Edgar Filing: PENTAIR INC

e10vq

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


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


	Page(s)
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)

Condensed Consolidated Statements of Income for the three and six months ended July 3, 2010 and June 27, 2009		3

Condensed Consolidated Balance Sheets as of July 3, 2010, December 31, 2009 and June 27, 2009		4

Condensed Consolidated Statements of Cash Flows for the six months ended July 3, 2010 and June 27, 2009		5

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended July 3, 2010 and June 27, 2009		6

Notes to Condensed Consolidated Financial Statements		7 - 13

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14 - 22

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk		22

ITEM 4. Controls and Procedures		22

Report of Independent Registered Public Accounting Firm		24

PART II OTHER INFORMATION

ITEM 1. Legal Proceedings		25

ITEM 1A. Risk Factors		25

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		25

ITEM 6. Exhibits		26

Signatures		27
EX-15
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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.

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.

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.

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.

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.

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

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

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

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.

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	)

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.


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,

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.

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

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.

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.

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.

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.

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.

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

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

		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.

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.

Minneapolis, Minnesota
July 29, 2010

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.

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.

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

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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