Acquisitions and Divestitures

Material acquisitions

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.

Based on the price of Pentair, Inc. common stock and our common shares issued on the date of the Merger, the purchase price was composed of the following:



In millions
Value of common shares issued to Tyco shareholders ⁽¹⁾	$	4,811.4
Value of replacement equity-based awards to holders of Tyco equity-based awards ⁽²⁾	119.8
Cash paid to Tyco in settlement of the working capital and net indebtedness adjustment ⁽³⁾	84.4
Cash paid to Tyco shareholders in lieu of fractional common shares ⁽⁴⁾	0.5
Total purchase price	$	5,016.1


(1)	Equals 110.9 million Pentair Ltd. shares distributed to Tyco shareholders multiplied by the Merger date share price of $43.39.

(2)

In accordance with applicable accounting guidance, the fair value of replacement equity-based awards attributable to pre-combination service is recorded as part of the consideration transferred in the Merger, while the fair value of replacement equity-based awards attributable to post-combination service is recorded separately from the business combination and recognized as compensation cost in the post-acquisition period over the remaining service period. The fair value of our equivalent stock options was estimated using the Black-Scholes valuation model utilizing various assumptions.


(3)	In June 2013, cash was paid to Tyco in settlement of the working capital and net indebtedness adjustment.


(4)	Equals cash paid to Tyco shareholders in lieu of less than 0.1 million Pentair Ltd. fractional shares multiplied by the Merger date share price of $43.39.

The purchase price was allocated based on the estimated fair value of net assets acquired and liabilities assumed at the date of the Merger. During 2013, the Company recorded fair value adjustments to the preliminary purchase price allocation reported at December 31, 2012. Purchase price adjustments were applied retrospectively back to the date of the Merger. These adjustments did not have a material impact on net income (loss) in 2012 and, therefore, the Company has not adjusted its net income (loss) attributable to Pentair Ltd. for the year ended December 31, 2012.

The following table summarizes the fair values of the assets acquired and liabilities assumed in the Merger as originally reported in the Company's Form 10-K for the year ended December 31, 2012 and as revised for adjustments made during 2013:



In millions	As Originally Reported			As Revised
Cash and cash equivalents	$	691.7		$	691.7
Accounts and notes receivable	771.6			753.5
Inventories	1,046.2			999.7
Other current assets	98.2			94.1
Property, plant and equipment	822.0			785.7
Goodwill	2,520.1			2,741.8
Intangibles	1,425.1			1,441.9
Other non-current assets	275.1			241.1
Current liabilities	(856.3		)	(881.4		)
Long-term debt	(914.5		)	(914.5		)
Income taxes, including current and deferred	(364.6		)	(304.0		)
Other liabilities and redeemable noncontrolling interest	(591.5		)	(633.5		)
Total purchase price	$	4,923.1		$	5,016.1

The fair value of the business acquired was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of purchase price over tangible net assets and identified intangible assets acquired was allocated to goodwill in the amount of $2,741.8 million. Goodwill was allocated to our reporting segments as follows: $1,511.6 million to Valves & Controls, $30.1 million to Process Technologies, $318.5 million to Flow Technologies, and $881.6 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 current value of the expected future income resulting from synergies of our combined operations. Identifiable intangible assets acquired as part of the Merger were $1,441.9 million and include $362.3 million of indefinite life trade name intangibles and the following definite-lived intangibles: $920.0 million of customer relationships with a weighted average useful life of 14.2 years, $115.9 million of proprietary technology with a weighted average useful life of 13.7 years and $43.7 million of customer backlog with a weighted average useful life of less than one year.

In May 2011, we 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. CPT provides sustainable purification systems and solutions for desalination, water reuse, industrial applications and beverage segments that effectively address the increasing challenges of clean water scarcity, rising energy costs and pollution. CPT’s product offerings include innovative ultrafiltration and nanofiltration membrane technologies, aseptic valves, CO2 recovery and control systems and specialty pumping equipment. Based in the Netherlands, CPT has broad sales diversity with the majority of revenues generated in European Union and Asia-Pacific countries.

The fair value of the CPT business acquired was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value acquired over the identifiable assets acquired and liabilities assumed is reflected as goodwill. Goodwill recorded as part of the purchase price allocation was $451.8 million, none of which is tax deductible. Identifiable intangible assets acquired as part of the acquisition were $197.2 million, including definite-lived intangibles, such as customer relationships and proprietary technology with a weighted average amortization period of approximately 10 years.

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 and as though the CPT acquisition had been completed on January 1, 2010:



	Years ended December 31
In millions, except per-share data	2012		2011
Pro forma net sales	$	7,409.9	$	7,326.4
Pro forma net income (loss) attributable to Pentair Ltd.	157.5		(47.4		)
Diluted earnings (loss) per common share attributable to Pentair Ltd.	0.75		(0.23		)

The 2011 unaudited pro forma net income includes the impact of $262.0 million in non-recurring items related to acquisition date fair value adjustments to inventory and customer backlog, $21.8 million of change of control costs and $8.7 million of transaction costs associated with the Merger. The 2011 unaudited pro forma net income excludes the impact of $12.9 million in non-recurring items related to acquisition date fair value adjustments to inventory and customer backlog and $8.0 million, respectively, of transaction costs associated with the CPT acquisition.

The 2012 unaudited pro forma net income excludes the impact of $57.3 million of transaction related costs, $21.8 million of change of control costs and $178.1 million of non-recurring items related to acquisition date fair value adjustments to inventory and customer backlog 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 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. There was no pro forma impact from this acquisition as the results of PRF were consolidated into our financial statements prior to acquiring the remaining interest.

On October 4, 2012, we acquired, as part of Valves & Controls, the remaining 25 percent equity interest in Pentair Middle East Holding S.a.r.l. (“KEF”), a privately held company, for $100.0 million in cash. Prior to the acquisition, we held a 75 percent 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 percent interest in KEF.

Additionally, during the year ended December 31, 2012, we completed other small acquisitions as part of Process Technologies with purchase prices totaling $121.2 million in cash, net of cash acquired. Total goodwill recorded as part of the purchase price allocations was $80.9 million, $67.1 million of which is tax deductible.

During the year ended December 31, 2011, we completed other small acquisitions as part of Process Technologies with purchase prices totaling $21.6 million, consisting of $17.8 million in cash and $3.8 million as notes payable. Total goodwill recorded as part of the purchase price allocations was $14.4 million, none of which is tax deductible. The pro forma impact of these acquisitions was not material.

Total transaction costs related to acquisition activities in 2013, 2012, and 2011 were $8.2 million, $57.3 million and $8.2 million, respectively, and were expensed as incurred and recorded in Selling, general and administrative in our Consolidated Statements of Operations and Comprehensive Income (Loss).

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. Goodwill of $5.3 million and $5.7 million was included in the assets of the business sold for Technical Solutions and Flow Technologies, respectively.