2009 as a result of the global recession. We believe these markets are stabilizing and we saw signs of a recovery during the first quarter of 2010 from first half 2009 levels. In response to market conditions over the past 18 months, we significantly restructured our operations to both reduce cost and reduce or relocate capacity. Because our businesses are significantly affected by general economic trends, further deterioration in our most important markets addressed below would likely have an adverse impact on our results of operations for 2010 and beyond.
•		We have also identified specific market opportunities that we have been and are pursuing that we find attractive, both within and outside the United States. We are reinforcing our businesses to more effectively address these opportunities through research and development and additional sales and marketing resources. Unless we successfully penetrate these product and geographic markets, our organic growth will be limited due to continuing stagnation or slower growth in other markets.
•		New home building and new pool starts have contracted for each of the past four years in the United States and have slowed significantly in Europe as well. Overall, we believe approximately 55% of sales by our water businesses (flow, filtration and pool equipment) are used in residential applications — for new construction, remodeling and repair, replacement and refurbishment. We saw stabilization of order rates at the end of 2009 and anticipate continuing stability, with volume increases in many markets, in 2010. We believe that housing construction will improve in 2010 from historically low levels in 2009, and we anticipate a stronger market will have a favorable impact on these businesses, but our participation in these trends appears to lag approximately six months from inception.
•		Industrial, communications and commercial markets for all of our businesses, including commercial and industrial construction, also slowed significantly over the past year. Order rates and sales stabilized in our industrial and communications businesses somewhat in the fourth quarter of 2009 and first quarter of 2010, although commercial and industrial construction markets are still shrinking. We believe that the outlook for most of these markets is mixed, and we expect that commercial and industrial construction will continue to decline over 10% year-over-year in 2010.
•		We experienced material cost and other deflation in a number of our businesses during the second half of 2009. We expect the current economic environment will result in continuing price volatility for many of our raw materials. We believe that the impact of higher commodity prices will impact us unfavorably for the remainder of 2010, but we are uncertain on the timing and impact of a return of cost inflation as the economy improves over the next year.
•		Our unfunded pension liability increased from $147 million at year end 2007 to $257 million at year end 2008, primarily reflecting our reduced investment return and significantly lower asset values in our U.S. defined benefit plans at the end of that year. Primarily as a result of better investment returns and higher contributions in 2009, our unfunded pension liabilities declined to approximately $223 million as of the end of 2009. The contributions included a discretionary contribution of $25 million in December 2009 to improve plan balances and reduce future contributions.
•		We have a long-term goal to consistently generate free cash flow that equals or exceeds 100% conversion of our net income. We define free cash flow as cash flow from continuing operating activities less capital expenditures plus proceeds from sale of property and equipment. Our target for free cash flow in 2010 is $225 million. We are continuing to target reductions in working capital, and particularly inventory, as a percentage of sales. See our discussion of Other financial measures under the caption “Liquidity and Capital Resources” in this report.
•		We experience seasonal demand in a number of markets within our Water Group. End-user demand for pool equipment follows warm weather trends and is normally 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 economic conditions and weather patterns, particularly by heavy flooding and droughts. We believe that this seasonality will continue in the second and third quarters of 2010, as it did modestly in 2009, but are uncertain of the size and impact of the seasonal spike for the year, and contemplate that any seasonal impact will likely be less than we have historically seen.
•		We experienced year over year unfavorable foreign currency effects on net sales and operating results in 2009 and the first three months of 2010, as a result of the strengthening of the U.S. dollar in relation to other foreign currencies. Our currency effect is primarily for the U.S. dollar against the euro, which may or may not trend favorably in the future.
•		The effective income tax rate for the three months ended April 3, 2010 was 33.5% compared to 29.5% for the three months ended March 28, 2009. We expect the effective tax rate for the remainder of 2010 to be between 33% and 34%. We continue to actively pursue initiatives to reduce our effective tax rate. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.

Outlook

In 2010, our operating objectives include the following:

•		Increasing our vertical market focus within each of our Global Business Units to grow in those markets in which we have competitive advantages;
•		Leveraging our technological capabilities to increasingly generate innovative new products;
•		Driving operations excellence through lean enterprise initiatives, with special focus on sourcing and supply management, cash flow management, and lean operations; and
•		Stressing proactive talent development, particularly in international management and other key functional areas.

On April 27, 2010, we announced our earnings for the first quarter of 2010 of $0.35 per share from continuing operations on a diluted basis. As further noted below, our revenue increased 12% in the quarter from the year-earlier period, with slightly higher growth in our water segment.

At the same time, we provided earnings guidance for the second quarter of 2010. We anticipate that sales growth will be approximately 10% to 13% and reported earnings per share on a diluted basis will range from $0.52 to $0.55 in the quarter.

On February 2, 2010, we initiated earnings guidance for the full year 2010 of a range of $1.75 to $1.90 per share on a diluted basis, which we affirmed on April 27, 2010. We are cautiously optimistic about our end markets both in the United States and in the Asia Pacific region, for the balance of 2010. As noted above, however, a deterioration in general economic conditions in our primary markets and geographies would adversely impact our anticipated annual revenues and financial performance.

Our full year 2010 outlook is based on several variables. First, our guidance anticipates modest organic revenue gains in our businesses as a whole of between 8-9% as a result of overall market conditions, which we expect to bring our total revenue to approximately $2.9 billion for the full year. Second, based upon that revenue expectation, we project net earnings of $1.75 to $1.90 per share as a result of higher operating margins due to carryover of productivity gains from our restructuring projects in 2009 and favorable commodities pricing in the first half of 2010, offset somewhat by higher costs for certain raw materials, reinstatement of certain employee benefits and wage increases and higher spending on research and development, and sales and marketing resources. Third, we believe our tax rate and pension expense will be slightly higher than in 2009, with some reduction in interest expense as a result of lower borrowing levels and continuing low interest rates. We also believe that should we experience volume gains in excess of those we are projecting, we will be able to convert those extra revenues into operating income at a rate of from 30% to 40%, consistent with our productivity and other factors. Our water businesses achieved the bottom of that range of expected conversion rates for extra volume in the first quarter of 2010 due to unfavorable mix and the timing of expenses for investments for growth initiatives and pay-as-you-go restructuring.

Our guidance assumes an absence of significant acquisitions or divestitures in 2010. We continue to look for smaller acquisitions to expand our geographic reach internationally, expand our presence in our various channels to market and acquire technologies and products to broaden our businesses’ capabilities to serve additional markets. We may also consider the divestiture or closure of discrete business units to further focus our businesses on their most attractive markets.

The ability to achieve our operating objectives will depend, to a certain extent, on factors outside our control. See “Forward-looking statements” in this report and “Risk Factors” under ITEM 1A in our 2009 Annual Report on Form 10-K.

RESULTS OF OPERATIONS

Net Sales

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

		Three months ended
		April 3,				March 28,
In thousands		2010				2009				$ change				% change
Net sales		$	707,013			$	633,840			$	73,173				11.5	%

The components of the net sales change in 2010 from 2009 were as follows:

		% Change from 2009
Percentages		First quarter
Volume			9.6
Price			(0.6	)
Currency			2.5
Total			11.5

Consolidated net sales

The 11.5 percent increase in consolidated net sales in the first quarter of 2010 from 2009 was primarily driven by:

•		higher sales of certain pump, pool and filtration products primarily related to the stabilization in the North American and Western European residential housing markets and other global markets following the global recession in 2009;
•		higher sales volumes in the Technical Products Group; and
•		favorable foreign currency effects.

These increases were partially offset by:

•

selective decreases in selling prices.

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

		Three months ended
		April 3,				March 28,
In thousands		2010				2009				$ change				% change
Water Group		$	478,038			$	423,932			$	54,106				12.8	%
Technical Product Group			228,975				209,908				19,067				9.1	%
Net sales		$	707,013			$	633,840			$	73,173				11.5	%

Water Group

The 12.8 percent increase in Water Group net sales in the first quarter of 2010 from 2009 was primarily driven by:

•		organic sales growth of approximately 10 percent (excluding foreign currency exchange) primarily due to higher sales of certain pump, pool and filtration products primarily related to the stabilization in the North American and Western European residential housing markets and other global markets following the global recession in 2009;
•		continued growth in India, China and in other emerging markets in the Asia-Pacific region as well as Eastern Europe; and
•		favorable foreign currency effects.

These increases were partially offset by:

•

selective decreases in selling prices.

Technical Products Group

The 9.1 percent increase in Technical Product Group net sales in the first quarter 2010 from 2009 was primarily driven by:

•		an increase in sales in industrial, general electronics, infrastructure and energy vertical markets;
•		favorable foreign currency effects; and
•		selective increases in selling prices.

Gross Profit

		Three months ended
		April 3,				%of				March 28,				%of
In thousands		2010				sales				2009				sales
Gross Profit		$	213,702				30.2	%		$	169,232				26.7	%
Percentage point change						3.5 pts

The 3.5 percent increase in gross profit as a percentage of sales in the first quarter of 2010 from 2009 was primarily the result of:

•		the effect of certain fixed costs spread over higher sales volumes;
•		cost savings from restructuring actions and other personnel reductions taken in response to the economic downturn and resulting volume decline in 2009; and
•		material cost deflation and savings generated from our Pentair Integrated Management System (“PIMS”) initiatives including lean and supply management practices.

These increases were partially offset by:

•

selective decreases in selling prices primarily in our residential and commercial water businesses.

Selling, general and administrative (SG&A)

		Three months ended
		April 3,				%of				March 28,				%of
In thousands		2010				sales				2009				sales
SG&A		$	132,890				18.8	%		$	117,275				18.5	%
Percentage point change						0.3 pts

The 0.3 percentage point increase in SG&A expense as a percentage of sales in the first quarter of 2010 from 2009 was primarily due to:

•

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

These increases were partially offset by:

•

reduced costs related to restructuring actions taken throughout 2009 to consolidate facilities and streamline general and administrative costs.

Research and development (R&D)

		Three months ended
		April 3,				% of				March 28,				% of
In thousands		2010				sales				2009				sales
R&D		$	17,211				2.4	%		$	14,743				2.3	%
Percentage point change						0.1 pts

The 0.1 percentage point increase in R&D expense as a percentage of sales in the first quarter of 2010 from the first quarter of 2009 was primarily due to:

•

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

Operating income
Water Group

		Three months ended
		April 3,				%of				March 28,				%of
In thousands		2010				sales				2009				sales
Operating Income		$	42,138				8.8	%		$	26,976				6.4	%
Percentage point change						2.4 pts

The 2.4 percentage point increase in Water segment operating income as a percentage of net sales in the first quarter of 2010 as compared to 2009 was primarily the result of:

•

higher gross margin due to increased sales into residential housing markets and other global markets following the global recession in 2009;

•		cost savings from restructuring actions and other personnel reductions taken in response to the economic downturn and resulting volume decline in 2009; and
•		savings generated from our PIMS initiatives including lean and supply management practices.

These increases were offset by:

•		selective decreases in selling prices primarily in our residential and commercial water businesses;
•		period expenses associated with the completion of restructuring of certain manufacturing operations; and
•		cost increases for certain raw materials.

Technical Products Group

		Three months ended
		April 3,				%of				March 28,				%of
In thousands		2010				sales				2009				sales
Operating Income		$	33,098				14.5	%		$	20,462				9.7	%
Percentage point change						4.8 pts

The 4.8 percentage point increase in Technical Products Group operating income as a percentage of sales in the first quarter of 2010 from 2009 was primarily the result of: