e10vq
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 3, 2010
OR
     
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)
Registrant’s telephone number, including area code: (763) 545-1730
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No 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 þ 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 July 3, 2010, 98,701,186 shares of Registrant’s common stock were outstanding.
 
 

 


 

Pentair, Inc. and Subsidiaries
         
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Pentair, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
                                 
    Three months ended     Six months ended  
    July 3,     June 27,     July 3,     June 27,  
In thousands, except per-share data   2010     2009     2010     2009  
 
Net sales
  $ 796,167     $ 693,712     $ 1,503,180     $ 1,327,552  
Cost of goods sold
    547,999       497,233       1,041,310       961,841  
 
Gross profit
    248,168       196,479       461,870       365,711  
Selling, general and administrative
    131,043       119,104       263,933       236,379  
Research and development
    16,999       13,815       34,210       28,558  
 
Operating income
    100,126       63,560       163,727       100,774  
Other (income) expense:
                               
Equity (income) losses of unconsolidated subsidiaries
    (1,375 )     279       (1,459 )     556  
Loss on early extinguishment of debt
          4,804             4,804  
Net interest expense
    8,569       9,833       18,096       21,617  
 
 
                               
Income from continuing operations before income taxes and noncontrolling interest
    92,932       48,644       147,090       73,797  
Provision for income taxes
    31,320       16,217       49,449       23,649  
 
Income from continuing operations
    61,612       32,427       97,641       50,148  
Gain (loss) on disposal of discontinued operations, net of tax
    593       (78 )     1,117       (68 )
 
Net income before noncontrolling interest
    62,205       32,349       98,758       50,080  
Noncontrolling interest
    1,124       421       2,356       887  
 
Net income attributable to Pentair, Inc.
  $ 61,081     $ 31,928     $ 96,402     $ 49,193  
 
 
                               
Net income from continuing operations attributable to Pentair, Inc.
  $ 60,488     $ 32,006     $ 95,285     $ 49,261  
 
 
                               
Earnings per common share attributable to Pentair, Inc.
                               
Basic
                               
Continuing operations
  $ 0.61     $ 0.33     $ 0.96     $ 0.51  
Discontinued operations
    0.01             0.01        
 
Basic earnings per common share
  $ 0.62     $ 0.33     $ 0.97     $ 0.51  
 
 
                               
Diluted
                               
Continuing operations
  $ 0.61     $ 0.33     $ 0.96     $ 0.50  
Discontinued operations
                0.01        
 
Diluted earnings per common share
  $ 0.61     $ 0.33     $ 0.97     $ 0.50  
 
 
                               
Weighted average common shares outstanding
                               
Basic
    98,208       97,507       98,081       97,445  
Diluted
    99,638       98,422       99,435       98,145  
 
                               
Cash dividends declared per common share
  $ 0.19     $ 0.18     $ 0.38     $ 0.36  
See accompanying notes to condensed consolidated financial statements.

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Pentair, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
                         
    July 3,     December 31,     June 27,  
In thousands, except share and per-share data   2010     2009     2009  
 
Assets
                       
Current assets
                       
Cash and cash equivalents
  $ 38,580     $ 33,396     $ 38,118  
Accounts and notes receivable, net
    475,679       455,090       462,106  
Inventories
    389,428       360,627       362,743  
Deferred tax assets
    49,058       49,609       51,465  
Prepaid expenses and other current assets
    42,878       47,576       50,111  
 
Total current assets
    995,623       946,298       964,543  
 
                       
Property, plant and equipment, net
    318,124       333,688       340,884  
 
                       
Other assets
                       
Goodwill
    2,033,064       2,088,797       2,106,026  
Intangibles, net
    451,806       486,407       504,674  
Other
    54,083       56,144       61,118  
 
Total other assets
    2,538,953       2,631,348       2,671,818  
 
Total assets
  $ 3,852,700     $ 3,911,334     $ 3,977,245  
 
 
                       
Liabilities and Shareholders’ Equity
                       
Current liabilities
                       
Short-term borrowings
  $ 2,320     $ 2,205     $ 6,143  
Current maturities of long-term debt
    163       81       122  
Accounts payable
    248,679       207,661       212,973  
Employee compensation and benefits
    86,471       74,254       71,674  
Current pension and post-retirement benefits
    8,948       8,948       8,890  
Accrued product claims and warranties
    42,981       34,288       36,780  
Income taxes
    23,252       5,659       14,668  
Accrued rebates and sales incentives
    34,418       27,554       26,286  
Other current liabilities
    78,496       85,629       84,491  
 
Total current liabilities
    525,728       446,279       462,027  
 
                       
Other liabilities
                       
Long-term debt
    734,472       803,351       883,281  
Pension and other retirement compensation
    213,142       234,948       270,588  
Post-retirement medical and other benefits
    29,819       31,790       32,847  
Long-term income taxes payable
    24,821       26,936       26,906  
Deferred tax liabilities
    139,977       146,630       150,167  
Other non-current liabilities
    92,926       95,060       96,016  
 
Total liabilities
    1,760,885       1,784,994       1,921,832  
 
                       
Commitments and contingencies
                       
 
                       
Shareholders’ equity
                       
Common shares par value $0.16 2/3; 98,701,186, 98,655,506 and 98,315,830 shares issued and outstanding, respectively
    16,449       16,442       16,386  
Additional paid-in capital
    480,125       472,807       458,257  
Retained earnings
    1,560,944       1,502,242       1,471,436  
Accumulated other comprehensive income (loss)
    (77,013 )     20,597       (3,892 )
Noncontrolling interest
    111,310       114,252       113,226  
 
Total shareholders’ equity
    2,091,815       2,126,340       2,055,413  
 
Total liabilities and shareholders’ equity
  $ 3,852,700     $ 3,911,334     $ 3,977,245  
 
See accompanying notes to condensed consolidated financial statements.

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Pentair, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
                 
    Six months ended  
    July 3,     June 27,  
In thousands   2010     2009  
 
Operating activities
               
Net income before noncontrolling interest
  $ 98,758     $ 50,080  
Adjustments to reconcile net income to net cash provided by (used for) operating activities
               
Gain (loss) on disposal of discontinued operations
    (1,117 )     68  
Equity (income) losses of unconsolidated subsidiaries
    (1,459 )     556  
Depreciation
    28,876       29,634  
Amortization
    13,357       14,601  
Deferred income taxes
    2,396       464  
Stock compensation
    12,365       9,087  
Excess tax benefits from stock-based compensation
    (1,322 )     (582 )
Gain on sale of assets
    (57 )     (286 )
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
               
Accounts and notes receivable
    (33,438 )     1,556  
Inventories
    (38,651 )     55,703  
Prepaid expenses and other current assets
    1,877       13,532  
Accounts payable
    46,938       (3,436 )
Employee compensation and benefits
    11,275       (21,821 )
Accrued product claims and warranties
    9,196       (4,792 )
Income taxes
    18,872       9,066  
Other current liabilities
    1,043       (23,234 )
Pension and post-retirement benefits
    (12,943 )     (1,433 )
Other assets and liabilities
    448       (2,205 )
 
Net cash provided by (used for) continuing operations
    156,414       126,558  
Net cash provided by (used for) operating activities of discontinued operations
          (1,408 )
 
Net cash provided by (used for) operating activities
    156,414       125,150  
 
               
Investing activities
               
Capital expenditures
    (28,937 )     (28,850 )
Proceeds from sale of property and equipment
    243       563  
Divestitures
          920  
Other
    (1,286 )     (10 )
 
Net cash provided by (used for) investing activities
    (29,980 )     (27,377 )
 
               
Financing activities
               
Net short-term borrowings
    115       6,024  
Proceeds from long-term debt
    335,021       400,000  
Repayment of long-term debt
    (403,742 )     (470,187 )
Debt issuance costs
    (50 )     (50 )
Excess tax benefits from stock-based compensation
    1,322       582  
Stock issued to employees, net of shares withheld
    (817 )     996  
Dividends paid
    (37,700 )     (35,433 )
 
Net cash provided by (used for) financing activities
    (105,851 )     (98,068 )
 
               
Effect of exchange rate changes on cash and cash equivalents
    (15,399 )     (931 )
 
Change in cash and cash equivalents
    5,184       (1,226 )
Cash and cash equivalents, beginning of period
    33,396       39,344  
 
Cash and cash equivalents, end of period
  $ 38,580     $ 38,118  
 
See accompanying notes to condensed consolidated financial statements.

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Pentair, Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited)
                                                                         
                                    Accumulated                             Comprehensive  
                    Additional             other                             income (loss)  
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
                            96,402               96,402       2,356       98,758     $ 96,402  
Change in cumulative translation adjustment
                                    (96,534 )     (96,534 )     (5,298 )     (101,832 )     (96,534 )
Changes in market value of derivative financial instruments, net of ($673) tax
                                    (1,076 )     (1,076 )             (1,076 )     (1,076 )
 
                                                                     
Comprehensive income (loss)
                                                                  $ (1,208 )
 
                                                                     
Cash dividends — $0.38 per common share
                            (37,700 )             (37,700 )             (37,700 )        
Exercise of stock options, net of 23,548 shares tendered for payment
    172,383       28       2,946                       2,974               2,974          
Issuance of restricted shares, net of cancellations
    3,981       1       607                       608               608          
Amortization of restricted shares
                    2,258                       2,258               2,258          
Shares surrendered by employees to pay taxes
    (130,684 )     (22 )     (4,378 )                     (4,400 )             (4,400 )        
Stock compensation
                    5,885                       5,885               5,885          
         
Balance — July 3, 2010
    98,701,186     $ 16,449     $ 480,125     $ 1,560,944     $ (77,013 )   $ 1,980,505     $ 111,310     $ 2,091,815          
         
                                                                         
                                    Accumulated                             Comprehensive  
                    Additional             other                             income (loss)  
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
                            49,193               49,193       887       50,080     $ 49,193  
Change in cumulative translation adjustment
                                    19,376       19,376       (9,049 )     10,327       19,376  
Changes in market value of derivative financial instruments, net of $2,155 tax
                                    3,347       3,347               3,347       3,347  
 
                                                                     
Comprehensive income
                                                                  $ 71,916  
 
                                                                     
Cash dividends — $0.36 per common share
                            (35,433 )             (35,433 )             (35,433 )        
Exercise of stock options, net of 104,554 shares tendered for payment
    70,686       12       601                       613               613          
Issuance of restricted shares, net of cancellations
    36,782       7       475                       482               482          
Amortization of restricted shares
                    3,746                       3,746               3,746          
Shares surrendered by employees to pay taxes
    (68,557 )     (12 )     (1,568 )                     (1,580 )             (1,580 )        
Stock compensation
                    3,762                       3,762               3,762          
         
Balance — June 27, 2009
    98,315,830     $ 16,386     $ 458,257     $ 1,471,436     $ (3,892 )   $ 1,942,187     $ 113,226     $ 2,055,413          
         
See accompanying notes to condensed consolidated financial statements.

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Pentair, Inc. and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
1. Basis of Presentation and Responsibility for Interim Financial Statements
We prepared the unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States can be condensed or omitted.
We are responsible for the unaudited financial statements included in this document. The financial statements include all normal recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. As these are condensed financial statements, one should also read our consolidated financial statements and notes thereto, 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 six months ended July 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 six months of 2010 have had or are expected to have a material impact on the Condensed Consolidated Financial Statements.
3. Stock-based Compensation
Total stock-based compensation expense was $5.6 million and $4.4 million for the three months ended July 3, 2010 and June 27, 2009, respectively, and was $12.4 million and $9.1 million for the six months ended July 3, 2010 and June 27, 2009, respectively.
During the first half 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 was $2.8 million and $2.6 million for the three months ended July 3, 2010 and June 27, 2009, respectively, and was $6.5 million and $5.3 million for the six months ended July 3, 2010 and June 27, 2009, respectively.
During the first half 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 $2.8 million and $1.8 million for the three months ended July 3, 2010 and June 27, 2009, respectively, and $5.9 million and $3.8 million for the six months ended July 3, 2010 and June 27, 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:
                 
    July 3,   June 27,
    2010   2009
 
Expected stock price volatility
    35.0 %     32.5 %
Expected life
  5.5 yrs   5.2 yrs
Risk-free interest rate
    2.25 %     2.24 %
Dividend yield
    2.20 %     2.82 %
The weighted-average fair value of options granted during the second quarter of 2010 and 2009 were $9.80 and $7.38 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.

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Pentair, Inc. and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
We based the expected life assumption on historical experience as well as the terms and vesting periods of the options granted. For purposes of determining expected volatility, we considered a rolling average of historical volatility measured over a period approximately equal to the expected option term. The risk-free rate for periods that coincide with the expected life of the options is based on the U.S. Treasury Department yield curve in effect at the time of grant.
4. Earnings Per Common Share
Basic and diluted earnings per share were calculated using the following:
                                 
    Three months ended     Six months ended
    July 3,     June 27,     July 3,     June 27,  
In thousands   2010     2009     2010     2009  
     
Weighted average common shares outstanding — basic
    98,208       97,507       98,081       97,445  
Dilutive impact of stock options and restricted stock
    1,430       915       1,354       700  
 
Weighted average common shares outstanding — diluted
    99,638       98,422       99,435       98,145  
 
 
                               
Stock options excluded from the calculation of diluted earnings per share because the exercise price was greater than the average market price of the common shares
    2,886       6,386       4,056       7,157  
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 $6.0 million in the six months ended June 27, 2009.
Restructuring accrual activity recorded on the Condensed Consolidated Balance Sheets is summarized as follows for the six months ended July 3, 2010 and June 27, 2009:
                 
    Six months ended
    July 3,   June 27,
In thousands   2010   2009
 
Beginning balance
  $ 14,509     $ 34,174  
 
Costs incurred
          6,048  
Cash payments and other
    (7,524 )     (22,016 )
 
Ending balance
  $ 6,985     $ 18,206  
 
6. Inventories
     Inventories were comprised of:
                         
    July 3,   December 31,   June 27,
In thousands   2010   2009   2009
 
Raw materials and supplies
  $ 211,254     $ 200,931     $ 196,224  
Work-in-process
    39,532       38,338       45,013  
Finished goods
    138,642       121,358       121,506  
 
Total inventories
  $ 389,428     $ 360,627     $ 362,743  
 

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Pentair, Inc. and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
7. Goodwill and Other Identifiable Intangible Assets
     The changes in the carrying amount of goodwill for the six months ended July 3, 2010 and June 27, 2009 by segment were as follows:
                                 
            Acquisitions/   Foreign Currency    
In thousands   December 31, 2009   Divestitures   Translation/Other   July 3, 2010
 
Water Group
  $ 1,802,913     $     $ (46,050 )   $ 1,756,863  
Technical Products Group
    285,884             (9,683 )     276,201  
 
Consolidated Total
  $ 2,088,797     $     $ (55,733 )   $ 2,033,064  
 
                                 
            Acquisitions/   Foreign Currency    
In thousands   December 31, 2008   Divestitures   Translation/Other   June 27, 2009
 
Water Group
  $ 1,818,470     $ (1,078 )   $ 4,174     $ 1,821,566  
Technical Products Group
    283,381             1,079       284,460  
 
Consolidated Total
  $ 2,101,851     $ (1,078 )   $ 5,253     $ 2,106,026  
 
The detail of acquired intangible assets consisted of the following:
                                                                         
    July 3, 2010   December 31, 2009   June 27, 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
  $ 15,434     $ (12,081 )   $ 3,353     $ 15,458     $ (11,502 )   $ 3,956     $ 15,441     $ (10,729 )   $ 4,712  
 
                                                                       
Proprietary technology
    72,163       (26,426 )     45,737       73,244       (23,855 )     49,389       72,792       (20,719 )     52,073  
 
                                                                       
Customer relationships
    274,077       (71,807 )     202,270       288,122       (66,091 )     222,031       284,397       (56,233 )     228,164  
 
                                                                       
Trade names
    1,494       (299 )     1,195       1,562       (235 )     1,327       1,536       (154 )     1,382  
 
 
                                                                       
Total finite-life intangibles
  $ 363,168     $ (110,613 )   $ 252,555     $ 378,386     $ (101,683 )   $ 276,703     $ 374,166     $ (87,835 )   $ 286,331  
 
                                                                       
Indefinite-life intangibles
                                                                       
 
                                                                       
Trade names
    199,251             199,251       209,704             209,704       218,343             218,343  
 
 
                                                                       
Total intangibles, net
  $ 562,419     $ (110,613 )   $ 451,806     $ 588,090     $ (101,683 )   $ 486,407     $ 592,509     $ (87,835 )   $ 504,674  
 
Intangible asset amortization expense was approximately $6.3 million and $7.3 million for the three months ended July 3, 2010 and June 27, 2009, respectively, and was approximately $11.8 million and $13.4 million for the six months ended July 3, 2010 and June 27, 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 Q3-Q4   2011   2012   2013   2014   2015
 
Estimated amortization expense
  $ 12,425     $ 25,040     $ 24,254     $ 23,856     $ 23,530     $ 23,233  

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Pentair, Inc. and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
8. Debt
 
Debt and the average interest rates on debt outstanding are summarized as follows:
                                         
    Average                
    interest rate   Maturity   July 3,   December 31,   June 27,
In thousands   July 3, 2010   (Year)   2010   2009   2009
 
Revolving credit facilities
    0.97 %     2012     $ 129,400     $ 198,300     $ 278,200  
Private placement — fixed rate
    5.65 %     2013-2017       400,000       400,000       400,000  
Private placement — floating rate
    0.92 %     2012-2013       205,000       205,000       205,000  
Other
    2.60 %     2010-2016       2,555       2,337       6,346  
 
Total contractual debt obligations
                    736,955       805,637       889,546  
 
Total debt, including current portion per balance sheet
                    736,955       805,637       889,546  
Less: Current maturities
                    (163 )     (81 )     (122 )
Short-term borrowings
                    (2,320 )     (2,205 )     (6,143 )
 
Long-term debt
                  $ 734,472     $ 803,351     $ 883,281  
 
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 July 3, 2010, we had no commercial paper outstanding.
Total availability under our existing Credit Facility was $670.6 million as of July 3, 2010, which was not limited by the credit agreement’s leverage ratio covenant as of that date.
In addition to the Credit Facility, we have $40.0 million of uncommitted credit facilities, under which we had $2.3 million of borrowings as of July 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 July 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 July 3, 2010 matures on a calendar year basis as follows:
                                                                 
In thousands   2010 Q3 -Q4   2011   2012   2013   2014   2015   Thereafter   Total
 
Contractual debt obligation maturities
  $ 2,474     $ 32     $ 234,419     $ 200,007     $ 8     $ 8     $ 300,007     $ 736,955  
 

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Pentair, Inc. and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
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.
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 $7.9 million, $8.1 million and $8.5 million at July 3, 2010, December 31, 2009 and June 27, 2009, respectively, and was recorded in Other non-current liabilities on the Condensed Consolidated Balance Sheets.
In September 2005, we entered into a $100 million interest rate swap agreement with several major financial institutions to exchange variable rate interest payment obligations for fixed rate obligations without the exchange of the underlying principal amounts in order to manage interest rate exposures. The effective date of the fixed rate swap was April 25, 2006. The swap agreement has a fixed interest rate of 4.68% and expires in July 2013. The fixed interest rate of 4.68% plus the .60% interest rate spread over LIBOR results in an effective fixed interest rate of 5.28%. The fair value of the swap was a liability of $10.2 million, $8.3 million and $8.3 million at July 3, 2010, December 31, 2009 and June 27, 2009, respectively, and was recorded in Other non-current liabilities on the Condensed Consolidated Balance Sheets.
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 $4.7 million and $3.4 million for the six months ended July 3, 2010 and June 27, 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 July 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 six months ended July 3, 2010 was 33.6% compared to 32.0% for the six months ended June 27, 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.

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Pentair, Inc. and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
The total gross liability for uncertain tax positions at July 3, 2010 was $27.9 million. We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Net interest expense, respectively, on the Condensed Consolidated Statements of Income, which is consistent with our past practices.
11. Benefit Plans
Components of net periodic benefit cost for the three and six months ended July 3, 2010 and June 27, 2009 were as follows:
                                 
    Three months ended
    Pension benefits   Post-retirement
    July 3,   June 27,   July 3,   June 27,
In thousands   2010   2009   2010   2009
 
Service cost
  $ 2,886     $ 3,066     $ 50     $ 53  
Interest cost
    7,887       8,116       503       595  
Expected return on plan assets
    (7,710 )     (7,563 )            
Amortization of transition obligation
    6       14              
Amortization of prior year service cost (benefit)
    8       5       (7 )     (11 )
Recognized net actuarial loss (gains)
    406       17       (823 )     (831 )
 
Net periodic benefit cost
  $ 3,483     $ 3,655     $ (277 )   $ (194 )
 
                                 
            Six months ended        
    Pension benefits   Post-retirement
    July 3,   June 27,   July 3,   June 27,
In thousands   2010   2009   2010   2009
 
Service cost
  $ 5,772     $ 6,133     $ 100     $ 107  
Interest cost
    15,774       16,231       1,006       1,189  
Expected return on plan assets
    (15,420 )     (15,126 )            
Amortization of transition obligation
    12       28              
Amortization of prior year service cost (benefit)
    16       11       (14 )     (21 )
Recognized net actuarial loss (gains)
    812       35       (1,646 )     (1,663 )
 
Net periodic benefit cost
  $ 6,966     $ 7,312     $ (554 )   $ (388 )
 

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Pentair, Inc. and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
12. Business Segments
Financial information by reportable segment for the three and six months ended July 3, 2010 and June 27, 2009 is shown below:
                                 
    Three months ended   Six months ended
    July 3,   June 27,   July 3,   June 27,
In thousands   2010   2009   2010   2009
 
Net sales to external customers
                               
Water Group
  $ 549,318     $ 486,990     $ 1,027,356     $ 910,922  
Technical Products Group
    246,849       206,722       475,824       416,630  
 
Consolidated
  $ 796,167     $ 693,712     $ 1,503,180     $ 1,327,552  
 
 
                               
Intersegment sales
                               
Water Group
  $ 427     $ 198     $ 944     $ 487  
Technical Products Group
    1,047       600       1,750       833  
Intercompany sales eliminations
    (1,474 )     (798 )     (2,694 )     (1,320 )
 
Consolidated
  $ --     $     $ --     $  
 
 
                               
Operating income (loss)
                               
Water Group
  $ 75,954     $ 49,781     $ 118,092     $ 76,757  
Technical Products Group
    37,990       23,578       71,088       44,040  
Unallocated corporate expenses and intercompany eliminations
    (13,818 )     (9,799 )     (25,453 )     (20,023 )
 
Consolidated
  $ 100,126     $ 63,560     $ 163,727     $ 100,774  
 
13. Warranty
The changes in the carrying amount of service and product warranties as of July 3, 2010, December 31, 2009 and June 27, 2009 were as follows:
                         
    July 3,   December 31,   June 27,
In thousands   2010   2009   2009
 
Balance at beginning of the year
  $ 24,288     $ 31,559     $ 31,559  
Service and product warranty provision
    34,296       55,232       28,041  
Payments
    (25,099 )     (62,672 )     (32,833 )
Acquired
          23        
Translation
    (504 )     146       13  
 
Balance at end of the period
  $ 32,981     $ 24,288     $ 26,780  
 
14. Commitments and Contingencies
There have been no further material developments from the disclosures contained in our 2009 Annual Report on Form 10-K.

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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 instability 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,

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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. We have seen some improvement in the Technical Products Group markets in 2010.
Key Trends and Uncertainties
The following trends and uncertainties affected our financial performance in 2009 and the first half 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 in some markets during the first half of 2010 from first half 2009 levels. In response to market conditions during the recession, 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 60% 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 have seen stabilization of order rates since the end of 2009 and anticipate continuing stability, with volume increases in many markets, for the remainder of 2010. We have seen housing construction improvement in the first half of 2010 from historically low levels in 2009, but anticipate some leveling off in that market. 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 in 2009. Order rates and sales stabilized in our industrial and communications businesses somewhat in the fourth quarter of 2009 and first half 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 overall 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. In the first half of 2010, we began to see material and other cost inflation. 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 this cost inflation.
  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. Additionally, in the second quarter of 2010 we made a discretionary contribution of $10 million.
  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. Free cash flow for the first half of 2010 was approximately $128 million, or conversion of 134% of net income compared to $98 million in the first half of 2009. 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 third quarter of 2010, as it did modestly in 2009, but are uncertain of the size and impact of the seasonal spike for the remainder of this period.
  We experienced year over year unfavorable foreign currency effects on net sales and operating results in 2009 and the second quarter 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 six months ended July 3, 2010 was 33.6% compared to 32.0% for the six months ended June 27, 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.

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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 July 29, 2010, we announced our earnings for the second quarter of 2010 of $0.61 per share from continuing operations on a diluted basis. As further noted below, our revenue increased 15% in the quarter from the year-earlier period, with slightly higher growth in our Technical Products segment.
At the same time, we provided earnings guidance for the third quarter and full year 2010. We anticipate that third quarter sales growth will be greater than 10%, compared to the prior year quarter and reported earnings per share on a diluted basis will range from $0.49 to $0.52 in the third 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 adjusted on July 29, 2010 to $1.86 to $1.96 per share on a diluted basis. 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 revenue gains in our businesses as a whole of approximately 10% as a result of improvements in overall market conditions, as well as the benefit from our growth initiatives, which we expect to bring our total revenue to approximately $2.95 billion for the full year. Second, based upon that revenue expectation, we project net earnings of $1.86 to $1.96 per share as a result of higher operating margins due to carryover of productivity gains from our restructuring projects in 2009 and ongoing productivity, 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 we should experience some reduction in interest expense as a result of lower borrowing levels and continuing low interest rates.
Our guidance assumes an absence of significant acquisitions or divestitures in 2010. We continue to look for 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   Six months ended
    July 3,   June 27,                   July 3,   June 27,        
In thousands   2010   2009   $ change   % change   2010   2009   $ change   % change
 
Net sales
  $ 796,167     $ 693,712     $ 102,455       14.8 %   $ 1,503,180     $ 1,327,552     $ 175,628       13.2 %
 
The components of the net sales change in 2010 from 2009 were as follows:
                 
    % Change from 2009
Percentages   Three months ended   Six months ended
 
Volume
    14.6       12.2  
Price
    0.6        
Currency
    (0.4 )     1.0  
 
Total
    14.8       13.2  
 

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Consolidated net sales
The14.8 and 13.2 percentage point increases in consolidated net sales in the second quarter and first half, respectively, of 2010 from 2009 were 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;
  favorable foreign currency effects in the first quarter of 2010; and
  selective increases in selling prices put in place in the second quarter of 2010 to mitigate inflationary cost increases.
These increases were partially offset by:
  unfavorable foreign currency effects in the second quarter of 2010 primarily related to the euro.
Net sales by segment and the change from prior year period were as follows:
                                                                 
    Three months ended   Six months ended
    July 3,   June 27,                   July 3,   June 27,        
In thousands   2010   2009   $ change   % change   2010   2009   $ change   % change
 
Water Group
  $ 549,318     $ 486,990     $ 62,328       12.8 %   $ 1,027,356     $ 910,922     $ 116,434       12.8 %
Technical Product Group
    246,849       206,722       40,127       19.4 %     475,824       416,630       59,194       14.2 %
 
Net sales
  $ 796,167     $ 693,712     $ 102,455       14.8 %   $ 1,503,180     $ 1,327,552     $ 175,628       13.2 %
 
Water Group
The 12.8 percentage point increase in Water Group net sales in each of the second quarter and first half of 2010 from 2009 was primarily driven by:
  organic sales growth of approximately 13.1 percent and 11.7 percent, for the second quarter and first half, respectively, of 2010 (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 sales growth in India, China and in other emerging markets in the Asia-Pacific region as well as Eastern Europe;
  favorable foreign currency effects in the first quarter of 2010; and
  selective increases in selling prices put in place in the second quarter of 2010 to mitigate inflationary cost increases.
These increases were partially offset by:
  unfavorable foreign currency effects in the second quarter of 2010 primarily related to the euro.
Technical Products Group
The 19.4 and 14.2 percentage point increases in Technical Product Group net sales in the second quarter and first half, respectively, of 2010 from 2009 were primarily driven by:
  an increase in sales in industrial, general electronics, infrastructure and energy vertical markets;
  favorable foreign currency effects in the first quarter of 2010; and
  selective increases in selling prices to mitigate inflationary cost increases.
These increases were partially offset by:
  unfavorable foreign currency effects in the second quarter of 2010 primarily related to the euro.

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Gross Profit
                                                                 
    Three months ended   Six months ended
    July 3,   %of   June 27,   %of   July 3,   %of   June 27,   %of
In thousands   2010   sales   2009   sales   2010   sales   2009   sales
 
Gross Profit
  $ 248,168       31.2 %   $ 196,479       28.3 %   $ 461,870       30.7 %   $ 365,711       27.6 %
 
Percentage point change
  2.9 pts   3.1 pts
The 2.9 and 3.1 percentage point increases in gross profit as a percentage of sales in the second quarter and first half, respectively, of 2010 from 2009 were 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;
  savings generated from our Pentair Integrated Management System (“PIMS”) initiatives including lean and supply management practices across both the Water and Technical Products Groups; and
  selective increases in selling prices primarily in our residential and commercial Water businesses and in Technical Products in the second quarter of 2010 to mitigate inflationary cost increases.
These increases were partially offset by:
  inflationary increases related to certain raw materials and labor and related costs.
Selling, general and administrative (SG&A)
                                                                 
    Three months ended   Six months ended
    July 3,   %of   June 27,   %of   July 3,   %of   June 27,   %of
In thousands   2010   sales   2009   sales   2010   sales   2009   sales
 
SG&A
  $ 131,043       16.5 %   $ 119,104       17.1 %   $ 263,933       17.6 %   $ 236,379       17.8 %
 
Percentage point change
  (0.6) pts   (0.2) pts
The 0.6 and 0.2 percentage point decreases in SG&A expense as a percentage of sales in the second quarter and first half, respectively, of 2010 from 2009 were primarily due to:
  reduced costs related to restructuring actions taken throughout 2009 to consolidate facilities and streamline general and administrative costs;
  higher sales volumes which resulted in leverage on the fixed operating expenses; and
  insurance proceeds related to the Horizon litigation received in the second quarter of 2010.
These decreases were partially offset by:
  continued investments in future growth with emphasis on growth in international markets, including personnel and business infrastructure investments.
Research and development (R&D)
                                                                 
    Three months ended   Six months ended
    July 3,   %of   June 27,   %of   July 3,   %of   June 27,   %of
In thousands   2010   sales   2009   sales   2010   sales   2009   sales
 
R&D
  $ 16,999       2.1 %   $ 13,815       2.0 %   $ 34,210       2.2 %   $ 28,558       2.2 %
 
Percentage point change
  0.1 pts   0.0 pts
The 0.1 percentage point increase in R&D expense as a percentage of sales in the second quarter of 2010 from 2009 was primarily due to:
  continued investments in the development of new products to generate growth.

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R&D expense as a percentage of sales in the first half of 2010 was flat compared to 2009.
Operating income
Water Group
                                                                 
    Three months ended   Six months ended
    July 3,   %of   June 27,   %of   July 3,   %of   June 27,   %of
In thousands   2010   sales   2009   sales   2010   sales   2009   sales
 
Operating Income
  $ 75,954       13.8 %   $ 49,781       10.2 %   $ 118,092       11.5 %   $ 76,757       8.4 %
 
Percentage point change
  3.6 pts   3.1 pts
The 3.6 and 3.1 percentage point increases in Water segment operating income as a percentage of net sales in the second quarter and first half, respectively, of 2010 as compared to 2009 were primarily the result of:
  higher gross margins 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;
  savings generated from our PIMS initiatives including lean and supply management practices;
  insurance proceeds related to the Horizon litigation received in the second quarter of 2010; and
  selective increases in selling prices in the second quarter of 2010 to mitigate inflationary cost increases.
These increases were offset by:
  cost increases for certain raw materials and labor as well as reinstatement of certain employee benefits; and
  continued investment in future growth with emphasis on growth in international markets.
Technical Products Group
                                                                 
    Three months ended   Six months ended
    July 3,   %of   June 27,   %of   July 3,   %of   June 27,   %of
In thousands   2010   sales   2009   sales   2010   sales   2009   sales
 
Operating Income
  $ 37,990       15.4 %   $ 23,578       11.4 %   $ 71,088       14.9 %   $ 44,040       10.6 %
 
Percentage point change
  4.0 pts   4.3 pts
The 4.0 and 4.3 percentage point increases in Technical Products Group operating income as a percentage of sales in the second quarter and first half, respectively, of 2010 from 2009 were primarily the result of:
  higher gross margins due to higher sales volumes in the Technical Products Group;
  cost savings from restructuring actions and other personnel reductions taken in response to the economic downturn and resulting volume decline in 2009;
  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 labor as well as reinstatement of certain employee benefits;
  period expenses associated with the consolidation of two manufacturing facilities in the first quarter of 2010; and
  continued investment in future growth with emphasis on growth in international markets, including personnel and business infrastructure investments.

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Net interest expense
                                                                 
    Three months ended   Six months ended
    July 3,   June 27,                   July 3,   June 27,        
In thousands   2010   2009   $change   %change   2010   2009   $change   %change
 
Net interest expense
  $ 8,569     $ 9,833     $ (1,264 )     -12.9 %   $ 18,096     $ 21,617     $ (3,521 )     -16.3 %
 
The 12.9 and 16.3 percentage point decreases in interest expense in the second quarter and first half, respectively, of 2010 from 2009 were primarily the result of:
  the favorable impact of lower debt levels in the second quarter and first half, respectively, of 2010.
Provision for income taxes
                                 
    Three months ended   Six months ended
    July 3,   June 27,   July 3,   June 27,
In thousands   2010   2009   2010   2009
 
Income from continuing operations before income taxes and noncontrolling interest
  $ 92,932     $ 48,644     $ 147,090     $ 73,797  
Provision for income taxes
    31,320       16,217       49,449       23,649  
Effective tax rate
    33.7 %     33.3 %     33.6 %     32.0 %
The 0.4 and 1.6 percentage point increases in the effective tax rate in the second quarter and first half, respectively, of 2010 from 2009 were primarily the result of:
  certain discrete items in the first half of 2009 that did not recur in 2010; and
  the mix of global earnings.
We estimate our effective income tax rate for the remaining quarters of this year will be between 33% and 34% resulting in a full year effective income tax rate of between 33% and 34%.
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; these are temporary loans that have in the past been repaid within less than a year.
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.
Our current $800 million multi-currency revolving credit facility (the “Credit Facility”) expires on June 4, 2012. The agent banks under the Credit Facility are J. P. Morgan, Bank of America, Wells Fargo, U. S. Bank and Bank of Tokyo-Mitsubishi. We have ample borrowing capacity for our currently projected needs (our capacity was $670.6 million at July 3, 2010, which was not limited by the credit agreement’s leverage ratio covenant as of that date).
We experience seasonal cash flows primarily due to seasonal demand in a number of markets within our Water Group. 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 $156.4 million in the first six months of 2010 compared to $125.2 million in the prior year comparable period. The increase in cash provided by operating activities was due primarily to an increase in net income in 2010, partially offset by an increase in working capital.

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Investing activities
Capital expenditures in the first six months for each of 2010 and 2009 were $28.9 million. We currently anticipate capital expenditures for fiscal 2010 will be approximately $55 million to $65 million, primarily for capacity expansions in our low cost country manufacturing facilities, new product development and replacement equipment.
Financing activities
Net cash used for financing activities was $105.9 million in the first six months of 2010 compared with $98.1 million in the prior year period. The increase primarily relates to fluctuations in liquidity. Financing activities included draw downs and repayments on our revolving credit facilities to fund our operations in the normal course of business, payments of dividends, cash received/used for stock issued to employees and tax benefits related to stock-based compensation.
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. 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 believe that internally generated funds and funds available under our Credit Facility will be sufficient to support our normal operations, dividend payments, stock repurchases and debt maturities over the life of the Credit Facility. As of July 3, 2010, we had no commercial paper outstanding.
We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We use the Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. Our use of commercial paper as a funding vehicle depends upon the relative interest rates for our commercial paper compared to the cost of borrowing under our Credit Facility.
In addition to the Credit Facility, we have $40.0 million of uncommitted credit facilities, under which we had $2.3 million of borrowings as of July 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 July 3, 2010.
On March 16, 2009, we announced the redemption of all of our remaining outstanding $133.9 million aggregate principal of the 7.85% Senior Notes due 2009 (the” Notes”) to take advantage of lower interest rates available under the Credit Facility. 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 utilizing funds on hand and drawings under our Credit Facility. No other significant debt obligations mature until 2012. 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.
Our current credit ratings are as follows:
                 
Rating Agency   Long-Term Debt Rating     Current Rating Outlook  
Standard & Poor’s
  BBB-   Stable
Moody’s
  Baa3   Stable
Our long-term debt rating is an investment grade rating. Investment grade is a credit rating of BBB- or higher by Standard & Poor’s or Baa3 or higher by Moody’s.
On March 28, 2010, Standard & Poor’s (“S&P”) affirmed our BBB- rating with a stable outlook. On April 6, 2010, Moody’s affirmed our Baa3 rating and changed our current rating outlook from negative to stable.
We believe the potential impact of a downgrade in our financial outlook is currently not material to our liquidity exposure or cost of debt. A credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program. The credit rating takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The ratings outlook also highlights the potential direction of a short or long-term rating. It focuses on identifiable events and short-term trends that cause ratings to be placed under observation by the respective rating agencies. A change in rating outlook does not mean a rating change is inevitable. Prior changes in our ratings outlook have had no immediate impact on our liquidity exposure or on our cost of debt.
From time to time, we issue short-term commercial paper notes that have not been rated by S&P or Moody’s. Even though our short-term commercial paper is unrated, we believe a downgrade in our long-term debt rating could have a negative impact on our ability to issue unrated commercial paper in the future.
We do not expect that a one rating downgrade of our long-term debt by either S&P or Moody’s would substantially affect our ability to access the long-term debt capital markets. However, depending upon market conditions, the amount, timing and pricing of new borrowings could be adversely

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affected. If both of our long-term debt ratings were downgraded to below BBB-/Baa3, our flexibility to access the term debt capital markets would be reduced.
We expect to continue to have cash requirements to support working capital needs and capital expenditures, to pay interest and service debt, and to pay dividends to shareholders annually and to repurchase shares of our common stock. 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.
We expect to continue to have cash requirements to support working capital needs and capital expenditures, to pay interest and service debt, and to pay dividends to shareholders annually and to repurchase shares of common stock. We have the ability and sufficient capacity to meet these cash requirements, by using available cash and internally generated funds, and to borrow under our committed and uncommitted credit facilities.
Dividends paid in the first six months of 2010 were $37.7 million, or $0.19 per common share, compared with $35.4 million, or $0.18 per common share, in the prior year period. We have increased dividends every year for the last 34 years and expect to continue paying dividends on a quarterly basis.
On July 27, 2010 the Board of Directors authorized the repurchase of shares of our common stock up to a maximum dollar limit of $25 million. The authorization expires in July 2011.
The total gross liability for uncertain tax positions at July 3, 2010 was $27.9 million. We are not able to reasonably estimate the amount by which the estimate will increase or decrease over time; however, at this time, we do not expect a significant payment related to these obligations within the next twelve months.
Other financial measures
In addition to measuring our cash flow generation or usage based upon operating, investing, and financing classifications included in the Condensed Consolidated Statements of Cash Flows, we also measure our free cash flow and our conversion of net income. We have a long-term goal to consistently generate free cash flow that equals or exceeds 100% conversion of net income. Free cash flow and conversion of net income are non-Generally Accepted Accounting Principles financial measures that we use to assess our cash flow performance. We believe free cash flow and conversion of net income are important measures of operating performance because they provide us and our investors a measurement of cash generated from operations that is available to pay dividends and repay debt. In addition, free cash flow and conversion of net income are used as a criterion to measure and pay compensation-based incentives. Our measure of free cash flow and conversion of net income may not be comparable to similarly titled measures reported by other companies. The following table is a reconciliation of free cash flow and a calculation of the conversion of net income with cash flows from continuing operations:
                 
    Six months ended
    July 3,   June 27,
In thousands   2010   2009
 
Net cash provided by (used for) operating activities
  $ 156,414     $ 126,558  
Capital expenditures
    (28,937 )     (28,850 )
Proceeds from sale of property and equipment
    243       563  
 
Free cash flow
    127,720       98,271  
Net income from continuing operations attributable to Pentair, Inc.
    95,285       49,261  
 
Conversion of net income from continuing operations attributable to Pentair, Inc.
    134 %     199 %
 
NEW ACCOUNTING STANDARDS
See Note 2 (New Accounting Standards) of ITEM 1.
CRITICAL ACCOUNTING POLICIES
In our 2009 Annual Report on Form 10-K, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements. We have not changed these policies from those previously disclosed in our Annual Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk during the quarter ended July 3, 2010. For additional information, refer to Item 7A of our 2009 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
(a)   Evaluation of Disclosure Controls and Procedures
 
    We maintain a system of disclosure controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter ended July 3, 2010 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon their evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the quarter ended July 3, 2010 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that information required to be disclosed by us in the reports we file or submit under the

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    Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.
 
(b)   Changes in Internal Controls
 
    There was no change in our internal control over financial reporting that occurred during the quarter ended July 3, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Pentair, Inc.:
Golden Valley, Minnesota
We have reviewed the accompanying condensed consolidated balance sheets of Pentair, Inc. and subsidiaries (the “Company”) as of July 3, 2010 and June 27, 2009, and the related condensed consolidated statements of income for the three-month and six-month periods ended July 3, 2010 and June 27, 2009, and of cash flows and changes in shareholders’ equity for the six-month periods ended July 3, 2010 and June 27, 2009. These interim condensed consolidated financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Pentair, Inc. and subsidiaries as of December 31, 2009, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 23, 2010, we expressed an unqualified opinion, and included an explanatory paragraph related to the Company’s change in its method of accounting for noncontrolling interest, on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2009 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
(SIGNATURE)
Minneapolis, Minnesota
July 29, 2010

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PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
There have been no further material developments from the disclosures contained in our 2009 Annual Report on Form 10-K.
ITEM 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in ITEM 1A. of our 2009 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information with respect to purchases we made of our common stock during the second quarter of 2010:
                                 
                    (c)    
                    Total Number of   (c)
                    Shares   Dollar Value of
    (a)           Purchased as Part of   Shares that
    Total Number of   (b)   Publicly Announced   May Yet Be Purchased
    Shares   Average Price   Plans   Under the Plans or
Period   Purchased   Paid per Share   or Programs   Programs
 
April 4 — May 1, 2010
    8,998     $ 33.21           $ 0  
May 2 — May 29, 2010
    2,863     $ 34.40           $ 0  
May 30 — July 3, 2010
    3,893     $ 36.75           $ 0  
 
Total
    15,754                        
 
(a)   The purchases in this column reflect shares deemed surrendered to us by participants in our Omnibus Stock Incentive Plan and the Outside Directors Nonqualified Stock Option Plan (the “Plans”) to satisfy the exercise price or withholding of tax obligations related to the exercise of stock options and vesting of restricted shares.
 
(b)   The average price paid in this column reflects the per share value of shares deemed surrendered to us by participants in the Plans to satisfy the exercise price for the exercise price of stock options and withholding tax obligations due upon stock option exercises and vesting of restricted shares.
 
(c)   On July 27, 2010 the Board of Directors authorized the repurchase of shares of our common stock up to a maximum dollar limit of $25 million. The authorization expires in July 2011.

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ITEM 6. Exhibits
(a) Exhibits
     
10.1
  Pentair, Inc. 2008 Omnibus Stock Incentive Plan, as amended and restated through February 23, 2010 (incorporated by reference to the Appendix A contained in Pentair’s proxy statement for its 2010 annual meeting of shareholders).
 
   
15
  Letter Regarding Unaudited Interim Financial Information.
 
   
31.1
  Certification of Chief Executive Officer.
 
   
31.2
  Certification of Chief Financial Officer.
 
   
32.1
  Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
101
  The following materials from Pentair, Inc.’s Quarterly Report on Form 10-Q for the quarter ended July 3, 2010 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income for the three and six months ended July 3, 2010 and June 27, 2009, (ii) the Condensed Consolidated Balance Sheets as July 3, 2010, December 31, 2009 and June 27, 2009, (iii) the Condensed Consolidated Statements of Cash Flows for the six months ended July 3, 2010 and June 27, 2009, (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended July 3, 2010 and June 27, 2009, and (v) Notes to Condensed Consolidated Financial Statements.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on July 29, 2010.
         
  PENTAIR, INC.
Registrant
 
 
  By  /s/ John L. Stauch    
    John L. Stauch   
    Executive Vice President and Chief Financial Officer   
 
     
  By  /s/ Mark C. Borin      
    Mark C. Borin   
    Corporate Controller and Chief Accounting Officer   
 

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Exhibit Index to Form 10-Q for the Period Ended July 3, 2010
     
10.1
  Pentair, Inc. 2008 Omnibus Stock Incentive Plan, as amended and restated through February 23, 2010 (incorporated by reference to the Appendix A contained in Pentair’s proxy statement for its 2010 annual meeting of shareholders).
 
   
15
  Letter Regarding Unaudited Interim Financial Information.
 
   
31.1
  Certification of Chief Executive Officer.
 
   
31.2
  Certification of Chief Financial Officer.
 
   
32.1
  Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
101
  The following materials from Pentair, Inc.’s Quarterly Report on Form 10-Q for the quarter ended July 3, 2010 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income for the three and six months ended July 3, 2010 and June 27, 2009, (ii) the Condensed Consolidated Balance Sheets as July 3, 2010, December 31, 2009 and June 27, 2009, (iii) the Condensed Consolidated Statements of Cash Flows for the six months ended July 3, 2010 and June 27, 2009, (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended July 3, 2010 and June 27, 2009, and (v) Notes to Condensed Consolidated Financial Statements.

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