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 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., formerly known as Tyco Flow Control International Ltd. (as used prior to the Merger (as defined below), "Flow Control"), is a company organized under the laws of Switzerland. The terms "us, "we" or "our" refer to Pentair Ltd. and its consolidated subsidiaries. Our business took its current form on September 28, 2012 as a result of a spin-off of Flow Control from its parent, Tyco International Ltd. ("Tyco"), and a reverse acquisition involving Pentair, Inc.

Prior to the spin-off, Tyco engaged in an internal restructuring whereby it transferred to Flow Control certain assets related to the flow control business of Tyco, and Flow Control assumed from Tyco certain liabilities related to the flow control business of Tyco. On September 28, 2012 prior to the Merger (as defined below), 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 110,898,934 of our common shares to Tyco's shareholders. Immediately following the Distribution, an indirect, wholly-owned subsidiary of ours merged with and into Pentair, Inc., with Pentair, Inc. surviving as an indirect, wholly-owned subsidiary of ours (the "Merger"). At the effective time of the Merger, each Pentair, Inc. common share was converted into the right to receive one of our common shares, resulting in 99,388,463 of our common shares being issued to Pentair, Inc. shareholders. The Merger is intended to be tax-free for U.S. federal income tax purposes. After the Merger, our common shares are traded on the New York Stock Exchange under the symbol PNR. Tyco equity-based awards held by Flow Control employees and certain Tyco employees and directors outstanding prior to the completion of the Distribution were converted in connection with the Distribution into equity-based awards with respect to our common shares and were assumed by us. Pentair, Inc. equity-based awards outstanding prior to the completion of the Merger were converted upon completion of the Merger into equity-based awards with respect to our common shares and were assumed by us. The total purchase price for Flow Control was $4.9 billion, consisting of $4.8 billion of common shares issued to Tyco shareholders, $0.5 million of cash paid to Tyco shareholders in lieu of fractional shares, and $92.3 million in replacement equity-based awards to holders of Tyco equity-based awards. The Merger is accounted for under the acquisition method of accounting with Pentair, Inc. treated as the acquirer.

• The Water & Fluid Solutions segment designs, manufactures, markets and services innovative water management and fluid processing products and solutions. In select geographies, Water & Fluid Solutions offers a wide variety of pumps, valves and pipes for water transmission applications. The Flow Technologies, Filtration & Process, Aquatic Systems and Water & Environmental Systems GBUs comprise this segment.

• The Valves & Controls segment designs, manufactures, markets, and services valves, fittings, automation and controls, and actuators and operates as a stand-alone GBU.

• The Technical Solutions segment designs, manufactures and markets 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 Equipment Protection and Thermal Management GBUs comprise this segment.

In 2012, Water & Fluid Solutions and Technical Solutions accounted for 70 percent and 30 percent of total revenues through the first nine months of the year, respectively. Water & Fluid Solutions, Valves & Controls and Technical Solutions accounted for 44 percent, 31 percent and 25 percent of total revenues during the fourth quarter of the year, respectively, reflecting our post-Merger revenue mix.

In May 2011, Pentair, Inc. acquired, as part of the Water & Fluid Solutions reporting segment, 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.

In the fourth quarter of 2012 and 2011, we completed our annual goodwill and intangible assets impairment reviews. As a result, we recorded a pre-tax non-cash impairment charge of $60.7 million for trade name intangibles and $200.5 million for goodwill in the fourth quarter of 2012 and 2011, respectively. These represent impairments of trade names across several of our reporting units in Water & Fluid Solutions and Technical Solutions in 2012. The impairment charges resulted from a rebranding strategy implemented in the fourth quarter of 2012. In 2011, the goodwill impairment occurred in Water & Fluid Solutions. The impairment charge resulted from changes in our forecasts in light of economic conditions and continued softness in the end-markets served by residential water treatment components.

Key Trends and Uncertainties Regarding Our Existing Business

Our net sales for 2012 were $4.4 billion, and were composed of sales in our reporting segments, as follows: Water & Fluid Solutions - $2.6 billion, Valves & Controls - $0.6 billion and Technical Solutions - $1.2 billion.

The following trends and uncertainties affected our financial performance in 2012 and 2011, and will likely impact our results in the future:

• Since 2010, most markets we serve have shown signs of improvement since the global recession in 2008 and 2009. Because our businesses are significantly affected by general economic trends, a lack of continued improvement in our most important markets addressed below would likely have an adverse impact on our results of operations for 2013 and beyond.

• In the fourth quarter of 2011, as a result of economic conditions and continued softness in end markets, we recorded goodwill impairment charges of $200.5 million.

• 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 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 are showing signs of rebound from their historically low levels in 2007-2011. New product introductions, expanded distribution, channel penetration and a recovering housing market have resulted in volume increases for 2012.

• Despite the overall strength of our end-markets, some of them have exhibited differing levels of volatility 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 Western Europe has negatively impacted business results and may continue to do so for the foreseeable future.

• Through 2011 and 2012, 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 2012 was $(21.0) million. The negative free cash flow resulted primarily from accelerated pension funding of $193.0 million, acquisition-related payments of $126.0 million and repositioning payments of $20.0 million. We expect to generate free cash flow in excess of 100 percent of our net income before noncontrolling interest in 2013. 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 2013, our operating objectives include the following:

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

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

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

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

• Integrating Pentair, Inc. and the Flow Control business.

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.

Net sales

Consolidated net sales and the year-over-year changes were as follows:

In thousands 2012 2011 $ change % change 2011 2010 $ change % change Net sales $ 4,416,146 $ 3,456,686 $ 959,460 27.8% $ 3,456,686 $ 3,030,773 $ 425,913 14.1%

Net sales by segment and year-over-year changes were as follows:

                                                                               2012 vs. 2011               2011 vs. 2010
In thousands                 2012            2011            2010         $ change      % change      $ change      % change
Water & Fluid Solutions   $ 2,638,403     $ 2,369,804     $ 2,041,281     $ 268,599        11.3 %     $ 328,523        16.1 %
Valves & Controls             546,707               -               -       546,707           - %             -           - %
Technical Solutions         1,231,036       1,086,882         989,492       144,154        13.3 %        97,390         9.8 %


Total                     $ 4,416,146     $ 3,456,686     $ 3,030,773     $ 959,460        27.8 %     $ 425,913        14.1 %

The components of the net sales change were as follows:

                                   2012 vs. 2011                                       2011 vs. 2010
                Water &                                                      Water &
                 Fluid          Valves &       Technical                      Fluid         Technical
Percentages    Solutions        Controls       Solutions       Total        Solutions       Solutions      Total
Volume                0.7               -            (5.2 )      (1.0 )            2.4             6.2        3.7
Acquisition          10.1           100.0            18.0        28.3             11.5               -        7.7
Price                 1.5               -             1.5         1.5              1.0             1.9        1.3
Currency             (1.0 )             -            (1.0 )      (1.0 )            1.2             1.7        1.4

Total 11.3 100.0 13.3 27.8 16.1 9.8 14.1

Consolidated net sales

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 Water & Fluid Solutions 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.

• higher sales volume related to the May 2011 acquisition of CPT;

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

• higher sales within the industrial and energy verticals by Technical Solutions;

• favorable foreign currency effects; and

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

These increases were partially offset by:

• 2010 sales resulting from the Gulf Intracoastal Waterway Project which did not reoccur in 2011; and

• lower sales within the infrastructure vertical by Technical Solutions.

Water & Fluid Solutions

The 11.3 percentage point increase in Water & Fluid Solutions sales in 2012 from 2011 was primarily the result of:

• sales volume of the Flow Control businesses subsequent to the Merger of $144.2 million and higher sales volume related to the May 2011 acquisition of CPT;

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

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

• increased sales in our Aquatic Systems 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 continued weakness in Western Europe and low flood-related product sales in the U.S. due to unusually dry weather; and

• unfavorable foreign currency effects.

The 16.1 percentage point increase in Water & Fluid Solutions sales in 2011 from 2010 was primarily the result of:

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

• organic sales growth primarily due to higher sales of certain pump, pool and filtration products;

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

• favorable foreign currency effects; and

These increases were partially offset by:

• 2010 sales resulting from the Gulf Intracoastal Waterway Project which did not reoccur in 2011.

Valves & Controls

The Valves & Controls sales in 2012 was the result of:

• sales volume of the Flow Control businesses subsequent to the Merger of $546.7 million.

Technical Solutions

The 13.3 percentage point increase in Technical Solutions sales in 2012 from 2011 was primarily the result of:

• sales volume of the Flow Control businesses subsequent to the Merger of $195.6 million;

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

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

These decreases were partially offset by:

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

• unfavorable foreign currency effects.

The 9.8 percentage point increase in Technical Solutions sales in 2011 from 2010 was primarily the result of:

• an increase in sales in industrial, energy and infrastructure verticals;

• favorable foreign currency effects; and

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

These increases were partially offset by:

• lower sales within the infrastructure vertical.

Gross profit

In thousands                     2012          % of sales              2011          % of sales             2010          % of sales
Gross profit                  $ 1,269,592            28.7%          $ 1,073,722            31.1%          $ 930,640             30.7%


Percentage point change                               (2.4 )pts                              0.4  pts

Gross Profit

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 in 2012 as a result of inventory fair market value step-up and customer backlog recorded as part of the Merger purchase accounting; and

• inflationary increases related to raw materials and labor costs.

• cost savings generated from our Pentair Integrated Management System ("PIMS") initiatives including lean and supply management practices;

• selective increases in selling prices in Water & Fluid Solutions and Technical Solutions to mitigate inflationary cost increases; and

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

The 0.4 percentage point increase in gross profit as a percentage of sales in 2011 from 2010 was primarily the result of:

• higher sales volumes in Water & Fluid Solutions and Technical Solutions and higher fixed cost absorption resulting from that volume;

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

• selective increases in selling prices in Water & Fluid Solutions and Technical Solutions to mitigate inflationary cost increases.

These increases were partially offset by:

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

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

Selling, general and administrative (SG&A)

In thousands                      2012 (1)        % of sales           2011 (2)        % of sales             2010          % of sales
SG&A                            $  1,219,154            27.6%         $   895,361            25.9%         $   550,501            18.2%


Percentage point change                                  1.7  pts                             7.7  pts

(1) Includes trade name impairment charge of $60.7 million.

(2) Includes goodwill impairment charge of $200.5 million.

The 1.7 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 for 2012 of $141.7 million, an increase of $73.4 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 actions taken in 2012;

• 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.

• nonrecurring goodwill impairment charge in 2011 of $200.5 million in Water & Fluid Solutions; and

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

The 7.7 percentage point increase in SG&A expense as a percentage of sales in 2011 from 2010 was primarily the result of:

• goodwill impairment charge of $200.5 million in Water & Fluid Solutions;

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

• "mark-to-market" actuarial losses related to pension and other post-retirement benefit plans for 2011 of $68.3 million, an increase of $47.1 million from 2010;

• restructuring actions taken in 2011;

• insurance proceeds related to the Horizon litigation and other legal settlements received in 2010 which did not reoccur at the same levels in 2011;

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

• certain increases for labor and related costs.

These increases were partially offset by:

• higher sales volumes in both Water & Fluid Solutions and Technical Solutions, which resulted in increased leverage on our fixed operating expenses.

Research and development (R&D)

In thousands                    2012         % of sales               2011        % of sales                2010         % of sales
R&D                         $     93,557            2.1%           $   78,158            2.3%           $     67,156            2.2%


Percentage point change                             (0.2 )pts                             0.1  pts

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 Water & Fluid Solutions 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.

• higher costs associated with the May 2011 acquisition of CPT; and

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

These increases were partially offset by:

• higher sales volumes in Water & Fluid Solutions and Technical Solutions, which resulted in increased leverage on the R&D expense spending.

Operating income - Water & Fluid Solutions

In thousands                     2012         % of sales             2011       % of sales              2010           % of sales
Operating income - Water &
Fluid Solutions               $   168,043            6.4%          $ 58,311            2.5%          $   231,588             11.3%


Percentage point change                               3.9  pts                         (8.8 )pts

The 3.9 percentage point increase in operating income for Water & Fluid . . .