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 March 31, 2007

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

Pentair, Inc.

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

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large accelerated filer þ Accelerated filer o Non-accelerated filer o

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

On April 27, 2007, 99,789,104 shares of the Registrant’s common stock were outstanding.

 

 

Pentair, Inc. and Subsidiaries

				Page(s)
PART I FINANCIAL INFORMATION
ITEM 1.		Financial Statements
		Condensed Consolidated Statements of Income for the three months ended March 31, 2007 and April 1, 2006			3
		Condensed Consolidated Balance Sheets as of March 31, 2007, December 31, 2006 and April 1, 2006			4
		Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and April 1, 2006			5
		Notes to Condensed Consolidated Financial Statements			6 – 21
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22 – 29
ITEM 3.		Quantitative and Qualitative Disclosures about Market Risk			29
ITEM 4.		Controls and Procedures			30
		Report of Independent Registered Public Accounting Firm			31
PART II OTHER INFORMATION
ITEM 1.		Legal Proceedings			32
ITEM 1A.		Risk Factors			32
ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds			33
ITEM 6.		Exhibits			34
		Signature			35
Third Restated Articles of Incorporation
Fourth Amended and Superseding By-Laws
Letter Regarding Unaudited Interim Financial Information
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Pentair, Inc. and Subsidiaries

		Three months ended
		March 31				April 1
In thousands, except per-share data		2007				2006
Net sales		$	807,995			$	771,389
Cost of goods sold			570,592				548,881
Gross profit			237,403				222,508
Selling, general and administrative			142,300				129,089
Research and development			14,950				14,863
Operating income			80,153				78,556
Net interest expense			15,120				13,284
Income from continuing operations before income taxes			65,033				65,272
Provision for income taxes			22,903				22,201
Income from continuing operations			42,130				43,071
Gain (loss) on disposal of discontinued operations, net of tax			143				(1,451	)
Net income		$	42,273			$	41,620
Earnings (loss) per common share
Basic
Continuing operations		$	0.43			$	0.43
Discontinued operations			—				(0.01	)
Basic earnings per common share		$	0.43			$	0.42
Diluted
Continuing operations		$	0.42			$	0.42
Discontinued operations			—				(0.01	)
Diluted earnings per common share		$	0.42			$	0.41
Weighted average common shares outstanding
Basic			98,966				100,493
Diluted			100,271				102,492
Cash dividends declared per common share		$	0.15			$	0.14

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

		March 31				December 31				April 1
In thousands, except share and per-share data		2007				2006				2006
Assets
Current assets
Cash and cash equivalents		$	64,230			$	54,820			$	50,237
Accounts and notes receivable, net			532,792				422,134				520,968
Inventories			413,178				398,857				375,619
Deferred tax assets			52,198				50,578				44,432
Prepaid expenses and other current assets			41,907				31,239				28,921
Total current assets			1,104,305				957,628				1,020,177
Property, plant and equipment, net			351,211				330,372				314,164
Other assets
Goodwill			1,830,359				1,718,771				1,723,952
Intangibles, net			384,933				287,011				262,829
Other			69,505				71,197				67,561
Total other assets			2,284,797				2,076,979				2,054,342
Total assets		$	3,740,313			$	3,364,979			$	3,388,683
Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings		$	16,003			$	14,563			$	—
Current maturities of long-term debt			8,257				7,625				4,246
Accounts payable			208,713				206,286				206,528
Employee compensation and benefits			85,741				88,882				75,536
Current pension and post-retirement benefits			7,918				7,918				—
Accrued product claims and warranties			42,766				44,093				42,238
Income taxes			13,525				22,493				27,195
Accrued rebates and sales incentives			31,293				39,419				23,353
Other current liabilities			91,402				90,003				94,418
Total current liabilities			505,618				521,282				473,514
Other liabilities
Long-term debt			1,056,495				721,873				888,015
Pension and other retirement compensation			213,512				207,676				158,535
Post-retirement medical and other benefits			47,401				47,842				73,812
Long-term income taxes payable			14,412				—				—
Deferred tax liabilities			111,106				109,781				123,663
Other non-current liabilities			85,912				86,526				76,452
Total liabilities			2,034,456				1,694,980				1,793,991
Commitments and contingencies
Shareholders’ equity
Common shares par value $0.16 2/3; 99,777,660, 99,777,165 and 101,642,814 shares issued and outstanding, respectively			16,629				16,629				16,940
Additional paid-in capital			484,376				488,540				524,904
Retained earnings			1,172,459				1,148,126				1,048,374
Accumulated other comprehensive income			32,393				16,704				4,474
Total shareholders’ equity			1,705,857				1,669,999				1,594,692
Total liabilities and shareholders’ equity		$	3,740,313			$	3,364,979			$	3,388,683

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and Subsidiaries

		Three months ended
		March 31				April 1
In thousands		2007				2006
Operating activities
Net income		$	42,273			$	41,620
Adjustments to reconcile net income to net cash used for operating activities
(Gain) loss on disposal of discontinued operations			(143	)			1,451
Depreciation			15,523				15,230
Amortization			4,900				4,258
Deferred income taxes			(355	)			2,483
Stock compensation			6,218				6,646
Excess tax benefits from stock-based compensation			(1,063	)			(2,532	)
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable			(99,387	)			(95,541	)
Inventories			(6,381	)			(25,379	)
Prepaid expenses and other current assets			(8,770	)			(4,258	)
Accounts payable			7,886				(4,041	)
Employee compensation and benefits			(13,081	)			(23,528	)
Accrued product claims and warranties			(1,403	)			(1,363	)
Income taxes			(1,448	)			10,717
Other current liabilities			(7,638	)			(26,140	)
Pension and post-retirement benefits			4,033				4,477
Other assets and liabilities			1,167				3,550
Net cash used for continuing operations			(57,669	)			(92,350	)
Net cash provided by operating activities of discontinued operations			—				48
Net cash used for operating activities			(57,669	)			(92,302	)
Investing activities
Capital expenditures			(18,865	)			(9,054	)
Proceeds from sale of property and equipment			1,329				79
Acquisitions, net of cash acquired			(230,581	)			(2,158	)
Divestitures			—				(24,007	)
Other			—				(2,150	)
Net cash used for investing activities			(248,117	)			(37,290	)
Financing activities
Net short-term borrowings			1,234				—
Proceeds from long-term debt			345,190				272,906
Repayment of long-term debt			(10,250	)			(133,051	)
Proceeds from exercise of stock options			1,762				2,577
Repurchases of common stock			(9,280	)			—
Excess tax benefits from stock-based compensation			1,063				2,532
Dividends paid			(15,022	)			(14,224	)
Net cash provided by financing activities			314,697				130,740
Effect of exchange rate changes on cash and cash equivalents			499				589
Change in cash and cash equivalents			9,410				1,737
Cash and cash equivalents, beginning of period			54,820				48,500
Cash and cash equivalents, end of period		$	64,230			$	50,237

See accompanying notes to condensed consolidated financial statements.

Pentair, Inc. and subsidiaries

1. Basis of Presentation and Responsibility for Interim Financial Statements

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

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

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

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

2. New Accounting Standards

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

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

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

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

3. Stock-based Compensation

Total stock-based compensation expense for the first quarter of 2007 and 2006 was $6.2 million and $6.6 million, respectively.

Non-vested shares of our common stock were granted during the first quarter of 2007 and 2006 to eligible employees with a vesting period of two to five years after issuance. Non-vested share awards are valued at market value on the date of grant and are typically expensed over the vesting period. Total compensation expense for non-vested share awards during the first quarter of 2007 and 2006 was $2.8 million and $2.3 million, respectively.

During the first quarter of 2007, option awards were granted under the Omnibus Stock Incentive Plan and the Outside Directors Nonqualified Stock Option Plan (together the “Plans”), each with an exercise price equal to the market price of our common stock on the date of grant. Prior to 2006, option grants under the Plans typically had a reload feature when shares were retired to pay the exercise price, allowing individuals to receive additional options upon exercise equal to the number of shares retired. Option awards granted after 2005 under the Plans do not have a reload feature attached to the option. The options vest one-third each year over a three-year period and have a ten-year contractual term. Compensation expense equal to the grant date fair value is recognized for these awards typically over the vesting period. No option grants were reloaded during the quarter for individuals retiring shares to pay the exercise price of options granted prior to 2006. Reload options are vested and expensed immediately. Total compensation expense for stock option awards was $3.4 and $4.3 million for the first quarter of 2007 and 2006, respectively.

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

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:

		March 31				April 1
		2007				2006
Expected stock price volatility			28.5	%			31.5	%
Expected life		4.8 yrs.				4.5 yrs.
Risk-free interest rate			4.66	%			4.56	%
Dividend yield			1.95	%			1.44	%

The weighted-average fair value of options granted during the first quarter of 2007 and 2006 was $8.29 and $11.49 per share, respectively.

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

We based the expected life assumption on historical experience as well as the terms and vesting periods of the options granted. For purposes of determining expected volatility, we considered a rolling-average of historical volatility measured over a period approximately equal to the expected option term. The risk-free rate for periods that coincide with the expected life of the options is based on the 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
		March 31				April 1
In thousands, except per-share data		2007				2006
Earnings (loss) per common share — basic
Continuing operations		$	42,130			$	43,071
Discontinued operations			143				(1,451	)
Net income		$	42,273			$	41,620
Continuing operations		$	0.43			$	0.43
Discontinued operations			—				(0.01	)
Basic earnings per common share		$	0.43			$	0.42
Earnings (loss) per common share — diluted
Continuing operations		$	42,130			$	43,071
Discontinued operations			143				(1,451	)
Net income		$	42,273			$	41,620
Continuing operations		$	0.42			$	0.42
Discontinued operations			—				(0.01	)
Diluted earnings per common share		$	0.42			$	0.41
Weighted average common shares outstanding — basic			98,966				100,493
Dilutive impact of stock options and restricted stock			1,305				1,999
Weighted average common shares outstanding — diluted			100,271				102,492
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			3,675				2,079

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

5. Acquisitions

On April 30, 2007, we acquired as part of our Water Group all of the capital interests in Porous Media, a privately held filtration and separation technologies business, for $225.0 million, excluding transaction costs and subject to a post-closing net asset value adjustment. Porous Media’s product portfolio includes high-performance filter media, membranes and related filtration products and purification systems for liquids, gases and solids for general industrial, petrochemical, refining and healthcare market segments among others. We announced the Porous Media acquisition on March 6, 2007.

On February 2, 2007, we acquired as part of our Water Group all the outstanding shares of capital stock of Jung Pumpen GmbH (“Jung”) for $230.2 million, including a cash payment of $239.9 million and transaction costs of $0.7 million, less cash acquired of $10.4 million. The purchase price is subject to a post-closing net asset value adjustment. Jung is a leading German manufacturer of wastewater products for municipal and residential markets. Jung brings us its strong application engineering expertise and a complementary product offering, including a new line of water re-use products, submersible wastewater and drainage pumps, wastewater disposal units and tanks. Jung also brings to Pentair its well-established European presence, a state-of-the-art training facility in Germany, and sales offices in Germany, Austria, France, Hungary, Poland and Slovakia. Goodwill recorded as part of the initial purchase price allocation was $103.2 million, of which approximately $53 million is tax deductible. We continue to evaluate the purchase price allocation for the Jung acquisition, including intangible assets, contingent liabilities, and property, plant and equipment. We expect to revise the purchase price allocation as better information becomes available.

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

During 2006, we completed several other small acquisitions totaling $14.2 million in cash and notes payable, adding to both our Water and Technical Products Groups. Total goodwill recorded as part of the initial purchase price allocations was $7.9 million, of which $2.9 million is tax deductible. We continue to evaluate the purchase price allocations for these acquisitions and expect to revise the purchase price allocations as better information becomes available.

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

		Three months ended
		March 31				April 1
In thousands, except per-share data		2007				2006
Pro forma net sales from continuing operations		$	814,171			$	795,334
Pro forma net income from continuing operations			42,403				43,933
Pro forma earnings per common share — continuing operations
Basic		$	0.43			$	0.44
Diluted		$	0.42			$	0.43
Weighted average common shares outstanding
Basic			98,966				100,493
Diluted			100,271				102,492

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

6. Discontinued Operations

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

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

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

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

		Three months ended
		March 31				April 1
In thousands		2007				2006
Gain (loss) on disposal of discontinued operations		$	225			$	(3,254	)
Income tax (expense) benefit			(82	)			1,803
Gain (loss) on disposal of discontinued operations, net of tax		$	143			$	(1,451	)

7. Inventories

Inventories were comprised of:

		March 31				December 31				April 1
In thousands		2007				2006				2006
Raw materials and supplies		$	193,049			$	186,508			$	162,274
Work-in-process			56,978				55,141				49,590
Finished goods			163,151				157,208				163,755
Total inventories		$	413,178			$	398,857			$	375,619

8. Comprehensive Income

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

		Three months ended
		March 31				April 1
In thousands		2007				2006
Net income		$	42,273			$	41,620
Changes in cumulative foreign currency translation adjustment			15,926				3,897
Changes in market value of derivative financial instruments classified as cash flow hedges			(237	)			1,563
Comprehensive income		$	57,962			$	47,080

9. Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the three months ended March 31, 2007 by segment were as follows:

						Technical
In thousands		Water				Products				Consolidated
Balance at December 31, 2006		$	1,449,460			$	269,311			$	1,718,771
Acquired			100,841				—				100,841
Purchase accounting adjustments			748				(198	)			550
Foreign currency translation			5,584				4,613				10,197
Balance at March 31, 2007		$	1,556,633			$	273,726			$	1,830,359

The acquired goodwill relates to the Jung acquisition. The purchase accounting adjustments recorded during the first quarter of 2007 related to the Krystil Klear acquisition and other small acquisitions. We finalized our purchase price allocation for the Krystil Klear acquisition during the first quarter of 2007.

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

Intangible assets, other than goodwill, were comprised of:

		March 31, 2007												December 31, 2006												April 1, 2006
		Gross												Gross												Gross
		carrying				Accum.								carrying				Accum.								carrying				Accum.
In thousands		amount				amort				Net				amount				amort				Net				amount				amort				Net
Finite-life intangibles
Patents		$	15,437			$	(6,475	)		$	8,962			$	15,433			$	(6,001	)		$	9,432			$	15,455			$	(4,589	)		$	10,866
Non-compete agreements			4,022				(3,031	)			991				4,343				(3,091	)			1,252				3,940				(2,276	)			1,664
Proprietary technology			45,834				(9,056	)			36,778				45,755				(8,240	)			37,515				51,378				(6,195	)			45,183
Customer relationships			157,992				(18,403	)			139,589				110,616				(15,924	)			94,692				87,525				(10,077	)			77,448
Total finite-life intangibles		$	223,285			$	(36,965	)		$	186,320			$	176,147			$	(33,256	)		$	142,891			$	158,298			$	(23,137	)		$	135,161
Indefinite-life intangibles
Brand names		$	198,613			$	—			$	198,613			$	144,120			$	—			$	144,120			$	127,668			$	—			$	127,668
Total intangibles, net										$	384,933											$	287,011											$	262,829

Intangible asset amortization expense for the three months ended March 31, 2007 and April 1, 2006 was approximately $3.7 million and $3.2 million, respectively. The estimated future amortization expense for identifiable intangible assets during the remainder of 2007 and the next five years is as follows:

In thousands		2007 Q2 - Q4				2008				2009				2010				2011				2012
Estimated amortization expense		$	12,301			$	15,417			$	15,172			$	14,660			$	14,451			$	13,538

10. Debt

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

		Average
		interest rate				Maturity				March 31				December 31				April 1
In thousands		March 31, 2007				(Year)				2007				2006				2006
Commercial paper, maturing within 54 days			5.75	%						$	243,267			$	208,882			$	166,261
Revolving credit facilities			5.78	%			2010				325,673				25,000				230,600
Private placement — fixed rate			5.50	%			2007 - 2013				135,000				135,000				135,000
Private placement — floating rate			5.96	%			2013				100,000				100,000				100,000
Senior notes			7.85	%			2009				250,000				250,000				250,000
Other			4.17	%			2007 - 2016				23,900				21,972				6,318
Total contractual debt obligations											1,077,840				740,854				888,179
Interest rate swap monetization deferred income											2,915				3,207				4,082
Total debt, including current portion per balance sheet											1,080,755				744,061				892,261
Less: Current maturities											(8,257	)			(7,625	)			(4,246	)
Short-term borrowings											(16,003	)			(14,563	)			—
Long-term debt										$	1,056,495			$	721,873			$	888,015

We have a multi-currency revolving Credit Facility (the “Credit Facility”) of $800 million expiring on March 4, 2010. The interest rate on the loans under the Credit Facility is 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. As of March 31, 2007, we had $243.3 million of commercial paper outstanding that matures within 54 days. All of the commercial paper was classified as long-term as we have the intent and the ability to refinance such obligations on a long-term basis under the Credit Facility.

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

We were in compliance with all debt covenants as of March 31, 2007.

We have $35 million of outstanding private placement debt maturing in May 2007. We classified this debt as long-term as of March 31, 2007 as we have the intent and ability to refinance such obligation on a long-term basis under the Credit Facility.

In addition to the Credit Facility, we have $25 million of uncommitted credit facilities, under which we had $16.0 million outstanding as of March 31, 2007.

Debt outstanding at March 31, 2007 matures on a calendar year basis as follows:

In thousands		2007 Q2-Q4				2008				2009				2010				2011				2012				Thereafter				Total
Contractual debt obligation maturities		$	22,050			$	1,290			$	250,255			$	604,135			$	75			$	6			$	200,029			$	1,077,840
Other maturities			874				1,166				875				—				—				—				—				2,915
Total maturities		$	22,924			$	2,456			$	251,130			$	604,135			$	75			$	6			$	200,029			$	1,080,755

11. Derivatives and Financial Instruments

Cash-flow hedges

In September 2005, we entered into a $100 million interest rate swap agreement with several major financial institutions to exchange variable rate interest payment obligations for fixed rate obligations without the exchange of the underlying principle amounts in order to manage interest rate exposures. The effective date of the fixed rate swap was April 25, 2006. The swap agreement has a fixed interest rate of 4.68% and expires in July 2013. The fixed interest rate of 4.68% plus the .60% interest rate spread over LIBOR, results in an effective fixed interest rate of 5.28%. The fair value of the swap was an asset of $1.4 million at March 31, 2007 and is recorded in Other assets.

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

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

The treasury rate lock agreement was designated as and was effective as a cash-flow hedge. The treasury rate lock agreement was settled at an interest rate of 4.67% and the corresponding settlement benefit of $0.5 million will be included in OCI in our Condensed Consolidated Balance Sheets, and will be recognized in earnings over the life of the debt after issuance. The agreement had no value at March 31, 2007.

12. Income Taxes

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

The effective income tax rate for the three months ended March 31, 2007 was 35.2% compared to 34.0% for the three months ended April 1, 2006. The first quarter 2006 effective tax included a $0.9 million favorable adjustment related to a prior year tax return. We expect the effective tax rate for the remainder of 2007 to be between 35.0% and 35.5%, resulting in a full year effective income tax rate of between 35.0% and 35.5%. However, we continue to actively pursue initiatives to reduce our effective tax rate. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.

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

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

We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Net interest expense, respectively, which is consistent with our past practices. As of January 1, 2007, we had recorded approximately $.3 million for the possible payment of penalties and $1.5 million related to the possible payment of interest.

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

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

During the first quarter of 2007, our total liability for unrecognized tax benefits did not materially increase or decrease. It is reasonably possible that this gross liability for unrecognized tax benefits will decrease by $2.0 million during the next twelve months as a result of audits and the expiration of statutes of limitations in various jurisdictions.

13. Benefit Plans

Components of net periodic benefit cost for the three months ended March 31, 2007 and April 1, 2006 were as follows:

		Three months ended
		Pension benefits								Post-retirement
		March 31				April 1				March 31				April 1
In thousands		2007				2006				2007				2006
Service cost		$	4,331			$	4,512			$	146			$	184
Interest cost			7,891				7,343				746				799
Expected return on plan assets			(7,133	)			(6,974	)			—				—
Amortization of transition obligation			35				31				—				—
Amortization of prior year service cost (benefit)			40				77				(62	)			(59	)
Recognized net actuarial loss			799				1,009				(355	)			(212	)
Net periodic benefit cost		$	5,963			$	5,998			$	475			$	712

14. Business Segments

Financial information by reportable segment for the three months ended March 31, 2007 and April 1, 2006 is shown below:

		Three months ended
		March 31				April 1
In thousands		2007				2006
Net sales to external customers
Water		$	555,412			$	517,169
Technical Products			252,583				254,220
Consolidated		$	807,995			$	771,389
Intersegment sales
Water		$	214			$	50
Technical Products			896				889
Other			(1,110	)			(939	)
Consolidated		$	—			$	—
Operating income (loss)
Water		$	60,879			$	55,587
Technical Products			31,631				37,704
Other			(12,357	)			(14,735	)
Consolidated		$	80,153			$	78,556

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

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

15. Warranty

The changes in the carrying amount of service and product warranties for the three months ended March 31, 2007 and April 1, 2006 were as follows:

		March 31				April 1
In thousands		2007				2006
Balance at beginning of the year		$	34,093			$	33,551
Service and product warranty provision			12,233				9,415
Payments			(14,752	)			(10,777	)
Acquired			1,116				—
Translation			76				49
Balance at end of the period		$	32,766			$	32,238

16. Commitments and Contingencies

Environmental and Litigation

There have been no further material developments from the disclosures contained in our 2006 Annual Report on Form 10-K.

Horizon Litigation

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

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

The only remaining unresolved claims in this case were those brought by Celebrity for damages resulting from the outbreak. Celebrity filed an amended complaint seeking attorney fees and costs for prior litigation as well as out-of-pocket losses, lost profits, and loss of business enterprise value. On June 28, 2006, a jury returned a verdict against the Essef defendants in the total amount of $193.0 million for its claims for out-of-pocket expenses ($10.4 million), lost profits ($47.6 million) and lost enterprise value ($135.0 million). The verdict was exclusive of pre-judgment interest and attorneys’ fees.

On January 17, 2007, the Court ruled on our post-trial motions, granting judgment in our favor as a matter of law with respect to Celebrity’s claim for lost enterprise value ($135.0 million). The Court also granted a new trial with respect to lost profits ($47.6 million). In addition, the Court denied without prejudice our claim for contribution to reduce Celebrity’s recovery by 30% to account for its contributory negligence, with leave to renew the motion following retrial. The trial of this matter has been scheduled for June 2007.

Celebrity’s claim for lost profits at trial amounted to approximately $60 million. We believe that actual lost profits suffered, if any, are substantially less. In a new trial, there remain questions of causation, contribution and proof of damages to be determined. We intend to vigorously defend against Celebrity’s claims. We cannot predict whether Celebrity will appeal the ruling on lost enterprise value, nor whether and to what extent Essef may eventually be found liable on Celebrity’s claims.

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

We believe that any judgment we pay in this matter would be tax-deductible in the year paid or in subsequent years. In addition to the impact of any loss on this matter on our earnings per share when recognized, we may need to borrow funds from our banks or other sources to pay any judgment finally determined after exhaustion of all appeals. We expect that we would have available adequate funds to allow us to do so, based on discussions with our lending sources and our estimates of the results of our business operations over the foreseeable future.

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

17. Financial Statements of Subsidiary Guarantors

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

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
For the three months ended March 31, 2007

		Parent				Guarantor				Non-Guarantor
In thousands		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Net sales		$	—			$	639,591			$	212,432			$	(44,028	)		$	807,995
Cost of goods sold			—				457,197				157,015				(43,620	)			570,592
Gross profit			—				182,394				55,417				(408	)			237,403
Selling, general and administrative			4,204				99,249				39,255				(408	)			142,300
Research and development			—				11,507				3,443				—				14,950
Operating (loss) income			(4,204	)			71,638				12,719				—				80,153
Net interest (income) expense			(14,044	)			29,715				(551	)			—				15,120
Income from continuing operations before income taxes			9,840				41,923				13,270				—				65,033
Provision for income taxes			3,416				15,009				4,478				—				22,903
Income from continuing operations			6,424				26,914				8,792				—				42,130
Gain on disposal of discontinued operations, net of tax			143				—				—				—				143
Net income		$	6,567			$	26,914			$	8,792			$	—			$	42,273

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

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
March 31, 2007

		Parent				Guarantor				Non-Guarantor
In thousands		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets
Current assets
Cash and cash equivalents		$	6,980			$	4,830			$	52,420			$	—			$	64,230
Accounts and notes receivable, net			174				405,288				173,584				(46,254	)			532,792
Inventories			—				290,739				122,439				—				413,178
Deferred tax assets			97,313				34,212				6,232				(85,559	)			52,198
Prepaid expenses and other current assets			16,047				12,571				28,845				(15,556	)			41,907
Total current assets			120,514				747,640				383,520				(147,369	)			1,104,305
Property, plant and equipment, net			4,500				208,644				138,067				—				351,211
Other assets
Investments in subsidiaries			2,224,447				61,357				386,539				(2,672,343	)			—
Goodwill			—				1,469,309				361,050				—				1,830,359
Intangibles, net			—				258,108				126,825				—				384,933
Other			74,651				13,631				6,603				(25,380	)			69,505
Total other assets			2,299,098				1,802,405				881,017				(2,697,723	)			2,284,797
Total assets		$	2,424,112			$	2,758,689			$	1,402,604			$	(2,845,092	)		$	3,740,313
Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings		$	—			$	—			$	16,003			$	—			$	16,003
Current maturities of long-term debt			1,167				257				284,178				(277,345	)			8,257
Accounts payable			4,956				153,312				102,185				(51,740	)			208,713
Employee compensation and benefits			9,942				39,559				36,240				—				85,741
Current pension and retirement medical benefits			7,918				—				—				—				7,918
Accrued product claims and warranties			—				27,225				15,541				—				42,766
Income taxes			327				8,628				4,570				—				13,525
Accrued rebates and sales incentives			—				25,898				5,395				—				31,293
Other current liabilities			22,516				48,764				29,456				(9,334	)			91,402
Total current liabilities			46,826				303,643				493,568				(338,419	)			505,618
Other liabilities
Long-term debt			1,017,017				1,786,863				57,081				(1,804,466	)			1,056,495
Pension and other retirement compensation			124,496				28,245				60,771				—				213,512
Post-retirement medical and other benefits			22,795				49,986				—				(25,380	)			47,401
Long-term income taxes payable			14,412				—				—				—				14,412
Deferred tax liabilities			3,123				161,359				32,183				(85,559	)			111,106
Due to / (from) affiliates			(540,814	)			102,947				525,319				(87,452	)			—
Other non-current liabilities			30,400				7,157				48,355				—				85,912
Total liabilities			718,255				2,440,200				1,217,277				(2,341,276	)			2,034,456
Shareholders’ equity			1,705,857				318,489				185,327				(503,816	)			1,705,857
Total liabilities and shareholders’ equity		$	2,424,112			$	2,758,689			$	1,402,604			$	(2,845,092	)		$	3,740,313

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

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 2007

		Parent				Guarantor				Non-Guarantor
In thousands		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Operating activities
Net income		$	6,567			$	26,914			$	8,792			$	—			$	42,273
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Gain on disposal of discontinued operations			(143	)			—				—				—				(143	)
Depreciation			300				10,234				4,989				—				15,523
Amortization			931				2,942				1,027				—				4,900
Deferred income taxes			(498	)			—				143				—				(355	)
Stock compensation			6,218				—				—				—				6,218
Excess tax benefit from stock-based compensation			(1,063	)			—				—				—				(1,063	)
Intercompany dividends			(24	)			24				—				—				—
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable			11,062				(88,833	)			(23,553	)			1,937				(99,387	)
Inventories			—				(7,051	)			670				—				(6,381	)
Prepaid expenses and other current assets			16,481				7,984				(26,213	)			(7,022	)			(8,770	)
Accounts payable			(9,300	)			(2,133	)			21,290				(1,971	)			7,886
Employee compensation and benefits			(5,312	)			(8,943	)			1,174				—				(13,081	)
Accrued product claims and warranties			—				(1,729	)			326				—				(1,403	)
Income taxes			(1,806	)			6,942				(6,584	)			—				(1,448	)
Other current liabilities			(10,134	)			(12,625	)			8,060				7,061				(7,638	)
Pension and post-retirement benefits			2,468				681				884				—				4,033
Other assets and liabilities			(1,348	)			1,412				1,103				—				1,167
Net cash provided by (used for) continuing operations			14,399				(64,181	)			(7,892	)			5				(57,669	)
Net cash provided by (used for) operating activities of discontinued operations			(143	)			—				143				—				—
Net cash provided by (used for) operating activities			14,256				(64,181	)			(7,749	)			5				(57,669	)
Investing activities
Capital expenditures			(46	)			(8,411	)			(10,408	)			—				(18,865	)
Proceeds from sale of property and equipment			—				747				582				—				1,329
Acquisitions, net of cash acquired			(229,903	)			—				(678	)			—				(230,581	)
Investment in subsidiaries			(98,247	)			70,464				27,788				(5	)			—
Net cash (used for) provided by investing activities			(328,196	)			62,800				17,284				(5	)			(248,117	)
Financing activities
Net short-term borrowings (repayments)			—				(51	)			1,285				—				1,234
Proceeds from long-term debt			345,190				—				—				—				345,190
Repayment of long-term debt			(10,250	)			—				—				—				(10,250	)
Proceeds from exercise of stock options			1,762				—				—				—				1,762
Repurchases of common stock			(9,280	)			—				—				—				(9,280	)
Excess tax benefits from stock-based compensation			1,063				—				—				—				1,063
Dividends paid			(15,022	)			—				—				—				(15,022	)
Net cash provided by financing activities			313,463				(51	)			1,285				—				314,697
Effect of exchange rate changes on cash			(1,353	)			(288	)			2,140				—				499
Change in cash and cash equivalents			(1,830	)			(1,720	)			12,960				—				9,410
Cash and cash equivalents, beginning of period			8,810				6,550				39,460				—				54,820
Cash and cash equivalents, end of period		$	6,980			$	4,830			$	52,420			$	—			$	64,230

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

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
For the three months ended April 1, 2006

		Parent				Guarantor				Non-Guarantor
In thousands		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Net sales		$	—			$	633,060			$	181,285			$	(42,956	)		$	771,389
Cost of goods sold			125				459,223				132,073				(42,540	)			548,881
Gross profit			(125	)			173,837				49,212				(416	)			222,508
Selling, general and administrative			6,221				93,541				29,743				(416	)			129,089
Research and development			—				11,784				3,079				—				14,863
Operating (loss) income			(6,346	)			68,512				16,390				—				78,556
Net interest (income) expense			(15,532	)			29,786				(970	)			—				13,284
Income from continuing operations before income taxes			9,186				38,726				17,360				—				65,272
Provision for income taxes			3,192				13,036				5,973				—				22,201
Income from continuing operations			5,994				25,690				11,387				—				43,071
Loss on disposal of discontinued operations, net of tax			(1,451	)			—				—				—				(1,451	)
Net income		$	4,543			$	25,690			$	11,387			$	—			$	41,620