Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking Statements

This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact are forward-looking statements. Without limitation, any statements preceded or followed by or that include the words “targets,” “plans,” “believes,” “expects,” “intends,” “will,” “likely,” “may,” “anticipates,” “estimates,” “projects,” “should,” “would,” “positioned,” “strategy,” “future” or words, phrases or terms of similar substance or the negative thereof, are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors include the ability to successfully complete the Redomicile (as defined below) and achieve the expected benefits from the Redomicile; the ability to successfully integrate Pentair, Inc. and the Flow Control (as defined below) business and achieve expected benefits from the Merger (as defined below); overall global economic and business conditions; competition and pricing pressures in the markets we serve; the strength of housing and related markets; volatility in currency exchange rates and commodity prices; inability to generate savings from excellence in operations initiatives consisting of lean enterprise, supply management and cash flow practices; increased risks associated with operating foreign businesses; the ability to deliver backlog and win future project work; failure of markets to accept new product introductions and enhancements; the impact of changes in laws and regulations, including those that limit U.S. tax benefits; the outcome of litigation and governmental proceedings; and the ability to achieve our long-term strategic operating goals. Additional information concerning these and other factors is contained in our filings with the U.S. Securities and Exchange Commission, including in Item 1A of this Annual Report on Form 10-K. All forward-looking statements speak only as of the date of this report. Pentair Ltd. assumes no obligation, and disclaims any obligation, to update the information contained in this report.

Overview

Pentair Ltd. is a focused diversified industrial manufacturing company comprising four reporting segments: Valves & Controls, Process Technologies, Flow Technologies and Technical Solutions. During the fourth quarter of 2013, we reorganized our business segments to reflect a new operating structure and management of our Global Business Units, resulting in a change from three reporting segments to four. All prior period amounts related to the segment change have been retrospectively reclassified throughout this Annual Report on Form 10-K to conform to the new presentation. We now have four reporting segments: Valves & Controls, Process Technologies, Flow Technologies and Technical Solutions. We classify our operations into business segments based primarily on types of products offered and markets served. For the year ended December 31, 2013, Valves & Controls, Process Technologies, Flow Technologies and Technical Solutions accounted for 33 percent, 23 percent, 22 percent and 22 percent of total revenues, respectively.

Pentair Ltd. took its current form on September 28, 2012 as a result of a reverse acquisition (the "Merger") involving Pentair, Inc. and an indirect, wholly-owned subsidiary of Flow Control (defined below), with Pentair, Inc. surviving as an indirect, wholly-owned subsidiary of Pentair Ltd. "Flow Control" refers to Pentair Ltd. prior the Merger. Prior to the Merger, Tyco International Ltd. ("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. The Merger was accounted for as a reverse acquisition under the purchase method of accounting with Pentair, Inc. treated as the acquirer.

In May 2011, Pentair, Inc. acquired, as part of Process Technologies, the Clean Process Technologies (“CPT”) division of privately held Norit Holding B.V. for $715.3 million (€502.7 million translated at the May 12, 2011 exchange rate). CPT’s results of operations have been included in our consolidated financial statements since the date of acquisition. CPT is a global leader in membrane solutions and clean process technologies in the high growth water and beverage filtration and separation segments.

On January 30, 2014, we acquired, as part of Process Technologies, the remaining 19.9 percent ownership interest in two entities, a U.S. entity and an international entity (collectively, Pentair Residential Filtration or “PRF”), from GE Water & Process Technologies (a unit of General Electric Company) (“GE”) for $134.3 million in cash. Prior to the acquisition, we held a 80.1 percent ownership equity interest in PRF, representing our and GE's respective global water softener and residential water filtration businesses.

Key Trends and Uncertainties Regarding Our Existing Business

The following trends and uncertainties affected our financial performance in 2013 and 2012, and will likely impact our results in the future:

•	In September 2012, we completed the Merger. With an acquisition of this magnitude and complexity, there are uncertainties and risks associated with realizing the amount and timing of anticipated growth opportunities and cost and tax synergies as described in ITEM 1A – Risk Factors.

•

We identified specific market opportunities that we continue to pursue that we find attractive, both within and outside the United States. We are reinforcing our businesses to more effectively address these opportunities through targeted research and development and additional sales and marketing resources. Unless we successfully penetrate these product and geographic markets, our organic growth would likely be limited.

•	End markets for new home building and new pool starts continue to show signs of rebound from their historically low levels in 2007—2011. New product introductions, expanded distribution, channel penetration and a recovering housing market resulted in volume increases for 2012 and 2013 in these end markets.

•	Despite the overall strength of our end-markets, we experience differing levels of volatility depending on the end-market and may continue to do so over the medium and longer term. While we believe the general trends are favorable, factors specific to each of our major end-markets may affect the capital spending plans of our customers.

•	Economic uncertainty in Australia has negatively impacted business results and may continue to do so for the foreseeable future.

•

Through 2012 and 2013, we experienced material and other cost inflation. We strive for productivity improvements, and we implement increases in selling prices to help mitigate this inflation. We expect the current economic environment will result in continuing price volatility for many of our raw materials. Commodity prices have begun to moderate, but we are uncertain as to the timing and impact of these market changes.

•

We have a long-term goal to consistently generate free cash flow that equals or exceeds 100 percent of our net income. We define free cash flow as cash flow from operating activities less capital expenditures plus proceeds from sale of property and equipment. Our free cash flow for the full year 2013 was $751.3 million, exceeding our goal of 100 percent net income conversion. We expect to generate free cash flow that equals or exceeds 105 percent of our net income in 2014. We are continuing to target reductions in working capital and particularly inventory as a percentage of sales. See the discussion of “Other financial measures” under “Liquidity and Capital Resources—Other financial measures” in this report for a reconciliation of our free cash flow.

In 2014, our operating objectives include the following:

•	Continued integration of Pentair, Inc. and the Flow Control business;

•	Increasing our presence in both fast growth and developed regions and vertical focus to grow in those markets in which we have competitive advantages;

•	Focusing on developing global talent in light of our increased global presence;

•	Optimizing our technological capabilities to increasingly generate innovative new products; and

•	Driving operating excellence through lean enterprise initiatives, with specific focus on sourcing and supply management, cash flow management and lean operations.

We may seek to meet our objectives of expanding our geographic reach internationally and expanding our presence in our various channels to market by acquiring technologies and products to broaden our businesses’ capabilities to serve additional markets and through acquisitions. We may also consider the divestiture of discrete business units to further focus our businesses on our most attractive markets.

Proposed Redomicile

On December 10, 2013, Pentair Ltd. entered into a Merger Agreement (the “Merger Agreement”) with Pentair plc, a newly-formed Irish public limited company and subsidiary of Pentair (“Pentair-Ireland”). Under the Merger Agreement, and subject to the conditions set forth in the Merger Agreement, Pentair will merge with and into Pentair-Ireland, with Pentair-Ireland being the surviving company (the “Redomicile”), thereby changing the jurisdiction of organization of the publicly-traded parent

company from Switzerland to Ireland. Pentair shareholders will receive one ordinary share of Pentair-Ireland for each common share of Pentair held immediately prior to the Redomicile.

Upon completion of the Redomicile, Pentair-Ireland intends to manage its affairs so that it is centrally managed and controlled in the United Kingdom (the “U.K.”) and therefore have its tax residency in the U.K. Pentair-Ireland will continue to own and conduct the same businesses as Pentair owned and conducted prior to the Merger, except that Pentair-Ireland will replace Pentair as the publicly-traded parent company. Pentair-Ireland will remain subject to U.S. Securities and Exchange Commission (“SEC”) reporting requirements and the applicable corporate governance rules of the New York Stock Exchange.

The Redomicile is subject to Pentair shareholder approval of the Merger Agreement and certain other conditions. Pentair’s shareholders will be asked to vote to approve the Merger Agreement at an extraordinary general meeting of shareholders, which Pentair expects to be held during the second quarter of 2014.

We anticipate that having our publicly-traded parent company incorporated in Ireland and tax resident in the U.K. will provide us the following benefits:

•	Incorporation of our publicly-traded parent company in Ireland would enable us to benefit by being subject to a legal and regulatory structure in a jurisdiction with a well-developed legal system and corporate law with established standards of corporate governance.

•	The U.K. has a developed, stable and internationally competitive tax system.

•

The legal requirements we will be subject to as a company incorporated in Ireland, listed on the NYSE and subject to SEC disclosure and shareholder voting requirements strike the right balance between robust external governance oversight and regulation of our executive and director pay practices and the ability of our compensation committee consisting of independent directors to determine executive compensation to provide incentives to our executive management and to offer competitive salaries and benefits.

CONSOLIDATED RESULTS OF OPERATIONS

The consolidated results of operations were as follows:

	Years ended December 31										% / point change
In millions	2013			2012			2011				2013 vs. 2012		2012 vs. 2011
Net sales	$	7,479.7		$	4,416.1		$	3,456.7			69.4	%	27.8	%
Cost of goods sold	5,006.8			3,146.5			2,383.0				59.1	%	32.0	%
Gross profit	2,472.9			1,269.6			1,073.7				94.8	%	18.2	%
% of net sales	33.1		%	28.7		%	31.1		%		4.4		(2.4	)
Selling, general and administrative	1,562.1			1,158.4			694.8				34.8	%	66.7	%
% of net sales	21.0		%	26.2		%	20.1		%		(5.2	)	6.1
Research and development	125.8			93.6			78.2				34.4	%	19.7	%
% of net sales	1.7		%	2.1		%	2.3		%		(0.4	)	(0.2	)
Operating income (loss)	774.0			(43.1		)	100.2				N.M.		(143.0	)%
% of net sales	10.3		%	(1.0		)%	2.9		%		11.3		(3.9	)
Gain on sale of businesses	(19.7		)	—			—				N.M.		—	%
Loss on early extinguishment of debt	—			75.4			—				(100.0	)%	N.M.
Net interest expense	69.1			67.6			58.9				2.2	%	14.8	%
Net income (loss) before income taxes and noncontrolling interest	726.4			(184.0		)	43.2				N.M.		N.M.
Provision (benefit) for income taxes	183.8			(79.4		)	46.4				N.M.		N.M.
Effective tax rate	25.3		%	43.1		%	107.3		%		(17.8	)	(64.2	)

N.M. Not Meaningful

Net sales

The components of the consolidated net sales change were as follows:

	2013 vs. 2012			2012 vs. 2011
Volume	7.3	%		(1.0	)%
Acquisition	62.1	%		28.3	%
Price	1.4	%		1.5	%
Currency	(1.4	)%		(1.0	)%
Total	69.4	%		27.8	%

The 69.4 percentage point increase in consolidated net sales in 2013 from 2012 was primarily the result of:

•	sales volume of the Flow Control businesses of $3,725.7 million in 2013, compared to $886.5 million in 2012;

•	organic sales growth in Process Technologies and Flow Technologies due to higher sales of certain pool products serving the North American residential housing market and increased demand for global food & beverage solutions;

•	growth in developed regions led by strength in the U.S. and Western Europe;

•	growth in emerging regions of the Middle East, Africa and Eastern Europe; and

•	selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•	lower sales in infrastructure; and

•	unfavorable foreign currency effects.

The 27.8 percentage point increase in consolidated net sales in 2012 from 2011 was primarily the result of:

•	sales volume of the Flow Control businesses subsequent to the Merger of $886.5 million and higher sales volume related to the May 2011 acquisition of CPT;

•	organic sales growth in Process Technologies and Flow Technologies primarily due to higher sales of certain pump, pool and filtration products primarily serving the North American residential housing market and other global markets;

•	continued sales growth in fast growth regions including in Latin America and Eastern Europe; and

•	selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•	decreases in Technical Solutions sales volume in Western Europe and in the infrastructure vertical; and

•	unfavorable foreign currency effects.

Gross profit

The 4.4 percentage point increase in gross profit as a percentage of sales in 2013 from 2012 was primarily the result of:

•	lower cost of goods sold as a result of inventory fair value step-up and customer backlog recorded as part of the Merger purchase accounting, which decreased from $179.6 million in 2012 to $86.9 million in 2013;

•	savings generated from our PIMS initiatives including lean and supply management practices and synergies from the combined operations subsequent to the Merger; and

•	selective increases in selling prices across all business segments to mitigate inflationary cost increases.

These increases were partially offset by:

•	inflationary increases related to raw materials and labor costs.

The 2.4 percentage point decrease in gross profit as a percentage of sales in 2012 from 2011 was primarily the result of:

•	higher cost of goods sold of $179.6 million in 2012 as a result of inventory fair value step-up and customer backlog recorded as part of the Merger purchase accounting; and

•	inflationary increases related to raw materials and labor costs.

These decreases were partially offset by:

•	cost savings generated from our PIMS initiatives including lean and supply management practices;

•	selective increases in selling prices in Process Technologies, Flow Technologies, and Technical Solutions to mitigate inflationary cost increases; and

•	higher cost of goods sold in 2011 as a result of the inventory fair value step-up and customer backlog recorded as part of the CPT purchase accounting.

Selling, general and administrative ("SG&A")

The 5.2 percentage point decrease in SG&A expense as a percentage of sales in 2013 from 2012 was primarily the result of:

•	"mark-to-market" actuarial gains related to pension and other post-retirement benefit plans of $63.2 million in 2013, compared to "mark-to-market" actuarial losses of $146.2 million in 2012;

•	costs associated with the Merger in 2012 that did not reoccur in 2013, including $23.2 million in transaction advisory fees, $21.8 million of change of control costs and $34.1 million of other transaction costs;

•	trade name impairment charge of $11.0 million for 2013, compared to $60.7 million in 2012;

•	sales volume of the Flow Control businesses subsequent to the Merger, which resulted in increased leverage on our fixed operating expenses; and

•	savings generated from back-office consolidation, reduction in personnel and other lean initiatives.

These decreases were partially offset by:

•	restructuring costs of $113.5 million in 2013, compared to $66.9 million in 2012;

•	certain increases for labor and related costs; and

•	intangible asset amortization associated with the Merger.

The 6.1 percentage point increase in SG&A expense as a percentage of sales in 2012 from 2011 was primarily the result of:

•	“mark-to-market” actuarial losses related to pension and other post-retirement benefit plans of $146.2 million in 2012, an increase of $80.0 million from 2011;

•	costs associated with the Merger, including $23.2 million in transaction advisory fees, $21.8 million of change of control costs and $34.1 million of other transaction costs;

•	restructuring costs of $66.9 million in 2012, compared to $13.0 million in 2011;

•	trade name impairment charge of $60.7 million;

•	intangible asset amortization related to the Merger and to the May 2011 acquisition of CPT; and

•	continued investments in future growth with emphasis on international markets, including personnel and business infrastructure investments.

These increases were partially offset by:

•	a nonrecurring goodwill impairment charge in 2011 of $200.5 million in Process Technologies; and

•	sales volume of the Flow Control businesses subsequent to the Merger, which resulted in increased leverage on our fixed operating expenses.

Research and development ("R&D")

The 0.4 percentage point decrease in R&D expense as a percentage of sales in 2013 from 2012 was primarily the result of:

•	lower R&D expenditures in 2013 versus 2012 as compared to sales volume from the Flow Control businesses.

This decrease was partially offset by:

•	continued investments in the development of innovative new products for future growth.

The 0.2 percentage point decrease in R&D expense as a percentage of sales in 2012 from 2011 was primarily the result of:

•	sales volume of the Flow Control businesses subsequent to the Merger, which resulted in increased leverage on the R&D spending; and

•	higher sales volumes in Process Technologies which resulted in increased leverage on the R&D spending.

These decreases were partially offset by:

•	continued investments in the development of new products to generate growth.

Net interest expense

The 2.2 percentage point increase in net interest expense in 2013 from 2012 was primarily the result of:

•	the impact of higher debt levels following the Merger; and

•	additional interest expense of $2.1 million in the second quarter of 2013 for the working capital and net indebtedness adjustment related to the Merger.

These increases were partially offset by:

•	reduced overall interest rates in effect on our outstanding debt; and

•	the impact of higher cash balances following the Merger.

The 14.8 percentage point increase in net interest expense in 2012 from 2011 was primarily the result of:

•	the impact of higher debt levels following the Merger.

This increase was partially offset by:

•	reduced overall interest rates in effect on our outstanding debt.

Gain on sale of businesses, net

During 2013, we sold businesses that were part of Technical Solutions and Flow Technologies for a cash purchase price of $30.1 million and $13.4 million, respectively, net of transaction costs, resulting in a net gain of $16.8 million and $2.9 million, respectively.

Loss on early extinguishment of debt

In October 2012, we redeemed the remaining outstanding aggregate principal of our 5.65% fixed rate senior notes due 2013-2017 totaling $400 million and our 1.05% floating rate senior notes due 2013 totaling $100 million (the “Fixed/Floating Rate Notes”). The redemptions included make-whole premiums of $65.8 million. Concurrent with the redemption of the Fixed/Floating Rate Notes, we terminated a related interest rate swap that was designated as a cash flow hedge, which resulted in the reclassification of $3.4 million of previously unrecognized variable to fixed swap losses from Accumulated Other Comprehensive Income (Loss) ("AOCI") to earnings in October 2012. All costs associated with the redemption were recorded as a Loss on the early extinguishment of debt including $0.6 million of unamortized deferred financing costs.

In December 2012, Pentair Finance S.A. (“PFSA”), completed an exchange offer pursuant to which it exchanged $373 million in aggregate principal amount of 5.00% Senior Notes due 2021 of Pentair, Inc. a wholly-owned, indirect subsidiary of the Company for a like amount of new 5.00% Senior Notes due 2021 of PFSA, plus $5.6 million in transaction-related costs which were recorded as a Loss on the early extinguishment of debt.

Provision (benefit) for income taxes

The 17.8% percentage point decrease in the effective tax rate in 2013 from 2012 was primarily due to:

•	the mix of global earnings, including the impact of the Merger; and

•	the decrease in non-deductible transaction costs during 2013 compared to 2012.

The decreases were partially offset by:

•	the favorable tax impact related to the 2012 exchange offer that did not occur in 2013; and

•	the favorable resolution of U.S. federal and state tax audits in 2012 that did not occur in 2013.

The 64.2 percentage point decrease in the effective tax rate in 2012 from 2011 was primarily due to:

•	the unfavorable tax impact of the $200.5 million goodwill impairment charge in 2011;

•	the favorable resolution of U.S. federal and state tax audits in 2012 that did not occur in 2011;

•	the mix of global earnings, including the impact of the Merger and the CPT acquisition; and

•	the favorable tax impact related to the 2012 exchange offer.

These decreases were partially offset by:

•	nonrecurring impacts of the Merger, including non-deductible transaction costs and loss of domestic manufacturing deduction tax benefits.

SEGMENT RESULTS OF OPERATIONS

This summary that follows provides a discussion of the results of operations of each of our four reportable operating segments (Valves & Controls, Process Technologies, Flow Technologies and Technical Solutions). Each of these segments is comprised of various product offerings that serve multiple end markets.

Valves & Controls

The Valves & Controls segment designs, manufactures, markets and services valves, fittings, automation and controls and actuators for the energy and industrial verticals.

The net sales and operating income (loss) for Valves & Controls were as follows:

	Years ended December 31										% / point change
In millions	2013			2012			2011				2013 vs. 2012		2012 vs. 2011
Net sales	$	2,469.2		$	548.6		$	—			350.1	%	—	%
Operating income (loss)	161.4			(76.8		)	—				310.2	%	—	%
% of net sales	6.5		%	(14.0		)%	—		%		20.5		—

Net sales

The components of the change in Valves & Controls net sales were as follows:

	2013 vs. 2012
Volume	20.7	%
Acquisition	331.3	%
Price	1.7	%
Currency	(3.6	)%
Total	350.1	%

The 350.1 percentage point increase in Valves & Controls net sales in 2013 from 2012 was primarily the result of:

•	a full year of sales volume in 2013, compared to one quarter in 2012; and

•	continued sales growth in the Middle East and the oil & gas industry.

The Valves & Controls net sales in 2012 were the result of:

•	sales volume of the Flow Control businesses subsequent to the Merger of $548.6 million. Valves & Controls was a new reporting segment, effective with the Merger and as a result, 2012 net sales represents the segment’s sales for the fourth quarter of 2012.

Operating income (loss)

The 20.5 percentage point increase in operating income for Valves & Controls as a percentage of net sales in 2013 from 2012 was primarily the result of:

•	higher volume related to the acquisition of Flow Control, which resulted in increased leverage of our fixed cost base;

•	lower cost of goods sold from inventory fair value step-up and customer backlog recorded as part of the Merger purchase accounting, which decreased from $113.5 million in 2012 to $80.6 million in 2013; and

•	savings generated from our PIMS initiatives, including lean and supply management practices.

These increases were partially offset by

•	costs related to the Merger, including integration and standardization;

•	restructuring costs of $51.0 million in 2013 compared to $5.1 million in 2012;

•	low margin on large projects and unfavorable project mix; and

•	inflationary increases related to raw materials and labor costs.

The operating loss for Valves & Controls in 2012 was the result of:

•	Valves & Controls operations subsequent to the Merger. Valves & Controls was a new reporting segment, effective with the Merger and as a result, 2012 operating loss represents the segment’s operating results for the fourth quarter of 2012; and

•	inventory fair value step-up and customer backlog of $113.5 million recorded as part of the Merger purchase accounting.

Process Technologies

The Process Technologies segment designs, manufactures, markets and services innovative water system products and solutions to meet filtration, separation and fluid process management challenges in food and beverage, water, wastewater, swimming pools and aquaculture applications.

The net sales and operating income (loss) for Process Technologies were as follows:

	Years ended December 31										% / point change
In millions	2013			2012			2011				2013 vs. 2012		2012 vs. 2011
Net sales	$	1,765.9		$	1,521.1		$	1,345.9			16.1	%	13.0	%
Operating income (loss)	243.2			132.5			(40.2		)		83.5	%	N.M.
% of net sales	13.7		%	8.7		%	(3.0		)%		5.0		11.7

Net sales

The components of the change in Process Technologies net sales were as follows:

	2013 vs. 2012			2012 vs. 2011
Volume	8.2	%		2.5	%
Acquisition	6.3	%		9.9	%
Price	1.7	%		1.9	%
Currency	(0.1	)%		(1.3	)%
Total	16.1	%		13.0	%

The 16.1 percentage point increase in Process Technologies sales in 2013 from 2012 was primarily the result of:

•	organic sales growth related to higher sales of certain pool products serving the North American Residential housing market and increased demand for global food & beverage solutions;

•	higher sales volume related to the Merger and other acquisitions in the second half of 2012;

•	growth in developed regions led by strength in U.S. and Western Europe; and

•	selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•	lower sales in India and Eastern Europe.

The 13.0 percentage point increase in Process Technologies sales in 2012 from 2011 was primarily the result of:

•	higher sales volume as a result of the May 2011 acquisition of CPT;

•	continued sales growth in Latin America, India and emerging markets in the Asia Pacific region;

•	increased sales in our Aquatics System business driven by pool dealer expansion and continued strong demand for our energy efficient products and solutions; and

•	selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•	decreases in sales due to weakness in the European market; and

•	unfavorable foreign currency effects.

Operating income (loss)

The 5.0 percentage point increase in operating income for Process Technologies as a percentage of net sales in 2013 from 2012 was primarily the result of:

•	higher sales volume, which resulted in increased leverage on operating expenses;

•	savings generated from our PIMS initiatives including lean and supply management practices;

•	decrease in restructuring costs from $23.9 million in 2012 to $8.8 million in 2013;

•	trade name impairment charges of $23.2 million in 2012 that did not reoccur in 2013; and

•	selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•	inflationary costs related to raw materials and labors costs.

The 11.7 percentage point increase in operating income for Process Technologies as a percentage of net sales in 2012 from 2011 was primarily the result of:

•	goodwill impairment charge of $200.5 million in 2011;

•	nonrecurring CPT acquisition related charges in 2011;

•	higher sales volume as a result of the CPT acquisition, which resulted in increased leverage of our fixed cost base;

•	savings generated from our PIMS initiatives including lean and supply management practices; and

•	selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•	cost increases for certain raw materials and labor;

•	increase in restructuring costs, from $3.9 million in 2011 to $23.9 million in 2012; and

•	trade name impairment charges of $23.2 million in 2012.

Flow Technologies

The Flow Technologies segment designs, manufactures and markets products and services designed for the transfer and flow of clean water, wastewater and a variety of industrial applications.

The net sales and operating income for Flow Technologies were as follows:

	Years ended December 31										% / point change
In millions	2013			2012			2011				2013 vs. 2012		2012 vs. 2011
Net sales	$	1,618.5		$	1,136.7		$	1,042.7			42.4	%	9.0	%
Operating income	149.7			35.5			97.9				N.M.		(63.7	)%
% of net sales	9.2		%	3.1		%	9.4		%		6.1		(6.3	)

Net sales

The components of the change in Flow Technologies net sales were as follows:

	2013 vs. 2012			2012 vs. 2011
Volume	10.0	%		(1.9	)%
Acquisition	35.4	%		10.5	%
Price	0.8	%		1.0	%
Currency	(3.8	)%		(0.6	)%
Total	42.4	%		9.0	%

The 42.4 percentage point increase in Flow Technologies sales in 2013 from 2012 was primarily the result of:

•	sales volume of the Flow Control business of $490.1 million in 2013; compared to $112.1 million in 2012;

•	selective increases in selling prices to mitigate inflationary cost increases;

•	organic growth in agriculture sales due to strong new product results and international expansion;

•	sales growth in the developed markets of the U.S. and Western Europe; and

•	continued sales growth in fast growth regions, including the Middle East and Southeast Asia.

These increases were partially offset by:

•	unfavorable foreign currency effects.

The 9.0 percentage point increase in Flow Technologies sales in 2012 from 2011 was primarily the result of:

•	sales volume of the Flow Control business subsequent to the Merger of $112.1 million;

•	organic sales growth primarily due to higher sales of certain pump products;

•	continued sales growth in Latin America and emerging markets in the Asia Pacific region; and

•	selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•	low flood-related product sales in the U.S. due to unusually dry weather; and

•	unfavorable foreign currency effects.

Operating income

The 6.1 percentage point increase in operating income for Flow Technologies as a percentage of net sales in 2013 from 2012 was primarily the result of:

•	higher volume related to the acquisition of Flow Control, which resulted in increased leverage of our fixed cost base;

•	savings generated from our PIMS initiatives including lean and supply management practices;

•	trade name impairment charges of $25.9 million in 2012 that did not reoccur in 2013: and

•	selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•	inflationary increases for certain raw materials and labor; and

•	unfavorable foreign currency effects.

The 6.3 percentage point decrease in operating income for Flow Technologies as a percentage of net sales in 2012 from 2011 was primarily the result of:

•	higher cost of goods sold of $21.9 million as a result of inventory fair value step-up and customer backlog recorded as part of the Merger purchase accounting;

•	restructuring actions of $25.2 million taken in 2012, compared to $7.1 million in 2011;

•	cost increases for certain raw materials and labor; and

•	trade name impairment charges of $25.9 million in 2012.

These decreases were partially offset by:

•	higher sales volume in Flow Technologies, which resulted in increased leverage of our fixed cost base;

•	savings generated from our PIMS initiatives including lean and supply management practices; and

•	selective increases in selling prices to mitigate inflationary cost increases.

Technical Solutions

The Technical Solutions segment designs, manufactures, markets and services products that guard and protect some of the world’s most sensitive electronics and electronic equipment, as well as heat management solutions designed to provide thermal protection to temperature sensitive fluid applications.

The net sales and operating income for Technical Solutions were as follows:

	Years ended December 31										% / point change
In millions	2013			2012			2011				2013 vs. 2012		2012 vs. 2011
Net sales	$	1,663.4		$	1,236.4		$	1,086.8			34.5	%	13.8	%
Operating income	285.0			165.0			185.8				72.7	%	(11.2	)%
% of net sales	17.1		%	13.3		%	17.1		%		3.8		(3.8	)

Net sales

The components of the change in Technical Solutions net sales were as follows:

	2013 vs. 2012			2012 vs. 2011
Volume	(2.9	)%		(4.7	)%
Acquisition	36.0	%		18.0	%
Price	1.4	%		1.5	%
Currency	—	%		(1.0	)%
Total	34.5	%		13.8	%

The 34.5 percentage point increase in Technical Solutions sales in 2013 from 2012 was primarily the result of:

•	sales volume of the Flow Control business of $656.5 million in 2013 compared to $195.7 million in 2012; and

•	selective increases in selling prices to mitigate inflationary cost increases.

The 13.8 percentage point increase in Technical Solutions sales in 2012 from 2011 was primarily the result of:

•	sales volume of the Flow Control business subsequent to the Merger of $195.7 million;

•	sales increases in our enclosures & cabinets businesses in the industrial vertical; and

•	selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•	decreases in sales volume in Western Europe and the industrial vertical, including project delays; and

•	unfavorable foreign currency effects.

Operating income

The 3.8 percentage point increase in operating income for Technical Solutions as a percentage of net sales in 2013 from 2012 was primarily the result of:

•	higher volume related to the acquisition of Flow Control, which resulted in increased leverage of our fixed cost base;

•	selective increases in selling prices to mitigate inflationary cost increases; and

•	savings generated from our PIMS initiatives including lean and supply management practices.

These increases were offset by:

•	lower margin from higher costs related to the Merger; including integration and standardization;

•	increase in restructuring costs from $12.7 million in 2012 to $19.4 million in 2013;

•	intangible asset amortization associated with the Merger; and

•	inflationary increases related to labor costs and certain raw materials.

The 3.8 percentage point decrease in operating income for Technical Solutions as a percentage of sales in 2012 from 2011 was primarily the result of:

•	higher cost of goods sold of $42.7 million as a result of inventory fair value step-up and customer backlog recorded as part of the Merger purchase accounting;

•	trade name impairment charges of $11.6 million in 2012;

•	restructuring costs of $12.7 million in 2012, compared to $2.0 million in 2011;

•	inflationary increases related to raw materials and labor related costs; and

•	continued investment in future growth with emphasis on international markets, including personnel and business infrastructure investments.

These decreases were offset by:

•	savings generated from our PIMS initiatives including lean and supply management practices; and

•	selective increases in selling prices to mitigate inflationary cost increases.

LIQUIDITY AND CAPITAL RESOURCES

We generally fund cash requirements for working capital, capital expenditures, equity investments, acquisitions, debt repayments, dividend payments and share repurchases from cash generated from operations, availability under existing committed revolving credit facilities and in certain instances, public and private debt and equity offerings. We have grown our businesses in significant part in the past through acquisitions financed by credit provided under our revolving credit facilities and from time to time, by private or public debt issuance. Our primary revolving credit facilities have generally been adequate for these purposes, although we have negotiated additional credit facilities as needed to allow us to complete acquisitions. We intend to issue commercial paper to fund our financing needs on a short-term basis and to use our revolving credit facility as back-up liquidity to support commercial paper.

We are focusing on increasing our cash flow and repaying existing debt, while continuing to fund our research and development, marketing and capital investment initiatives. Our intent is to maintain investment grade ratings and a solid liquidity position.

We experience seasonal cash flows primarily due to seasonal demand in a number of markets within Process Technologies and Flow Technologies. We generally borrow in the first quarter of our fiscal year for operational purposes, which usage reverses in the second quarter as the seasonality of our businesses peaks. End-user demand for pool and certain pumping equipment follows warm weather trends and is at seasonal highs from April to August. The magnitude of the sales spike is partially mitigated by employing some advance sale “early buy” programs (generally including extended payment terms and/or additional discounts). Demand for residential and agricultural water systems is also impacted by weather patterns, particularly by heavy flooding and droughts.

Operating activities

Cash provided by operating activities was $915.3 million in 2013, or $847.3 million higher than in 2012. The increase in cash provided by operating activities was due primarily to a $501.3 million increase in Net income (loss) before noncontrolling interest, net of the following non-cash items: depreciation and amortization, gain on sale of businesses, trade name impairment and pension and other post-retirement expense (income). Also attributing to the increase were accelerated contributions of pension and other post-retirement obligations in 2012 that reduced the need for ongoing contributions in 2013.

Cash provided by operating activities was $68.0 million in 2012, or $252.2 million lower than in 2011. The decrease in cash provided by operating activities was due primarily to accelerated contributions of pension and other post-retirement obligations in 2012. Also attributing to the decrease was a $102.3 million increase in Net income (loss) before noncontrolling interest, net of the following non-cash items: depreciation and amortization, goodwill and trade name impairment and pension and other post-retirement expense.

Investing activities

Net cash used for investing activities was $211.2 million in 2013. Net cash provided by investing activities was $375.6 million in 2012. Net cash used for investing activities was $808.1 million in 2011.

Acquisitions

In June 2013, $84.4 million of cash was paid to Tyco in settlement of the working capital and net indebtedness adjustment related to the Merger. In addition, in December 2013 we acquired a business as part of Process Technologies for cash consideration of $8 million, net of cash acquired.

In September 2012, we acquired $691.7 million of cash in conjunction with the Merger. In October 2012, we acquired, as part of Valves & Controls, the remaining 25 percent equity interest in Pentair Middle East Holding S.a.R.L. (“KEF”) for $100.0 million in cash. Additionally, during 2012, we completed other small acquisitions in Process Technologies with purchase prices totaling $121.2 million in cash, net of cash acquired.

In May 2011, we acquired as part of Process Technologies, the CPT division of privately held Norit Holdings for $715.3 million. Additionally, during 2011, we completed other small acquisitions in Process Technologies with purchase prices totaling $21.6 million, consisting of $17.8 million in cash and $3.8 million as notes payable.

Divestitures

During 2013, we sold businesses that were part of Technical Solutions and Flow Technologies for a cash purchase price of $30.1 million and $13.4 million, respectively, net of transaction costs, resulting in a net gain of $16.8 million and $2.9 million, respectively.

Capital expenditures

Capital expenditures in 2013, 2012 and 2011 were $170.0 million, $94.5 million and $73.3 million, respectively. The increase in capital expenditures in 2012 from 2011 was primarily due to the Merger. We anticipate capital expenditures for fiscal 2014 to be approximately $175 million, primarily for capacity expansions of manufacturing facilities located in our low-cost countries, developing new products and general maintenance.

Financing activities

Net cash used for financing activities was $719.1 million in 2013. Cash used for financing activities in 2013 included share repurchases and payments of dividends, partially offset by net borrowings of commercial paper and revolving long-term debt to fund our operations in the normal course of business and cash received for shares issued to employees.

Net cash used for financing activities was $232.3 million in 2012. Cash used for financing activities in 2012 included payments of dividends, early debt termination fees and share repurchases, partially offset by net borrowings of long-term debt, as further described below.

Net cash provided by financing activities was $503.6 million in 2011. Cash provided by financing activities in 2011 primarily relates to borrowings used to fund the CPT acquisition in May 2011, partially offset by repayments of long-term debt, dividend payments and share repurchases.

In December 2012, our wholly-owned subsidiary, Pentair Finance S.A. (“PFSA”), completed an exchange offer (the “Exchange Offer”) pursuant to which it exchanged $373 million in aggregate principal amount of 5.00% Senior Notes due 2021 of Pentair, Inc., a wholly-owned, indirect subsidiary of the Company (the “2021 Notes”) for a like amount of new 5.00% Senior Notes due 2021 of PFSA (the “New 2021 Notes”) plus $5.6 million in transaction-related costs. Upon completion of the Exchange Offer, $127 million in aggregate principal amount of 2021 Notes remained outstanding. The remaining 2021 Notes and New 2021 Notes are guaranteed as to payment by Pentair Ltd.

In November 2012, PFSA completed a private offering of $350 million aggregate principal amount of 1.35% Senior Notes due 2015 (the “2015 Notes”) and $250 million aggregate principal amount of 2.65% Senior Notes due 2019 (the “2019 Notes” and, collectively, the “2015/2019 Notes”), which are guaranteed as to payment by Pentair Ltd. In certain circumstances, PFSA may be required to pay additional interest on the 2015/2019 Notes. We used the net proceeds from the sale of the 2015/2019 Notes to repay commercial paper and for general corporate purposes.

In October 2012, we redeemed the remaining outstanding aggregate principal of our 5.65% fixed rate senior notes due 2013-2017 totaling $400 million and our 1.05% floating rate senior notes due 2013 totaling $100 million (the “Fixed/Floating Rate Notes”). The redemptions included make-whole premiums of $65.8 million. Concurrent with the redemption of the Fixed/Floating Rate Notes, we terminated a related interest rate swap that was designated as a cash flow hedge, which resulted in the reclassification of $3.4 million of previously unrecognized variable to fixed swap losses from AOCI to earnings in October 2012. All costs associated with the redemption were recorded as a Loss on the early extinguishment of debt including $0.6 million of unamortized deferred financing costs.

In September 2012, PFSA, completed a private offering of $550 million aggregate principal amount of 3.15% Senior Notes due 2022 (the “2022 Notes”) and $350 million aggregate principal amount of 1.875% Senior Notes due 2017 (the “2017 Notes” and, collectively, the “2017/2022 Notes”), which are guaranteed as to payment by Pentair Ltd. In certain circumstances, PFSA may be required to pay additional interest on the 2017/2022 Notes. The 2017/2022 Notes remained outstanding after the Merger. A portion of the net proceeds from the 2017/2022 Notes offering were used to repay $435 million to Tyco in conjunction with the Distribution and the Merger.

In September 2012, Pentair, Inc. entered into a credit agreement providing for an unsecured, committed revolving credit facility (the “Credit Facility”) with initial maximum aggregate availability of up to $1,450 million. The Credit Facility replaced Pentair, Inc.’s $700 million Former Credit Facility (as defined below). The Credit Facility matures in September 2017. Upon the completion of the Merger, Pentair Ltd. became the guarantor under the Credit Facility and PFSA and certain other of our subsidiaries became affiliate borrowers under the Credit Facility. Borrowings under the Credit Facility generally bear interest at

a variable rate equal to the London Interbank Offered Rate (“LIBOR”) plus a specified margin based upon PFSA’s credit ratings. PFSA must also pay a facility fee ranging from 10.0 to 30.0 basis points per annum (based upon PFSA’s credit ratings) on the amount of each lender’s commitment.

In May 2011, Pentair, Inc. completed a public offering of $500 million aggregate principal amount of the 2021 Notes. Pentair, Inc. used the net proceeds from the offering of the 2021 Notes to finance in part the CPT acquisition in 2011. The 2021 Notes which remain outstanding subsequent to the Exchange Offer are guaranteed as to payment by Pentair Ltd.

In April 2011, Pentair, Inc. entered into a Fourth Amended and Restated Credit Agreement that provided for an unsecured, committed revolving credit facility (the “Former Credit Facility”) of up to $700 million, with multi-currency sub-facilities to support investments outside the U.S. Borrowings under the Former Credit Facility bore interest at the rate of LIBOR plus 1.75%. We used borrowings under the Former Credit Facility to fund a portion of the CPT acquisition in 2011 and to repay $105 million of matured senior notes in May 2012. The Former Credit Facility was terminated in September 2012 in connection with the Merger and replaced by the Credit Facility, at which time the subsidiary guarantees in place under the Former Credit Facility ceased to exist.

PFSA is authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. PFSA uses the Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. As of December 31, 2013 and 2012, we had $528.9 million and $424.7 million, respectively, of commercial paper outstanding, all of which 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.

We used borrowings under the Credit Facility and proceeds from the 2017/2022 Notes offering, to repay the Former Credit Facility and to pay other fees and expenses in connection with the Merger. Total availability under the Credit Facility was $921.1 million as of December 31, 2013, which was not limited by any covenants contained in the Credit Facility’s credit agreement. Subsequent to the Merger, we used the remaining proceeds from the 2017/2022 Notes offering and issuances of commercial paper to redeem the Fixed/Floating Rate Notes as discussed above, to repurchase shares in conjunction with our share repurchase as discussed in ITEM 8, Note 13 of the Notes to Consolidated Financial Statements and to purchase the remaining 25 percent interest in KEF for $100 million as discussed in ITEM 8, Note 2 of the Notes to Consolidated Financial Statements.

Our debt agreements contain certain financial covenants, the most restrictive of which are in the Credit Facility, including that we may not permit (i) the ratio of our consolidated debt plus synthetic lease obligations to our consolidated net income (excluding, among other things, non-cash gains and losses) before interest, taxes, depreciation, amortization, non-cash share-based compensation expense, and up to $40 million of costs and expenses incurred in connection with the Merger (“EBITDA”) for the four consecutive fiscal quarters then ended (the “Leverage Ratio”) to exceed 3.50 to 1.00 on the last day of each fiscal quarter, and (ii) the ratio of our EBITDA for the four consecutive fiscal quarters then ended to our consolidated interest expense, including consolidated yield or discount accrued as to outstanding securitization obligations (if any), for the same period to be less than 3.00 to 1.00 as of the end of each fiscal quarter. For purposes of the Leverage Ratio, the Credit Facility provides for the calculation of EBITDA giving pro forma effect to the Merger and certain acquisitions, divestitures and liquidations during the period to which such calculation relates. As of December 31, 2013, we were in compliance with all financial covenants in our debt agreements.

In addition to the Credit Facility, we have various other credit facilities with an aggregate availability of $86.7 million, of which none was outstanding at December 31, 2013. Borrowings under these credit facilities bear interest at variable rates. Additionally, as part of the Merger and CPT acquisition we assumed certain capital leases with an outstanding balance of $21.5 million and $23.8 million at December 31, 2013 and 2012, respectively.

As of December 31, 2013, we have $113.0 million of cash held in certain countries in which the ability to repatriate is limited due to local regulations or significant potential tax consequences.

We expect to continue to have cash requirements to support working capital needs and capital expenditures, to pay interest and service debt and to pay dividends to shareholders quarterly. We believe we have the ability and sufficient capacity to meet these cash requirements by using available cash and internally generated funds and to borrow under our committed and uncommitted credit facilities.

Dividends

We paid dividends in 2013 of $194.2 million, or $0.96 per common share, compared with $112.4 million, or $0.88 per common share, in 2012 and $79.5 million, or $0.80 per common share in 2011. At our 2013 annual meeting of shareholders held on April 29, 2013, our shareholders approved a proposal to pay quarterly cash dividends through the second quarter of 2014. The authorization provided that dividends of $1.00 per share be made in quarterly installments of $0.25 for each of the third and fourth quarters of 2013 and first and second quarters of 2014 and we expect to continue paying dividends on a quarterly basis.

We intend to seek authorization from our shareholders at our 2014 annual general meeting of shareholders to extend the increased dividend or increase the dividend for the remainder of 2014, which will mark the 38th consecutive year we have increased dividends.

Authorized shares

Our authorized share capital consists of 213.0 million common shares with a par value of 0.50 Swiss francs per share. The board of directors is authorized to increase the total share capital until September 14, 2014 by a maximum amount of 106.5 million shares. In addition, our share capital may be increased by:

•

a maximum of 81.5 million shares upon the exercise of conversion, option, exchange, warrant or similar rights for the subscription of shares granted to third parties or shareholders in connection with bonds, notes, options, warrants or other securities issued by us in national or international capital markets or pursuant to our existing and future contractual obligations (“Rights Bearing Obligations”); and/or

•	a maximum of 25.0 million shares upon the exercise of rights related to Rights-Bearing Obligations granted to members of the board of directors, members of the executive management, employees, contractors, consultants or other persons providing services for our benefit.

Share repurchases

Prior to the closing of the Merger, our board of directors, and Tyco as our sole shareholder, authorized the repurchase of our common shares with a maximum aggregate value of $400.0 million following the closing of the Merger. This authorization does not have an expiration date. In October 2012, our board of directors authorized the repurchase of our common shares with a maximum aggregate value of $800.0 million. This authorization expires on December 31, 2015 and is in addition to the $400.0 million share repurchase authorization. As of December 31, 2013, we had repurchased 19.6 million of our common shares for $1.05 billion pursuant to these authorizations and had $150.0 million remaining available for repurchases under these authorizations.

In December 2013, the Board of Directors authorized the repurchase of shares of our common stock up to a maximum dollar limit of $1.0 billion. This authorization is in addition to the combined $1.2 billion prior share repurchase authorization. The authorization allows the company to commence share repurchases effective immediately and expires on December 31, 2016. No repurchases were made under this authorization in 2013.

Contractual obligations

The following summarizes our significant contractual obligations that impact our liquidity:

	Years ended December 31
In millions	2014			2015			2016			2017			2018			Thereafter			Total
Debt obligations	$	—		$	350.0		$	—		$	878.9		$	—		$	1,304.7		$	2,533.6
Capital lease obligations	2.5			5.5			0.5			0.5			0.5			12.0			21.5
Interest obligations on fixed-rate debt	60.2			60.2			55.5			55.5			49.0			138.5			418.9
Operating lease obligations, net of sublease rentals	54.5			39.8			29.4			21.4			13.4			23.4			181.9
Purchase obligations	43.2			7.0			0.4			0.3			0.2			0.2			51.3
Pension and other post-retirement plan contributions	24.6			29.9			41.1			15.4			17.5			168.5			297.0
Total contractual obligations, net	$	185.0		$	492.4		$	126.9		$	972.0		$	80.6		$	1,647.3		$	3,504.2

The majority of the purchase obligations represent commitments for raw materials to be utilized in the normal course of business. For purposes of the above table, arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction.

In addition to the summary of significant contractual obligations, we will incur annual interest expense on outstanding variable rate debt. As of December 31, 2013, variable interest rate debt was $528.9 million at a weighted average interest rate of 0.52%.

The total gross liability for uncertain tax positions at December 31, 2013 is estimated to be $60.8 million. We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Interest expense, respectively, which is consistent with our past practices. As of December 31, 2013, we had recorded $0.9 million for the possible payment of penalties and $8.9 million related to the possible payment of interest.

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. We have a long-term goal to consistently generate free cash flow that equals or exceeds 100 percent conversion of net income. Free cash flow is a non-Generally Accepted Accounting Principles financial measure that we use to assess our cash flow performance. We believe free cash flow is an important measure of operating performance because it provides us and our investors a measurement of cash generated from operations that is available to pay dividends, make acquisitions, repay debt and repurchase shares. In addition, free cash flow is used as a criterion to measure and pay compensation-based incentives. Our measure of free cash flow may not be comparable to similarly titled measures reported by other companies. The following table is a reconciliation of free cash flow:

	Years ended December 31
In millions	2013			2012			2011
Net cash provided by operations	$	915.3		$	68.0		$	320.2
Capital expenditures	(170.0		)	(94.5		)	(73.3		)
Proceeds from sale of property and equipment	6.0			5.5			1.3
Free cash flow	$	751.3		$	(21.0	)	$	248.2

Off-balance sheet arrangements

At December 31, 2013, we had no off-balance sheet financing arrangements.

COMMITMENTS AND CONTINGENCIES

We have been made parties to a number of actions filed or have been given notice of potential claims relating to the conduct of our business, including those pertaining to commercial disputes, product liability, asbestos, environmental, safety and health, patent infringement and employment matters.

While we believe that a material impact on our consolidated financial position, results of operations or cash flows from any such future claims or potential claims is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future adverse ruling or unfavorable development could result in future charges that could have a material impact. We do and will continue to periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our consolidated financial position, results of operations and cash flows for the proceedings and claims described in ITEM 8, Note 16 of the Notes to Consolidated Financial Statements could change in the future.

Asbestos Matters

Our subsidiaries and numerous other companies are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were attached to or used with asbestos-containing components manufactured by third-parties. Each case typically names between dozens to hundreds of corporate defendants. While we have observed an increase in the number of these lawsuits over the past several years, including lawsuits by plaintiffs with mesothelioma-related claims, a large percentage of these suits have not presented viable legal claims and, as a result, have been dismissed by the courts. Our historical strategy has been to mount a vigorous defense aimed at having unsubstantiated suits dismissed, and, where appropriate, settling suits before trial. Although a large percentage of litigated suits have been dismissed, we cannot predict the extent to which we will be successful in resolving lawsuits in the future.

As of December 31, 2013, there were approximately 2,000 lawsuits pending against our subsidiaries. A lawsuit might include several claims, and we have approximately 2,200 claims outstanding as of December 31, 2013. This amount is not adjusted for claims that are not actively being prosecuted, identified incorrect defendants, or duplicated other actions, which would ultimately reflect our current estimate of the number of viable claims made against us, our affiliates, or entities for which we assumed responsibility in connection with acquisitions or divestitures. In addition, the amount does not include certain claims pending against third parties for which we have been provided an indemnification.

Our estimated liability for asbestos-related claims was $254.7 million and $278.9 million as of December 31, 2013 and 2012, respectively, and was recorded in Other non-current liabilities in the Consolidated Balance Sheets for pending and future claims and related defense costs. Our estimated receivable for insurance recoveries was $119.6 million and $131.0 million at December 31, 2013 and 2012, respectively, and was recorded in Other non-current assets in the Consolidated Balance Sheets.

Environmental Matters

We are involved in or have retained responsibility and potential liability for environmental obligations and legal proceedings related to our current business and, including pursuant to certain indemnification obligations, related to certain formerly owned businesses. We are responsible, or alleged to be responsible, for ongoing environmental investigation and/or remediation of sites in several countries. These sites are in various stages of investigation and/or remediation and at some of these sites our liability is considered de minimis. We received notification from the U.S. Environmental Protection Agency and from similar state and non-U.S. environmental agencies, that several sites formerly or currently owned and/or operated by us, and other properties or water supplies that may be or may have been impacted from those operations, contain disposed or recycled materials or waste and require environmental investigation and/or remediation. Those sites include instances where we have been identified as a potentially responsible party under U.S. federal, state and/or non-U.S. environmental laws and regulations. For several formerly owned businesses, we have also received claims for indemnification from purchasers of these businesses.

Our accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. It can be difficult to estimate reliably the final costs of investigation and remediation due to various factors. In our opinion, the amounts accrued are appropriate based on facts and circumstances as currently known. Based upon our experience, current information regarding known contingencies and applicable laws, we have recorded reserves for these environmental matters of $39.3 million and $49.2 million as of December 31, 2013 and 2012, respectively. We do not anticipate these environmental conditions will have a material adverse effect on our financial position, results of operations or cash flows. However, unknown conditions, new details about existing conditions or changes in environmental requirements may give rise to environmental liabilities that will exceed the amount of our current reserves and could have a material adverse effect in the future.

Product liability claims

We are subject to various product liability lawsuits and personal injury claims. A substantial number of these lawsuits and claims are insured and accrued for by Penwald, our captive insurance subsidiary. See discussion in ITEM 1 and ITEM 8, Note 1 of the Notes to Consolidated Financial Statements — Insurance subsidiary. Penwald records a liability for these claims based on actuarial projections of ultimate losses. For all other claims, accruals covering the claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are adjusted periodically as additional information becomes available. In 2004, we disposed of the Tools Group and we retained responsibility for certain product claims. We have not experienced significant unfavorable trends in either the severity or frequency of product liability lawsuits or personal injury claims.

Compliance Matters

Prior to the Merger, the Flow Control business was subject to investigations by the U.S. Department of Justice (“DOJ”) and the SEC related to allegations that improper payments were made by the Flow Control business and other Tyco subsidiaries and third-party intermediaries in recent years in violation of the Foreign Corrupt Practices Act. Tyco reported to the DOJ and the SEC the remedial measures that it had taken in response to the allegations and Tyco’s own internal investigations. As a result of discussions with the DOJ and SEC aimed at resolving these matters, on September 24, 2012, Tyco entered into a settlement with the SEC and a non-prosecution agreement with the DOJ, pursuant to which the Flow Control business is for a three year period subject to yearly reporting to the DOJ concerning its continuing compliance efforts.

Stand-by Letters of Credit, Bank Guarantees and Bonds

In certain situations, Tyco guaranteed Flow Control’s performance to third parties or provided financial guarantees for financial commitments of Flow Control. In situations where Flow Control and Tyco were unable to obtain a release from these guarantees in connection with the spin-off, we will indemnify Tyco for any losses it suffers as a result of such guarantees.

In disposing of assets or businesses, we often provide representations, warranties and indemnities to cover various risks including unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not have the ability to reasonably estimate the potential liability due to the inchoate and unknown nature of these potential liabilities. However, we have no reason to believe that these uncertainties would have a material adverse effect on our financial position, results of operations or cash flows.

In the ordinary course of business, we are required to commit to bonds, letters of credit and bank guarantees that require payments to our customers for any non-performance. The outstanding face value of these instruments fluctuates with the value

of our projects in process and in our backlog. In addition, we issue financial stand-by letters of credit primarily to secure our performance to third parties under self-insurance programs.

As of December 31, 2013 and 2012, the outstanding value of bonds, letters of credit and bank guarantees totaled $484.0 million and $493.2 million, respectively.

NEW ACCOUNTING STANDARDS

See ITEM 8, Note 1 of the Notes to Consolidated Financial Statements, included in this Form 10-K, for information pertaining to recently adopted accounting standards or accounting standards to be adopted in the future.

CRITICAL ACCOUNTING POLICIES

We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our significant accounting policies are more fully described in ITEM 8, Note 1 of the Notes to Consolidated Financial Statements. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry and information available from other outside sources, as appropriate. We consider an accounting estimate to be critical if:

•	it requires us to make assumptions about matters that were uncertain at the time we were making the estimate; and

•	changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations.

Our critical accounting estimates include the following:

Impairment of goodwill and indefinite-lived intangibles

Goodwill

Goodwill represents the excess of the cost of acquired businesses over the net of the fair value of identifiable tangible net assets and identifiable intangible assets purchased and liabilities assumed.

Goodwill is tested at least annually for impairment and is tested for impairment more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is performed using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. If the estimated fair value is less than the carrying amount of the reporting unit there is an indication that goodwill impairment exists and a second step must be completed in order to determine the amount of the goodwill impairment, if any that should be recorded. In the second step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation.

The fair value of each reporting unit is determined using a discounted cash flow analysis and market approach. Projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital and the appropriate discount rate. Use of the market approach consists of comparisons to comparable publicly-traded companies that are similar in size and industry. Actual results may differ from those used in our valuations.

In developing our discounted cash flow analysis, assumptions about future revenues and expenses, capital expenditures and changes in working capital are based on our annual operating plan and long-term business plan for each of our reporting units. These plans take into consideration numerous factors including historical experience, anticipated future economic conditions, changes in raw material prices and growth expectations for the industries and end markets we participate in. These assumptions are determined over a six year long-term planning period. The six year growth rates for revenues and operating profits vary for each reporting unit being evaluated. Revenues and operating profit beyond 2019 are projected to grow at a perpetual growth rate of 3.0%.

Discount rate assumptions for each reporting unit take into consideration our assessment of risks inherent in the future cash flows of the respective reporting unit and our weighted-average cost of capital. We utilized discount rates ranging from 11.5% to 12.5% in determining the discounted cash flows in our fair value analysis.

In estimating fair value using the market approach, we identify a group of comparable publicly-traded companies for each reporting unit that are similar in terms of size and product offering. These groups of comparable companies are used to develop

multiples based on total market-based invested capital as a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”). We determine our estimated values by applying these comparable EBITDA multiples to the operating results of our reporting units. The ultimate fair value of each reporting unit is determined considering the results of both valuation methods.

Impairment charge

We completed step one of our annual goodwill impairment evaluation during the fourth quarter of 2013 and 2012 with each reporting unit’s fair value exceeding its carrying value. Accordingly, step two of the impairment analysis was not required for 2013 or 2012.

In connection with our annual impairment test, we determined that the fair value of our Australian reporting unit within Flow Technologies did not exceed its carrying value by a significant amount. The percentage of excess fair value over carrying value of this reporting unit was approximately 13 percent for 2013. Goodwill for this reporting unit was $304.0 million as of the annual impairment testing date. If cash flow projections decreased by 13.6% or if the discount rate increased by 150 basis points (the discount rate used in the impairment analysis was 12.5%), this reporting unit would have failed the step one test and a step two analysis would have been required.

For the year ended December 31, 2011, we recorded a pre-tax non-cash impairment charge of $200.5 million as a result of our annual goodwill impairment test. This represented impairment of goodwill in Process Technologies. The impairment charge resulted from changes in our forecasts in light of economic conditions and due to continued softness in the end-markets served by residential water treatment components.

Identifiable intangible assets

Our primary identifiable intangible assets include: customer relationships, trade names and trademarks, proprietary technology, backlog and patents. Identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant. We complete our annual impairment test during the fourth quarter each year for those identifiable assets not subject to amortization. Impairment charges of $11.0 million and $60.7 million were recorded in 2013 and 2012, respectively, related to trade names. These charges were recorded in Impairment of trade names and goodwill in our Consolidated Statements of Operations and Comprehensive Income (Loss). There was no impairment charge recorded in 2011 for identifiable intangible assets.

The impairment test consists of a comparison of the fair value of the trade name with its carrying value. Fair value is measured using the relief-from-royalty method. This method assumes the trade name has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. The impairment charges recorded in 2013 and 2012 were the result of a rebranding strategies implemented in the fourth quarters of 2013 and 2012, respectively.

At December 31, 2013 our goodwill and intangible assets were $6,910.3 million and represented 59% of our total assets. If we experience future declines in sales and operating profit or do not meet our operating forecasts, we may be subject to future impairments. Additionally, changes in assumptions regarding the future performance of our businesses, increases in the discount rate used to determine the discounted cash flows of our businesses or significant declines in our share price or the market as a whole could result in additional impairment indicators. Because of the significance of our goodwill and intangible assets, any future impairment of these assets could have a material adverse effect on our financial results.

Impairment of long-lived assets

We review the recoverability of long-lived assets to be held and used, such as property, plant and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced for the cost to dispose of the assets. The measurement of impairment requires us to estimate future cash flows and the fair value of long-lived assets. During 2013, we recorded impairment charges of $20.0 million in conjunction with restructuring activities. There were no material impairment charges recorded related to long-lived assets in 2012 or 2011.

Percentage of completion revenue recognition

Revenue from certain long-term contracts is recognized over the contractual period under the percentage of completion method of accounting. Under this method, sales and gross profit are recognized as work is performed either based on the relationship between the actual costs incurred and the total estimated costs at completion (“the cost-to-cost method”) or based on efforts

expended for measuring progress towards completion in situations in which this approach is more representative of the progress on the contract than the cost-to-cost method. Changes to the original estimates may be required during the life of the contract and such estimates are reviewed on a regular basis. Sales and gross profit are adjusted using the cumulative catch-up method for revisions in estimated total contract costs and contract values. These reviews have not resulted in adjustments that were significant to our results of operations. Estimated losses are recorded when identified. Claims against customers are recognized as revenue upon settlement.

Pension and other post-retirement plans

We sponsor U.S. and Non-U.S. defined-benefit pension and other post-retirement plans. The amounts recognized in our consolidated financial statements related to our defined-benefit pension and other post-retirement plans are determined from actuarial valuations. Inherent in these valuations are assumptions, including: expected return on plan assets, discount rates, rate of increase in future compensation levels and health care cost trend rates. These assumptions are updated annually and are disclosed in ITEM 8, Note 12 to the Notes to Consolidated Financial Statements. Differences in actual experience or changes in assumptions may affect our pension and other post-retirement obligations and future expense.

We recognize changes in the fair value of plan assets and net actuarial gains or losses for pension and other post-retirement benefits annually in the fourth quarter each year ("mark-to-market adjustment") and, if applicable, in any quarter in which an interim remeasurement is triggered. Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension and other post-retirement plans or when assumptions change as they may each year. The primary factors contributing to actuarial gains and losses each year are (1) changes in the discount rate used to value pension and other post-retirement benefit obligations as of the measurement date and (2) differences between the expected and the actual return on plan assets. This accounting method also results in the potential for volatile and difficult to forecast mark-to-market adjustments. Mark-to-market adjustments resulted in pre-tax income of $63.2 million in 2013 and pre-tax charges of $146.2 million and $66.2 million in 2012 and 2011, respectively. The remaining components of pension expense, primarily service and interest costs and the expected return on plan assets, are recorded on a quarterly basis as ongoing pension expense.

Discount rate

The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to payments from a stream of bonds available in the marketplace rated AA or higher, adjusted to eliminate the effects of call provisions. This produced a weighted-average discount rate for our U.S. plans of 4.51% in 2013, 3.67% in 2012 and 5.05% in 2011. The discount rates on our Non-U.S. plans ranged from 0.50% to 5.00% in 2013, 0.50% to 4.50% in 2012 and 0.75% to 5.00% in 2011. There are no known or anticipated changes in our discount rate assumption that will impact our pension expense in 2014.

Expected rate of return

Our expected rate of return on plan assets for our U.S. plans was 3.75% for 2013, 7.50% in 2012 and 8.00% in 2011. The expected rate of return on our Non-U.S. plans ranged from 1.00% to 6.50% in 2013, 1.00% to 4.60% in 2012 and 0.25% to 5.20% in 2011. The expected rate of return is designed to be a long-term assumption that may be subject to considerable year-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical returns, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader longer-term market indices.

During 2012, we adopted an investment strategy for our U.S. pension plans with a primary objective of preserving the funded status of the U.S. plans. This is achieved through investments in fixed interest instruments with interest rate sensitivity characteristics closely reflecting the interest rate sensitivity of our benefit obligations. The shifting of allocations away from equities to liability hedging fixed income investments, by reinvesting in fixed income instruments as equity investments were redeemed, was completed during 2013. As of December 31, 2013, the U.S. pension plans have an approximately 92 percent allocation to fixed income investments. As a result of the adoption of this investment strategy, we anticipate the expected rate of return on our U.S. funded pension plans will continue to be consistent with the discount rate.

See ITEM 8, Note 12 of the Notes to Consolidated Financial Statements for further information regarding pension and other post-retirement plans.

Loss contingencies

Accruals are recorded for various contingencies including legal proceedings, self-insurance and other claims that arise in the normal course of business. The accruals are based on judgment, the probability of losses and, where applicable, the consideration of opinions of internal and/or external legal counsel and actuarially determined estimates. Additionally, we record receivables from third party insurers when recovery has been determined to be probable.

We recognize asbestos-related liabilities on an undiscounted basis when a loss is probable and can be reasonably estimated. Certain of these liabilities are subject to insurance coverage. Our subsidiaries and numerous other companies are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were attached to or used with asbestos-containing components manufactured by third-parties. The process of estimating asbestos-related liabilities and the corresponding insurance recoveries receivable is complex and dependent primarily on our historical claim experience, estimates of potential future claims, our legal strategy for resolving these claims, the availability of insurance coverage, and the solvency and creditworthiness of insurers.

See ITEM 8, Note 16 of the Notes to Consolidated Financial Statements for further information regarding loss contingencies.

Income taxes

In determining taxable income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.

We currently have recorded valuation allowances that we will maintain until when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Our income tax expense recorded in the future may be reduced to the extent of decreases in our valuation allowances. The realization of our remaining deferred tax assets is primarily dependent on future taxable income in the appropriate jurisdiction. Any reduction in future taxable income including but not limited to any future restructuring activities may require that we record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance could result in additional income tax expense in such period and could have a significant impact on our future earnings.

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management records the effect of a tax rate or law change on the Company’s deferred tax assets and liabilities in the period of enactment. Future tax rate or law changes could have a material effect on the Company’s financial condition, results of operations or cash flows.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We perform reviews of our income tax positions on a quarterly basis and accrue for uncertain tax positions. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the tax jurisdictions in which we operate based on our estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. As events change or resolution occurs, these liabilities are adjusted, such as in the case of audit settlements with taxing authorities. The ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.