PNR 10-Q Quarter ended March 30, 2013

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended March 30, 2013

OR

Commission file number 001-11625

Pentair Ltd.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: 41-52-630-48-00

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 ¨

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

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

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

On March 30, 2013, 204,522,310 shares of Registrant’s common stock were outstanding.

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Pentair Ltd. and Subsidiaries

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See accompanying notes to condensed consolidated financial statements.

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See accompanying notes to condensed consolidated financial statements.

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See accompanying notes to condensed consolidated financial statements.

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Condensed Consolidated Statements of Changes in Equity (Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Notes to condensed consolidated financial statements (unaudited)

The accompanying unaudited condensed consolidated financial statements of Pentair Ltd. and subsidiaries (“we,” “us,” “our,” “Pentair,” or “the Company”) have been prepared following the requirements of the U.S. 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 of America 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 Annual Report on Form 10-K for the year ended December 31, 2012.

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.

New Accounting Standards

In February 2013, the FASB issued authoritative guidance surrounding the presentation of items reclassified from Accumulated other comprehensive income (loss) (“ AOCI”) to net income. This guidance requires entities to disclose, either in the notes to the consolidated financial statements or parenthetically on the face of the statement that reports comprehensive income, items reclassified out of AOCI and into net income in their entirety and the effect of the reclassification on each affected net income line item. In addition, for AOCI reclassification items that are not reclassified in their entirety into net income, a cross reference to other required disclosures is required. This guidance was effective for fiscal years and interim periods beginning after December 15, 2012. The adoption of this guidance on January 1, 2013 did not impact our financial condition or results of operations. The reclassifications out of AOCI and into net income were not material for the three months ended March 30, 2013.

Material acquisitions

Pentair Ltd., formerly known as Tyco Flow Control International Ltd. (as used prior to the Merger (as defined below), “Flow Control”), took its current form on September 28, 2012 as a result of a spin-off of Flow Control from its parent, Tyco International Ltd. (“Tyco”), and a reverse acquisition involving Pentair, Inc. Prior to the spin-off, Tyco engaged in an internal restructuring whereby it transferred to Flow Control certain assets related to the flow control business of Tyco, and Flow Control assumed from Tyco certain liabilities related to the flow control business of Tyco. On September 28, 2012 prior to the Merger, Tyco effected a spin-off of Flow Control through the pro-rata distribution of 100% of the outstanding common shares of Flow Control to Tyco’s shareholders (the “Distribution”), resulting in the distribution of approximately 110.9 million of our common shares to Tyco’s shareholders. Immediately following the Distribution, an indirect, wholly-owned subsidiary of ours merged with and into Pentair, Inc., with Pentair, Inc. surviving as an indirect, wholly-owned subsidiary of ours (the “Merger”). The Merger was accounted for as a reverse acquisition under the purchase method of accounting with Pentair, Inc. treated as the acquirer. Flow Control’s net sales and income for the three months ending March 30, 2013 were $888 million and $22 million, respectively.

During the first quarter of 2013, the Company recorded fair value adjustments to its preliminary allocation of purchase price, including increases to accounts receivable, current liabilities, and net deferred tax liabilities and decreases to inventory, other current assets, property, plant and equipment and other non-current assets. These adjustments were applied retrospectively back to the date of the Merger. The net impact of those adjustments increased the preliminary allocation of goodwill by less than $1 million.

The purchase price has been preliminarily allocated based on the estimated fair value of net assets acquired and liabilities assumed at the date of the Merger. The preliminary purchase price allocation is subject to further refinement and may require significant adjustments to arrive at the final purchase price allocation. These adjustments will primarily relate to accounts receivable, inventories, property, plant and equipment, certain contingent liabilities and income tax-related items. We expect the purchase price allocation to be completed in the third quarter of 2013. There can be no assurance that such finalization will not result in material changes from the preliminary purchase price allocation. The purchase price is subject to a working capital and net indebtedness adjustment.

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Notes to condensed consolidated financial statements (unaudited)

The following table summarizes our preliminary fair values of the assets acquired and liabilities assumed in the Merger:

The excess of purchase price over tangible net assets and identified intangible assets acquired was allocated to goodwill in the amount of $2,526 million. Goodwill has been preliminarily allocated to our reporting segments as follows: $321 million to Water & Fluid Solutions, $1,334 million to Valves & Controls and $871 million to Technical Solutions. None of the goodwill recognized from the Merger is expected to be deductible for income tax purposes. Goodwill recognized from the Merger reflects the value of future income resulting from synergies of our combined operations. Identifiable intangible assets acquired as part of the Merger were $1,425 million and include $362 million of indefinite life trade name intangibles and the following definite-lived intangibles: $906 million of customer relationships with a weighted average useful life of 14.2 years, $116 million of proprietary technology with a weighted average useful life of 13.7 years and $41 million of customer backlog with a weighted average useful life of less than one year.

Pro forma results of material acquisitions

The following unaudited pro forma condensed consolidated financial results of operations are presented as if the Merger had been completed on January 1, 2011:

The 2012 unaudited pro forma net income excludes the impact of $12 million of transaction related costs associated with the Merger.

The pro forma consolidated financial information was prepared for comparative purposes only and includes certain adjustments, as noted above. The adjustments are estimates based on currently available information and actual amounts may have differed materially from these estimates. They do not reflect the effect of costs or synergies that would have been expected to result from the integration of Flow Control. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the business combination occurred at the beginning of the period presented or of future results of the consolidated entities.

Other acquisitions

On October 4, 2012, we acquired, as part of Valves & Controls, the remaining 25% equity interest in Pentair Middle East Holding S.a.r.l. (“KEF”), a privately held company, for $100 million in cash. Prior to the acquisition, we held a 75% equity interest in KEF, a vertically integrated valve manufacturer in the Middle East. There was no pro forma impact from this acquisition as the results of KEF were consolidated into Flow Control’s financial statements prior to acquiring the remaining 25% interest in KEF.

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Notes to condensed consolidated financial statements (unaudited)

Additionally, during the year ended December 31, 2012, we completed other small acquisitions as part of Water & Fluid Solutions with purchase prices totaling $121 million in cash, net of cash acquired. Total goodwill recorded as part of the purchase price allocations was $81 million, $67 million of which is tax deductible.

Divestitures

During the first quarter of 2013, we sold a business that was part of Technical Solutions for cash of $30 million, net of transaction costs, resulting in a gain of $17 million. Goodwill of $5 million was included in the assets of the business sold. The sales price is subject to a working capital adjustment.

Total share-based compensation expense was $10 million and $5 million for the first quarter of 2013 and 2012, respectively. Total compensation expense for restricted stock units during the first quarter of 2013 and 2012 was $7 million and $3 million, respectively. Restricted stock units are valued at market value on the date of grant and are typically expensed over a three to four year vesting period. Total compensation expense for stock option awards was $3 million and $2 million for the first quarter of 2013 and 2012, respectively. Option awards are granted with an exercise price equal to the market price of our common shares on the date of grant. Option awards generally vest over a three-year period and are expensed over the vesting period.

During the first quarter of 2013, we issued our annual share-based compensation grants under the Pentair Ltd. 2012 Stock and Incentive Plan to eligible employees. The total number of awards issued was approximately 1.2 million, of which 0.9 million were stock options and 0.3 million were restricted stock units. The weighted-average grant date fair value of the stock options and restricted stock units issued was $13.89 and $50.60, 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:

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

We based the expected life assumption on historical experience as well as the terms and vesting periods of the options granted. For purposes of determining expected share price volatility, we considered a rolling average of historical volatility measured over a period approximately equal to the expected option term. The risk-free interest 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.

During the three months ended March 30, 2013 and the year ended December 31, 2012, we initiated certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business. The 2013 initiatives included the reduction in hourly and salaried headcount of approximately 400 employees, which included 100 in Water & Fluid Solutions, 100 in Valves & Controls and 200 in Technical Solutions. The 2012 initiatives included the reduction in hourly and salaried headcount of approximately 1,000 employees, which included 500 in Water & Fluid Solutions, 300 in Valves & Controls and 200 in Technical Solutions.

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Notes to condensed consolidated financial statements (unaudited)

Restructuring related costs included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) included costs for severance and other restructuring costs as follows:

Total restructuring costs related to Water & Fluid Solutions, Valves & Controls and Technical Solutions were $7 million, $5 million and $10 million, respectively, for the three months ended March 30, 2013.

Activity in the restructuring accrual recorded in Other current liabilities and Employee compensation and benefits in the Condensed Consolidated Balance Sheets is summarized as follows for the three months ended March 30, 2013:

Basic and diluted earnings per share were calculated as follows:

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Notes to condensed consolidated financial statements (unaudited)