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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 28, 2008
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-04689
Pentair, Inc.
 
(Exact name of Registrant as specified in its charter)
     
Minnesota   41-0907434
     
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification number)
     
5500 Wayzata Blvd, Suite 800, Golden Valley, Minnesota   55416
     
(Address of principal executive offices)   (Zip code)
Registrant’s telephone number, including area code: (763) 545-1730
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o  Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o Noþ
On June 28, 2008, 98,919,004 shares of Registrant’s common stock were outstanding.
 
 

 


 

Pentair, Inc. and Subsidiaries
             
        Page(s)  
PART I FINANCIAL INFORMATION        
 
           
  Financial Statements (unaudited)     3  
 
           
  Condensed Consolidated Statements of Income for the three and six months ended June 28, 2008 and June 30, 2007     3  
 
           
 
  Condensed Consolidated Balance Sheets as of June 28, 2008, December 31, 2007 and June 30, 2007     4  
 
           
 
  Condensed Consolidated Statements of Cash Flows for the six months ended June 28, 2008 and June 30, 2007     5  
 
           
 
  Notes to Condensed Consolidated Financial Statements     6–21  
 
           
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     22–30  
 
           
  Quantitative and Qualitative Disclosures about Market Risk     31  
 
           
  Controls and Procedures     31  
 
           
 
  Report of Independent Registered Public Accounting Firm     32  
 
           
PART II OTHER INFORMATION     33  
 
           
  Legal Proceedings     33  
 
           
  Risk Factors     33  
 
           
  Unregistered Sales of Equity Securities and Use of Proceeds     34  
 
           
  Submission of Matters to a Vote of Security Holders     35  
 
           
  Exhibits     36  
 
           
 
  Signature     37  
 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

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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Pentair, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
                                 
    Three months ended   Six months ended
    June 28   June 30   June 28   June 30
In thousands, except per-share data   2008   2007   2008   2007
 
Net sales
  $ 909,757     $ 899,299     $ 1,750,161     $ 1,692,144  
Cost of goods sold
    631,695       619,750       1,220,768       1,176,664  
 
Gross profit
    278,062       279,549       529,393       515,480  
Selling, general and administrative
    146,311       151,881       284,957       291,363  
Research and development
    16,314       14,808       32,180       29,758  
Legal settlement
    20,435             20,435        
 
Operating income
    95,002       112,860       191,821       194,359  
Other (income) expense:
                               
Gain on sale of interest in subsidiaries
    (109,648 )           (109,648 )      
Equity losses of unconsolidated subsidiary
    847       36       1,764       993  
Net interest expense
    15,862       18,483       31,950       33,194  
 
Income from continuing operations before income taxes
    187,941       94,341       267,755       160,172  
Provision for income taxes
    49,206       33,348       76,376       56,550  
 
Income from continuing operations
    138,735       60,993       191,379       103,622  
Income (loss) from discontinued operations, net of tax
          1,008       (1,217 )     509  
Gain (loss) on disposal of discontinued operations, net of tax
          64       (7,137 )     207  
 
Net income
  $ 138,735     $ 62,065     $ 183,025     $ 104,338  
 
 
                               
Earnings (loss) per common share
                               
Basic
                               
Continuing operations
  $ 1.41     $ 0.62     $ 1.95     $ 1.04  
Discontinued operations
          0.01       (0.09 )     0.01  
 
Basic earnings per common share
  $ 1.41     $ 0.63     $ 1.86     $ 1.05  
 
 
                               
Diluted
                               
Continuing operations
  $ 1.39     $ 0.61     $ 1.92     $ 1.03  
Discontinued operations
          0.01       (0.08 )     0.01  
 
Diluted earnings per common share
  $ 1.39     $ 0.62     $ 1.84     $ 1.04  
 
 
                               
Weighted average common shares outstanding
                               
Basic
    98,062       98,874       98,172       98,915  
Diluted
    99,509       100,371       99,462       100,294  
 
                               
Cash dividends declared per common share
  $ 0.17     $ 0.15     $ 0.34     $ 0.30  
See accompanying notes to condensed consolidated financial statements.

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Pentair, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
                         
    June 28   December 31   June 30
In thousands, except share and per-share data   2008   2007   2007
 
Assets
                       
Current assets
                       
Cash and cash equivalents
  $ 74,616     $ 70,795     $ 52,016  
Accounts and notes receivable, net
    558,928       466,675       523,941  
Inventories
    437,421       392,416       395,330  
Deferred tax assets
    51,961       50,511       51,621  
Prepaid expenses and other current assets
    46,213       35,908       41,605  
Current assets of discontinued operations
          21,716       31,750  
 
Total current assets
    1,169,139       1,038,021       1,096,263  
 
                       
Property, plant and equipment, net
    379,471       365,990       352,853  
 
                       
Other assets
                       
Goodwill
    2,158,229       2,004,720       1,924,208  
Intangibles, net
    558,451       491,263       503,663  
Other
    78,732       82,237       77,821  
Non-current assets of discontinued operations
          18,383       18,436  
 
Total other assets
    2,795,412       2,596,603       2,524,128  
 
Total assets
  $ 4,344,022     $ 4,000,614     $ 3,973,244  
 
 
                       
Liabilities and Shareholders’ Equity
                       
Current liabilities
                       
Short-term borrowings
  $ 217     $ 13,586     $ 10,202  
Current maturities of long-term debt
    4,442       5,075       4,516  
Accounts payable
    238,656       229,937       211,504  
Employee compensation and benefits
    98,816       111,475       95,960  
Current pension and post-retirement benefits
    8,557       8,557       7,918  
Accrued product claims and warranties
    47,528       49,382       48,867  
Income taxes
    18,115       12,919       20,322  
Accrued rebates and sales incentives
    36,687       36,663       42,075  
Other current liabilities
    130,431       90,377       93,948  
Current liabilities of discontinued operations
          2,935       9,616  
 
Total current liabilities
    583,449       560,906       544,928  
 
                       
Other liabilities
                       
Long-term debt
    1,024,160       1,041,925       1,173,184  
Pension and other retirement compensation
    171,923       161,042       218,420  
Post-retirement medical and other benefits
    35,095       37,147       46,806  
Long-term income taxes payable
    24,442       21,306       14,705  
Deferred tax liabilities
    189,214       167,633       110,412  
Other non-current liabilities
    95,544       97,086       87,949  
Non-current liabilities of discontinued operations
          2,698       2,546  
 
Total liabilities
    2,123,827       2,089,743       2,198,950  
 
                       
Commitments and contingencies
                       
 
                       
Minority interest
    122,960              
 
                       
Shareholders’ equity
                       
Common shares par value $0.16 2/3; 98,919,004, 99,221,831 and 99,969,848 shares issued and outstanding, respectively
    16,483       16,537       16,662  
Additional paid-in capital
    465,141       476,242       493,114  
Retained earnings
    1,445,504       1,296,226       1,219,555  
Accumulated other comprehensive income
    170,107       121,866       44,963  
 
Total shareholders’ equity
    2,097,235       1,910,871       1,774,294  
 
Total liabilities and shareholders’ equity
  $ 4,344,022     $ 4,000,614     $ 3,973,244  
 
See accompanying notes to condensed consolidated financial statements.

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Pentair, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
                 
    Six months ended
    June 28   June 30
In thousands   2008   2007
 
Operating activities
               
Net income
  $ 183,025     $ 104,338  
Adjustments to reconcile net income to net cash provided by (used for) operating activities
               
(Income) loss from discontinued operations
    1,217       (509 )
(Gain) loss on disposal of discontinued operations
    7,137       (207 )
Equity losses of unconsolidated subsidiary
    1,764       993  
Depreciation
    30,795       30,043  
Amortization
    13,101       12,952  
Deferred income taxes
    21,037       (6,476 )
Stock compensation
    11,932       12,626  
Excess tax benefits from stock-based compensation
    (776 )     (2,213 )
Gain on sale of assets
    (443 )      
Gain on sale of interest in subsidiaries
    (109,648 )      
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
               
Accounts and notes receivable
    (85,203 )     (84,466 )
Inventories
    (20,300 )     8,040  
Prepaid expenses and other current assets
    (7,852 )     (3,465 )
Accounts payable
    11,044       10,308  
Employee compensation and benefits
    (18,482 )     (4,915 )
Accrued product claims and warranties
    (2,298 )     4,561  
Income taxes
    4,131       5,157  
Other current liabilities
    31,261       2,525  
Pension and post-retirement benefits
    3,320       7,730  
Other assets and liabilities
    4,986       2,554  
 
Net cash provided by (used for) continuing operations
    79,748       99,576  
Net cash provided by ( used for) operating activities of discontinued operations
    (4,137 )     (1,660 )
 
Net cash provided by (used for) operating activities
    75,611       97,916  
 
               
Investing activities
               
Capital expenditures
    (26,328 )     (30,058 )
Proceeds from sale of property and equipment
    3,802       1,526  
Acquisitions, net of cash acquired or received
    6,237       (482,885 )
Divestitures
    29,959        
Other
          (779 )
 
Net cash provided by (used for) investing activities
    13,670       (512,196 )
 
               
Financing activities
               
Net short-term borrowings
    (13,965 )     (4,708 )
Proceeds from long-term debt
    279,405       1,121,402  
Repayment of long-term debt
    (297,740 )     (673,341 )
Debt issuance costs
    (50 )     (1,782 )
Excess tax benefits from stock-based compensation
    776       2,213  
Proceeds from exercise of stock options
    2,175       4,922  
Repurchases of common stock
    (21,721 )     (9,280 )
Dividends paid
    (33,747 )     (29,991 )
 
Net cash provided by (used for) financing activities
    (84,867 )     409,435  
 
               
Effect of exchange rate changes on cash and cash equivalents
    (593 )     2,041  
 
Change in cash and cash equivalents
    3,821       (2,804 )
Cash and cash equivalents, beginning of period
    70,795       54,820  
 
Cash and cash equivalents, end of period
  $ 74,616     $ 52,016  
 
See accompanying notes to condensed consolidated financial statements.

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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
1. Basis of Presentation and Responsibility for Interim Financial Statements
We prepared the unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States can be condensed or omitted.
We are responsible for the unaudited financial statements included in this document. The financial statements include all normal recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. As these are condensed financial statements, one should also read our consolidated financial statements and notes thereto, which are included in our 2007 Annual Report on Form 10-K for the year ended December 31, 2007.
Certain line items within the 2007 Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Cash Flows have been reclassified from the 2007 presentation to conform to the 2008 presentation. The reclassification reflects the presentation of Equity losses of unconsolidated subsidiary of $0.1 and $1.0 for the three and six months ended June 30, 2007, respectively, and as a separate line item below Operating income in the Condensed Consolidated Statements of Income rather than as a component of Selling, general and administrative, and as a separate line in the Adjustments to reconcile net income to net cash used for operating activities in the Condensed Consolidated Statements of Cash Flows, rather than as a component of Other assets and liabilities. This reclassification corrects the previous presentation and was not material to the financial statements. It did not affect Net income within the Condensed Consolidated Statements of Income or net cash provided by (used for) operating, investing or financing activities within the Condensed Consolidated Statements of Cash Flows.
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 March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB statement No. 133 (“SFAS 161”). SFAS 161 expands the disclosure requirements in Statement 133 about an entity’s derivative instruments and hedging activities. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the impact of adopting FAS 161.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51 (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, except for the presentation and disclosure requirements, which will apply retrospectively. We are currently evaluating the impact of adopting FAS 160 on our consolidated results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R replaces SFAS No. 141. SFAS 141R retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. SFAS 141R also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We will apply SFAS 141R prospectively to business combinations completed on or after that date. There will be no impact upon adoption to our current 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 (“the Fair Value Option”). SFAS 159 is effective for fiscal years beginning after November 15, 2007. We did not choose the Fair Value Option; therefore, the adoption of SFAS 159 did not have any impact on our consolidated results of operations and financial condition.
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, with the exception of the application of the statement to the determination of fair value of nonfinancial assets and liabilities that are recognized or disclosed on a nonrecurring basis, which is effective for fiscal years beginning after November 15, 2008.

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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based upon our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
At June 28, 2008, our interest rate swaps (see note 12) 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.
3. Stock-based Compensation
Total stock-based compensation expense was $5.5 million and $6.4 million for the three months ended June 28, 2008 and June 30, 2007, respectively, and was $11.9 million and $12.6 million for the six months ended June 28, 2008 and June 30, 2007, respectively.
Non-vested shares of our common stock were granted 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 second quarter of 2008 and 2007 was $2.4 million and $2.6 million for the three months ended June 28, 2008 and June 30, 2007, respectively, and was $5.5 million and $5.4 million for the six months ended June 28, 2008 and June 30, 2007, respectively.
During the first half of 2008, option awards were granted under the Omnibus Stock Incentive Plan, the 2008 Omnibus Stock Incentive Plan, as amended, 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. Total compensation expense for stock option awards was $3.1 and $3.8 million for the three months ended June 28, 2008 and June 30, 2007, respectively, and was $6.4 million and $7.2 million for the six months ended June 28, 2008 and June 30, 2007, 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:
                 
    June 28   June 30
    2008   2007
 
Expected stock price volatility
    27.0 %     28.5 %
Expected life
    4.8 yrs     4.8 yrs
Risk-free interest rate
    3.16 %     4.76 %
Dividend yield
    1.91 %     1.74 %
The weighted-average fair value of options granted during the second quarter of 2008 and 2007 was $7.38 and $8.34 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 (revised 2004), Share Based Payment, (“SFAS 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.

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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
4. Earnings Per Common Share
Basic and diluted earnings per share were calculated using the following:
                                 
    Three months ended   Six months ended
    June 28   June 30   June 28   June 30
In thousands   2008   2007   2008   2007
     
Weighted average common shares outstanding — basic
    98,062       98,874       98,172       98,915  
Dilutive impact of stock options and restricted stock
    1,447       1,497       1,290       1,379  
 
Weighted average common shares outstanding — diluted
    99,509       100,371       99,462       100,294  
 
 
                               
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
    2,177       2,163       3,719       3,150  
In December 2007, the Board of Directors authorized the repurchase of shares of our common stock during 2008 up to a maximum dollar limit of $50 million. As of June 28, 2008, we had purchased 654,118 shares for $22.4 million pursuant to this authorization during 2008. This authorization expires on December 31, 2008.
5. Restructuring
During the second quarter of 2008, we announced and initiated certain business restructuring initiatives to further streamline our operations as a result of continuing deterioration in certain end markets. In relation to these initiatives, we recorded restructuring charges (reflected in selling, general and administrative expense on the accompanying Consolidated Statement of Income) of $2.7 million primarily for severance benefits paid or to be paid to terminated employees, the majority of which has been paid.
6. Acquisitions
On June 28, 2008, we entered into a transaction with GE Water & Process Technologies (a unit of General Electric Company) (“GE”) that was accounted for as an acquisition of an 80.1 percent ownership interest in GE’s global water softener and residential water filtration business in exchange for a 19.9 percent interest in our global water softener and residential water filtration business (the “GE Transaction”). The acquisition was effected through the formation of two new entities, a U.S. entity and an international entity, into which we and GE contributed certain assets, properties, liabilities and operations representing our respective global water softener and residential water filtration businesses. We are an 80.1 percent owner of the new entities and GE is a 19.9 percent owner. The fair value of the acquisition was $226.0 million. The acquisition and related sale of our 19.9 percent interest resulted in a gain of $109.6 million ($85.8 million after tax), representing the difference between the carrying amount of the 19.9 percent interest sold and the fair value of our share of the acquired business.
With the formation of this business, we will be better positioned to serve residential customers with industry-leading technical applications in the areas of water conditioning, whole house filtration, point of use water management and water sustainability and expected to accelerate revenue growth by selling GE’s existing residential conditioning products through our sales channels.
The fair value of the business acquired was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value acquired over the identifiable assets acquired and liabilities assumed is reflected as goodwill. Goodwill recorded as part of the purchase price allocation was $129.8 million, all of which is tax deductible. We continue to evaluate the purchase price allocation, including tangible and intangible assets, which primarily consist of trademarks, proprietary technology and customer relationships, contingent liabilities and liabilities associated with exit or disposal activities, and expect to revise the purchase price allocation in future periods as these estimates are finalized. The following table represents the preliminary purchase price allocation:
         
In thousands        
 
Inventory
  $ 16,988  
Property, plant & equipment
    12,965  
Goodwill
    129,750  
Identifiable intangible assets
    66,483  
Current liabilities
    (224 )
 
       
 
  $ 225,962  
 
       
On May 7, 2007, we acquired as part of our Technical Products Group the assets of Calmark Corporation (“Calmark”). Calmark’s results of operations have been included in our condensed consolidated financial statements since the date of acquisition.

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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
On April 30, 2007, we acquired as part of our Water Group all of the capital interests in Porous Media Corporation and Porous Media, Ltd. (together, “Porous Media”). Porous Media’s results of operations have been included in our condensed consolidated financial statements since the date of acquisition.
The following pro forma condensed financial results of operations are presented as if the acquisitions described above had been completed at the beginning of the period.
                                 
    Three months ended   Six months ended
    June 28   June 30   June 28   June 30
In thousands, except share and per-share data   2008   2007   2008   2007
 
Pro forma net sales from continuing operations
  $ 939,341     $ 920,824     $ 1,804,634     $ 1,759,166  
Pro forma net income from continuing operations
    138,735       60,993       191,379       103,436  
Income (loss) from discontinued operations, net of tax
          1,072       (8,354 )     716  
Pro forma net income
    138,735       62,065       183,025       104,152  
Pro forma earnings per common share — continuing operations
                               
Basic
  $ 1.41     $ 0.62     $ 1.95     $ 1.05  
Diluted
  $ 1.39     $ 0.61     $ 1.92     $ 1.03  
 
                               
Weighted average common shares outstanding
                               
Basic
    98,062       98,874       98,172       98,915  
Diluted
    99,509       100,371       99,462       100,294  
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.
7. Discontinued Operations
In February 2008, consistent with our strategy to refine our portfolio and more fully focus on our growing core pool equipment business globally within our Water Group, we sold our National Pool Tile (“NPT”) business to Pool Corporation in a cash transaction for approximately $30.0 million subject to certain price adjustments. NPT is a wholesale distributor of pool tile and composite pool finishes serving professional contractors in the swimming pool refurbish and construction markets. The results of NPT have been reported as discontinued operations for all periods presented. The assets and liabilities of NPT have been reclassified as discontinued operations for all periods presented.
Operating results of the discontinued operations for the second quarter of 2008 and 2007 are summarized below:
                                 
    Three months ended   Six months ended
    June 28   June 30   June 28   June 30
In thousands   2008   2007   2008   2007
 
Net sales
      $ 23,346     $ 7,085     $ 38,496  
Income (loss) from discontinued operations before income taxes
          1,619       (1,965 )     821  
Income tax (expense) benefit
          (611 )     748       (312 )
 
Income (loss) from discontinued operations, net of income taxes
          1,008       (1,217 )     509  
Gain (loss) on disposal of discontinued operations, before taxes
          100       (6,588 )     325  
Income tax expense
          (36 )     (549 )     (118 )
 
Gain (loss) on disposal of discontinued operations, net of tax
      $ 64     $ (7,137 )   $ 207  
 

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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Net assets (liabilities) of discontinued operations consist of the following:
                 
    December 31   June 30
In thousands   2007   2007
 
Accounts and notes receivable, net
  $ 5,547     $ 9,203  
Inventories
    14,710     20,678  
Other current assets
    1,459     1,869  
 
Current assets of discontinued operations
    21,716       31,750  
Property, plant and equipment, net
    1,436       1,469  
Goodwill
    16,806       16,806  
Other non-current assets
    141       161  
 
Non-current assets of discontined operations
    18,383       18,436  
 
Total assets
  $ 40,099     $ 50,186  
 
Accounts payable
  $ 1,712     $ 7,647  
Other current liabilities
    1,223       1,969  
 
Current liabilities of discontined operations
    2,935       9,616  
Deferred income tax
    2,400       2,203  
Other non-current liabilities
    298       343  
 
Non-current liabilities of discontined operations
    2,698       2,546  
 
Total liabilities
    5,633       12,162  
 
Net assets of discontinued operations
  $ 34,466     $ 38,024  
 
8. Inventories
Inventories were comprised of:
                         
    June 28   December 31   June 30
In thousands   2008   2007   2007
 
Raw materials and supplies
  $ 216,002     $ 199,330     $ 198,651  
Work-in-process
    52,660       51,807       55,133  
Finished goods
    168,759       141,279       141,546  
 
Total inventories
  $ 437,421     $ 392,416     $ 395,330  
 
9. Comprehensive Income
Comprehensive income and its components, net of tax, were as follows:
                                 
    Three months ended   Six months ended
    June 28   June 30   June 28   June 30
In thousands   2008   2007   2008   2007
 
Net income
  $ 138,735     $ 62,065     $ 183,025     $ 104,338  
Changes in cumulative foreign currency translation adjustment
    (933 )     11,021       46,887       26,947  
Changes in market value of derivative financial instruments classified as cash flow hedges
    5,872       1,548       1,354       1,311  
 
Comprehensive income
  $ 143,674     $ 74,634     $ 231,266     $ 132,596  
 
10. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the six months ended June 28, 2008 and June 30, 2007 by segment were as follows:
                                 
                    Foreign Currency    
In thousands   December 31, 2007   Acquisitions   Translation   June 28, 2008
 
Water Group
  $ 1,712,227     $ 130,210     $ 21,824     $ 1,864,261  
Technical Products Group
    292,493       (46 )     1,521       293,968  
 
Consolidated Total
  $ 2,004,720     $ 130,164     $ 23,345     $ 2,158,229  
 

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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
                                 
                    Foreign Currency    
In thousands   December 31, 2006   Acquisitions   Translation   June 30, 2007
 
Water Group
  $ 1,432,653     $ 196,980     $ 7,454     $ 1,637,087  
Technical Products Group
    269,311       11,421       6,389       287,121  
 
Consolidated Total
  $ 1,701,964     $ 208,401     $ 13,843     $ 1,924,208  
 
The increase in goodwill in the Water Group is related primarily to the GE Transaction in 2008 and our acquisition of Jung Pump during 2007.
Intangible assets, other than goodwill, were comprised of:
                                                                         
    June 28, 2008   December 31, 2007   June 30, 2007
    Gross                   Gross                   Gross        
    carrying   Accumulated           carrying   Accumulated           carrying   Accumulated    
In thousands   amount   amortization   Net   amount   amortization   Net   amount   amortization   Net
 
Finite-life intangibles
                                                                       
Patents
  $ 15,478     $ (8,863 )   $ 6,615     $ 15,457     $ (7,904 )   $ 7,553     $ 15,443     $ (6,949 )   $ 8,494  
Non-compete agreements
    4,722       (4,316 )     406       4,722       (4,050 )     672       4,722       (3,322 )     1,400  
Brand names
    1,602             1,602                                      
Proprietary technology
    73,996       (15,052 )     58,944       59,944       (12,564 )     47,380       53,538       (9,997 )     43,541  
Customer relationships
    296,372       (39,015 )     257,357       238,712       (30,378 )     208,334       256,316       (23,449 )     232,867  
 
Total finite-life intangibles
  $ 392,170     $ (67,246 )   $ 324,924     $ 318,835     $ (54,896 )   $ 263,939     $ 330,019     $ (43,717 )   $ 286,302  
 
 
                                                                       
Indefinite-life intangibles
                                                                       
Brand names
    233,527             233,527       227,324             227,324       217,361             217,361  
 
 
                                                                       
Total intangibles, net
  $ 625,697     $ (67,246 )   $ 558,451     $ 546,159     $ (54,896 )   $ 491,263     $ 547,380     $ (43,717 )   $ 503,663  
 
Intangible asset amortization expense was approximately $5.9 million and $7.1 million for the three months ended June 28, 2008 and June 30, 2007, respectively, and was approximately $12.4 million and $10.9 million for the six months ended June 28, 2008 and June 30, 2007 respectively. The estimated future amortization expense for identifiable intangible assets during the remainder of 2008 and the next five years is as follows:
                                                 
In thousands   2008 Q3-Q4   2009   2010   2011   2012   2013
 
Estimated amortization expense
  $ 13,419     $ 26,161     $ 25,488     $ 25,381     $ 24,374     $ 24,210  
11. Debt
Debt and the average interest rate on debt outstanding are summarized as follows:
                                         
    Average                
    interest rate   Maturity   June 28   December 31   June 30
In thousands   June 28, 2008   (Year)   2008   2007   2007
 
Commercial paper, maturing within 34 days
    2.90 %           $ 49,383     $ 105,990     $ 215,019  
Revolving credit facilities
    2.96 %     2012       116,500       76,722       98,453  
Private placement — fixed rate
    5.65 %     2013-2017       400,000       400,000       400,000  
Private placement — floating rate
    3.37 %     2012-2013       205,000       205,000       205,000  
Senior notes
    7.85 %     2009       250,000       250,000       250,000  
Other
    3.02 %     2008-2016       6,478       20,387       16,336  
 
Total contractual debt obligations
                    1,027,361       1,058,099       1,184,808  
Deferred income related to swaps
                    1,458       2,487       3,094  
 
Total debt, including current portion per balance sheet
                    1,028,819       1,060,586       1,187,902  
Less: Current maturities
                    (4,442 )     (5,075 )     (4,516 )
Short-term borrowings
                    (217 )     (13,586 )     (10,202 )
 
Long-term debt
                  $ 1,024,160     $ 1,041,925     $ 1,173,184  
 

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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
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 will bear interest at the rate of LIBOR plus 0.50%. 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 June 28, 2008, we had $49.4 million of commercial paper outstanding that matures within 34 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.
Total availability under our existing Credit Facility was $609.1 million at June 28, 2008.
In addition to the Credit Facility, we have $25.0 million of uncommitted credit facilities, under which we had no borrowings as of June 28, 2008.
We were in compliance with all debt covenants as of June 28, 2008.
Debt outstanding at June 28, 2008 matures on a calendar year basis as follows:
                                                                 
In thousands   2008 Q3-Q4   2009   2010   2011   2012   2013   Thereafter   Total
 
Contractual debt obligation maturities
  $ 2,847     $ 250,721     $ 72     $ 6     $ 273,685     $ 200,007     $ 300,023     $ 1,027,361  
Other maturities
    583       875                                     1,458  
 
Total maturities
  $ 3,430     $ 251,596     $ 72     $ 6     $ 273,685     $ 200,007     $ 300,023     $ 1,028,819  
 
On July 8, 2008, we announced the commencement of a cash tender offer for all of the outstanding $250 million aggregate principal 7.85% Senior Notes due 2009 (‘the Notes”). The tender offer is being made pursuant to an Offer to Purchase and related Letter of Transmittal dated July 8, 2008, which sets forth more fully the terms and conditions of the tender offer, including a minimum tender condition and other general conditions. On July 17, 2008, we amended the tender offer to increase the effective tender price and remove the minimum tender condition. We intend to use the available capacity under our Credit Facility to fund the purchase of the Notes.
12. Derivatives and Financial Instruments
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 principle 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 $3.4.million at June 28, 2008 and is recorded in Other non-current liabilities.
In September 2005, we entered into a $100 million interest rate swap agreement with several major financial institutions to exchange variable rate interest payment obligations for fixed rate obligations without the exchange of the underlying 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 a liability of $2.3 million at June 28, 2008 and is recorded in Other non-current liabilities.
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 Consolidated Balance Sheets, with changes in their fair value included in Accumulated 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.
13. 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 June 28, 2008 was 28.5% compared to 35.3% for the six months ended June 30, 2007. We expect the effective tax rate for the remainder of 2008 to be between 33% and 34%, resulting in a full year effective income tax rate of between 30.0% and 31.0%. We continue to actively pursue initiatives to reduce our effective tax rate. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.
The total gross liability for uncertain tax positions under FASB Interpretation No. (“FIN”) 48 at June 28, 2008 is estimated to be approximately $24.4 million. We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Net interest expense, respectively, which is consistent with our past practices.

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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
14. Benefit Plans
Components of net periodic benefit cost for the three and six months ended June 28, 2008 and June 30, 2007 were as follows:
                                 
    Three months ended
    Pension benefits   Post-retirement
    June 28   June 30   June 28   June 30
In thousands   2008   2007   2008   2007
 
Service cost
  $ 3,529     $ 4,331     $ 65     $ 146  
Interest cost
    8,174       7,891       634       746  
Expected return on plan assets
    (7,475 )     (7,133 )            
Amortization of transition obligation
    12       36              
Amortization of prior year service cost (benefit)
    44       40       (34 )     (62 )
Recognized net actuarial loss (gains)
    68       798       (825 )     (355 )
 
Net periodic benefit cost
  $ 4,352     $ 5,963     $ (160 )   $ 475  
 
                                 
    Six months ended
    Pension benefits   Post-retirement
    June 28   June 30   June 28   June 30
In thousands   2008   2007   2008   2007
 
Service cost
  $ 7,058     $ 8,662     $ 130     $ 292  
Interest cost
    16,348       15,782       1,268       1,492  
Expected return on plan assets
    (14,950 )     (14,266 )            
Amortization of transition obligation
    24       72              
Amortization of prior year service cost (benefit)
    88       80       (68 )     (124 )
Recognized net actuarial loss (gains)
    136       1,596       (1,650 )     (710 )
 
Net periodic benefit cost
  $ 8,704     $ 11,926     $ (320 )   $ 950  
 
15. Business Segments
Financial information by reportable segment for the three and six months ended June 28, 2008 and June 30, 2007 is shown below:
                                 
    Three months ended Six months ended
    June 28   June 30   June 28   June 30
In thousands   2008   2007   2008   2007
 
Net sales to external customers
                               
Water Group
  $ 605,497     $ 642,149     $ 1,160,441     $ 1,182,411  
Technical Products Group
    304,260       257,150       589,720       509,733  
 
Consolidated
  $ 909,757     $ 899,299     $ 1,750,161     $ 1,692,144  
 
 
                               
Intersegment sales
                               
Water Group
  $ 139     $ 46     $ 511     $ 260  
Technical Products Group
    1,034       1,689       2,172       2,585  
Other
    (1,173 )     (1,735 )     (2,683 )     (2,845 )
 
Consolidated
  $     $     $     $  
 
 
                               
Operating income (loss)
                               
Water Group
  $ 57,822     $ 89,195     $ 122,241     $ 151,621  
Technical Products Group
    49,732       36,140       95,069       67,771  
Other
    (12,552 )     (12,475 )     (25,489 )     (25,033 )
 
Consolidated
  $ 95,002     $ 112,860     $ 191,821     $ 194,359  
 
Other sales and operating loss is primarily composed of unallocated corporate expenses, costs related to our captive insurance subsidiary and our intermediate finance companies, and intercompany eliminations.

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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
16. Warranty
The changes in the carrying amount of service and product warranties for the six months ended June 28, 2008 and June 30, 2007 were as follows:
                 
    June 28   June 30
In thousands   2008   2007
 
Balance at beginning of the year
  $ 39,382     $ 34,093  
Service and product warranty provision
    33,726       34,907  
Payments
    (36,024 )     (31,462 )
Acquired
    184       1,116  
Translation
    260       213  
 
Balance at end of the period
  $ 37,528     $ 38,867  
 
17. Commitments and Contingencies
Environmental and Litigation
There have been no further material developments from the disclosures contained in our 2007 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 and certain of its subsidiaries (the “Essef Defendants”) 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 in July 1994.
The remaining 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. The first trial in 2006 resulted in a verdict against the Essef Defendants for Celebrity’s out-of-pocket expenses of $10.4 million. Verdicts for lost profits ($47.6 million) and lost enterprise value ($135 million) were reversed in January 2007. In the retrial in June 2007, the jury awarded Celebrity damages for lost profits for 1994 and 1995 of $15.2 million (after netting for amounts taken into account by the earlier verdict for out-of-pocket expenses). The verdicts were exclusive of pre-judgment interest and attorneys’ fees.
In February 2008, the District Court entered judgment against the Essef Defendants in the aggregate amount of $30.4 million for out-of-pocket costs and expenses and lost profits, including interest accrued to February 29, 2008. On March 28, 2008, Celebrity filed a notice of appeal to the Second Circuit Court of Appeals. The Essef Defendants filed their notice of cross-appeal on April 10, 2008.
In late June 2008, the parties agreed to settle the outstanding claims for a total of $35 million, inclusive of all costs and interest to the date of payment. A Settlement Agreement and Release was entered into on July 8, 2008 pursuant to which we will pay Celebrity approximately $28 million no later than August 7, 2008. The first layer excess liability insurer with respect to this claim will pay Celebrity the balance of its policy limits, which is approximately $7 million. With those payments, the case will be closed.
We have assessed the impact of the final judgment and appeals on our previously established reserves for this matter and have increased the accruals as of June 28, 2008 by approximately $20 million to an aggregate of $28 million.
We have identified an additional insurance policy that we believe applies to this liability. The insurer has denied coverage, and we have initiated suit to recover for our loss in the Horizon case. The increase in our accruals discussed above does not take into account any potential recovery under this additional insurance policy.
We believe that this settlement amount will be tax-deductible in 2008. We will borrow the amount of the settlement payment of $28 million under our Credit Facility.
18. 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 June 28, 2008, December 31, 2007 and June 30, 2007, the related Condensed Consolidated Statements of Income for the three and six-months ended June 28, 2008 and June 30, 2007, and Statements of Cash Flows for the six-months ended June 28, 2008 and June 30, 2007, for the Parent Company, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries, and total consolidated Pentair and subsidiaries. Net change in advances to subsidiaries in the following 2007 Condensed Consolidated Statements of Cash Flows has been reclassified from investing activities to financing activities to conform to the current year presentation. The following condensed financial statements also reflect a change in the presentation of the earnings from investments in subsidiary as previously disclosed in our 2007 footnote.

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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 June 28, 2008
                                         
    Parent   Guarantor   Non-Guarantor        
In thousands   Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
 
Net sales
  $     $ 691,424     $ 285,110     $ (66,777 )   $ 909,757  
Cost of goods sold
          496,837       201,591       (66,733 )     631,695  
 
Gross profit
          194,587       83,519       (44 )     278,062  
Selling, general and administrative
    3,943       96,800       45,612       (44 )     146,311  
Research and development
    89       11,797       4,428             16,314  
Legal settlement
          20,435                   20,435  
 
Operating (loss) income
    (4,032 )     65,555       33,479             95,002  
Other (income) expense:
                                       
Earnings from investment in subsidiary
    (128,239 )                 128,239        
Gain on sale of interest in subsidiaries
          (109,648 )                 (109,648 )
Equity losses of unconsolidated subsidiary
          847                   847  
Net interest (income) expense
    (21,067 )     38,391       (1,462 )           15,862  
 
Income (loss) before income taxes
    145,274       135,965       34,941       (128,239 )     187,941  
Provision for income taxes
    6,539       33,057       9,610             49,206  
 
Income (loss) from continuing operations
    138,735       102,908       25,331       (128,239 )     138,735  
 
Net income (loss)
  $ 138,735     $ 102,908     $ 25,331     $ (128,239 )   $ 138,735  
 
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
For the six months ended June 28, 2008
                                         
    Parent   Guarantor   Non-Guarantor        
In thousands   Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
 
Net sales
  $     $ 1,332,274     $ 540,645     $ (122,758 )   $ 1,750,161  
Cost of goods sold
          960,259       382,913       (122,404 )     1,220,768  
 
Gross profit
          372,015       157,732       (354 )     529,393  
Selling, general and administrative
    8,463       186,845       90,003       (354 )     284,957  
Research and development
    164       23,669       8,347             32,180  
Legal settlement
          20,435                   20,435  
 
Operating (loss) income
    (8,627 )     141,066       59,382             191,821  
Other (income) expense:
                                       
Earnings from investment in subsidiary
    (162,472 )                 162,472        
Gain on sale of interest in subsidiaries
          (109,648 )                 (109,648 )
Equity losses of unconsolidated subsidiary
          1,764                   1,764  
Net interest (income) expense
    (42,121 )     76,758       (2,687 )           31,950  
 
Income (loss) before income taxes
    195,966       172,192       62,069       (162,472 )     267,755  
Provision for income taxes
    12,868       46,266       17,242             76,376  
 
Income (loss) from continuing operations
    183,098       125,926       44,827       (162,472 )     191,379  
Loss from discontinued operations, net of tax
    (73 )     (1,144 )                 (1,217 )
Loss on disposal of discontinued operations, net of tax
          (7,137 )                 (7,137 )
 
Net income (loss)
  $ 183,025     $ 117,645     $ 44,827     $ (162,472 )   $ 183,025  
 

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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
June 28, 2008
                                         
    Parent   Guarantor   Non-Guarantor        
In thousands   Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
 
ASSETS
                                       
Current assets
                                       
Cash and cash equivalents
  $ 6,602     $ 5,499     $ 62,515     $     $ 74,616  
Accounts and notes receivable, net
    732       337,676       290,942       (70,422 )     558,928  
Inventories
          252,494       184,927             437,421  
Deferred tax assets
    72,756       35,344       9,173       (65,312 )     51,961  
Prepaid expenses and other current assets
    8,311       3,105       38,646       (3,849 )     46,213  
 
Total current assets
    88,401       634,118       586,203       (139,583 )     1,169,139  
 
                                       
Property, plant and equipment, net
    5,790       173,778       199,903             379,471  
 
                                       
Other assets
                                       
Investments in/advances to subsidiaries
    2,435,523       93,906       737,019       (3,266,448 )      
Goodwill
          1,078,024       1,080,205             2,158,229  
Intangibles, net
          320,528       237,923             558,451  
Other
    77,140       8,053       23,921       (30,382 )     78,732  
 
Total other assets
    2,512,663       1,500,511       2,079,068       (3,296,830 )     2,795,412  
 
Total assets
  $ 2,606,854     $ 2,308,407     $ 2,865,174     $ (3,436,413 )   $ 4,344,022  
 
 
                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY                                        
Current liabilities
                                       
Short-term borrowings
  $     $     $ 217     $     $ 217  
Current maturities of long-term debt
    8,591       159       250,014       (254,322 )     4,442  
Accounts payable
    877       154,312       153,158       (69,691 )     238,656  
Employee compensation and benefits
    11,163       45,179       42,474             98,816  
Current pension and post-retirement benefits
    8,557                         8,557  
Accrued product claims and warranties
          32,869       14,659             47,528  
Income taxes
    6,218       3,262       8,635             18,115  
Accrued rebates and sales incentives
          29,955       6,732             36,687  
Other current liabilities
    129,902       (55,233 )     59,611       (3,849 )     130,431  
 
Total current liabilities
    165,308       210,503       535,500       (327,862 )     583,449  
 
                                       
Other liabilities
                                       
Long-term debt
    1,021,174       1,947,579       269,019       (2,213,612 )     1,024,160  
Pension and other retirement compensation
    70,698       23,903       77,322             171,923  
Post-retirement medical and other benefits
    21,173       44,304             (30,382 )     35,095  
Long-term taxes payable
    24,442                         24,442  
Deferred tax liabilities
    3,539       187,481       63,506       (65,312 )     189,214  
Due to / (from) affiliates
    (721,832 )     189,714       728,932       (196,814 )      
Other non-current liabilities
    (74,882 )     107,119       63,307             95,544  
 
Total liabilities
    509,620       2,710,603       1,737,586       (2,833,982 )     2,123,827  
 
                                       
Minority Interest
          1,796       121,164             122,960  
 
                                       
Shareholders’ equity
    2,097,234       (403,992 )     1,006,424       (602,431 )     2,097,235  
 
Total liabilities and shareholder’s equity
  $ 2,606,854     $ 2,308,407     $ 2,865,174     $ (3,436,413 )   $ 4,344,022  
 

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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the six months ended June 28, 2008
                                         
    Parent   Guarantor   Non-Guarantor        
In thousands   Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
 
Operating activities
                                       
Net income (loss)
  $ 183,025     $ 117,645     $ 44,827     $ (162,472 )   $ 183,025  
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
                                       
(Income) loss from discontinued operations
          1,217                   1,217  
(Gain) loss on disposal of discontinued operations
    73       7,064                   7,137  
Equity losses of unconsolidated subsidiary
          1,764                   1,764  
Depreciation
    500       19,897       10,398             30,795  
Amortization
    1,486       8,528       3,087             13,101  
Earnings from investments in subsidiaries
    (162,472 )                 162,472        
Deferred income taxes
    (2,530 )     23,816       (249 )           21,037  
Stock compensation
    11,932                         11,932  
Excess tax benefits from stock-based compensation
    (776 )                       (776 )
Gain on sale of assets, net
    (443 )                       (443 )
Gain on sale of interest in subsidiaries
          (109,648 )                 (109,648 )
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
                                       
Accounts and notes receivable
    (6,223 )     (60,148 )     (38,958 )     20,126       (85,203 )
Inventories
          (11,389 )     (8,911 )           (20,300 )
Prepaid expenses and other current assets
    24,968       (664 )     (13,156 )     (19,000 )     (7,852 )
Accounts payable
    4,625       8,045       18,503       (20,129 )     11,044  
Employee compensation and benefits
    (7,613 )     (13,621 )     2,752             (18,482 )
Accrued product claims and warranties
            (1,693 )     (605 )           (2,298 )
Income taxes
    (705 )     2,528       2,308             4,131  
Other current liabilities
    (19,345 )     22,103       9,500       19,003       31,261  
Pension and post-retirement benefits
    2,041       (270 )     1,549             3,320  
Other assets and liabilities
    2,782       (504 )     2,618       90       4,986  
 
Net cash provided by (used for) continuing operations
    31,325       14,670       33,663       90       79,748  
Net cash provided by (used for) discontinued operations
          (4,137 )                 (4,137 )
 
Net cash provided by operating activities
    31,325       10,533       33,663       90       75,611  
 
                                       
Investing activities
                                       
Capital expenditures
    (1,150 )     (18,007 )     (7,171 )           (26,328 )
Proceeds from sales of property and equipment
          31       3,771             3,802  
Acquisitions, net of cash acquired or received
    1,150             5,087             6,237  
Divestitures
          29,959                   29,959  
 
Net cash provided by (used for) investing activities of continuing operation
          11,983       1,687             13,670  
 
                                       
Financing activities
                                       
Net short-term borrowings (repayments)
    (13,965 )                       (13,965 )
Proceeds from long-term debt
    279,405                         279,405  
Repayment of long-term debt
    (297,740 )                       (297,740 )
Net change in advances to subsidiaries
    61,706       (31,940 )     (29,676 )     (90 )      
Debt issuance costs
    (50 )                       (50 )
Excess tax benefit from stock-based compensation
    776                         776  
Proceeds from exercise of stock options
    2,175                         2,175  
Repurchases of common stock
    (21,721 )                       (21,721 )
Dividends paid
    (33,747 )                       (33,747 )
 
Net cash provided by financing activities of continuing operations
    (23,161 )     (31,940 )     (29,676 )     (90 )     (84,867 )
 
                                       
Effect of exchange rate changes on cash
    (8,236 )     4,074       3,569             (593 )
 
Change in cash and cash equivalents
    (72 )     (5,350 )     9,243             3,821  
Cash and cash equivalents, beginning of period
    6,674       10,849       53,272             70,795  
 
Cash and cash equivalents, end of period
  $ 6,602     $ 5,499     $ 62,515     $     $ 74,616  
 

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Table of Contents

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 June 30, 2007
                                         
    Parent   Guarantor   Non-Guarantor        
In thousands   Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
 
Net sales
  $     $ 721,841     $ 230,157     $ (52,699 )   $ 899,299  
Cost of goods sold
          506,667       165,686       (52,603 )     619,750  
 
Gross profit
          215,174       64,471       (96 )     279,549  
Selling, general and administrative
    18,890       104,423       28,664       (96 )     151,881  
Research and development
          11,127       3,681             14,808  
 
Operating (loss) income
    (18,890 )     99,624       32,126             112,860  
Other (income) expense:
                                       
Earnings from investment in subsidiary
    (72,612 )                 72,612        
Equity losses of unconsolidated subsidiary
          36                   36  
Net interest (income) expense
    (10,371 )     29,220       (366 )           18,483  
 
Income (loss) before income taxes
    64,093       70,368       32,492       (72,612 )     94,341  
Provision for income taxes
    2,092       20,365       10,891             33,348  
 
Income (loss) from continuing operations
    62,001       50,003       21,601       (72,612 )     60,993  
Income from discontinued operations, net of tax
          1,008                   1,008  
Gain on disposal of discontinued operations, net of tax
    64                         64  
 
Net income (loss)
  $ 62,065     $ 51,011     $ 21,601     $ (72,612 )   $ 62,065  
 
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
For the six months ended June 30, 2007
                                         
    Parent   Guarantor   Non-Guarantor        
In thousands   Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
 
Net sales
  $     $ 1,346,171     $ 442,704     $ (96,731 )   $ 1,692,144  
Cost of goods sold
          950,075       322,816       (96,227 )     1,176,664  
 
Gross profit
          396,096       119,888       (504 )     515,480  
Selling, general and administrative
    8,908       215,040       67,919       (504 )     291,363  
Research and development
          22,634       7,124             29,758  
 
Operating (loss) income
    (8,908 )     158,422       44,845             194,359  
Other (income) expense:
                                       
Earnings from investment in subsidiary
    (93,977 )                 93,977        
Equity losses of unconsolidated subsidiary
          993                   993  
Net interest (income) expense
    (24,415 )     58,526       (917 )           33,194  
 
Income (loss) before income taxes
    109,484       98,903       45,762       (93,977 )     160,172  
Provision for income taxes
    5,353       35,828       15,369             56,550  
 
Income (loss) from continuing operations
    104,131       63,075       30,393       (93,977 )     103,622  
Income from discontinued operations, net of tax
          509                   509  
Gain on disposal of discontinued operations, net of tax
    207                         207  
 
Net income (loss)
  $ 104,338     $ 63,584     $ 30,393     $ (93,977 )   $ 104,338  
 

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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
June 30, 2007
                                         
    Parent   Guarantor   Non-Guarantor        
In thousands   Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
 
ASSETS
                                       
Current assets
                                       
Cash and cash equivalents
  $ 5,842     $ 6,507     $ 39,667     $     $ 52,016  
Accounts and notes receivable, net
    118       387,150       189,405       (52,732 )     523,941  
Inventories
          272,404       122,926             395,330  
Deferred tax assets
    95,963       33,190       5,368       (82,900 )     51,621  
Prepaid expenses and other current assets
    12,000       11,097       36,584       (18,076 )     41,605  
Current assets of discontinued operations
          31,750                   31,750  
 
Total current assets
    113,923       742,098       393,950       (153,708 )     1,096,263  
 
                                       
Property, plant and equipment, net
    4,282       217,755       130,816             352,853  
 
                                       
Other assets
                                       
Investments in/advances to subsidiaries
    2,228,747       89,906       526,528       (2,845,181 )      
Goodwill
          1,572,992       351,216             1,924,208  
Intangibles, net
          353,624       150,039             503,663  
Other
    76,363       14,367       12,471       (25,380 )     77,821  
Non-current assets of discontinued operations
          18,436                   18,436  
 
Total other assets
    2,305,110       2,049,325       1,040,254       (2,870,561 )     2,524,128  
 
Total assets
  $ 2,423,315     $ 3,009,178     $ 1,565,020     $ (3,024,269 )   $ 3,973,244  
 
 
                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY                                        
Current liabilities
                                       
Short-term borrowings
  $     $     $ 10,202     $     $ 10,202  
Current maturities of long-term debt
    8,166       156       305,950       (309,756 )     4,516  
Accounts payable
    4,740       161,314       103,632       (58,182 )     211,504  
Employee compensation and benefits
    12,059       47,912       35,989             95,960  
Current pension and post-retirement benefits
    7,918                         7,918  
Accrued product claims and warranties
          33,539       15,328             48,867  
Income taxes
    (1,472 )     13,991       7,803             20,322  
Accrued rebates and sales incentives
          36,205       5,870             42,075  
Other current liabilities
    17,190       52,225       36,428       (11,895 )     93,948  
Current liabilities of discontinued operations
          9,616                   9,616  
 
Total current liabilities
    48,601       354,958       521,202       (379,833 )     544,928  
 
                                       
Other liabilities
                                       
Long-term debt
    1,131,347       1,786,435       59,767       (1,804,365 )     1,173,184  
Pension and other retirement compensation
    127,350       28,176       62,894             218,420  
Post-retirement medical and other benefits
    22,458       49,728             (25,380 )     46,806  
Long-term taxes payable
    14,705                         14,705  
Deferred tax liabilities
    3,155       159,155       31,002       (82,900 )     110,412  
Due to / (from) affiliates
    (729,543 )     268,296       642,300       (181,053 )      
Other non-current liabilities
    30,948       7,097       49,904             87,949  
Non-current liabilities of discontinued operations
          2,546                   2,546  
 
Total liabilities
    649,021       2,656,391       1,367,069       (2,473,531 )     2,198,950  
 
                                       
Shareholders’ equity
    1,774,294       352,787       197,951       (550,738 )     1,774,294  
 
Total liabilities and shareholders’ equity
  $ 2,423,315     $ 3,009,178     $ 1,565,020     $ (3,024,269 )   $ 3,973,244  
 

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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2007
                                         
    Parent   Guarantor   Non-Guarantor        
In thousands   Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
 
Operating activities
                                       
Net income (loss)
  $ 104,338     $ 63,584     $ 30,393     $ (93,977 )   $ 104,338  
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
                                       
(Income) loss from discontinued operations
          (509 )                 (509 )
(Gain) loss on disposal of discontinued operations
    (207 )                       (207 )
Equity losses of unconsolidated subsidiary
          993                   993  
Depreciation
    600       20,338       9,105             30,043  
Amortization
    2,331       8,427       2,194             12,952  
Earnings from investments in subsidiaries
    (93,977 )                 93,977        
Deferred income taxes
    (71 )           (6,405 )           (6,476 )
Stock compensation
    12,626                         12,626  
Excess tax benefits from stock-based compensation
    (2,213 )                       (2,213 )
Intercompany dividends
    (23 )     13,714       (13,691 )            
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
                                       
Accounts and notes receivable
    9,909       (66,385 )     (36,405 )     8,415       (84,466 )
Inventories
          5,850       2,190             8,040  
Prepaid expenses and other current assets
    9,143       12,352       (20,458 )     (4,502 )     (3,465 )
Accounts payable
    (8,562 )     5,904       21,379       (8,413 )     10,308  
Employee compensation and benefits
    (3,992 )     (1,381 )     458             (4,915 )
Accrued product claims and warranties
          4,584       (23 )           4,561  
Income taxes
    179       4,177       801             5,157  
Other current liabilities
    (2,089 )     (1,766 )     1,880       4,500       2,525  
Pension and post-retirement benefits
    4,986       354       2,390             7,730  
Other assets and liabilities
    (2,083 )     463       4,174             2,554  
 
Net cash provided by (used for) continuing operations
    30,895       70,699       (2,018 )           99,576  
Net cash provided by (used for) discontinued operations
          (1,660 )                 (1,660 )
 
Net cash provided by (used for) operating activities
    30,895       69,039       (2,018 )           97,916  
 
                                       
Investing activities
                                       
Capital expenditures
    (129 )     (14,932 )     (14,997 )           (30,058 )
Proceeds from sales of property and equipment
          811       715             1,526  
Acquisitions, net of cash acquired
    (482,535 )           (350 )           (482,885 )
Other
          (779 )                 (779 )
 
Net cash provided by (used for) investing activities of continuing operat
    (482,664 )     (14,900 )     (14,632 )           (512,196 )
 
                                       
Financing activities
                                       
Net short-term borrowings (repayments)
          (131 )     (4,577 )           (4,708 )
Proceeds from long-term debt
    1,121,402                         1,121,402  
Repayment of long-term debt
    (673,341 )                       (673,341 )
Net change in advances to subsidiaries
    18,521       (54,652 )     36,131              
Debt issuance costs
    (1,782 )                       (1,782 )
Excess tax benefit from stock-based compensation
    2,213                         2,213  
Proceeds from exercise of stock options
    4,922                         4,922  
Repurchases of common stock
    (9,280 )                       (9,280 )
Dividends paid
    (29,991 )                       (29,991 )
 
Net cash provided by (used for) financing activities of contining operati
    432,664       (54,783 )     31,554             409,435  
 
                                       
Effect of exchange rate changes on cash
    16,137       601       (14,697 )           2,041  
 
Change in cash and cash equivalents
    (2,968 )     (43 )     207             (2,804 )
Cash and cash equivalents, beginning of period
    8,810       6,550       39,460             54,820  
 
Cash and cash equivalents, end of period
  $ 5,842     $ 6,507     $ 39,667     $     $ 52,016  
 

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Pentair, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
December 31, 2007
                                         
    Parent   Guarantor   Non-Guarantor        
In thousands   Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
 
ASSETS
                                       
 
                                       
Current assets
                                       
Cash and cash equivalents
  $ 6,674     $ 10,849     $ 53,272     $     $ 70,795  
Accounts and notes receivable, net
    522       329,230       188,313       (51,390 )     466,675  
Inventories
          267,742       124,674             392,416  
Deferred tax assets
    70,494       35,152       7,947       (63,082 )     50,511  
Prepaid expenses and other current assets
    12,673       9,392       37,246       (23,403 )     35,908  
Current assets of discontinued operations
          21,716                   21,716  
 
Total current assets
    90,363       674,081       411,452       (137,875 )     1,038,021  
 
                                       
Property, plant and equipment, net
    5,140       218,989       141,861             365,990  
 
                                       
Other assets
                                       
Investments in/advances to subsidiaries
    2,434,205       90,212       575,238       (3,099,655 )      
Goodwill
          1,587,996       416,724             2,004,720  
Intangibles, net
          329,056       162,207             491,263  
Other
    80,575       14,990       17,054       (30,382 )     82,237  
Non-current assets of discontinued operations
          18,383                   18,383  
 
Total other assets
    2,514,780       2,040,637       1,171,223       (3,130,037 )     2,596,603  
 
Total assets
  $ 2,610,283     $ 2,933,707     $ 1,724,536     $ (3,267,912 )   $ 4,000,614  
 
 
                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                       
Current liabilities
                                       
Short-term borrowings
  $     $     $ 13,586     $     $ 13,586  
Current maturities of long-term debt
    20,114       158       338,827       (354,024 )     5,075  
Accounts payable
    2,138       174,672       104,336       (51,209 )     229,937  
Employee compensation and benefits
    15,935       58,790       36,750             111,475  
Current pension and post-retirement benefits
    8,557                         8,557  
Accrued product claims and warranties
          34,378       15,004             49,382  
Income taxes
    3,207       (5,628 )     15,340             12,919  
Accrued rebates and sales incentives
          28,209       8,454             36,663  
Other current liabilities
    19,510       52,940       40,779       (22,852 )     90,377  
Current liabilities of discontinued operations
          2,935                   2,935  
 
Total current liabilities
    69,461       346,454       573,076       (428,085 )     560,906  
 
                                       
Other liabilities
                                       
Long-term debt
    1,021,464       1,972,655       34,139       (1,986,333 )     1,041,925  
Pension and other retirement compensation
    67,872       22,905       70,265             161,042  
Post-retirement medical and other benefits
    21,958       45,571             (30,382 )     37,147  
Long-term taxes payable
    21,306                         21,306  
Deferred tax liabilities
    3,429       168,815       58,471       (63,082 )     167,633  
Due to / (from) affiliates
    (542,763 )     205,731       689,149       (352,117 )      
Other non-current liabilities
    36,685       7,085       53,316             97,086  
Non-current liabilities of discontinued operations
          2,698                   2,698  
 
Total liabilities
    699,412       2,771,914       1,478,416       (2,859,999 )     2,089,743  
 
                                       
Shareholders’ equity
    1,910,871       161,793       246,120       (407,913 )     1,910,871  
 
Total liabilities and shareholders’ equity
  $ 2,610,283     $ 2,933,707     $ 1,724,536     $ (3,267,912 )   $ 4,000,614  
 

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” or the negative thereof or similar words. 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 2007 Annual Report on Form 10-K may impact the achievement of forward-looking statements:
  changes in general economic and industry conditions, such as:
    continued deterioration in the U.S. housing market;
 
    fluctuations in foreign exchange rates;
 
    the strength of product demand and the markets we serve;
 
    the intensity of competition, including that from foreign competitors;
 
    pricing pressures;
 
    market acceptance of 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;
 
    our ability to source components from third parties, in particular from foreign manufacturers, without interruption and at reasonable prices; and
 
    the financial condition of our customers;
  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;
  domestic and foreign governmental and regulatory policies;
  general economic and political conditions, such as political instability, the rate of economic growth or decline in our principal geographic or product markets or fluctuations in exchange rates;
  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 overseas;
  our ability to generate savings from our excellence in operations initiatives consisting of lean enterprise, supply management and cash flow practices;
  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; thermal management products; and accessories. In 2008, we expect our Water Group and Technical Products Group to generate approximately 2/3 and 1/3 of 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 $2.3 billion in 2007. 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.
On February 29, 2008, we sold our National Pool Tile (“NPT”) business to Pool Corporation in a cash transaction for approximately $30.0 million subject to certain price adjustments. The results of NPT have been reported as discontinued operations for all periods presented. The assets and liabilities of NPT have been reclassified as discontinued operations for all periods presented.

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On June 28, 2008, we entered into a transaction with GE Water & Process Technologies (a unit of General Electric Company) (“GE”) that was accounted for as an acquisition of an 80.1 percent ownership interest in GE’s global water softener and residential water filtration business in exchange for a 19.9 percent interest in our global water softener and residential water filtration business (the “GE Transaction”). The acquisition was effected through the formation of two new entities, a U.S. entity and an international entity, into which we and GE contributed certain assets, properties, liabilities and operations representing their respective global water softener and residential water filtration businesses. We are an 80.1 percent owner of the new entities and GE is a 19.9 percent owner.
Our Technical Products Group operates in a large global market with significant potential for growth in industry segments such as defense, security, medical and networking. 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 datacommunication and telecommunication markets. From 2004 through 2007, sales volumes increased due to the addition of new distributors, new products and higher demand in targeted markets.
Key Trends and Uncertainties
The following trends and uncertainties affected the first six months of our financial performance through 2008 and will likely impact our results in the future:
  The housing market and new pool starts slowed in 2006 and 2007, and continued to shrink in the first half of 2008. We believe that construction of new homes and new pools starts in North America affects approximately 12% of our sales, largely in our pool, spa and flow businesses. This downturn is expected to adversely impact our sales for the remainder of 2008.
  As sales of products into residential end-markets in our Water Group business continued to slow appreciably we have reduced our investments in businesses in those markets, and further restructured our operations by closing or downsizing facilities, reducing headcount and taking other market-related actions.
  The telecommunication equipment market, particularly in North America, slowed throughout 2007 and impacted North American electronics sales within our Technical Products Group. The 2007 revenue decrease was attributable to telecommunication industry consolidation (which has delayed enclosure product sales) and some OEM datacommunication programs reaching end-of-life. Based on some recovery of telecommunication equipment procurement in the second half of 2007 and the first half of 2008, we anticipate continuing improvement in the remainder of 2008 and growth rates in the low double digits for our North American electronics sales. A weak economy in the United States and Europe could reduce marketplace spending on telecommunication capital investments and therefore our anticipated revenue growth.
  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 expect our operations to continue to benefit from our Pentair Integrated Management System (“PIMS”) initiatives, which include strategy deployment; lean enterprise with special focus on sourcing and supply management, cash flow management and lean operations; and IGNITE, our process to drive organic growth.
  We are experiencing material cost and other inflation in a number of our businesses. We are striving for greater productivity improvements and implementing selective increases in selling prices to help mitigate cost increases we have experienced in base materials such as carbon steel, copper and resins and other costs such as health care and other employee benefit costs.
  We have a long-term goal to consistently generate free cash flow that equals or exceeds 100% conversion of our adjusted 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. Free cash flow for the full year 2007 was approximately $285 million, or 135% of our net income. See our discussion of Other financial measures under the caption “Liquidity and Capital Resources” in this report.
  We experienced favorable foreign currency effects on net sales in 2007 and the first half of 2008. Our currency effect is primarily for the U.S. dollar against the euro, which may or may not trend favorably in the future.
  On February 29, 2008, we sold our NPT business to Pool Corporation for approximately $30 million in cash. We believe this sale enables the leadership of our Pool business to focus more fully on the pool equipment market, which is the core of our business. The transaction generated a negative 8 cent impact to diluted earnings per share (which was classified as discontinued operations), consisting of a loss on the sale of NPT of 7 cents per diluted share and a loss from NPT financial results for January and February 2008 of 1 cent per diluted share.
  On June 28, 2008, we completed the GE Transaction. We believe this transaction provides us with expanded revenue growth and cost synergy opportunities. The one-time gain on the transaction increased diluted earnings per share, on an after tax basis, by 86 cents in the second quarter of 2008.

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  The effective income tax rate for the six months ended June 28, 2008 was 28.5% compared to 35.3% for the six months ended June 30, 2007. We expect the effective tax rate for the remainder of 2008 to be between 33% and 34%, resulting in a full year effective income tax rate of between 30.0% and 31.0%. 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 2008, our operating objectives include the following:
  Continue to drive operating excellence through lean enterprise initiatives, with special focus on sourcing and supply management, cash flow management, and lean operations;
  Continue to restructure our operations in challenging markets while investing in higher growth markets and geographies;
  Continue the development of our Global Business Units to achieve growth and productivity targets;
  Continue proactive talent development, particularly in international management and other key functional areas;
  Continue the integration of acquisitions and realize identified synergistic opportunities; and
  Continue to evaluate strategic acquisitions to grow and expand our existing platforms in our Water and Technical Products Groups.
On July 22, 2008, we updated our fiscal 2008 guidance to approximately $2.44 to $2.49 per share from our previous fiscal 2008 guidance of earnings per share of approximately $2.30 to $2.40. In addition to the one time gain recorded in the second quarter, we expect our positive performance to continue in our international and Technical Products businesses, offset by increased costs associated with the GE Transaction, costs associated with the recently announced restructuring actions, and costs associated with other third and fourth quarter actions.
A summary of our updated diluted EPS guidance is as follows:
         
Guidance as of April 22, 2008
  $ 2.30 to $2.40  
 
       
Impact of GE Transaction and Horizon settlement
+   $0.72  
 
       
Impact of Q2 through Q4 restructuring charges
- $0.51 to $0.61  
 
       
Increase from base business outlook
+ $0.00 to $0.05  
 
       
Impact of increased costs associated with GE Transaction and other actions
-   $0.07  
 
       
Guidance as of July 22, 2008
  $ 2.44 to $2.49  
Our estimate is based on three primary variables. First, we anticipate modest organic growth in the low single digits, including some price and product mix improvements, bringing our total revenues to $3.5 billion for the full year. Second, we anticipate that our manufacturing productivity initiatives, in particular our materials sourcing programs, will improve through our lean enterprise initiatives and through somewhat higher unit volumes. Third, we anticipate our selling, marketing and research and development expenses will change with economic conditions in our primary markets.
If economic conditions continue to worsen in North America and Europe, then we expect that our sales and productivity increases may deteriorate from the current forecasts. In that event, we expect to reduce discretionary selling, marketing and research and development costs in order to minimize the impact of these declines on our earnings per share, which we anticipate would still meet the bottom of our guidance range. Conversely, if economic conditions hold up or improve over the year, we expect our net income should be able to reach the top of our guidance range. We believe we would then have the flexibility to increase expenditures in our selling, marketing and research and development efforts to maximize organic sales growth in 2008 and sustain anticipated growth in 2009.
Our guidance assumes an absence of significant acquisitions or divestitures in 2008, other than the GE Transaction. As noted above, in 2008 we may seek 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 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 2007 Annual Report on Form 10-K.

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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
    June 28   June 30                   June 28   June 30        
In thousands   2008   2007   $ change   % change   2008   2007   $ change   % change
 
Net sales
  $ 909,757     $ 899,299     $ 10,458       1.2 %   $ 1,750,161     $ 1,692,144     $ 58,017       3.4 %
 
The components of the net sales change in 2008 from 2007 were as follows:
                 
    % Change from 2007
Percentages   Three months   Six months
 
Volume
    (4.1 )     (1.3 )
Price
    2.1       1.6  
Currency
    3.2       3.1  
 
Total
    1.2       3.4  
 
Consolidated net sales
The 1.2 percent and 3.4 percent increases in consolidated net sales in the second quarter and first half, respectively, of 2008 from 2007 were primarily driven by:
  higher Technical Products Group sales in both the Electrical and Electronics businesses;
  favorable foreign currency effects;
  selective increases in selling prices to mitigate inflationary cost increases; and
  an increase in sales volume due to our April 30, 2007 acquisition of Porous Media Corporation and Porous Media, Ltd. (together “Porous Media”).
These increases were partially offset by:
  lower sales of certain pump, pool and filtration products related to the downturn in the North American residential housing market; and
 
  second quarter 2007 sales of municipal pumps related to a large flood control project, which did not recur in 2008.
Net sales by segment and the change from the prior year period were as follows:
                                                                 
    Three months ended   Six months ended
    June 28   June 30                   June 28   June 30        
In thousands   2008   2007   $ change   % change   2008   2007   $ change   % change
 
Water
  $ 605,497     $ 642,149     $ (36,652 )     (5.7 %)   $ 1,160,441     $ 1,182,411     $ (21,970 )     (1.9 %)
Technical Products
    304,260       257,150       47,110       18.3 %     589,720       509,733       79,987       15.7 %
 
Total
  $ 909,757     $ 899,299     $ 10,458       1.2 %   $ 1,750,161     $ 1,692,144     $ 58,017       3.4 %
 
Water
The 5.7 percent and 1.9 percent decreases in Water Group net sales in the second quarter and first half, respectively, of 2008 from 2007 were primarily driven by:
  organic sales decline of approximately 9 percent for the second quarter and 7 percent for the first half of 2008 (excluding acquisitions and foreign currency exchange), which included:
    a decline in sales of certain pump, pool and filtration products into weak North American residential markets; and
 
    second quarter 2007 sales of municipal pumps related to a large flood control project, which did not recur in 2008.
          These decreases were partially offset by:
    selective increases in selling prices to mitigate inflationary cost increases; and

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    continued growth in China and in other markets in Asia-Pacific as well as continued success in penetrating markets in Europe and the Middle East.
These decreases were further offset by:
  favorable foreign currency effects; and
  an increase in sales volume driven by our February 2, 2007 acquisition of Jung and our April 30, 2007 acquisition of Porous Media.
Technical Products
The 18.3 percent and 15.7 percent increase in Technical Products Group net sales in the second quarter and first half, respectively, of 2008 from 2007 were primarily driven by:
  an increase in sales into electrical markets, which includes new products and selective increases in selling prices to mitigate inflationary cost increases;
  favorable foreign currency effects;
  an increase in sales to electronics markets that is largely attributable to increased spending in the telecommunication equipment industry; and
  strong sales performance in Asia.
Gross profit
                                                                 
    Three months ended   Six months ended
    June 28   % of   June 30   % of   June 28   % of   June 30   % of
In thousands   2008   sales   2007   sales   2008   sales   2007   sales
 
Gross profit
  $ 278,062       30.6 %   $ 279,549       31.1 %   $ 529,393       30.3 %   $ 515,480       30.5 %
 
Percentage point change
          (0.5 )pts                           (0.2 )pts                
The 0.5 percent and 0.2 percent decreases in gross profit as a percentage of sales in the second quarter and first half, respectively, of 2008 from 2007 were primarily the result of:
  inflationary increases related to raw materials and labor; and
  a decline in sales of certain pump, pool and filtration products into weak North American residential markets.
These decreases were partially offset by:
  higher Technical Products Group sales in both the Electrical and Electronics businesses;
  selective increases in selling prices in our Water and Technical Products Groups to mitigate inflationary cost increases;
  savings generated from our PIMS initiatives including lean and supply management practices; and
  lower cost in 2008 as a result of a fair market value inventory step-up related to the Jung and Porous Media acquisitions recorded in 2007.
*Selling, general and administrative (SG&A)
                                                                 
    Three months ended   Six months ended
    June 28   % of   June 30   % of   June 28   % of   June 30   % of
In thousands   2008   sales   2007   sales   2008   sales   2007   sales
 
*SG&A
  $ 166,746       18.3 %   $ 151,881       16.9 %   $ 305,392       17.5 %   $ 291,363       17.2 %
 
Percentage point change
          1.4 pts                           0.3 pts                
 
*   Includes Legal settlement

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The 1.4 and 0.3 percentage point increases in SG&A expense as a percentage of sales in the second quarter and first half, respectively, of 2008 from 2007 were primarily due to:
  increased reserves for settlement of the Horizon litigation;
  restructuring actions taken to streamline general and administrative costs during the second quarter of 2008; and
  higher selling and general expense to fund investments in future growth with emphasis on growth in the international markets, including personnel and business infrastructure investments.
These increases were partially offset by:
  reduced costs related to productivity actions taken in the second half of 2007; and
  reduced costs related to the completion of the European SAP implementation in 2007.
Research and development (R&D)
                                                                 
    Three months ended   Six months ended
    June 28   % of   June 30   % of   June 28   % of   June 30   % of
In thousands   2008   sales   2007   sales   2008   sales   2007   sales
 
R&D
  $ 16,314       1.8 %   $ 14,808       1.6 %   $ 32,180       1.8 %   $ 29,758       1.8 %
 
Percentage point change
          0.2 pts                           0.0 pts                
The 0.2 percentage point increase as a percentage of sales in the second quarter 2008 from 2007 and consistent in the first half of 2008 from 2007 were primarily due to:
  increased R&D expense spending on flat volume.
Operating income
Water
                                                                 
    Three months ended   Six months ended
    June 28   % of   June 30   % of   June 28   % of   June 30   % of
In thousands   2008   sales   2007   sales   2008   sales   2007   sales
 
Operating income
  $ 57,822       9.5 %   $ 89,195       13.9 %   $ 122,241       10.5 %   $ 151,621       12.8 %
 
Percentage point change
          (4.4 )pts                           (2.3 )pts                
The 4.4 and 2.3 percentage point decreases in Water Group operating income as a percentage of sales in the second quarter and first half, respectively, of 2008 from 2007 were primarily the result of:
  inflationary increases related to raw materials and labor;
  a decline in sales of certain pump, pool and filtration products resulting from the downturn in the North American residential housing markets;
  increased reserves for settlement of the Horizon litigation; and
  second quarter 2007 sales of municipal pumps related to a large flood control project, which did not recur in 2008.
These decreases were partially offset by:
  selective increases in selling prices to mitigate inflationary cost increases;
  savings generated from our PIMS initiatives, including lean and supply management practices;
  an increase in sales volume driven by our February 2, 2007 acquisition of Jung Pump as well as the April 30, 2007 acquisition of Porous Media; and
  lower cost in 2008 as a result of a fair market value inventory step-up related to the Jung and Porous Media acquisitions recorded in 2007.

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Technical Products
                                                                 
    Three months ended   Six months ended
    June 28   % of   June 30   % of   June 28   % of   June 30   % of
In thousands   2008   sales   2007   sales   2008   sales   2007   sales
 
Operating income
  $ 49,732       16.3 %   $ 36,140       14.1 %   $ 95,069       16.1 %   $ 67,771       13.3 %
 
Percentage point change
          2.2 pts                           2.8 pts                
The 2.2 and 2.8 percentage point increases in Technical Products Group operating income as a percentage of sales in the second quarter and first half, respectively, of 2008 from 2007 were primarily the result of:
  an increase in sales to electrical markets, which includes selective increases in selling prices to mitigate inflationary cost increases;
  savings realized from the continued success of PIMS, including lean and supply management activities;
  an increase in sales into electronics markets as orders and sales to our telecommunications customers rebounded and we continued to expand into other vertical markets; and
  no longer incurring exit costs related to a previously announced 2001 French facility closure.
These increases were partially offset by:
  inflationary increases related to raw materials such as carbon steel and labor costs.
Net interest expense
                                                                 
    Three months ended   Six months ended
    June 28   June 30                   June 28   June 30        
In thousands   2008   2007   Difference   % change   2008   2007   Difference   % change
 
Net interest expense
  $ 15,862     $ 18,483     $ (2,621 )     (14.2 %)   $ 31,950     $ 33,194     $ (1,244 )     (3.7 %)
 
The 14.2 and 3.7 percentage point decreases in interest expense in the second quarter and first half, respectively, of 2008 from 2007 were primarily the result of:
  a decrease in outstanding debt; and
  favorable impact of lower interest rates.
Provision for income taxes from continuing operations
                                 
    Three months ended   Six months ended
    June 28   June 30   June 28   June 30
In thousands   2008   2007   2008   2007
 
Income before income taxes
  $ 187,941     $ 94,341     $ 267,755     $ 160,172  
Provision for income taxes
    49,206       33,348       76,376       56,550  
Effective tax rate
    26.2 %     35.4 %     28.5 %     35.3 %
The 9.2 and 6.8 percentage point decreases in the effective tax rate in the second quarter and first half, respectively, of 2008 from 2007 were primarily the result of:
  higher earnings in lower-tax rate jurisdictions during 2008; and
  a portion of the gain on the GE Transaction is taxed at a rate of 0%.
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 30.0% and 31.0%.

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LIQUIDITY AND CAPITAL RESOURCES
Cash requirements for working capital, capital expenditures, equity investments, acquisitions, debt repayments, share repurchases, and dividend payments are generally funded from cash generated from operations, availability under existing committed revolving credit facilities, and in certain instances, public and private debt and equity offerings.
We experience seasonal cash flows primarily due to seasonal demand in a number of markets within our Water Group. End-user demand for pool equipment normally 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 sales “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.
The following table presents selected working capital measurements calculated from our monthly operating results based on a 13-month moving average:
                         
    June 28   December 31   June 30
Days   2008   2007   2007
 
Days of sales in accounts receivable
    56       53       55  
Days inventory on hand
    77       75       76  
Days in accounts payable
    57       54       55  
Operating activities
Cash provided by operating activities was $75.6 million in the first six months of 2008 compared with cash provided by operating activities of $97.9 million in the prior year comparable period. The decrease in cash provided by operating activities was primarily due to an increase in cash used for working capital in the first half of 2008 versus the same period of last year. In the future, we expect our working capital ratios to improve as we are able to capitalize on our PIMS initiatives.
Investing activities
Capital expenditures in the first six months of 2008 were $26.3 million compared with $30.1 million in the prior year period. We currently anticipate capital expenditures for fiscal 2008 will be approximately $65 to $75 million, primarily for capacity expansions in our low cost country manufacturing facilities, new product development, and replacement capital.
Cash proceeds from the sale of property and equipment of $3.8 million in 2008 was primarily related to the sale of a facility in our Water Group.
In connection with the GE Transaction, we received cash of $6.2 million that will be used to acquire additional assets and to fund restructuring initiatives.
On February 29, 2008, we sold our NPT business to Pool Corporation in a cash transaction for approximately $30.0 million subject to certain price adjustments. The results of NPT have been reported as discontinued operations for all periods presented. The assets and liabilities of NPT have been reclassified as discontinued operations for all periods presented.
Financing activities
Net cash used for financing activities was $84.9 million in the first six months of 2008 compared with $409.4 million provided by financing activities in the prior year period. The change primarily relates to the funds borrowed in 2007 for the Porous Media and Jung Pump acquisition. 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 used to repurchase Company stock, cash received from stock option exercises, and tax benefits related to stock-based compensation.
We have a multi-currency 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 will bear interest at the rate of LIBOR plus 0.50%. 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 June 28, 2008, we had $49.4 million of commercial paper outstanding that matures within 34 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.
Total availability under our existing Credit Facility was $609.1 million at June 28, 2008.
In addition to the Credit Facility, we have $25.0 million of uncommitted credit facilities, under which we had no borrowings as of June 28, 2008.
On July 8, 2008, we announced the commencement of a cash tender offer for all of the outstanding $250 million aggregate principal 7.85% Senior Notes due 2009 (the “Notes”). The tender offer is being made pursuant to an Offer to Purchase and related Letter of Transmittal

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dated July 8, 2008, which sets forth more fully the terms and conditions of the tender offer, including a minimum tender condition and other general conditions. On July 17, 2008, we amended the tender offer to increase the effective tender price and remove the minimum tender condition. We intend to use the available capacity under our Credit Facility to fund the purchase of the Notes.
We were in compliance with all debt covenants as of June 28, 2008.
Our current credit ratings are as follows:
         
Rating Agency   Long-Term Debt Rating   Current Rating Outlook
Standard & Poor’s
  BBB   Negative
Moody’s
  Baa3   Stable
In March 2007, Standard & Poor’s Ratings Services revised its current rating outlook on us from stable to negative. At the same time, Standard & Poor’s affirmed its long-term debt rating of ‘BBB’. Standard & Poor’s stated that the outlook revision reflects the additional leverage and stress on credit metrics that will result from the acquisition of Porous Media, which had been announced at the time. The negative outlook indicates the rating could be lowered if financial policies become more aggressive or if operating results are weaker than expected.
As of June 28, 2008, our capital structure consisted of $1,028.8 million in total indebtedness and $2,097.2 million in shareholders’ equity. The ratio of debt-to-total capital at June 28, 2008 was 32.9 percent, compared with 35.7 percent at December 31, 2007 and 40.1 percent at June 30, 2007. Our targeted debt-to-total capital ratio is approximately 40 percent. We will exceed this target ratio from time to time as needed for operational purposes and/or acquisitions.
We expect to continue to have cash requirements to support working capital needs and capital expenditures, to pay interest and service debt, to pay dividends to shareholders, and to repurchase Company stock. In order to meet these cash requirements, we intend to use available cash and internally generated funds, and to borrow under our committed and uncommitted credit facilities.
Dividends paid in the first six months of 2008 were $33.7 million, or $0.34 per common share, compared with $30.0 million, or $0.30 per common share, in the prior year period. We have increased dividends every year for the last 32 years and expect to continue paying dividends on a quarterly basis.
In December 2007, the Board of Directors authorized the repurchase of shares of our common stock during 2008 up to a maximum dollar limit of $50 million. As of June 28, 2008, we had repurchased an additional 654,118 shares for $22.4 million pursuant to this plan and, accordingly, we have the authority to repurchase additional shares up to a maximum dollar limit of $27.6 million for the remainder of 2008.
The total gross liability for uncertain tax positions under FIN 48 at June 28, 2008 is approximately $24.4 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.
There have been no material changes with respect to the contractual obligations, other than noted above, or off-balance sheet arrangements described in our 2007 Annual Report on Form 10-K.
Other financial measures
In addition to measuring our cash flow generation or usage based upon operating, investing, and financing classifications included in the Consolidated Statements of Cash Flows, we also measure our free cash flow and our conversion of income from continuing operations. We have a long-term goal to consistently generate free cash flow that equals or exceeds 100% conversion of adjusted income from continuing operations. Free cash flow and conversion of income from continuing operations are non-GAAP financial measures that we use to assess our cash flow performance. We believe free cash flow and conversion of income from continuing operations 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, repurchase common stock and repay debt. In addition, free cash flow and conversion of income from continuing operations are used as a criterion to measure and pay compensation-based incentives. Our measure of free cash flow and conversion of income from continuing operations may not be comparable to similarly titled measures reported by other companies. The following table is a reconciliation of free cash flow to cash flows from continuing operations:
                 
    Six months ended
    June 28   June 30
In thousands   2008   2007
 
Net cash provided by (used for) continuing operations
  $ 79,748     $ 99,576  
Capital expenditures
    (26,328 )     (30,058 )
Proceeds from sale of property and equipment
    3,802       1,526  
 
Free Cash Flow
    57,222       71,044  
 
In 2008, our objective is to generate free cash flow that equals or exceeds 100% conversion of adjusted net income.

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NEW ACCOUNTING STANDARDS
See Note 2 (New Accounting Standards) of ITEM 1.
CRITICAL ACCOUNTING POLICIES
In our 2007 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 June 28, 2008. For additional information, refer to Item 7A of our 2007 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 June 28, 2008 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 June 28, 2008 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 June 28, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Pentair, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Pentair, Inc. and subsidiaries (the “Corporation”) as of June 28, 2008 and June 30, 2007, and the related condensed consolidated statements of income for the three month and six month periods ended June 28, 2008 and June 30, 2007, and of cash flows for the six-month periods ended June 28, 2008 and June 30, 2007. These interim condensed consolidated financial statements are the responsibility of the Corporation’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 sheets of Pentair, Inc. and subsidiaries as of December 31, 2007, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the year then ended prior to the reclassification for the discontinued operations described in Note 7 to the accompanying condensed consolidated financial statements (not presented herein). Our report dated February 25, 2008, expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph relating to the Corporation’s changes in its method of accounting for uncertain tax positions in 2007. We also audited the adjustments described in Note 7 that were applied to reclassify the December 31, 2007 consolidated balance sheet of Pentair, Inc. and subsidiaries (not presented herein) for discontinued operations. In our opinion, such adjustments are appropriate and have been properly applied to the previously issued consolidated balance sheet in deriving the accompanying retrospectively adjusted condensed consolidated balance sheet as of December 31, 2007.
DELOITTE & TOUCHE LLP
Minneapolis, MN
July 22, 2008

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PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
Environmental and Litigation
There have been no further material developments from the disclosures contained in our 2007 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 and certain of its subsidiaries (the “Essef Defendants”) 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 in July 1994.
The remaining 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. The first trial in 2006 resulted in a verdict against the Essef Defendants for Celebrity’s out-of-pocket expenses of $10.4 million. Verdicts for lost profits ($47.6 million) and lost enterprise value ($135 million) were reversed in January 2007. In the retrial in June 2007, the jury awarded Celebrity damages for lost profits for 1994 and 1995 of $15.2 million (after netting for amounts taken into account by the earlier verdict for out-of-pocket expenses). The verdicts were exclusive of pre-judgment interest and attorneys’ fees.
In February 2008, the District Court entered judgment against the Essef Defendants in the aggregate amount of $30.4 million for out-of-pocket costs and expenses and lost profits, including interest accrued to February 29, 2008. On March 28, 2008, Celebrity filed a notice of appeal to the Second Circuit Court of Appeals. The Essef Defendants filed their notice of cross-appeal on April 10, 2008.
In late June 2008, the parties agreed to settle the outstanding claims for a total of $35 million, inclusive of all costs and interest to the date of payment. A Settlement Agreement and Release was entered into on July 8, 2008 pursuant to which we will pay Celebrity approximately $28 million no later than August 7, 2008. The first layer excess liability insurer with respect to this claim will pay Celebrity the balance of its policy limits, which is approximately $7 million. With those payments, the case will be closed.
We have assessed the impact of the final judgment and appeals on our previously established reserves for this matter and have increased the accruals as of June 28, 2008 by approximately $20 million to an aggregate of $28 million.
We have identified an additional insurance policy that we believe applies to this liability. The insurer has denied coverage, and we have initiated suit to recover for our loss in the Horizon case. The increase in our accruals discussed above does not take into account any potential recovery under this additional insurance policy.
We believe that this settlement amount will be tax-deductible in 2008. We will borrow the amount of the settlement payment of $28 million under our revolving credit agreement with our banks.
ITEM 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in ITEM 1A. of our 2007 Annual Report on Form 10-K.

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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 2008:
                                 
    (a)   (b)   (c)   (d)
                    Total Number of Shares   Dollar Value of Shares
    Total Number           Purchased as Part of   that May Yet Be
    of Shares   Average Price   Publicly Announced Plans   Purchased Under the
Period   Purchased   Paid per Share   or Programs   Plans or Programs
 
March 30 - April 26, 2008
    137,008     $ 34.61       103,527     $ 33,974,176  
April 27 - May 24, 2008
    84,674     $ 37.21       56,656     $ 31,874,614  
May 25 - June 28, 2008
    122,810     $ 35.12       122,322     $ 27,578,808  
 
Total
    344,492               282,505          
 
(a)   The purchases in this column include shares repurchased as part of our publicly announced programs and, in addition, 33,481 shares for the period March 30 -April 26, 2008, 28,018 shares for the period April 27 — May 24, 2008, and 488 shares for the period May 25 — June 28, 2008 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 non-vested shares.
 
(b)   The average price paid in this column includes shares repurchased as part of our publicly announced programs and shares deemed surrendered to us by participants in the Plans to satisfy the exercise price or withholding of tax obligations related to the exercise price of stock options and non-vested shares.
 
(c)   The number of shares in this column represents the number of shares repurchased as part of a publicly announced program to repurchase up to $50 million of our common stock.
 
(d)   In December 2007, the Board of Directors authorized the repurchase of shares of our common stock during 2008 up to a maximum dollar limit of $50 million. As of June 28, 2008, we had purchased 654,118 shares for $22.4 million pursuant to this authorization during 2008. This authorization expires on December 31, 2008.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company’s annual meeting of shareholders was held on May 1, 2008. There were 98,979,984 shares of Common Stock entitled to vote at the meeting and a total of 84,902,973 shares (85.78%) were represented at the meeting.
     Proposal 1. — Election of Directors
To elect three directors of the Company to terms expiring in 2011. Each nominee for director was elected by a vote of the shareholders as follows:
                 
Nominees   Votes For   Votes Withheld
 
               
Leslie Abi-Karam
    80,362,507       4,540,466  
Jerry W. Burris
    81,338,613       3,564,360  
Ronald L. Merriman
    70,958,515       13,944,458  
The Company’s other directors that were in office prior to the annual meeting of shareholders and with terms of office that continue after the annual meeting of shareholders are Glynis A. Bryan, T. Michael Glenn, Charles A. Haggerty, David H. Y. Ho, Randall J. Hogan, David A. Jones and William T. Monahan.
     Proposal 2. — Proposal to Approve the Pentair, Inc. 2008 Omnibus Stock Incentive Plan
To approve the Pentair, Inc. 2008 Omnibus Stock Incentive Plan. The proposal was approved by a vote of the shareholders as follows:
             
Votes For   Votes Against   Abstain   Broker Non-Vote
52,738,356
  15,672,395   422,864   16,069,357
     Proposal 3. — Ratification of Appointment of Deloitte & Touche LLP as our Independent Registered Public Accounting Firm for 2008
To ratify the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2008. The proposal was approved by a vote of the shareholders as follows:
             
Votes For   Votes Against   Abstain   Broker Non-Vote
82,990,447   1,690,482   222,044  

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ITEM 6. Exhibits
     (a) Exhibits
     
15
  Letter Regarding Unaudited Interim Financial Information.
 
   
31.1
  Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
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.

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SIGNATURE
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 22, 2008.
         
  PENTAIR, INC.
Registrant
 
 
  By   /s/ John L. Stauch    
    John L. Stauch   
    Executive Vice President and Chief Financial Officer   
 
         
     
  By   /s/ Mark C. Borin    
    Mark C. Borin   
    Corporate Controller and Chief Accounting Officer   
 

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Exhibit Index to Form 10-Q for the Period Ended June 28, 2008
     
15
  Letter Regarding Unaudited Interim Financial Information
 
   
31.1
  Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
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.