Pentair Annual Report 2003

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FY2003 Annual Report · Pentair

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SUPPLY

MANAGEMENT

TALENT
CREATING
VALUE 360ß
CASH
FLOW PIMS

L E A N
ENTERPRISE

O R G A N I C

GROWTH

S U M M A RY A N N U A L R E PO R T 2 0 0 3

PENTAIR

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Pentair is a diversi(cid:222)ed operating company whose Water Technologies Group is

principally engaged in providing innovative products and systems used world-

wide in the movement, treatment, storage and enjoyment of water. Pentair also

participates in electronic technology markets through its Enclosures Group, and

professional and do-it-yourself tool markets through its Tools Group. Pentair(cid:213)s

2003 revenues totaled $2.7 billion, while operating income was $259.6 million.

Headquartered in Minnesota, the company employs 12,000 people in more than

50 locations around the world. Pentair common stock is

traded on the New York Stock

Exchange under

the

symbol: PNR.

Pentair, Inc. and Subsidiaries

(Dollars in thousands, except per-share data)

Operations:

Net sales

Operating income

Excluding certain items (1)

Net income (cid:209) continuing operations

Excluding certain items (1)

Diluted EPS (cid:209) continuing operations

Excluding certain items (1)

Years ended December 31

2003

2002

2001

2000

1999

$ 2,724,365 $2,580,783 $2,574,080 $2,705,630 $2,087,063

259,554

144,288

2.90

235,992

157,761

235,992

234,928

129,902

57,516

202,030

263,275

81,868

201,726

249,183

98,088

129,902

119,328

130,240

133,557

2.61

1.17

2.42

1.68

2.68

2.21

3.02

Net cash provided by operating activities

262,939

270,794

232,334

184,947

144,296

Capital expenditures (2)

Free cash (cid:223)ow (3)

43,622

56,696

53,668

68,041

219,317

214,098

178,666

116,906

Number of employees at year end

12,300

11,900

11,700

13,100

53,671

90,625

12,400

Other (cid:222)nancial data:

Total debt

Shareholders(cid:213) equity

806,493

735,085

723,706

913,974 1,035,084

1,261,478

1,105,724 1,015,002

1,010,591

990,771

Total debt as a percent of total capital

Return on average shareholders(cid:213) equity

39.0%

11.9%

39.9%

12.3%

41.6%

3.2%

47.5%

5.6%

51.1%

12.2%

Cash dividends declared per common share

Closing stock price

0.82

45.70

0.74

34.55

0.70

36.52

0.66

24.19

0.64

38.50

Restructuring charge

Tax effect of restructuring charge

Diluted EPS effect of restructuring charge

Goodwill amortization (4)

Tax effect of goodwill amortization (4)

Diluted EPS effect of goodwill amortization (4)

(cid:209)

41,060

(11,291)

0.60

36,107

(4,064)

0.65

24,789

(8,887)

0.33

36,456

(3,986)

0.67

23,048

(8,413)

0.34

24,409

(3,575)

0.47

Weighted-average shares (cid:209) diluted

49,810

49,744

49,297

48,645

44,287

(1) Excludes restructuring charge and goodwill amortization. (2) Includes $23.0 million for the acquisition of a previously leased facility. (3) Free cash (cid:223)ow de(cid:222)ned
as net cash provided by operating activities less capital expenditures. (4) Effective January 1, 2002, we adopted SFAS No. 142 which requires goodwill and
intangible assets deemed to have an inde(cid:222)nite life no longer be amortized. This standard did not require restatement of prior period amounts to be consistent
with the current year presentation. Certain (cid:222)nancial information has been presented to show the effect of excluding goodwill amortization for the prior year
periods to be comparable with the current year presentation.

Everywhere you look in Pentair, you can see the

results of efforts to build shareholder value.

We have established critical operating disciplines

to strengthen our internal processes, reinforce

command and control mechanisms, and support

R a n da l l J. H o g a n
Chairman and Chief Executive Officer

the practice of strategy deployment. Overlaying

these disciplines, we have applied (cid:222)ve key operating initiatives,

focused on cash (cid:223)ow, supply management, lean enterprise, talent

management, and organic growth. Collectively, these actions have

positioned Pentair for a bold, strategy driven transformation that is

CREATING VALUE 360ß

Certainly, that is something we do well. Consider that Murray Harpole founded Pentair

in the mid-(cid:212)60s and within a decade transformed it into a paper business. Murray and

Pentair(cid:213)s second CEO, Gene Nugent, then diversi(cid:222)ed into industrial products. When Pentair(cid:213)s

third CEO, Winslow Buxton, led the divestiture of the paper business in 1995, Pentair

transformed into a diversi(cid:222)ed manufacturing company, with operations in three areas of

enterprise: Water, Enclosures and Tools. With each transformation, Pentair reached a higher

level of performance and added value for its shareholders.

Today, we are transforming again, with a pending acquisition that could help us build

the highest-performing water technologies company in the world.

In February 2004, Pentair entered into an agreement to purchase WICOR, a unit of

Wisconsin Energy Corporation, which manufactures water system, (cid:222)ltration, and pool

equipment products under the Sta-Rite, SHUR(cid:223)o, and Hypro brands. The company employs

3,500 people in 24 locations worldwide.

1 Pentair

When we complete the acquisition of WICOR, Pentair will have a $2 billion Water

Technologies business, comprised of a $900 million water and wastewater systems business,

a global pool and spa equipment business with revenues of roughly $600 million, and a

(cid:222)ltration and puri(cid:222)cation business of approximately $500 million. Equally signi(cid:222)cant, we will

become more global in scope, with anticipated international water-related sales of 20 percent,

or about $400 million.

Our acquisition of WICOR underscores our commitment to the water business, which

we identi(cid:222)ed as an attractive market nine years ago. It also strengthens our ability to

provide highly innovative, quality products designed to meet the broad needs of customers

in (cid:222)ltration and puri(cid:222)cation, pool and spa, and water and wastewater systems markets. Our

Water Technologies business will continue to be a growth engine and driver of shareholder

value going forward.

Looking ahead: The best of both businesses

2003 Highlights

When we complete the acquisition of WICOR,

> Earnings per share from continuing

we expect to bring together the best of both

operations were $2.90 in 2003, re(cid:223)ecting an

11 percent gain over 2002;

> For the seventh year in a row, we achieved record cash

businesses. For example, the WICOR

organization has a very strong customer

(cid:223)ow reaching $219 million in 2003;

service capability which we foresee

> We continued to drive operating excellence through our

using as a model to strengthen our

Lean Enterprise and Supply Management practices, which

generated savings of more than $50 million in 2003;

> Our Enclosures Group recorded its eighth consecutive quarter of

margin improvement;

> Margins have stabilized in our Water Technologies Group and are

on an upward trend;

> We acquired the Everpure commercial water (cid:222)ltration business,

existing customer service func-

tions. Similarly, Pentair has a

proven set of operating disci-

plines, which we anticipate will

be adopted within the WICOR

significantly strengthening our position in water filtration

businesses after completion of

markets, and purchased the product lines and/or assets of four

the transaction.

small water-related businesses;

> We recorded the sixth consecutive quarter of income gains in

our European businesses; and,

Our priorities in the acquisi-

tion of WICOR are to maintain a

> Return on Invested Capital reached 14.1 percent, 30 basis

long-term focus on growing the

points higher than in 2002.

Pentair 2

G R O W T H

P I M

Rick Cathcart

Dave Harrison

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Mike Schrock

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Randy Hogan

Charley Brown

revenue

This graphic

communicates

the

value

and

potential of Pentair(cid:213)s

operating initiatives: Cash

Flow, Supply Management,

PIMS/Lean Enterprise, and Organic

Growth. A

fifth

initiative (cid:209) Talent

Management (cid:209) is a foundation for the other four.

Pentair is improving its performance by pursuing these initiatives, which drive Return

on Invested Capital (ROIC) and Revenue. For example, cash (cid:223)ow from improved

margins and reduced working capital increase ROIC. Improved supply management

performance and Pentair(cid:213)s lean enterprise initiative (PIMS) contribute to higher

ROIC through higher cost productivity. These can also contribute to higher

revenue through lower costs, reduced cycle times, and higher service levels,

which can mean higher volume. The organic growth initiative drives actions

targeted to achieve revenue growth at rates higher than the market.

We have made excellent progress on our (cid:222)ve key initiatives: our emphasis on

cash (cid:223)ow has become part of our culture; our Supply Management initiative

is driving performance gains in all of our businesses; our PIMS program is

advancing new concepts across the organization and we are further accelerating its

C R E AT I N G
VALUE
360ß

implementation; our commitment to our Talent Management efforts has been redoubled; and

we are pursuing clear well-de(cid:222)ned plans to build organic growth while remaining alert to acquisition opportunities that have the

potential to expand or extend our existing business interests and offer unique value for our shareholders. Pentair(cid:213)s progress in

executing its (cid:222)ve strategic initiatives is detailed throughout the pages of this annual report.

3 Pentair

Bonnie Schneider

Susan Gangsei

Steve Cotariu

Ram Ramakrishnan

Pentair 4

O R G A N I C

GROWTH

leverage Pentair(cid:213)s

improved operating

capabilities, product development, and cost

productivity efforts, we committed to grow

by de(cid:222)ning concrete initiatives and driving

execution for top-line results. Our goal is

to realize organic sales growth of between

(cid:222)ve percent and eight percent. Exploring

new business platforms within our existing

operations, expanding product lines, entering

new channels, and establishing our businesses in

new geographic markets are all avenues we are pursuing in

an effort to accelerate Pentair(cid:213)s performance.

Our organic growth initiatives continue to show tangible results. For

example, the Enclosures Group performed exceptionally well in the

midst of 2003(cid:213)s soft markets by pursuing several attractive market

segments having unique requirements for specialized enclosure

Rodney Jackson

Gary Witt

products. This initiative has already led to seven new

million-dollar customers in medical, security, defense, and

food and beverage markets. These contributed to organic

growth of six percent in the fourth quarter of 2003 versus

the same period in the prior year.

Our Water Technologies Group achieved (cid:222)ve percent

organic growth in 2003, driven by expansion of the

international water businesses, new pool and spa

equipment products, a broader Water Treatment

distributor base and new residential Water Treatment

products. With the shift in Pentair(cid:213)s business mix

resulting from the planned acquisition of WICOR, we

expect to further accelerate our organic growth in

Water Technologies in the years ahead.

In Tools, an array of new products (cid:209) including the

890 Router line, the new 12-inch Delta miter saws,

various private-label products, and new nailers and

reciprocating saws (cid:209) contributed to a fourth quarter

2003 organic sales gain of three percent compared to

the same period in the prior year.

Pentair continues to pursue clear, well-de(cid:222)ned plans

to build organic sales growth while remaining alert to

acquisition opportunities that have the potential to

expand or extend our existing business interests and offer

high value for our shareholders.

5 Pentair

Bob McCory

Bob Brown

Gary Anderson

Ning Hong

Bob McKone

Dave Roland

Steve Pilla

Linling Gan

On average, more than

50 percent of Pentair(cid:213)s costs

are attributable to goods and

services purchased from outside

suppliers. The goal of Pentair(cid:213)s Supply

Management initiative is to lower the total cost

of ownership

for

these goods and services by

SUPPLY

MANAGEMENT

more than (cid:222)ve percent annually through the strategic selection,

purchase, and transport of materials and services. This is

accomplished by greater integration of Pentair buying across

business units; developing and working with suppliers in low

cost regions; improving ef(cid:222)ciency in the use of goods and

services; and working with suppliers to lower their costs.

In 2003, Pentair(cid:213)s Supply Management initiative realized

incremental savings of more than $50 million, which is a

savings of approximately four percent of our total spend. With

upward pressure on commodity prices, the supply management

initiatives will be increasingly critical to Pentair(cid:213)s performance in the

coming years.

Pentair 6

business, and to act quickly in the (cid:222)rst 18 months to capture an expected $30 million in

synergies primarily from operations, including sourcing, supply chain, and manufacturing.

Material cost savings will play the most important role as we consolidate global sourcing and

supply management initiatives. Finally, we expect to bene(cid:222)t from balance sheet and cash

(cid:223)ow improvements, including one-time working capital reductions of some $40 million.

Our integration planning process (cid:209) which is based on our own proven approaches,

industry best practices, and dedicated resources (cid:209) is well underway. In this process, the

similarities between Pentair and WICOR are both an advantage and an opportunity. We

intend to hit the ground running once the transaction is complete. More importantly, both

companies(cid:213) emphasis on values and integrity gives us con(cid:222)dence that we will be successful

in our integration. As in past integrations, our (cid:222)rst priority will be to satisfy every one of our

current customers and deliver on our current business commitments. Throughout the

integration, we will keep the following fundamentals (cid:222)rmly in our minds:

1) We will maintain focus on our values by:

> Treating people with respect;

> Maintaining absolute integrity; and

> Communicating openly and often.

2) This is an acquisition in which we will:

> Maintain a long-term focus on growing the business; and

> Act quickly to capture some $30 million in synergies.

3) We will retain the best of both businesses by:

> Developing a shared vision and common culture;

> Identifying and retaining key talent and capabilities at all levels; and

> Strengthening the brands, products, and channel relationships of both businesses.

4) We will take advantage of what we consider to be a transformational opportunity by:

> Putting speed before perfection;

> By maintaining momentum and securing ongoing business; and by

> Thinking big.

7 Pentair

Enclosures: Near-(cid:223)awless execution of operating initiatives

Although the Water Technologies Group will be our largest business, we remain

committed to a diverse business mix. This diversity has provided a measure of performance

consistency across business and economic cycles. In keeping with this desire for a

diverse business mix, Pentair(cid:213)s Enclosures business will continue to be a key element of

Pentair(cid:213)s portfolio.

The value of the Enclosures business today is seen clearly in its recent history. In the

second half of 2001, a dramatic drop in industrial capital spending, commercial construction

spending, and technology spending led to declining sales. The sustained contraction of the

market forced the Enclosures Group to focus on strengthening its cost position, a process

that was achieved by pursuing Pentair(cid:213)s (cid:222)ve operating initiatives. As the initiatives began

to take effect, the downward sales trend (cid:223)attened and margins began to climb. Since

that time, the Enclosures Group has recorded eight consecutive quarters of improved

margin performance.

Today, the Enclosures Group sets the standard for performance in many of Pentair(cid:213)s (cid:222)ve

operating initiatives. Consider the following:

> Focusing on total cost productivity, the Pentair Integrated Management System (PIMS)

and Supply Management have become the foundation of the Group(cid:213)s operating

structure. Productivity generated through PIMS has enabled the Enclosures Group to

reduce structural costs (cid:209) including a reduction of six facilities over the past three

years (cid:209) while increasing responsiveness to the customer. With raw material as the

Group(cid:213)s largest component of cost, the Group(cid:213)s supply management expertise has

generated signi(cid:222)cant overall savings.

> Increased productivity, improving inventory turns and a philosophy of (cid:210)creativity before

capital(cid:211) have also produced dramatic results in cash (cid:223)ow as the group provided cash in

excess of 150 percent of net operating pro(cid:222)t after taxes for the second year in a row.

> The Enclosures Group has served as a proving ground for strong, talented leaders. Many

of these leaders, having demonstrated their skills in the turnaround of the Enclosures

Group, have been transplanted to other Pentair groups where they share best practices

Pentair 8

Pentair has launched a new, more proactive talent management process as a central part of driving a

high performance culture. The talent management initiative has grown to encompass a variety of

programs and best practices. These include an executive development program for

high potential managers, individual development planning processes,

cross-group/business rotations and assignments, and an executive

compensation program which more closely links rewards to the

strategic priorities of the business. The human resources function

has instituted an improved process to integrate acquisitions

comprising cross-company integration management teams,

diagnostic tools designed to assess the compatibility of

organizational cultures, an organization design model, and a

battery of performance targets and communication protocols. A

highlight of the 2003 talent management activity was the

TALENT

MANAGEMENT

Company(cid:213)s first all-employee

opinion survey, the

results of which

emphasize the fact that Pentair has

been (cid:209) and continues to be

(cid:209) an organization charac-

terized by

integrity

and guided by

shared values.

Linda Evans

Tom Carman

Fred Koury

Roma Anderson

9 Pentair

PIMS
L E A N
ENTERPRISE

The Pentair Integrated Management System (PIMS) is Pentair(cid:213)s application of Lean

Enterprise concepts. The essence of PIMS is the unending quest to eliminate waste and

variability from every business process, with the ultimate goal of providing world-class

quality, delivery, and service to customers at the lowest possible cost.

Rolled-out company wide in early 2001, PIMS activities have reduced (cid:223)oor space, improved

quality, accelerated on-time delivery, increased inventory turns, and cut lead-times. These

gains, in turn, are re(cid:223)ected in productivity improvements, increased sales per employee, and

higher margins. In Enclosures, for example, an order for 30 stainless steel built-to-order cabinets

used to require about eight to 10 weeks to complete. After applying PIMS techniques to streamline

material (cid:223)ow, improve automated design tools, and shrink the size of manufacturing cells, the Group can now

complete the same order within three days and at a reduced cost.

PIMS is also being executed in functions not associated with the manufacturing process. In 2003, a group of Pentair

Finance employees conducted a company wide PIMS event designed to improve the complex month-end accounting close

process. The event involved gathering (cid:222)nancial activities data from various sources, constructing the activity (cid:223)ow, analyzing the

process, and reconciling for error and oversight. The event delivered 18

process improvement opportunities, a two-day reduction

in the closing cycle, the elimination of three work

steps, and the implementation of four new

quality-control steps. Pentair(cid:213)s goal is

to realize (cid:222)ve percent total cost

productivity improvement on

core business cost each

year

through PIMS

activities.

Paul Whalen

Tracy Theisen

Sheronda Rivers

Ed Smith

Serban Simian

Don Westman

Amy Risley

Heidi Desormey

Lisa Beck

Michelle Kissel

Jorge Rodriguez

Pentair 10

and apply their knowledge and experience. Meanwhile, their prot(cid:142)g(cid:142)s advance within

the Enclosures organization and continue to build upon their predecessors(cid:213) work.

> Enclosures Group sales declines were reversed by expansion into growing markets

including medical, data networking, security, defense, and food and beverage. This was

further supported by targeting Original Equipment Manufacturers (OEMs).

With competition hurt by three years of soft markets, the Enclosures Group has

capitalized on its strengths (cid:209) the largest distribution network in North America, the

broadest geographic presence, and the highest brand recognition in the industry (cid:209) to build

market share. As markets continue to recover, the Group(cid:213)s outstanding lean enterprise

programs and tight cost structure is expected to deliver substantial bene(cid:222)t to the Group(cid:213)s

bottom line results.

Opportunity to examine the future of tools

For many years, and particularly during the 1990s, the Tools business was Pentair(cid:213)s key

driver of sales and pro(cid:222)t growth. It was, and still is, a good business equipped with an

excellent reputation built on a long history of innovation and quality.

The Group has made signi(cid:222)cant progress in its performance over the last three years,

driving our (cid:222)ve operating initiatives. A strengthened Tools management team continues to

effect cost reductions and productivity improvements while supporting a stream of new

products offered under the strong core brand names of Porter-Cable, Delta, and FLEX, and

others offered by the DeVilbiss Air Power Company and Oldham Saw businesses. Aided by

its established Asian manufacturing base, these excellent businesses and their strong

brands have bright prospects ahead.

In recent years, however, our Water Technologies Group has taken the leading sales

and pro(cid:222)t-generating position among our businesses. Now, with the pending WICOR

transaction, we have an ideal opportunity to examine the future of our Tools business.

11 Pentair

Accordingly, we have engaged Goldman Sachs to assist us as we explore strategic

alternatives for our Tools Group. This action is entirely consistent with our desire to expand

our presence and core strengths in the water industry. Indeed, we are con(cid:222)dent that the

Tools Group will continue to improve its performance, strengthen its brands, produce

quality products, maintain good relationships with customers and vendors, and generate

good pro(cid:222)ts in the future. We believe that it is in the best interests of our shareholders, as

well as the employees and customers of our Tools business, to pursue strategic alternatives

for this business.

That said, Pentair will continue to support, invest in, and operate the Tools businesses

throughout the decision-making process, just as we have for the last 22 years. As always,

our employees will continue their focus on improving performance and meeting the needs

of their customers.

We anticipate that a (cid:222)nal decision regarding strategic alternatives for the Tools business

will be made sometime before the fourth quarter of 2004.

Solid results from a growing water technologies group

The Water Technologies arena has been a focus for expansion for nearly a decade. The

most recent acquisition in water was completed on December 31, 2003, when Pentair

purchased water (cid:222)ltration products manufacturer, Everpure, Inc., of Northbrook, Illinois,

from United States Filter Corporation, a unit of Veolia Environnement. Everpure is a leading

global provider of water (cid:222)ltration products and services principally for the commercial

sector, and complements Pentair(cid:213)s Plymouth Products business, which manufactures water

(cid:222)ltration products used principally in residential applications. Together with Plymouth

Products, Everpure gives Pentair a solid position in the global water (cid:222)ltration market.

Everpure(cid:213)s strong brand name, industry leading process technology, rapid product

development capabilities, and broad footprint in North America, Europe, and Asia, are

expected to build our strengths while accelerating the long-term growth and pro(cid:222)tability

of our business.

Pentair 12

CASH
FLOW

Pentair(cid:213)s cash (cid:223)ow initiative was an early success that quickly became a key element

of the Company(cid:213)s operating routine and business culture. In the last four years, we

have generated three times more cash than in the previous four years. This resulted

in a signi(cid:222)cant decrease in interest expense. The resulting lower debt levels have

allowed us to fund the expansion of our business, both in terms of strategic

investments for growth in our existing businesses, as well as in acquisitions. In 2003,

we again exceeded our free cash (cid:223)ow target of $200 million, generating a total of

$219 million, or cash EPS of $4.40. Pentair(cid:213)s success in generating cash comes from a

disciplined focus on the basics. First, cash (cid:223)ow has increased as our margins have improved.

Secondly, cash (cid:223)ow has increased as our Balance Sheet productivity has improved, giving us a signi(cid:222)cant

reduction in Working Capital. As we progressed through 2003, our Accounts Receivable and Inventory ratios improved.

Our PIMS activities have also made Pentair far more capital-ef(cid:222)cient,

reducing our level of annual capital expenditures. We

expect that we will continue to make progress,

both in terms of margin improvement

and Working Capital reduction.

Dave Harrison

Jeff Grund

Steve Ragaller

Mike Meyer

Karen Durant

13 Pentair

Acquisitions aside, Water Technologies continues to improve its performance on all

fronts. For 2003, Water Technologies Group sales were up nearly 14 percent, representing

(cid:222)ve percent organic growth, excluding acquisitions and the impact of currency translation.

The Group recorded margins of 13.6 percent, equal to 2002 levels and reversing a decline

related to Asian investments and unfavorable retail mix in 2001 and 2002. Margin

improvements have been driven by the continued success of our PIMS and supply chain

initiatives, particularly in the pump business. These strong fundamentals give our Water

Technologies business good momentum that we can carry into the WICOR integration.

Upholding our commitment to values and growth

While the integration of WICOR will be a major task and the sole focus of a dedicated

team of people, we will continue to pursue our plans to grow and enhance value for our

shareholders. Our immediate priorities in addition to the WICOR acquisition are to complete

the integration of the Everpure acquisition. We also will complete our review of strategic

alternatives for the Tools Group. Most important, we will continue driving the (cid:222)ve operating

initiatives (cid:209) Cash Flow, Supply Management, PIMS/Lean Enterprise, Talent Management,

and Organic Growth (cid:209) across the company.

As we move forward, we remain committed to our focus on values and long-term

growth. Water technology will transform the company, while we continue to grow our

Enclosures business.

These are good times for Pentair. And while change is in the air, it is change that we

con(cid:222)dently embrace. We always have.

Sincerely,

R a n da l l J. H o g a n
Chairman and Chief Executive Officer

Pentair 14

CODEOF
BUSINESS
CONDUCT

Pentair, Inc. chooses
to be an independent, publicly
owned company, and this statement
is to guide the development of its

organization and the conduct of

its

business affairs. Our businesses are to be
managed in keeping with the highest business,
ethical, moral and patriotic standards applicable
to a publicly owned corporation. Our businesses
are to be operated so that we are respected for
our actions by shareholders, employees, plant
communities, customers, suppliers, investors
and all other stakeholders. Our approach to
business is intended to make Pentair, Inc.
a top-performing company managed
and operated to provide long-term
bene(cid:222)ts to all constituents.

OPERATING

GUIDELINES

> Balanced consideration will be

given to the interests of shareholders and

employees in managing the corporation.

> The corporation staff will be kept to minimum size, and

subsidiary operations will be as autonomous as practicable.

> A strong work ethic is expected of all constituents. Good performance

will be freely recognized. Poor performance will not be condoned.

> We will strive to: operate with the highest regard for the environment;

eliminate environmental risks from the workplace; and minimize emissions

and waste.

> The dignity and self-worth of all persons involved with the Company will be respected.

> Safety in the workplace and in work practices shall be maximized.

> We will encourage, aid and promote the physical and mental health and wellness of

employees and their families.

> Quali(cid:222)ed employees will be given priority for internal employment opportunities.

> Standards of ethics, integrity and work practices shall apply equally to all employees.

> We will honor agreements, meet obligations timely, maintain the spirit and

intent of our commitments, and value good relationships.

> Hiring emphasis will recognize ability, compatibility and integrity, and

will not discriminate on the basis of sex, religion, race or age.

> We will promote open and candid communications with

emphasis on

informality and on conversational

exchanges.

15 Pentair

offerings

brands

applications

market segments

Pentair
Pump
Group

Products range from light duty
household utility pumps to massive,
high-(cid:223)ow turbine pumps designed for
municipal water applications.

Pentair
Water
Treatment

Control valves; (cid:222)berglass pressure
vessels; storage tanks; residential,
commercial, and industrial (cid:222)ltration
housings; replaceable cartridge
elements; and drinking water (cid:222)ltration
system components.

Myers, Fairbanks
Morse, Shur-Dri,
Hydromatic,
Aurora, Verti-line,
Layne & Bowler,
Water Ace.

Pumps for residential
and municipal wells;
water treatment and
wastewater solids
handling; and (cid:222)re
protection.

Fleck, SIATA,
CodeLine,
Structural,
WellMate,
American Plumber,
Armor, Everpure,
Pentek.

Products used in the
manufacture of water
softeners and (cid:222)ltration,
deionization, desalination
systems, and residential
water (cid:222)ltration.

Residential, commercial,
municipal applications for
sump, well and irrigation,
(cid:222)re, commercial HVAC,
waste and water treatment,
general industrial.

Residential, Commercial,
Industrial, Municipal.

Pentair
Pool
Products

Hoffman
Enclosures

Pentair
Enclosures
Europe

Pentair
Electronic
Packaging

Delta

A complete line of pool/spa equipment
and accessories including pumps, (cid:222)lters,
valves, heaters, automatic controls,
lights, automatic cleaners, commercial
deck equipment, pool tile/(cid:222)nishing
materials, cleaning/maintenance
equipment, spa/jetted tub hydrotherapy
(cid:222)ttings and pool/spa accessories.

Enclosures, cabinets, data networking
and communication, structural support,
and thermal management solutions to
protect electrical and electronic control
components, and instruments.

Metallic enclosures consisting of 19-inch
racks, subracks and cabinets as structural
parts for electrical and electronic
devices/installations, as well as integrated
solutions with power supplies, backplanes
and thermal management products.

Standard, modi(cid:222)ed, and custom enclosures
and cabinets; cases, subracks, backplanes,
turn-key, and custom microcomputer
systems; and high-volume stamped chassis
and assemblies.

A full line of benchtop and stationary
woodworking machines, and
a complete line of accessories.

Pool and spa construction,
maintenance, repair,
and operations.

Residential, Commercial, and
Municipal markets
for in-ground and
above-ground pools, Spas,
and jetted tubs.

Pentair Pool
Products,
National Pool
Tile, Pentair
Aquatics, Letro
Products,
Kreepy Krauly,
Intellitouch.

Hoffman

Housing and protection of
electrical and electronic
controls, instruments,
and components.

Schroff

Structural parts/housings
for electrical and
electronic devices/
installations.

Schroff, Taunus,
Pentair
Electronic
Packaging.

Housing and storage of
electrical and electronic
controls, instruments, and
components.

Delta, Delta
Shopmaster, Delta
Industrial, and
Biesemeyer.

Woodworking, cabinet
and furniture making,
commercial and
residential construction.

Automotive; petroleum and
petrochemical; food; machine
tool, and other industrial
manufacturing customers;
defense and security; and
commercial construction.

Telecom, computer
networks, data
communication, industrial
controls, transport, test and
measurement, medical,
defense, and aerospace.

Electronics; datacom
and telecom; medical;
general industrial; security
and defense; test and
measurement.

DIY/homeshop craftsmen;
residential, commercial, and
industrial construction;
remodelers; cabinet
manufacturers, case goods,
and furniture makers.

Portable electric tools and related
accessories; pneumatic nailers; and
cordless tools including saws, routers,
sanders, grinders, drills, etc.

Pressure washers, air compressors,
generators, pneumatic tools.

Router bits, circular saw blades, and
related accessories.

Porter-Cable

DeVilbiss
Air Power
Company

Tools
Accessories
Platform

Pentair 16

Porter-Cable
and FLEX.

Commercial and
residential construction,
professional
woodworking and DIY.

Contractor, remodeler, DIYer,
woodworker; furniture
manufacturer, industrial
fabrication and maintenance.

Air America,
Ex-Cell, Power
Back, Charge Air
Pro, 2 by 4, and a
variety of private
label brands.

Oldham, Viper,
Hickory, United
States Saw,
Delta, and
Porter-Cable.

Commercial, contractor,
and DIY activities.

Homeowners; professional
building contractors; and
automotive, woodworking,
and industrial markets.

Commercial and
residential construction
and DIY activities.

Contractor, remodeler, DIYer,
woodworker, furniture
manufacturer, industry.

customers

competitors

strengths

locations

web

Home centers, wholesale
and retail distributors,
plumbing wholesalers,
supply houses, contractors,
direct.

Independent dealers,
vertically integrated
dealers, plumbing supply
houses, OEMs.

ITT, Grundfos,
Flowserve,
Gormann Rupp,
Wayne.

Cuno, Pall,
Osmonics/GE.

One of the top 10 pump
businesses in the world, and
the second largest water and
wastewater pump business
in North America.

Ashland, Ohio;
North Aurora, Illinois;
Kansas City, Kansas;
Shanghai, China.

Holds the number one position
in the worldwide water
treatment control valve and
(cid:222)berglass pressure vessel
market, leading supplier of
(cid:222)ltration products to residential,
commercial, industrial markets.

Brook(cid:222)eld and Sheboygan,
Wisconsin; Chardon, Ohio;
Northbrook, Illinois; Buc
and Colombes, France;
Herentals, Belgium; New
Delhi and Goa, India; Florence
and Milan, Italy; Billingham,
England; Shanghai, China.

Sanford, North Carolina;
Moorpark, El Monte,
and Anaheim, California;
Lagrangeville, New York;
Johannesburg, South
Africa; Milan, Italy.

aurorapump.com
fairbanksmorsepump.com
hydromatic.com
femyers.com
waterace.com
shur-dri.com

pentairwater.com
(cid:223)eckcontrols.com
structural.com
wellmate.com
everpure.com

nptgonline.com
paragonaquatics.com
pentairpool.com

Distributors, OEMs, builders,
commercial contractors,
pool service and specialty
pool retailers.

Hayward, Astral.

The world(cid:213)s largest pool and
spa equipment manufacturer.

Industrial/Electrical MRO,
OEM, electrical and data
(on-premise) contractors.

OEMs, Motorola, Ericsson,
Siemens, Intel and
electronic components
distributors.

Rittal, Saginaw,
Hammond,
Wiegmann, Cooper
B-Line, local
machine shops.

Rittal, Knuerr, APW,
Elma.

OEMs, Telecom, Datacom,
Motorola, Lucent, Dell, HP,
Distributors.

APW, Rittal,
regional competitors.

The leading North American
producer of electrical enclosures;
depth and breadth of product
offering; low cost manufacturing;
strong brand; and premier
electrical distribution.

Mt. Sterling, Kentucky;
Anoka, Minnesota; Reynosa
and Mexico City, Mexico;
Scarborough, Ontario, Canada;
Boituva, Brazil; Chinyokaha,
Japan; Singapore.

hoffmanonline.com

Worldwide brand recognition;
Schroff pioneered the market
for standardized 19-inch
electronics packaging; product
expertise; unit-cost ef(cid:222)ciencies,
integration capabilities.

Platform-based full-line
solutions, speed and (cid:223)exibility,
global reach, supply chain
management.

Germany, United Kingdom,
France, Sweden, Italy,
Poland, China, Japan,
and Singapore.

schroff.de
schroff.fr
schroff.uk
schroff.se

pentair-ep.com

Warwick, Rhode Island;
Des Plaines, Illinois;
Reynosa, Mexico;
Boituva, Brazil;
Qingdao, China.

Home Depot, Lowe(cid:213)s, Sears,
industrial tool
distributors, mail
order/e-commerce,
hardware stores.

DeWalt, Makita, Ryobi,
Grizzly, Skil, Powermatic,
Emerson, and Jet.

Strong brand name (cid:209) one
of the most respected names
in the business; Asian
manufacturing capability.

Mesa, Arizona; Jackson,
Tennessee; Ontario, Canada;
Taichung, Taiwan; Qingdao
and Suzhou, China.

deltawoodworking.com

Home Depot, Lowe(cid:213)s, Sears,
industrial tool distributors, Mail
order/e-commerce, hardware
stores, lumber and building supply.

Skil/Bosch, Hitachi,
Black & Decker/DeWalt,
Stanley Works, Makita,
and Milwaukee.

Home Depot, Lowe(cid:213)s, Sears,
Sam(cid:213)s Club, regional home
centers, farm & agriculture
stores, hardware, and
STAFDA/Industrial.

Campbell-Hausfeld,
Coleman, Karcher,
Generac, DeWalt,
Ingersoll Rand, and
Florida Pneumatic.

Home Depot, Lowe(cid:213)s, Sears;
lumber yards; industrial tool
distributors; mail order/
e-commerce; hardware stores.

DeWalt/Black & Decker,
American Tool, Vermont
American, Freud, various
tool manufacturers.

Professional brand name recogni-
tion, innovation, and best-in-class
quality and value.

Jackson, Tennessee;
Steinheim, Germany;
Ontario, Canada.

porter-cable.com

Innovative new products, high
quality, performance, and value
has made DeVilbiss a leader in air
compressor and pressure washer
markets, and a strong player in
generators and air tool markets.

Oldham Saw holds a leading
share in the router bit category,
and a second place position in
the circular saw blade category
in North America.

Jackson, Tennessee;
Decatur, Arkansas.

devap.com

West Jefferson,
North Carolina.

oldham-usa.com

17 Pentair

1,200

1,000

800

600

400

200

3,000

2,500

2,000

1,500

1,000

500

60%

50%

40%

30%

20%

10%

600

500

400

300

200

100

’99 ’00 ’01 ’02 ’03

f u l l - c i r c l e f i n a n c i a l s

450

Pentair focuses on delivering full circle (cid:222)nancial value, striving to optimize the

balance between growth (sales), quality of earnings (income), and leverage

(balance sheet productivity). Financial results are delivered within a frame-

400

350

300

250

200

150

100

work of (cid:222)nancial controls, forthright communication, and ethical conduct in

’99 ’00 ’01 ’02 ’03

all aspects of business, and especially so in matters related to (cid:222)nance and

’99 ’00 ’01 ’02 ’03

accounting practices. We will continue to operate

in accordance with our long-standing Code

of Business Conduct and strive to deliver

4
1
2

9
1
2

9
7
1

ever-improving (cid:222)nancials, thereby deliv-

7
1
1

ering added value to our shareholders.

3
6
2

9
4
2

0
6
2

5
3
2

6
3
2

300

250

200

150

100

0
9
.
2

1
6
.
2

2
4
.
2

3.00

2,50

2.00

1.50

1.00

0.50

250

200

150

100

1
9

’99 ’00 ’01 ’02 ’03

sales

’01 ’02 ’03
adjusted diluted eps
($ per share)

eps

’99 ’00 ’01 ’02 ’03

cash fl

3
7
.
6
3
$

5
3
.
6
3
$

5
3
.
5
3
$

4
5
.
8
3
$

6
8
.
8
3
$

6
0
.
9
3
$

5
3
.
0
4
$

0
8
.
2
4
$

7
8
.
9
3
$

0
0
.
1
4
$

0
6
.
3
4
$

0
7
.
5
4
$

8
6
.
5
4
$

1
0
.
4
5
$

%
3
.
2
3

%
4
.
6
2

%
3
.
5
2

40%

35%

30%

25%

20%

15%

10%

%
9
.
8
8

100%

80%

60%

40%

20%

-20%

Pentair S&P 500 DJIA
1-year stock price
appreciation

1y return

Pentair S&P 500 DJIA

3y return

%
3
5
2

%
9
8
8

100%

80%

60%

40%

20%

-20%

%
8
5
1
-

%
1
3
-

40%

35%

30%

%
3
2
3

%
4
6
2

jan feb mar apr may jun jul aug sep oct nov dec jan feb
’03 ’04

25%

20%

Pentair stock price
($ per share)

15%

10%

Pentair S&P 500 DJIA

1y return

3y return

3-year stock price
appreciation

$54

$52

$50

$48

$46

$44

$42

$40

$38

$36

$34

$32

Pentair 18

1,200

1,000

800

600

400

200

1,200

1,000

800

600

400

200

60%

50%

40%

30%

20%

10%

600

500

400

300

200

100

60%

50%

40%

30%

20%

10%

600

500

400

300

200

100

450

400

350

300

250

200

150

100

450

400

350

300

250

200

150

100

’99 ’00 ’01 ’02 ’03

0
0
’99 ’00 ’01 ’02 ’03

0
’99 ’00 ’01 ’02 ’03

1,200

1,000

6
0
7
,
2

4
7
5
,
2

1
8
5
,
2

800
3,000
4
2
7
600
,
2,500
2

400
2,000

200
1,500

0
1,000

500

1
8
5
,
3
2
6
2

4
7
5
,
2
9
4
2

4
2
7
,
2

5
3
2

7
8
0
,
2

6
0
7
,
2
300

250

200

150

’99 ’00 ’01 ’02 ’03

100

’99 ’00 ’01 ’02 ’03

3,000

2,500

2,000

1,500

1,000

500

60%

50%

40%

30%

6
3
20%
2

10%

300

0
250
6
2

200

150

100

600

500

400

3
6
2

3.00

9
4
2

300

200

100

2,50

2.00

1.50

1.00

0.50

450

400

350

300

250

200
9
150
7
1
100

50
250
40

2
4
.
2

1
6
.
2

0
9
.
2

30
200
20

150
10

0
100

7
1
1

1
9

0
6
2

0
9
.
2

1
6
.
2

6
3
2

5
2
3
4
2
.
2

3.00

2,50

2.00

1.50

1.00

’99 ’00 ’01 ’02 ’03

0.50

4
1
2

250

9
1
2
200

150

9
7
1

7
1
1

100

1
9

’99 ’00 ’01 ’02 ’03

’01 ’02 ’03

’99 ’00 ’01 ’02 ’03

’99 ’00 ’01 ’02 ’03
6
0
7
,
2

4
2
7
,
2

4
oi
7
5
,
2

1
8
5
,
2

’99 ’00 ’01 ’02 ’03

sales

7
8
0
,
2

3,000

2,500

2,000

1,500

1,000

500

’99 ’00 ’01 ’02 ’03
adjusted operating
income ($ in millions)

’01 ’02 ’03

9
4
2

eps

3
6
2

5
3
2

0
6
2

6
3
2

300

250

200

150

100

’99 ’00 ’01 ’02 ’03
net sales
($ in millions)
sales

’99 ’00 ’01 ’02 ’03

9
1
2

4
1
2

7
1
1

9
7
1

600

500

400

300

200

100

0
600

’99 ’00 ’01 ’02 ’03

0
80

accounts
receivable
($ in millions)

500

400

9
4
2

300

3
200
6
2

100

0
6
2

5
3
2

6
3
2

days sales
outstanding
(13 month moving average)

30
2
20
4
2
10

3.00

2,50

2.00

0
9
2

1
6
2

’99 ’00 ’01 ’02 ’03
1.50

450

400

350

300

250

200

150

100

0
450

400

350

300

250

200

150

100

60%

50%

40%

30%

20%

10%

0
60%

50%

40%

30%
4
2
7
20%
2

10%

’99 ’00 ’01 ’02 ’03

4
7
5
2

1
8
5
2

3,000

400

2,500

200

’99 ’00 ’01 ’02 ’03

4
2
4
’99 ’00 ’01 ’02 ’03
7
7
,
2
5
,
2

1
8
5
,
2

2,500

sales

1,200

1,000

800

600

400

200

1,200

1,000

800

600

2,000

1,500

1,000

500

3,000

2,000

1,500

1,000

500

300

250

200

150

100

0
300

250

200

150

100

’99 ’00 ’01 ’02 ’03
0
6
2

3
6
2

9
4
2

5
3
2

6
3
2

0
9
.
’01 ’02 ’03
2
1
6
.
2

2
4
.
eps
2

1.00

0.50

0
3.00

2,50

2.00

1.50

1.00

0.50

100
inventories
($ in millions)

1
9

days on hand
(13 month moving average)

0
250

’99 ’00 ’01 ’02 ’03
9
1
2

4
1
2

19 Pentair

200

cash fl

9
7
1

100

150

’99 ’00 ’01 ’02 ’03

’01 ’02 ’03

’99 ’00 ’01 ’02 ’03

sales

eps

cash fl

3.00

2,50

2.00

1.50

1.00

0.50
1,200

0
1,000

800

600

400

200

’99 ’00 ’01 ’02 ’03
0
free cash (cid:223)ow
9
.
($ in millions)
cash fl
2
1
6
.
2

eps

2
4
.
2

cash fl

250

200

150

100

1
9

60%

50%

40%

30%

20%

10%

’01 ’02 ’03

eps

70
’99 ’00 ’01 ’02 ’03
60

total debt
($ in millions)

3,000

7
’99 ’00 ’01 ’02 ’03
8
0
2

2,500

2,000

1,500

1,000

500

250

200

150

debt/total capital

4
2
7
2

4
7
5
2

1
8
5
2

6
10
0
7
0
2
90

9
1
2

4
1
2

9
7
1

’99 ’00 ’01 ’02 ’03

sales

7
1
1

450

400

350

300

250

200

150

100

500
’99 ’00 ’01 ’02 ’03
400

cash fl

300

200

100

’99 ’00 ’01 ’02 ’03

300

250

200

150

100

3
6
2

9
4
2

5
3
2

3.00

2,50

2.00

1.50

1.00

0.50

250

200

150

100

’99 ’00 ’01 ’02 ’03

’01 ’02 ’03

’99 ’00 ’01 ’02 ’03

eps

cash fl

f i n a n c i a l o v e r v i e w

We are a diversified industrial manufacturer operating in three segments: Water, Enclosures, and Tools. Our Water segment

manufactures and markets essential products for the transport and treatment of water and wastewater and generates

approximately 39 percent of revenues. Our Enclosures segment accounts for approximately 21 percent of revenues, and

designs, manufactures, and markets standard, modified and custom enclosures that protect sensitive controls and

components for markets that include data communications, networking, telecommunications, test and measurement,

automotive, medical, security, defense, and general electronics. Our Tools segment manufactures and markets a wide range

of power tools under several brand names generating approximately 40 percent of total revenues.

0.00.20.40.60.81.0

enclosures
enclosures
enclosures
21%
21%
21%

tools
40%

enclosures
enclosures
enclosures
18%
18%
18%

tools
40%

other
2%
Europe
10%

Europe
10%

other
2%

tools
30%

water
39%

water
52%

North America
88%

2003 net sales
by business segment
2003 = $2.7 billion

2003 operating income
by business segment

2003 geographic sales
from point of origin

We refer to a non-GAAP financial measure, adjusted operating income (GAAP operating income excluding goodwill

amortization and restructuring charges), because we believe it allows investors and management to meaningfully compare

our operating performance between different periods.

w a t e r

(Dollars in thousands)

Net sales

Sales growth %

2003

2002

2001

2000

1999

$ 1,060,303

$ 932,420

$ 882,615

$ 898,247

$ 579,236

13.7%

5.6%

(1.7%)

55.1%

32.0%

Operating income as reported

Add back goodwill amortization

Operating income excluding goodwill amortization

% of net sales

Percentage point change

143,962

$ 126,559

$ 109,792

$ 120,732

$ 73,362

(cid:209)

18,560

18,074

12,714

143,962

$ 126,559

$ 128,352

$ 138,806

$ 86,076

13.6%

0.0

13.6%

(0.9)

14.5%

(1.0)

15.5%

14.9%

0.6

0.3

Net sales

The 13.7 percent increase in Water segment sales in 2003 from 2002 was primarily due to:

> sales attributable to the fourth quarter 2002 acquisition of Plymouth Products;
> higher sales of residential pumps and pool equipment;
> an increase in European sales, particularly commercial valves, water conditioning and pool products;
> continued growth in the developing markets of Asia and India; and
> favorable foreign currency effects.

Pentair 20

The 5.6 percent increase in Water segment sales in 2002 from 2001

was primarily due to:

> higher pump sales, with most of the growth coming from residential retail

and municipal products;

> the fourth quarter 2002 acquisition of Plymouth Products; and
> higher sales volume in our pool and spa equipment business.

Operating income

The unchanged operating income percentage in the Water segment

as a percent of net sales in 2003 from 2002 was primarily due to:

> benefits from the continued success of our Pentair Integrated Management

System (PIMS) and supply management initiatives;

> increased volume in our expanding markets of Europe, Asia, and India; and
> favorable foreign currency effects.

1,200

1,000

800

600

400

200

16%

1,000

15%

14%

13%

12%

11%

800

600

400

200

14%

12%

10%

1,200

1,000

800

600

400

200

14%

12%

10%

’99 ’00 ’01 ’02 ’03

net sales
water
($ in millions)

operating income %
(as adjusted)

enclosures

tools

These bene(cid:222)ts were offset by:

> increased selling and R&D expense;
> higher insurance costs in 2003; and
> price and volume declines related to our reverse osmosis product line and costs associated with downsizing the Chardon,

Ohio operation and moving most of this product line to our factory in India.

The 0.9 percentage point decline in Water segment operating income as a percent of net sales in 2002 from

2001 was primarily due to:

> unfavorable product mix as a result of higher sales of lower margin residential retail pumps;
> higher costs at certain pump and water treatment businesses; and
> price declines, primarily related to large international water treatment projects for reverse osmosis housings.

e n c l o s u r e s

(Dollars in thousands)

Net sales

Sales growth %

Operating income as reported

Add back goodwill amortization

Add back restructuring charge

Operating income excluding goodwill

2003

2002

2001

2000

1999

$ 582,684

$ 556,032

$ 689,820

$ 777,725

$ 657,500

4.8%

(19.4%)

(11.3%)

18.3%

12.0%

$ 51,094

$ 29,942

1,857

$ 96,268

$ 46,346

(cid:209)

8,273

39,382

9,097

(1,625)

8,413

16,743

amortization and restructuring charge

$ 51,094

$ 29,942

$ 49,512

$ 103,740

$ 71,502

% of net sales

Percentage point change

8.8%

3.4

5.4%

(1.8)

7.2%

(6.1)

13.3%

10.9%

2.4

2.1

Net sales

The 4.8 percent increase in Enclosures segment sales in 2003 from 2002 was primarily due to:

> favorable foreign currency effects; and
> share growth in targeted markets such as networking, security, and medical.

21 Pentair

1,200

1,000

800

600

400

200

16%

1,000

15%

14%

13%

12%

11%

800

600

400

200

14%

12%

10%

’99 ’00 ’01 ’02 ’03

The 19.4 percent decline in Enclosures segment sales in 2002

from 2001 was primarily due to:

1,200

> lower sales volume reflecting severely reduced capital spending in the

14%

1,000

industrial market; and

12%

800

600

400

200

> over-capacity and weak demand in the datacom and telecom markets.

10%

These decreases were partially offset by:

> favorable foreign currency effects.

Operating income

The 3.4 percentage point increase in Enclosures segment
’99 ’00 ’01 ’02 ’03
operating income as a percent of net sales in 2003 from 2002 was

water

net sales
enclosures
($ in millions)

operating income %
(as adjusted)

tools

primarily due to:

> efficiencies resulting from our continued implementation of PIMS and

stronger sourcing practices;

> volume-related efficiencies and improved product mix; and
> shifting more production to lower-cost labor markets.

These increases were partially offset by:

> expenses related to downsizing.

The 1.8 percentage point decline in Enclosures segment operating income as a percent of net sales in 2002 from

2001 was primarily due to:

> lower sales volume due to continuing significant industry-wide sales declines, resulting in unabsorbed overhead despite

reductions in overall cost structure.

The decline was partially offset by:

> savings realized as part of our restructuring program, net of one-time nonrecurring costs.

t o o l s

(Dollars in thousands)

Net sales

Sales growth %

Operating income as reported

Add back goodwill amortization

Add back restructuring charge

Operating income excluding goodwill

2003

2002

2001

2000

1999

$ 1,081,378

$ 1,092,331 $ 1,001,645

$ 1,029,658

$ 850,327

(1.0%)

9.1%

(2.7%)

21.1%

32.0%

81,774

97,598 $

63,232

23,751

$ 100,680

(cid:209)

9,274

(cid:209)

9,285

5,396

3,282

6,305

amortization and restructuring charge

81,774

97,598 $

72,506

38,432

$ 110,267

% of net sales

Percentage point change

7.6%

(1.3)

8.9%

1.7

7.2%

3.5

3.7%

(9.3)

13.0%

0.5

Net sales

The 1.0 percent decrease in Tools segment sales in 2003 from 2002 was primarily due to:

> lower organic sales volume due to the effects of a slow economy and competitive marketplace; and
> a decline in average selling prices due to increased promotional pricing.

Pentair 22

These decreases were partially offset by:

> sales attributable to the fourth quarter 2002 acquisition of Oldham Saw.

1,200

16%

1,000

The 9.1 percent increase in Tools segment sales in 2002 from 2001

1,000

15%

800

was primarily due to:
800
> higher sales volume in our DeVilbiss Air Power Company business,

14%

600

particularly for pressure washers;

> higher sales volume in our Delta business as a result of our new
400
sub-branding strategy through the creation of Delta Shopmaster“ and

13%

12%

400

200

Delta Industrial“ brands. The Delta Shopmaster“ brand is targeted

200

toward the entry-level do-it-yourselfer and the Delta Industrial“ brand is
0

11%

targeted toward the professional craftsman; and

’99 ’00 ’01 ’02 ’03

> the fourth quarter 2002 acquisition of Oldham Saw.
water
enclosures

These increases were partially offset by:

14%

12%

10%

1,200

1,000

800

600

400

200

14%

12%

10%

’99 ’00 ’01 ’02 ’03

net sales
tools
($ in millions)

operating income %
(as adjusted)

> declines in average selling prices due to the introduction of lower price point products for the Delta Shopmaster“ brand

and heavy second-half 2002 promotional pricing in a more competitive marketplace.

Operating income

The 1.3 percentage point decrease in Tools segment operating income as a percent of net sales in 2003 from 2002

was primarily due to:

> a decline in average selling prices due to increased promotional pricing;
> lower sales volumes;
> higher ocean transportation costs and higher raw material prices;
> anticipated settlement and defense costs for a class action suit launched against the compressor industry for alleged

mislabeling; and

> expenses related to capacity downsizing.

These decreases were partially offset by:

> cost savings as a result of our supply management and PIMS initiatives; and
> lower distribution and outbound freight costs.

The 1.7 percentage point increase in Tools segment operating income as a percent of net sales in 2002 from

2001 was primarily due to:

> higher sales volume, partially offset by price declines due to promotional discounting;
> cost savings as a result of our supply management and PIMS; and
> the fourth quarter 2002 acquisition of Oldham Saw.

23 Pentair

f i n a n c i a l r e p o r t s

Report of management

We are responsible for the integrity and objectivity of the financial information presented in this report. The

financial statements have been prepared in conformity with accounting principles generally accepted in the United

States of America and include certain amounts based on our best estimates and judgment.

We are also responsible for establishing and maintaining our accounting systems and related internal controls,

which are designed to provide reasonable assurance that assets are safeguarded and transactions are properly

recorded. These systems and controls are reviewed by the internal auditors. In addition, our code of conduct states

that our affairs are to be conducted under the highest ethical standards.

The independent auditors provide an independent review of the financial statements and the fairness of the

information presented therein. The Audit and Finance Committee of the Board of Directors, composed solely of

outside directors, meets regularly with us, our internal auditors, and our independent auditors to review audit

activities, internal controls, and other accounting, reporting, and financial matters. Both the independent auditors

and internal auditors have unrestricted access to the Audit and Finance Committee.

R a n da l l J. H o g a n
Chairman and Chief Executive Officer
Golden Valley, Minnesota
March 4, 2004

Dav i d D. H a r r i s o n
Executive Vice President and Chief Financial Officer

Independent auditors(cid:213) report on condensed (cid:222)nancial information

Board of Directors and Shareholders of Pentair, Inc.

We have audited the consolidated balance sheets of Pentair, Inc. and subsidiaries (the (cid:210)Company(cid:211)) as of

December 31, 2003 and 2002, and the related consolidated statements of income, cash flows, and changes in

shareholders(cid:213) equity for each of the three years in the period ended December 31, 2003. Such consolidated financial

statements and our report thereon dated March 4, 2004, expressing an unqualified opinion (which are not included

herein), are included in the Annual Report on Form 10-K of the Company for the year ended December 31, 2003.

The accompanying condensed consolidated financial statements are the responsibility of the Company(cid:213)s

management. Our responsibility is to express an opinion on the condensed consolidated financial statements in

relation to the complete consolidated financial statements.

In our opinion, the information set forth in the accompanying condensed balance sheets [page 26] as of

December 31, 2003 and 2002, and the related condensed consolidated statements of income [page 25] and cash

flows [page 27] for each of the three years in the period ended December 31, 2003, is fairly stated in all material

respects in relation to the basic consolidated financial statements from which it has been derived.

As discussed in Note 1 to the consolidated financial statements included in the Annual Report on Form 10-K,

effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill

and Other Intangible Assets.

Minneapolis, Minnesota
March 4, 2004

Pentair 24

c o n d e n s e d c o n s o l i d a t e d s t a t e m e n t s o f i n c o m e

Pentair, Inc. and Subsidiaries

(Dollars in thousands, except per-share data)

Net sales

Cost of goods sold

Gross pro(cid:222)t

Selling, general and administrative

Research and development

Restructuring charge

Operating income

Interest income

Interest expense

Other expense, write-off of investment

Income from continuing operations before income taxes

Provision for income taxes

Income from continuing operations

Loss from discontinued operations, net of tax

Net income

Earnings per common share:

Basic

Continuing operations

Discontinued operations

Basic earnings per common share

Diluted

Continuing operations

Discontinued operations

Diluted earnings per common share

Years ended December 31

2003

2002

2001

$ 2,724,365

$ 2,580,783

$ 2,574,080

2,045,327

1,965,076

1,967,945

679,038

375,586

43,898

(cid:209)

259,554

654

41,590

(cid:209)

218,618

74,330

144,288

(2,936)

615,707

342,806

36,909

(cid:209)

235,992

793

44,338

(cid:209)

192,447

62,545

129,902

606,135

377,098

31,171

40,105

157,761

960

62,448

2,985

93,288

35,772

57,516

(cid:209)

(24,647)

141,352

129,902

32,869

2.95

(0.06)

2.89

2.90

(0.06)

2.84

2.64

(cid:209)

2.64

2.61

(cid:209)

2.61

1.17

(0.50)

0.67

1.17

(0.50)

0.67

Weighted average common shares outstanding

Basic

Diluted

48,938

49,810

49,235

49,744

49,047

49,297

These condensed consolidated (cid:222)nancial statements should be read in conjunction with the audited consolidated (cid:222)nancial statements in Pentair(cid:213)s Annual Report on Form 10-K.

25 Pentair

c o n d e n s e d c o n s o l i d a t e d b a l a n c e s h e e t s

Pentair, Inc. and Subsidiaries

(Dollars in thousands, except per-share data)

Assets:

Current assets

Cash and cash equivalents

Accounts and notes receivable, net of allowance of $15,359 and $16,676, respectively

Inventories

Deferred tax assets

Prepaid expenses and other current assets

Total current assets

December 31

2003

2002

47,989

39,648

420,403

285,577

50,989

24,493

829,451

403,793

293,202

55,234

18,931

810,808

Property, plant and equipment, net

343,550

351,316

Other assets

Goodwill

Intangibles, net

Other

Total other assets

Total assets

Liabilities and Shareholders(cid:213) Equity:

Current liabilities

Short-term borrowings

Current maturities of long-term debt

Accounts payable

Employee compensation and bene(cid:222)ts

Accrued product claims and warranties

Income taxes

Other current liabilities

Total current liabilities

Long-term debt

Pension and other retirement compensation

Postretirement medical and other bene(cid:222)ts

Deferred tax liabilities

Other noncurrent liabilities

Total liabilities

Commitments and contingencies

Shareholders(cid:213) equity

Common shares par value $0.16 2/3;

49,502,542 and 49,222,450 shares issued and outstanding, respectively

Additional paid-in capital

Retained earnings

Unearned restricted stock compensation

Accumulated other comprehensive loss

Total shareholders(cid:213) equity

Total liabilities and shareholders(cid:213) equity

1,373,549

1,218,341

108,118

126,009

19,194

114,791

1,607,676

1,352,326

$ 2,780,677

$ 2,514,450

(cid:209)

686

73,631

170,077

84,587

37,148

13,198

118,810

497,451

732,862

101,704

42,134

78,532

66,516

60,488

171,709

84,965

36,855

12,071

109,426

476,200

673,911

124,301

42,815

31,728

59,771

1,519,199

1,408,726

8,250

492,619

760,966

(6,189)

5,832

8,204

482,695

660,108

(5,138)

(40,145)

1,261,478

1,105,724

$ 2,780,677

$ 2,514,450

These condensed consolidated (cid:222)nancial statements should be read in conjunction with the audited consolidated (cid:222)nancial statements in Pentair(cid:213)s Annual Report on Form 10-K.

Pentair 26

c on d ens ed con sol i dated sta tem e nts o f ca sh flows

Pentair, Inc. and Subsidiaries

(Dollars in thousands, except per-share data)

Operating activities:

Net income

Depreciation

Other amortization

Goodwill amortization

Deferred income taxes

Restructuring charge

Stock compensation

Other expense, write-off of investment

Loss from discontinued operations

Years ended December 31

2003

2002

2001

141,352

$ 129,902

32,869

61,129

4,514

(cid:209)

33,134

(cid:209)

306

(cid:209)

2,936

58,833

5,869

(cid:209)

29,677

(cid:209)

Changes in assets and liabilities, net of effects of business acquisitions and dispositions:

Accounts and notes receivable

Inventories

Prepaid expenses and other current assets

Accounts payable

Employee compensation and bene(cid:222)ts

Accrued product claims and warranties

Income taxes

Other current liabilities

Pension and post-retirement bene(cid:222)ts

Other assets and liabilities

Net cash provided by continuing operations

Net cash provided by (used for) discontinued operations

Net cash provided by operating activities

Investing activities:

Capital expenditures

Acquisition of previously leased facility

Proceeds (payments) from sale of businesses

Acquisitions, net of cash acquired

Equity investments

Other

9,400

25,782

(2,779)

(15,530)

(6,423)

(1,012)

2,349

3,135

5,621

(179)

263,735

(796)

262,939

(43,622)

(cid:209)

(2,400)

(229,094)

(5,294)

25,535

29,717

8,147

(18,356)

6,289

(1,704)

5,863

(18,384)

(4,787)

10,667

267,268

3,526

270,794

(33,744)

(22,952)

1,744

(170,270)

(9,383)

(7)

Net cash used for investing activities

(280,362)

(234,612)

62,674

5,568

36,107

(4,916)

41,060

(cid:209)

2,985

24,647

70,057

87,840

383

(68,488)

(12,919)

(4,468)

9,942

(51,025)

16,816

(6,950)

242,182

(9,848)

232,334

(53,668)

(cid:209)

70,100

(1,937)

(25,438)

(186)

(11,129)

Financing activities:

Net short-term borrowings (repayments)

Proceeds from long-term debt

Repayment of long-term debt

Proceeds from exercise of stock options

Repurchases of common stock

Dividends paid

Net cash provided by (used for) (cid:222)nancing activities

Effect of exchange rate changes on cash

Change in cash and cash equivalents

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

(873)

780,857

(709,886)

5,795

(1,589)

(40,494)

33,810

(8,046)

8,341

39,648

47,989

665

(108,336)

462,599

(468,161)

2,730

(cid:209)

(36,420)

(38,587)

2,209

(196)

39,844

$39,648

2,811

(84,525)

2,913

(1,458)

(34,327)

(222,922)

6,617

4,900

34,944

$39,844

These condensed consolidated (cid:222)nancial statements should be read in conjunction with the audited consolidated (cid:222)nancial statements in Pentair(cid:213)s Annual Report on Form 10-K.

27 Pentair

s e l e c t e d f i n a n c i a l d a t a

Pentair, Inc. and Subsidiaries

(Dollars in thousands, except per-share data)

Statement of operations:

Net sales

Sales growth

Cost of goods sold

Gross pro(cid:222)t

Margin %

Selling, general and administrative

Research and development

Restructuring charge

Operating income

Margin %

Margin % excluding restructuring charge

Gain on sale of business

Net interest expense

Other expense, write-off of investment

Provision for income taxes

Income from continuing operations

Income (loss) from discontinued operations, net of tax

Cumulative effect of accounting change, net of tax

Net income

Preferred dividends

Income available to common shareholders

Common share data:

Basic EPS (cid:209) continuing operations

Diluted EPS (cid:209) continuing operations

Cash dividends declared per common share

Stock dividends declared per common share

Market value per share (December 31)

Balance sheet data:

Accounts Receivable

Inventories

Property and equipment, net

Goodwill, net

Total assets

Total debt

Shareholders(cid:213) equity

Other data:

Debt/total capital

Depreciation

Goodwill amortization

Tax effect of goodwill amortization (1)

Diluted EPS effect of goodwill amortization (1)

Other amortization

Net cash provided by operating activities

Capital expenditures

Employees of continuing operations

Days sales outstanding (DSO) (13 mo moving avg)

Days inventory on hand (DOH) (13 mo moving avg)

Years ended December 31

2003

2002

2001

2000

1999

1998

1997

1996

Years ended December 31

$ 2,724,365

$ 2,580,783

$ 2,574,080

$ 2,705,630

$ 2,087,063

$ 1,669,865

$ 1,593,181

$ 1,384,512

5.6%

0.3%

(4.9%)

2,045,327

679,038

1,965,076

615,707

1,967,945

606,135

24.9%

23.9%

23.5%

29.6%

25.0%

4.8%

15.1%

2,051,515

654,115

1,529,419

557,644

1,189,777

403,404

1,032,343

352,169

24.2%

26.7%

26.5%

25.3%

25.4%

375,586

43,898

(cid:209)

259,554

9.5%

(cid:209)

40,936

(cid:209)

74,330

144,288

(2,936)

(cid:209)

141,352

(cid:209)

141,352

2.95

2.90

0.82

(cid:209)

45.70

420,403

285,577

343,550

1,373,549

2,780,677

806,493

1,261,478

39.0%

61,129

(cid:209)

4,514

262,939

43,622

12,300

342,806

36,909

(cid:209)

235,992

9.1%

(cid:209)

43,545

(cid:209)

62,545

129,902

(cid:209)

129,902

(cid:209)

129,902

2.64

2.61

0.74

(cid:209)

34.55

403,793

293,202

351,316

1,218,341

2,514,450

735,805

1,105,724

39.9%

58,833

(cid:209)

5,869

270,794

56,696

11,900

377,098

31,171

40,105

157,761

6.1%

7.7%

(cid:209)

61,488

2,985

35,772

57,516

(24,647)

(cid:209)

32,869

(cid:209)

32,869

1.17

0.70

(cid:209)

36.52

398,579

300,923

329,500

1,088,206

2,372,198

723,706

1,015,002

41.6%

62,674

36,107

(4,064)

0.65

5,568

232,334

53,668

11,700

396,105

31,191

24,789

202,030

7.5%

8.4%

74,899

(cid:209)

45,263

81,868

(24,759)

(1,222)

55,887

(cid:209)

55,887

1.68

0.66

(cid:209)

24.19

468,081

392,495

352,984

1,141,102

2,644,025

913,974

1,010,591

59,897

36,456

(3,986)

0.67

2,675

184,947

68,041

13,100

310,700

22,170

23,048

201,726

9.7%

10.8%

43,582

(cid:209)

60,056

98,088

5,221

103,309

(cid:209)

103,309

2.24

2.21

0.64

(cid:209)

38.50

502,235

352,830

367,783

1,164,056

2,706,516

1,035,084

990,771

56,081

24,409

(3,575)

0.47

1,578

144,296

53,671

12,400

1,227,427

442,438

261,302

16,894

(cid:209)

164,242

9.8%

(cid:209)

19,855

(cid:209)

53,667

90,720

16,120

(cid:209)

106,840

(4,267)

102,573

2.25

2.09

0.60

(cid:209)

39.81

331,672

216,084

271,389

448,893

1,484,207

340,721

707,628

46,571

13,912

(2,520)

0.26

1,571

120,872

43,335

8,800

241,062

16,236

(cid:209)

146,106

9.2%

10,313

19,729

(cid:209)

58,089

78,601

12,999

(cid:209)

91,600

(4,867)

86,733

1.94

1.81

0.54

(cid:209)

35.94

314,289

215,957

261,486

416,605

1,413,494

328,538

627,653

47,577

13,571

(2,321)

0.25

1,669

107,896

69,364

8,800

216,775

11,989

(cid:209)

123,405

8.9%

16,849

(cid:209)

42,860

63,696

10,813

(cid:209)

74,509

(4,928)

69,581

1.57

1.47

0.50

100%

32.25

246,436

206,957

270,071

287,417

1,236,694

312,817

560,751

42,620

11,395

(1,576)

0.22

1,400

104,479

67,216

8,000

47.5%

51.1%

32.5%

34.4%

35.8%

(1) Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. This new standard requires that goodwill and intangible assets deemed to have an
inde(cid:222)nite life no longer be amortized. This standard did not require restatement of prior period amounts to be consistent with the current year presentation and therefore we have not made

Pentair 28

(cid:222)

2000

1999

1998

1997

1996

Years ended December 31

$ 2,705,630

$ 2,087,063

$ 1,669,865

$ 1,593,181

$ 1,384,512

29.6%

25.0%

4.8%

15.1%

2,051,515

654,115

1,529,419

557,644

1,227,427

442,438

1,189,777

403,404

1,032,343

352,169

24.2%

26.7%

26.5%

25.3%

25.4%

396,105

31,191

24,789

202,030

7.5%

8.4%

(cid:209)

74,899

(cid:209)

45,263

81,868

(24,759)

(1,222)

55,887

(cid:209)

55,887

1.68

0.66

(cid:209)

24.19

468,081

392,495

352,984

1,141,102

2,644,025

913,974

1,010,591

310,700

22,170

23,048

201,726

9.7%

10.8%

(cid:209)

43,582

(cid:209)

60,056

98,088

5,221

(cid:209)

103,309

(cid:209)

103,309

2.24

2.21

0.64

(cid:209)

38.50

502,235

352,830

367,783

1,164,056

2,706,516

1,035,084

990,771

261,302

16,894

(cid:209)

164,242

9.8%

(cid:209)

19,855

(cid:209)

53,667

90,720

16,120

(cid:209)

106,840

(4,267)

102,573

2.25

2.09

0.60

(cid:209)

39.81

331,672

216,084

271,389

448,893

1,484,207

340,721

707,628

241,062

16,236

(cid:209)

146,106

9.2%

10,313

19,729

(cid:209)

58,089

78,601

12,999

(cid:209)

91,600

(4,867)

86,733

1.94

1.81

0.54

(cid:209)

35.94

314,289

215,957

261,486

416,605

1,413,494

328,538

627,653

216,775

11,989

(cid:209)

123,405

8.9%

(cid:209)

16,849

(cid:209)

42,860

63,696

10,813

(cid:209)

74,509

(4,928)

69,581

1.57

1.47

0.50

100%

32.25

246,436

206,957

270,071

287,417

1,236,694

312,817

560,751

47.5%

51.1%

32.5%

34.4%

35.8%

59,897

36,456

(3,986)

0.67

2,675

184,947

68,041

13,100

56,081

24,409

(3,575)

0.47

1,578

144,296

53,671

12,400

46,571

13,912

(2,520)

0.26

1,571

120,872

43,335

8,800

47,577

13,571

(2,321)

0.25

1,669

107,896

69,364

8,800

42,620

11,395

(1,576)

0.22

1,400

104,479

67,216

8,000

any adjustments to historical (cid:222)nancial information presented. However, we have provided supplemental tax and diluted EPS information as we believe it is necessary
to the understanding of our (cid:222)nancial trend.

29 Pentair

c o r p o r a t e l e a d e r s h i p

Corporate of(cid:222)cers

Board of directors

R a n da l l J. H o g a n
Chairman and Chief Executive Officer

G ly n i s A . B rya n (1), 45
Chief Financial Officer of APL Logistics

Dav i d D. H a r r i s o n
Executive Vice President and Chief Financial Officer

Ba r ba r a B . G ro g a n (2,3,4), 56
Chairman and President of Western Industrial Contractors, Inc.

R i c h a r d J. Cat h c a rt
President and Chief Operating Officer, Water Technologies

C h a r l e s A . H ag g e rt y (2,3,4), 62
Chief Executive Officer of LeConte Associates, LLC

M i c h a e l V. S c h ro c k
President and Chief Operating Officer, Enclosures

R a n da l l J. H o g a n (4), 48
Chairman and Chief Executive Officer of Pentair, Inc.

C h a r l e s M . B row n
President and Chief Operating Officer, Tools

Dav i d A . Jo n e s (1), 54
Chairman and Chief Executive Officer of Rayovac Corporation

L o u i s L . A i n swo rt h
Senior Vice President, General Counsel, and Secretary

St ua rt M a i t l a n d (2), 58
Former Director of Manufacturing Operations for Vehicle Operations,
Ford Motor Company

Fr e d e r i c k S . Ko u ry
Senior Vice President, Human Resources

K a r e n A . D u r a n t
Vice President, Finance and Controller

Au g u s to M e o z z i (1,4), 64
Member of the Supervisory Board of the ISOLA Group

Wi l l i a m T. M o n a h a n (2, 3), 56
Chairman of the Board and Chief Executive Officer of Imation Corp.

K a r e n E . We l k e (1,4), 59
Former Group Vice President for Medical Markets, 3M Company

(1) Audit and Finance Committee
(2) Compensation Committee
(3) Governance Committee
(4) International Committee

Pentair 30

David A. Jones

Karen Welke

Glynis Bryan

Augusto Meozzi

Stuart Maitland

Charles A. Haggerty

Randall J. Hogan

Barbara B. Grogan

William T. Monahan

31 Pentair

c o m m o n s t o c k d a t a

Pentair common stock is listed on the New York Stock Exchange under the symbol PNR. The price information below

represents closing sale prices reported in the Wall Street Journal for the calendar year 2003. There were 3,980 shareholder
accounts on December 31, 2003.

Price range and dividends of common stock ($)

2003

High

37.55

41.90

43.53

46.57

Low

32.80

35.35

38.58

36.85

Div.

.19

.21

36.47

39.38

39.44

45.70

2002

High

45.14

49.61

47.11

38.31

Low

32.38

42.34

36.84

29.34

Div.

0.18

0.19

44.97

48.08

37.79

34.55

Common dividends Dividends are $0.21 per share paid quarterly in February, May, August, and November. Pentair

has now paid 112 consecutive quarterly dividends.

Dividend reinvestment Pentair has established a Dividend Reinvestment Plan. This plan enables shareholders to

automatically reinvest Pentair dividends and to invest up to an additional $3,000 per calendar quarter in Pentair common

stock, with any costs of purchasing the shares paid by the Company. The plan brochure and enrollment cards are

available from the Company or Wells Fargo Bank, N.A.

Direct book entry registration Pentair offers its shareholders the opportunity to participate in the Company(cid:213)s Direct

Book Entry Registration service. Direct Book Entry is an uncertificated form of stock ownership that provides protection

against loss, theft, and inadvertent destruction of stock certificate(s), while reducing administrative costs. Shareholders can

contact Wells Fargo Bank, N.A. for more information.

Shareholder account information available online Shareholders of record can view their shareholder account

information online at http://www.wellsfargo.com. For assistance, shareholders can contact Wells Fargo Bank, N.A.

Annual meeting The annual meeting of shareholders will be held in the Auditorium at Thrivent Financial

(formerly Lutheran Brotherhood), 625 Fourth Avenue South, Minneapolis, Minnesota, at 10:00 a.m. on April 30, 2004.

Management and directors encourage all shareholders to attend the annual meeting.

Form 10-K available A copy of the Company(cid:213)s annual report on Form 10-K, as filed with the Securities and Exchange

Commission, will be provided on request. Written requests should be directed to Pentair Investor Relations. All Pentair

reports and filings are available on line at http://www.pentair.com under the Financial Information section.

Forward-looking statements This summary annual report contains forward-looking statements that are based on

current expectations, estimates, and projections. These statements are not guarantees of future performance and involve

risks and uncertainties, which are difficult to predict. Important factors that could cause actual results to differ materially

include changes in industry conditions, changes in business strategies, governmental and regulatory policies, general

economic conditions, and changes in operating factors.

Trademarks, copyrights, and trade names Certain trademarks, copyrights, and trade names are owned or licensed

by Pentair, Inc. or its wholly owned subsidiaries. Other trademarks, copyrights, and trade names may also appear in this

report. It is not Pentair(cid:213)s intent to imply that these are its own.

Registrar, stock transfer, and dividend paying agent Wells Fargo Bank, N.A., P.O. Box 64854, St. Paul,

MN 55164-0854, 1-877-536-3554, http://www.wellsfargo.com/com/shareowner_services

Certi(cid:222)ed public accountants Deloitte & Touche LLP, Minneapolis, MN 55402

Pentair 32

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
¨ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003

OR
(cid:143) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11625
Pentair, Inc.

(Exact name of Registrant as specified in its charter)

Minnesota
(State or other jurisdiction of incorporation or organization)

41-0907434
(I.R.S. Employer Identification number)

5500 Wayzata Boulevard, Suite 800,
Golden Valley, Minnesota
(Address of principal executive offices)

55416-1259
(Zip code)

Registrant(cid:144)s telephone number, including area code: (763) 545-1730

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Common Shares, $0.16 2/3 par value

Common Share Purchase Rights

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past
90 days. Yes ¨ No (cid:143)

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant(cid:144)s knowledge, in definitive proxy or information
statements incorporated by reference in PART III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes ¨ No (cid:143)

Aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant, based
on the closing price of $39.38 per share as reported on the New York Stock Exchange on June 28, 2003 (the last
day of Registrant(cid:144)s most recently completed second quarter): $1,813,237,884.

The number of shares outstanding of Registrant(cid:144)s only class of common stock on February 18, 2004, was 49,834,191.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the company(cid:144)s definitive proxy statement for its annual meeting to be held on April 30, 2004, are
incorporated by reference in this Form 10-K in response to Part III, Item 10, 11, 12 and 14.

Pentair, Inc.
Annual Report on Form 10-K
For the Year Ended December 31, 2003

PART I

ITEM 1.

Business

ITEM 2.

Properties

ITEM 3.

Legal Proceedings

ITEM 4.

Submission of Matters to a Vote of Security Holders

PART II

ITEM 5.

Market for Registrant(cid:144)s Common Stock and Related Security Holder Matters

ITEM 6.

Selected Financial Data

ITEM 7.

Management(cid:144)s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

ITEM 8.

Financial Statements and Supplementary Data

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

ITEM 9A. Controls and Procedures

ITEM 10.

Directors and Executive Officers of the Registrant

ITEM 11.

Executive Compensation

PART III

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related

Stockholder Matters

ITEM 13.

Certain Relationships and Related Transactions

ITEM 14.

Principal Accountant Fees and Services

ITEM 15.

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Signatures

PART IV

Page

PART I

ITEM 1. BUSINESS
Unless otherwise indicated, all references to (cid:141)Pentair,(cid:142) (cid:141)we,(cid:142) (cid:141)our,(cid:142) and (cid:141)us(cid:142) refer to Pentair, Inc., a Minnesota
corporation (incorporated in 1966), and its subsidiaries.

Overview
We are a focused diversified industrial manufacturer operating in three segments:

(cid:139) Water;
(cid:139) Enclosures; and
(cid:139) Tools.

Our Water segment manufactures and markets essential products and systems used in the movement, treatment,
storage and enjoyment of water and generates approximately 39 percent of total revenues. Trade names within
the Water segment include Myersﬁ, Fairbanks Morseﬁ, Hydromaticﬁ, Auroraﬁ, Water Aceﬁ, Shur-Driﬁ, Fleckﬁ,
SIATA(cid:146), CodeLine(cid:146), Structural(cid:146), WellMate(cid:146), Verti-line(cid:146), Layne & Bowler(cid:146), American Plumber(cid:146), Armor(cid:146),
National Pool Tile(cid:146), Rainbow Lifegard(cid:146), Paragon Aquatics(cid:146), Kreepy Krauly(cid:146), Pentair Pool Products(cid:146),
PENTEK(cid:146), and Everpureﬁ.

Our Enclosures segment accounts for approximately 21 percent of total revenues, and designs, manufactures, and
markets standard, modified and custom enclosures that protect sensitive controls and components for markets
that include industrial machinery, data communications, networking, telecommunications, test and measurement,
automotive, medical, security, defense, and general electronics. The segment goes to market under four primary
trade names: Hoffmanﬁ, Schroffﬁ, Pentair Electronic Packaging(cid:146), and Taunus(cid:146).

Our Tools segment designs, manufactures and markets a wide range of power tools under several well
established trade names (cid:132) Porter-Cable(cid:146), Deltaﬁ, Delta Shopmaster(cid:146), Delta Industrial(cid:146), Biesemeyerﬁ,
FLEX(cid:146), Ex-Cell(cid:146), Air Americaﬁ, Charge Air Proﬁ, 2 x 4(cid:146), Oldhamﬁ, Contractor SuperDuty(cid:146), Viperﬁ,
Hickory Woodworkingﬁ, and The Woodworker(cid:144)s Choiceﬁ, (cid:132) generating approximately 40 percent of total
revenues.

Pentair Strategy
Our basic operating strategies include:
(cid:139)
long-term growth in sales, income and cash flows, driven by internal growth initiatives and acquisitions;
(cid:139) ongoing cost containment and productivity improvement driven by lean enterprise initiatives, which we call

the Pentair Integrated Management System (PIMS), coupled with strong supply management;

(cid:139) new product development and consistent product enhancement;
(cid:139) multi-channel distribution; and
(cid:139) portfolio management of our businesses.

Pentair Financial Objectives
Our long-term financial objectives are:
(cid:139) Sales growth: 5-8% organic, plus acquisitions
(cid:139) Achieve benchmark financial performance:

(cid:139) EBIT Margin
(cid:139) Net Return on Sales (NROS)
(cid:139) Return on Invested Capital (ROIC)
(cid:139) Free Cash Flow (FCF)
(cid:139) EPS Growth
(cid:139) Debt/Total Capital

12+%
7.5%
20%
100% conversion of net income
10+% (sales growth plus margin expansion)
40%

(cid:139) Achieve 5% annual productivity improvement on core business cost

RECENT DEVELOPMENTS

Growth of our business
We continually look at each of our businesses to determine whether they fit with our evolving strategic vision.
Our primary focus is on businesses with strong fundamentals and growth opportunities. We seek growth through
product and service innovation, market expansion, and acquisitions. Acquisitions have played an important part
in the growth of our business and will continue to be an important part of our growth in the future.

Recent announcements
On February 3, 2004, we entered into an agreement to acquire WICOR Inc. ((cid:141)WICOR(cid:142)), a unit of Wisconsin
Energy Corporation, Milwaukee, Wisconsin. WICOR, which manufactures water system, filtration, and pool
equipment products under the Sta-Rite, SHURflo, and Hypro brands, generated sales of approximately
$746 million in 2003. The $850 million cash transaction, which we plan to complete in the second or third
quarter of 2004, is subject to satisfaction of customary conditions and regulatory approvals. As part of the
transaction, we will assume approximately $24 million of WICOR debt.

We also announced that we have engaged Goldman Sachs to explore strategic alternatives for our Tools
Segment, comprising the Porter-Cable, Delta, DeVilbiss Air Power Company, Oldham Saw, and Flex businesses
with $1,081.4 million in net sales in 2003.

Acquisitions
On December 31, 2003, we acquired all of the common stock of Everpure, Inc. (Everpure), from United States
Filter Corporation, a unit of Veolia Environnement, for $217.3 million in cash, including cash acquired of
$5.5 million. Everpure is a manufacturer of water filtration products for the commercial and consumer sectors
and they generated approximately $60 million in net sales for fiscal 2003.

During 2003, we also completed four product line acquisitions in our Water segment for total consideration of
$21.4 million in cash: Hydrotemp Manufacturing Co., Inc., Letro Products, Inc. and certain assets of TwinPumps,
Inc. and K&M Plastics, Inc.

We have invested approximately $30.5 million to acquire a 49 percent interest in the joint venture operations of a
long time Asian supplier for bench top power tools, of which $5.6 million was paid in 2003, $4.5 million was
paid in 2002 and $20.4 million was paid in 2001. In February 2004, we signed a letter of intent to purchase the
remaining 51 percent ownership interest in this supplier.

On September 30, 2002, we acquired all of the common stock of Plymouth Products, Inc. and affiliated entities
(Plymouth Products) from USF Consumer & Commercial WaterGroup, a unit of Vivendi Environnement (now
Veolia Environnement), for total consideration of $121.7 million in cash, including debt assumed of $1.2 million.
Plymouth Products is a manufacturer of water filtration products used in residential, commercial, and industrial
applications. In the first quarter of 2003, we received $1.9 million in purchase price adjustments relative to our
fourth quarter 2002 acquisition of Plymouth Products. The adjustments primarily related to final determination of
closing date net assets.

On October 1, 2002, we acquired all of the common stock of privately held Oldham Saw Co., Inc. and affiliated
entities (Oldham Saw) for total consideration of $53.0 million cash, including debt assumed of $1.5 million and
cash acquired of $1.7 million. Oldham Saw designs, manufactures, and markets router bits, circular saw blades,
and related accessories for the do-it-yourself (DIY) and professional power tool markets.

These acquisitions were financed through available lines of credit, supported by strong cash flow.

Also refer to ITEM 7, Management(cid:144)s Discussion and Analysis, and ITEM 8, Note 2 of the Notes to Consolidated
Financial Statements, included in this Form 10-K.

Discontinued operations/divestitures
In December 2000, we adopted a plan to sell our Equipment segment businesses, Service Equipment (Century
Mfg. Co./Lincoln Automotive Company) and Lincoln Industrial, Inc. (Lincoln Industrial). In October 2001, we
completed the sale of the Service Equipment businesses to Clore Automotive, LLC for total consideration of
$18.2 million. In December 2001, we completed the sale of Lincoln Industrial to affiliates of The Jordan
Company LLC (Jordan), other investors, and members of management of Lincoln Industrial for total
consideration of $78.4 million, including a preferred stock interest. The selling price of Lincoln Industrial was
subject to a final purchase price adjustment that was finalized in January 2003, in which we paid Jordan $2.4
million. In the fourth quarter of 2003, we reported an additional loss from discontinued operations of $2.9
million, or $0.06 per diluted share, primarily due to a reduction in estimated proceeds related to exiting two
remaining facilities.

Also refer to ITEM 7, Management(cid:144)s Discussion and Analysis, and ITEM 8, Note 3 of the Notes to Consolidated
Financial Statements, included in this Form 10-K.

BUSINESS SEGMENTS

We classify our continuing operations into the following business segments:

(cid:139) Water (cid:132) manufactures and markets essential products and systems used in the movement, treatment, storage

and enjoyment of water. Water segment products include water and wastewater pumps; filtration and
purification components and systems; storage tanks and pressure vessels; and pool and spa equipment and
accessories.

(cid:139) Enclosures (cid:132) designs, manufactures, and markets standard, modified and custom enclosures that protect
sensitive controls and components. Markets served include industrial machinery, data communications,
networking, telecommunications, test and measurement, automotive, medical, security, defense, and general
electronics. Products include metallic and composite enclosures, cabinets, cases, subracks, backplanes, and
associated thermal management systems.

(cid:139) Tools (cid:132) designs, manufactures and markets power tool products positioned at the mid- to upper-end of the
market and targets non-professional DIY, upscale hobbyists, and professional end users. Tools segment
products include woodworking machinery, portable power tools, power tool accessories, metal and
stoneworking tools, pneumatic tools, compressors, generators, and pressure washers.

(cid:139) Other (cid:132) is primarily composed of unallocated corporate expenses, our captive insurance subsidiary,

intermediate finance companies, divested operations, and intercompany eliminations.

Business segment and geographical financial information is contained in ITEM 8, Note 15 of the Notes to
Consolidated Financial Statements, included in this Form 10-K.

WATER SEGMENT

Strategy
Our Water segment strategies are to:

(cid:139) Capture opportunities and drive for break-through growth in filtration, pool, and water and wastewater

systems;

(cid:139) Drive for double-digit profitable growth through improved service levels and aligning with key channel

partners;

(cid:139) Create value by maximizing cash flow while achieving moderate growth through continued operational

improvements;

(cid:139) Achieve low cost product development and sourcing platform by leveraging China/India; and

(cid:139) Accelerate bolt-ons and make strategic acquisitions.

Seasonality
We experience strong seasonal demand in our Water segment for pool and spa equipment products in the March
through July time period, with some advance sales occurring in earlier months, which generally include extended
payment terms. We also experience increased sales in our pump group during droughts and heavy flooding in
North America.

Competition
Our Water segment faces numerous competitors, some of which are larger, and have more resources.
Competition in commercial and residential pumps focuses on brand names, product performance, quality, and
price. While home center and national retailers are important for residential lines of water and wastewater pumps,
they are much less important in commercial pumps. In municipal pumps, competition focuses on performance to
meet required specifications, service, and price. Competition in water treatment and filtration components
focuses on product performance and design, quality, delivery, and price. In pool and spa equipment, there are a
number of competitors. We compete by offering a wide variety of innovative and high-quality products, which
are competitively priced. We believe our existing distribution channels and reputation for quality also contribute
to our continuing industry penetration.

Customer concentration
Information regarding significant customers in our Water segment is contained in ITEM 8, Note 15 of the Notes
to Consolidated Financial Statements, included in this Form 10-K.

ENCLOSURES SEGMENT

Strategy
Our Enclosures segment strategies are to:

(cid:139)

Increase sales volume by:

(cid:139)

focusing on growing market segments;

(cid:139) pursuing strategic OEMs;

(cid:139) expanding into adjacent markets; and

(cid:139) globalization.

(cid:139) Lower our manufacturing cost by:

(cid:139) shifting manufacturing to low labor cost areas;

(cid:139)

implementing PIMS enterprise practices; and

(cid:139) driving operational excellence.

(cid:139) Transform the product mix by:

(cid:139)

increasing product innovation; and

targeting higher margin markets.

Seasonality
The Enclosure segment is not significantly impacted by any seasonal demand fluctuations.

Competition
Competition in the enclosures markets can be intense, particularly in telecom and datacom markets, where
product design, prototyping, global supply, and customer service are significant factors. The overall global
decline in market demand over the last three years has created excess capacity throughout the industry. Despite
the retrenchment of virtually all participants in these markets, the need to generate fixed-cost absorption in this
period of weakened demand has caused increased price competition in many markets. Our Enclosures segment
has continued to focus on cost control and improving profitability on a sequential quarter to quarter basis, while

many competitors have faced financial constraints and even bankruptcy stemming from significant volume
declines. Recent growth in the Enclosures segment is a result of continued channel penetration, growth in
targeted market segments, new product development, and geographic expansion. Consolidation, globalization,
and outsourcing are visible trends in the enclosures marketplace and typically play to the strengths of a large and
globally positioned supplier. We believe our Enclosures business has the broadest array of products available, as
well as the capability to deploy them globally.

Customer concentration
Information regarding significant customers in our Enclosure segment is contained in ITEM 8, Note 15 of the
Notes to Consolidated Financial Statements, included in this Form 10-K.

TOOLS SEGMENT

Strategy
Our Tools segment strategies are to:

(cid:139) Reduce our overall cost structure by:

(cid:139)

implementing PIMS enterprise practices;

(cid:139) utilizing low-cost manufacturing facilities; and

(cid:139) capturing supply management opportunities.

(cid:139) Leverage brands by:

(cid:139) accelerating market driven innovation;

(cid:139)

reducing product development cycle time; and

instituting targeted reseller and user marketing programs.

(cid:139) Reinforce our multi-channel strategy by targeting under-penetrated channels.

(cid:139) Drive accessories growth.

Seasonality
We experience strong seasonal demand for our pressure washer product line in the March through August time
period. Demand for woodworking machinery, portable power tools, accessories, and compressors are strongest
during spring, fall, and holiday promotional seasons. As a result, we typically experience stronger sales in the
second and fourth quarters and weaker sales in the first and third quarters. This seasonality also drives higher
inventories and accounts receivable levels in the second and third quarters of each year.

Competition
The Tools segment faces numerous competitors and strong distributors, many of which are larger and have more
resources. Competition in the Tools segment has been intense and continues to increase, especially as these
industries consolidate. Many competitors have extensive product lines. We anticipate growth to come from
existing channel customers, product development, and continued penetration of expanding market channels.

Competition at the end-user level focuses primarily on trade names, product performance and features, quality,
service, and price. The competition for shelf space at home centers and national retailers is particularly intense,
demanding continuing product innovation, special inventory and delivery programs, and competitive pricing. Our
strategy is to be the quality leader at a competitive price in our selected markets. We believe our success in
maintaining our position in the marketplace is primarily due to strong trade names, developing product feature
innovations, new products, promotions, and productivity gains.

Customer concentration
Information regarding significant customers in our Tools segment is contained in ITEM 8, Note 15 of the Notes
to Consolidated Financial Statements, included in this Form 10-K.

INFORMATION REGARDING ALL BUSINESS SEGMENTS

Backlog
Our backlog of orders from continuing operations as of December 31 by segment was:

In thousands

Water
Enclosures
Tools

Total

2003

2002

$ change % change

$130,294
58,234
42,089

$ 97,777
52,525
23,113

$32,517
5,709
18,976

$230,617

$173,415

$57,202

33.3%
10.9%
82.1%

33.0%

The $32.5 million increase in Water segment backlog was primarily due to the timing of orders in our pool
business. The $5.7 million increase in Enclosures segment backlog was largely driven by the impacts of foreign
currency fluctuations. The $19.0 million increase in Tools segment backlog was primarily due to the timing of
orders. We expect our backlog at December 31, 2003 will be filled in 2004.

Research and development
Research and development costs during 2003, 2002, and 2001 were $43.9 million, $36.9 million, and $31.2
million, respectively.

Environmental
Environmental matters are discussed in ITEM 3, ITEM 7, and in ITEM 8, Note 16 of the Notes to Consolidated
Financial Statements, included in this Form 10-K.

Raw materials
The principal materials used in the manufacturing of products are electric motors, mild steel, stainless steel,
plastic, electronic components, plastics, and paint (powder and liquid). In addition to the purchase of raw
materials, some finished goods are purchased for distribution through our sales channels.

The materials used in the various manufacturing processes are purchased on the open market, and the majority
are available through multiple sources and are in adequate supply. We have not experienced any significant work
stoppages to date due to shortages of materials. We have certain long-term commitments, principally price
commitments, for the purchase of various component parts and raw materials and believe that it is unlikely that
any of these agreements would be terminated prematurely. Alternate sources of supply at competitive prices are
available for most materials for which long-term commitments exist, and we believe that the termination of any
of these commitments would not have a material adverse effect on operations.

Certain commodities, such as steel, are subject to a degree of market and duty-driven price fluctuations. These
fluctuations are managed through several mechanisms, including long-term agreements with escalator / de-
escalator clauses. Prices for raw materials, such as steel, are expected to trend higher in the future.

Distribution
We sell products through numerous distribution channels. Products are sold directly to users and through
numerous wholesalers, retailers, jobbers, distributors and dealers in a wide variety of trades in many countries
around the world.

Intellectual property
Patents, non-compete agreements, proprietary technologies, customer relationships, trade marks, and trade names
are important to our business. However, we do not regard our business as being materially dependent upon any
single patent, non-compete agreement, proprietary technology, customer relationship, trade mark, or trade name.

Employees
At the end of 2003, we employed approximately 12,300 people worldwide. Total employees in the United States
were approximately 9,450, of which approximately 1,200 were represented by trade unions having collective
bargaining agreements. We consider our employee relations to be very good.

Captive Insurance Subsidiary
We insure general and product liability, property, workers(cid:144) compensation, and automobile liability risks through
our regulated wholly owned captive insurance subsidiary, Penwald Insurance Company (Penwald). Reserves for
policy claims are established based on actuarial projections of ultimate losses.

Matters pertaining to Penwald are discussed in ITEM 3 and ITEM 8, Note 1 of the Notes to Consolidated
Financial Statements, included in this Form 10-K.

Available information
We make available free of charge (other than an investor(cid:144)s own Internet access charges) through our Internet
website (http://www.pentair.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and if applicable, amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the 1934 Act as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission. Reports of beneficial ownership filed by our directors and
executive officers pursuant to Section 16(a) of the 1934 Act are also available on our website. We are not
including the information contained on our website as part of, or incorporating it by reference into, this Annual
Report on Form 10-K.

ITEM 2. PROPERTIES

Our corporate office is located in Golden Valley, Minnesota. Manufacturing operations are carried out at
approximately 22 plants located throughout the United States and at 17 plants located in 10 other countries.
Through a 49 percent-owned joint venture with a long time Asian tool supplier, we have an interest in three
additional factories in Asia. In addition, we have approximately 23 warehouse facilities and numerous
distribution facilities and sales offices. We also own or lease four idle facilities.

We believe that our production facilities are suitable for their purpose and are adequate to support our businesses.

ITEM 3. LEGAL PROCEEDINGS

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, environmental,
safety and health, patent infringement, and employment matters.

Some of these lawsuits and proceedings raise difficult and complex factual and legal issues, and are subject to
many uncertainties, such as the facts and circumstances of the particular lawsuit, the jurisdiction and forum in
which the lawsuit is pending and the applicable law. We record liabilities in those instances where we can
reasonably estimate the amount of the loss and where liability will likely arise.

We cannot always definitively determine possible liabilities that exceed recorded amounts related to the legal
proceedings to which we are a party. There can be no certainty that Pentair may not ultimately incur charges,
whether related to products liability, antitrust, or other litigation, environmental matters, or other actions, in
excess of presently recorded liabilities. However, we believe it is unlikely, based upon the nature of the legal
proceedings and our current knowledge of relevant facts and circumstances, that the possible liabilities exceeding
the recorded amounts would be material individually or in the aggregate to our consolidated financial position,
results of operations, or cash flows. With respect to product liability claims, such a conclusion about possible
liabilities considers insurance coverage available for such liabilities.

While we believe that a material adverse impact on our consolidated financial position, results of operations, or
cash flows from any such future charges 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 adverse 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
(cid:141)Legal Proceedings(cid:142) could change in the future.

Environmental
We have been named as defendants, targets, or potentially responsible parties (PRPs) in a small number of
environmental cleanups, in which our current or former business units have generally been given de minimis status.
To date, none of these claims have resulted in cleanup costs, fines, penalties, or damages in an amount material to
our financial position or results of operations. We have disposed of a number of businesses over the past ten years
and in certain cases, such as the disposition of the Cross Pointe Paper Corporation uncoated paper business in 1995,
the disposition of the Federal Cartridge Company ammunition business in 1997, and the disposition of Lincoln
Industrial in 2001, we have retained responsibility and potential liability for certain environmental obligations. We
have received claims for indemnification from purchasers both of the paper business and the ammunition business
and have established what we believe to be adequate accruals for potential liabilities arising out of retained
responsibilities. We settled one such claim in 2003 and our recorded accrual was adequate.

In addition, there are pending environmental issues concerning a limited number of sites, including one site
acquired in the acquisition of Essef Corporation in 1999, that relates to operations no longer carried out at that
site. We have established what we believe to be adequate accruals for remediation costs at this and other sites.
We do not believe that projected response costs will result in a material liability.

We may be named as a PRP at other sites in the future, for both divested and acquired businesses. When it has been
possible to provide reasonable estimates of our liability with respect to environmental sites, provisions have been
made in accordance with generally accepted accounting principles in the United States. As of December 31, 2003,
our reserve for such environmental liabilities was approximately $11.2 million, measured on an undiscounted basis.
We cannot ensure that environmental requirements will not change or become more stringent over time or that our
eventual environmental cleanup costs and liabilities will not exceed the amount of our current reserves.

Product liability claims
As of February 8, 2004, we are involved in approximately 152 product liability lawsuits and personal injury
claims. We believe we have in place insurance coverage adequate for our needs. A substantial number of these
lawsuits and claims are insured and accrued for by Penwald. See discussion in ITEM 1 and ITEM 8, Note 1 of
the Notes to the Consolidated Financial Statements (cid:133) Insurance subsidiary. Accounting accruals covering the
deductible portion of liability claims not covered by Penwald have been established and are reviewed on a
regular basis. We have not experienced significant unfavorable trends in either the severity or frequency of
product liability lawsuits or personal injury claims.

Horizon litigation
Twenty-eight separate lawsuits involving 29 primary plaintiffs, a class action, and claims for indemnity by
Celebrity Cruise Lines, Inc. (Celebrity) were brought against Essef Corporation (Essef) and certain of its
subsidiaries prior to our acquisition of Essef in August 1999. These lawsuits alleged exposure to Legionnaires
bacteria by passengers aboard the cruise ship M/V Horizon, a ship operated by Celebrity. The lawsuits included a
class action brought on behalf of all passengers aboard the ship during the relevant time period, individual (cid:141)opt-
out(cid:142) passenger suits, and a suit by Celebrity. Celebrity alleged in its suit that it had sustained economic damages
due to loss of use of the M/V Horizon while it was dry-docked.

The claims against Essef and its involved subsidiaries were based upon the allegation that Essef designed,
manufactured, and marketed two sand swimming pool filters that were installed as a part of the spa system on the
Horizon, and allegations that the spa and filters contained bacteria that infected certain passengers on cruises
from December 1993 through July 1994.

Prior to the acquisition of Essef, a settlement was reached in the class action. With regard to the individual (cid:141)opt
out(cid:142) passenger suits, the claims of one plaintiff were tried under a stipulation among all remaining parties
provided that the liability findings would be applicable to all plaintiffs and defendants. The trial resulted in a jury
verdict on June 13, 2000 finding liability on the part of the Essef defendants (70%) and Celebrity and its sister
company, Fantasia (together 30%). Compensatory damages in the total amount of $2.7 million were awarded,
with each defendant being accountable for its proportionate share of liability. The Essef defendant(cid:144)s
proportionate share was covered by insurance. Punitive damages were separately awarded against the Essef
defendants in the total amount of $7.0 million, with 60% awarded to all remaining plaintiffs and 40% to
Celebrity.

After exhaustion of post-trial appeals, we paid all outstanding punitive damage awards of $7.0 million in the
Horizon cases, plus interest of approximately $1.6 million in January 2004. We had reserved for the amount of
punitive damages awarded at the time of the Essef acquisition. A reserve for the $1.6 million interest cost was
recorded in 2003.

All of the personal injury cases have now been resolved through either settlement or trial. The only remaining
unresolved case is that brought by Celebrity for interruption of its business. That case had been dormant, but was
recently activated. One of Essef(cid:144)s insurance carriers has issued a notice of rights letter. We believe we have
reserves sufficient to cover the amount of any uninsured awards or settlements.

Ellerbrake et al v. DeVilbiss Air Power Company
In August 2001, a national class action was brought against DeVilbiss Air Power Company (DAPC) and four
other manufacturers of retail air compressors on behalf of consumers that had purchased certain air compressors.
Plaintiffs alleged that the manufacturers mislabeled horsepower ratings on compressors they manufacture.
Plaintiffs sought to represent a class of all persons who had purchased since August 1996 an air compressor for
which the horsepower ratings were allegedly mislabeled.

Without admitting any liability, DAPC settled with plaintiffs and the settlement was preliminarily approved by
the Court in January 2004. Terms of the settlement include changes in labeling, an education program for
consumers, attorney(cid:144)s fees and tools or accessories for qualifying claimants. While certain elements of the
settlement have specific dollars assigned to them, the ultimate cost of some elements is still unknown at this
time. We believe reserves recorded in 2003 are sufficient to cover the cost of this settlement based on the
information available to us at this time.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

Current executive officers of Pentair, their ages, current position, and their business experience during at least
the past five years are as follows:

Name

Randall J. Hogan

Age

David D. Harrison

Current Position and Business Experience

Chief Executive Officer since January 2001 and Chairman of the Board effective May 1, 2002;
President and Chief Operating Officer, December 1999 (cid:132) December 2000; Executive Vice
President and President of Pentair(cid:144)s Electrical and Electronic Enclosures Group, March 1998 (cid:132)
December 1999; United Technologies(cid:144) 1994 (cid:132) 1997: Pratt & Whitney Industrial Turbines Vice
President and General Manager 1994 (cid:132) 1995; Carrier Transicold President 1995 (cid:132) 1997;
General Electric various executive positions 1988 (cid:132) 1994; McKinsey & Company consultant
1981 (cid:132) 1987.

Executive Vice President and Chief Financial Officer since February 2000; Executive Vice
President and Chief Financial Officer of Scotts Company, a marketer of branded consumer products
for lawn and garden care, August 1999 (cid:132) February 2000; Executive Vice President and Chief
Financial Officer of Coltec Industries, a manufacturer of a diversified range of highly-engineered
aerospace and industrial products, August 1996 (cid:132) August 1999; Executive Vice President and
Chief Financial Officer of Pentair, Inc., March 1994 (cid:132) July 1996; Senior Executive with General
Electric Technical Services organization, January 1990 (cid:132) March 1994. Various executive positions
with General Electric Plastics/Borg-Warner Chemicals 1972 (cid:132) 1990.

Richard J. Cathcart

President and Chief Operating Officer of Water Technologies segment since January 2001;
Executive Vice President and President of Pentair(cid:144)s Water Technologies Group,
February 1996 (cid:132) December 2000; Executive Vice President, Corporate Development,
March 1995 (cid:132) January 1996.

Michael V. Schrock

Charles M. Brown

President and Chief Operating Officer of Enclosures segment since October 2001; President,
Pentair Water Technologies (cid:132) Americas, January 2001 (cid:132) October 2001; President, Pentair
Pump and Pool Group, August 2000 (cid:132) January 2001; President, Pentair Pump Group, January
1999 (cid:132) August 2000; Vice President and General Manager, Aurora, Fairbanks Morse and
Pentair Pump Group International, March 1998 (cid:132) December 1998; Divisional Vice President
and General Manager, Honeywell Inc., 1994 (cid:132) 1998.

President and Chief Operating Officer of Tools segment since August 2003; President of Aqua
Glass Corporation, a manufacturer of acrylic and gelcoat fiberglass showers, bathtubs, and
shower-tub combinations, a unit of Masco Corporation, March 1996 (cid:132) August 2003; Vice
President of Marketing for Masco(cid:144)s Plumbing Products Division, April 1993 (cid:132) March 1996;
Black & Decker various positions, April 1988 (cid:132) April 1993.

Louis L. Ainsworth

Senior Vice President and General Counsel since July 1997 and Secretary since January 2002;
Shareholder and Officer of the law firm of Henson & Efron, P.A., November 1985 (cid:132) June
1997.

Frederick S. Koury

Senior Vice President, Human Resources, since August 2003; Vice President of Human
Resources of the Victoria(cid:144)s Secret Stores unit of Limited Brands, a specialty retailer of apparel
and personal care products, September 2000 (cid:132) August 2003; PepsiCo, Inc., a global food and
beverage company, various executive positions, June 1985 (cid:132) September 2000.

Karen A. Durant

44 Vice President of Finance and Controller since April 2002; Vice President, Controller
September 1997 (cid:132) March 2002; Controller, January 1996 (cid:132) August 1997; Assistant
Controller, September 1994 (cid:132) December 1995; Director of Financial Planning and Control of
Hoffman Enclosures Inc. (subsidiary of Registrant), October 1989 (cid:132) August 1994.

PART II

ITEM 5. MARKET FOR REGISTRANT(cid:144)S COMMON STOCK AND RELATED SECURITY

HOLDER MATTERS

Pentair(cid:144)s common stock is listed for trading on the New York Stock Exchange and trades under the symbol
(cid:141)PNR.(cid:142) As of December 31, 2003, there were 3,980 shareholders of record.

The high, low, and closing sales price for our common stock and the dividends declared for each of the quarterly
periods for 2003 and 2002 were as follows:

High
Low
Close
Dividends declared

2003

2002

First

Second

Third

Fourth

First

Second

Third

Fourth

$37.55
$32.80
$36.47
0.19

$41.90
$35.35
$39.38
0.21

$43.53
$38.58
$39.44
0.21

$46.57
$36.85
$45.70
0.21

$45.14
$32.38
$44.97
0.18

$49.61
$42.34
$48.08
0.18

$47.11
$36.84
$37.79
0.19

$38.31
$29.34
$34.55
0.19

Pentair has paid 112 consecutive quarterly dividends. See ITEM 8, Note 9 of the Notes to Consolidated Financial
Statements for certain dividend restrictions.

ITEM 6. SELECTED FINANCIAL DATA

Dollars in thousands, except per-share data

2003

2002

2001

2000

1999

1998

1997

1996

Years ended December 31

Statement of operations
Net sales

Water
Enclosures
Tools
Other

$1,060,303
582,684
1,081,378
(cid:132)

$ 932,420
556,032
1,092,331
(cid:132)

$ 882,615
689,820
1,001,645
(cid:132)

$ 898,247
777,725
1,029,658
(cid:132)

$ 579,236
657,500
850,327
(cid:132)

$438,810
586,829
644,226

$304,647
600,491
559,907
(cid:132) 128,136

$216,769
566,919
467,464
133,360

Total

2,724,365

2,580,783

2,574,080

2,705,630

2,087,063

1,669,865

1,593,181

1,384,512

Sales growth

Cost of goods sold
Gross profit
Margin

Selling, general and administrative
Research and development
Restructuring charge Water

Operating income

Enclosures
Tools
Other

Total

Water
Enclosures
Tools
Other

Total

5.6%

0.3%

(4.9%)

29.6%

25.0%

4.8%

15.1%

2,045,327
679,038

1,965,076
615,707

1,967,945
606,135

2,051,515
654,115

1,529,419
557,644

1,227,427
442,438

1,189,777
403,404

1,032,343
352,169

24.9%

23.9%

23.5%

24.2%

26.7%

26.5%

25.3%

25.4%

375,586
43,898
(cid:132)
(cid:132)
(cid:132)
(cid:132)

342,806
36,909
(cid:132)
(cid:132)
(cid:132)
(cid:132)

377,098
31,171
(cid:132)
38,427
(cid:132)
1,678

396,105
31,191
(cid:132)
(1,625)
5,396
21,018

310,700
22,170
(cid:132)
16,743
6,305
(cid:132)

261,302
16,894
(cid:132)
(cid:132)
(cid:132)
(cid:132)

241,062
16,236
(cid:132)
(cid:132)
(cid:132)
(cid:132)

216,775
11,989
(cid:132)
(cid:132)
(cid:132)
(cid:132)

(cid:132)

40,105

24,789

23,048

(cid:132)

143,962
51,094
81,774
(17,276)

126,559
29,942
97,598
(18,107)

109,792
1,857
63,232
(17,120)

120,732
96,268
23,751
(38,721)

73,362
46,346
100,680
(18,662)

56,264
46,026
80,383
(18,431)

32,366
47,282
62,669
3,789

30,562
53,856
45,800
(6,813)

259,554

235,992

157,761

202,030

201,726

164,242

146,106

123,405

Margin

9.5%

9.1%

6.1%

7.5%

9.7%

9.8%

9.2%

8.9%

Gain on sale of business
Net interest expense
Other expense, write-off of investment
Provision for income taxes
Income from continuing operations
Income (loss) from discontinued operations,

net of tax

Cumulative effect of accounting change, net

of tax

Net income
Preferred dividends

(cid:132)
40,936
(cid:132)
74,330
144,288

(2,936)

(cid:132)

141,352
(cid:132)

(cid:132)
43,545
(cid:132)
62,545
129,902

(cid:132)

129,902
(cid:132)

Income available to common shareholders

141,352

129,902

Common share data
Basic EPS (cid:132) continuing operations
Basic EPS (cid:132) discontinued operations
Basic EPS (cid:132) cumulative effect of accounting

change

Basic EPS (cid:132) net income

Diluted EPS (cid:132) continuing operations
Diluted EPS (cid:132) discontinued operations
Diluted EPS (cid:132) cumulative effect of

accounting change

Diluted EPS (cid:132) net income

Cash dividends declared per common share
Stock dividends declared per common share
Market value per share (December 31)

2.95
(0.06)

(cid:132)

2.89

2.90
(0.06)

(cid:132)

2.84

0.82
(cid:132)
45.70

2.64
(cid:132)

(cid:132)

2.64

2.61
(cid:132)

(cid:132)

2.61

0.74
(cid:132)
34.55

(cid:132)
61,488
2,985
35,772
57,516

(cid:132)
74,899
(cid:132)
45,263
81,868

(cid:132)
43,582
(cid:132)
60,056
98,088

(cid:132)
19,855
(cid:132)
53,667
90,720

10,313
19,729
(cid:132)
58,089
78,601

(cid:132)
16,849
(cid:132)
42,860
63,696

(24,647)

(24,759)

5,221

16,120

12,999

10,813

(cid:132)

(1,222)

(cid:132)

32,869
(cid:132)

32,869

1.17
(0.50)

(cid:132)

0.67

1.17
(0.50)

(cid:132)

0.67

0.70
(cid:132)
36.52

55,887
(cid:132)

103,309
(cid:132)

106,840
(4,267)

91,600
(4,867)

74,509
(4,928)

55,887

103,309

102,573

86,733

69,581

1.68
(0.51)

(0.02)

1.15

1.68
(0.51)

(0.02)

1.15

0.66
(cid:132)
24.19

2.24
0.12

(cid:132)

2.36

2.21
0.12

(cid:132)

2.33

0.64
(cid:132)
38.50

2.25
0.42

(cid:132)

2.67

2.09
0.37

(cid:132)

2.46

0.60
(cid:132)
39.81

1.94
0.34

(cid:132)

2.28

1.81
0.30

(cid:132)

2.11

0.54
(cid:132)
35.94

1.57
0.29

(cid:132)

1.86

1.47
0.26

(cid:132)

1.73

0.50
100%

32.25

ITEM 6. SELECTED FINANCIAL DATA (cid:133) (continued)

Dollars in thousands, except per-share data

2003

2002

2001

2000

1999

1998

1997

1996

Years ended December 31

Balance sheet data
Accounts receivable
Inventories
Property, plant and equipment, net
Goodwill
Total assets
Total debt
Shareholders(cid:144) equity

Other data
Debt/total capital
Depreciation

Water
Enclosures
Tools
Other

Total

Goodwill amortization(1)

Water
Enclosures
Tools
Other

Total

Tax effect of goodwill amortization(1)
Diluted EPS effect of goodwill amortization(1)
Other amortization
Net cash provided by operating activities
Capital expenditures
Employees of continuing operations
Days sales outstanding in receivables(2)
Days inventory on hand(2)

(cid:132)
(cid:132)
4,514
262,939
43,622
12,300
56
63

420,403
285,577
343,550
1,373,549
2,780,677
806,493
1,261,478

403,793
293,202
351,316
1,218,341
2,514,450
735,805
1,105,724

398,579
300,923
329,500
1,088,206
2,372,198
723,706
1,015,002

468,081
392,495
352,984
1,141,102
2,644,025
913,974
1,010,591

502,235
352,830
367,783
1,164,056
2,706,516
1,035,084
990,771

331,672
216,084
271,389
448,893
1,484,207
340,721
707,628

314,289
215,957
261,486
416,605
1,413,494
328,538
627,653

246,436
206,957
270,071
287,417
1,236,694
312,817
560,751

39.0%

39.9%

41.6%

47.5%

51.1%

32.5%

34.4%

35.8%

20,517
19,721
20,320
571

61,129

(cid:132)
(cid:132)
(cid:132)
(cid:132)

(cid:132)

19,478
19,026
20,256
73

58,833

(cid:132)
(cid:132)
(cid:132)
(cid:132)

(cid:132)

(cid:132)
(cid:132)
5,869
270,794
56,696
11,900
59
63

19,472
23,008
20,033
161

62,674

18,560
8,273
9,274
(cid:132)

36,107

(4,064)
0.65
5,568
232,334
53,668
11,700
65
75

19,157
20,701
17,406
2,633

59,897

18,074
9,097
9,285
(cid:132)

36,456

(3,986)
0.67
2,675
184,947
68,041
13,100
71
80

15,453
26,846
13,615
167

56,081

12,714
8,413
3,282
(cid:132)

24,409

(3,575)
0.47
1,578
144,296
53,671
12,400
68
71

9,163
26,453
10,797
158

7,082
24,689
9,664
6,142

4,894
22,630
8,200
6,896

46,571

47,577

42,620

7,793
5,832
287
(cid:132)

7,363
5,576
214
418

4,920
5,667
306
502

13,912

13,571

11,395

(2,520)
0.26
1,571
120,872
43,335
8,800
68
75

(2,321)
0.25
1,669
107,896
69,364
8,800
65
80

(1,576)
0.22
1,400
104,479
67,216
8,000
64
85

(1)

Effective January 1, 2002 we adopted SFAS No. 142, Goodwill and Other Intangible Assets. This standard requires goodwill and
intangible assets deemed to have an indefinite life no longer be amortized. This standard did not require restatement of prior period
amount to be consistent with the current year presentation and therefore, we have not made any adjustments to the historical financial
information presented. However, we have provided supplemental tax and diluted EPS information as we believe it is necessary to the
understanding of our financial performance trend.

(2) Calculated using a 13-month average.

In fiscal 2001, we discontinued our Equipment segment (Century Mfg. Co./Lincoln Automotive and Lincoln Industrial businesses). Historical
financial information has been adjusted to reflect this change. The 2001 results reflect a pre-tax loss on the sale of these businesses of
$36.3 million ($24.6 million after tax, or $0.50 per share).

Capital expenditures in 2002 includes $23.0 million for the acquisition of a previously leased facility.

Cost of goods sold in 2001 includes $1.0 million related to the 2001 restructuring charge for our Enclosures segment.

The 2000 results reflect a non-cash pre-tax cumulative effect of accounting change related to revenue recognition that reduced income by
$1.9 million ($1.2 million after tax, or $0.02 per share).

The 1997 results include a pre-tax gain on the sale of Federal Cartridge of $10.3 million ($1.2 million after tax, or $0.03 per share).

Reference should be made to the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial
Condition and Results of Operations.

ITEM 7. MANAGEMENT(cid:144)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

This report contains statements that we believe to be (cid:141)forward-looking statements(cid:142) within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations or
forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking
terminology such as (cid:141)may,(cid:142) (cid:141)will,(cid:142) (cid:141)expected,(cid:142) (cid:141)intend,(cid:142) (cid:141)estimate,(cid:142) (cid:141)anticipate,(cid:142) (cid:141)believe,(cid:142) (cid:141)project,(cid:142) or
(cid:141)continue,(cid:142) or the negative thereof or similar words. From time to time, we also may provide oral or written
forward-looking statements in other materials we release to the public. Any or all of our forward-looking
statements in this report and in any public statements we make could be materially different from actual results.
They can be affected by assumptions we might make or by known or unknown risks or uncertainties.
Consequently, we cannot guarantee any forward-looking statements. Investors are cautioned not to place undue
reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or
identify all such factors and should not consider the following list to be a complete statement of all potential risks
and uncertainties.

The following factors may impact the achievement of forward-looking statements:

(cid:139) changes in industry conditions, such as:

(cid:139)

the strength of product demand;

the intensity of competition, including foreign competitors;

(cid:139) pricing pressures;

(cid:139) market acceptance of new product introductions;

(cid:139)

the introduction of new products by competitors;

(cid:139) our ability to maintain and expand relationships with large retail stores;

(cid:139) our ability to source components from third parties, in particular foreign manufacturers, without

interruption and at reasonable prices; and

(cid:139)

the financial condition of our customers.

(cid:139)

risks relating to our proposed acquisition of WICOR, including our ability to integrate WICOR successfully,
our ability to obtain regulatory approvals on anticipated terms and our ability to fully realize synergies on our
anticipated timetable;

(cid:139) changes in our business strategies, including acquisition, divestiture, and restructuring activities;

(cid:139) governmental and regulatory policies;

(cid:139) general economic and political conditions, such as political instability, the rate of economic growth in our

principal geographic or product markets, or fluctuations in exchange rates;

(cid:139) changes in operating factors, such as continued improvement in manufacturing activities and the achievement
of related efficiencies, cost reductions, and inventory risks due to shifts in market demand and costs associated
with moving production overseas;

(cid:139) our ability to continue to successfully generate savings from our supply management and lean enterprise

initiatives;

(cid:139) our ability to successfully identify, complete, and integrate future acquisitions;

(cid:139) our ability to accurately evaluate the effects of contingent liabilities such as taxes, product liability,

environmental, and other claims;

(cid:139) our ability to access capital markets and obtain anticipated financing under favorable terms; and

(cid:139) no material declines in the fair market value of, or cash flows from, our equity method investments.

The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may
occur that would impact our business. We assume no obligation, and disclaim any duty, to update the forward-
looking statements in this report.

Overview
We are a focused diversified industrial manufacturer operating in three segments: Water, Enclosures, and Tools.
Our Water segment manufactures and markets essential products and systems used in the movement, treatment,
storage and enjoyment of water and generates approximately 39 percent of total revenues. Our Enclosures
segment accounts for approximately 21 percent of total revenues and designs, manufactures and markets
standard, modified and custom enclosures that protect sensitive controls and components for markets that include
industrial machinery, data communications, networking, telecommunications, test and measurement, automotive,
medical, security, defense, and general electronics. Our Tools segment designs, manufactures and markets a wide
range of power tools under several well established trade names generating approximately 40 percent of total
revenues.

Our Water segment has progressively become a more important part of our business portfolio with sales
increasing from $100 million in 1995 to approximately $1 billion in 2003. We have identified target industry
segments totaling $50 billion, representing a small portion of the $350 billion global water market. We continue
to capitalize on growth opportunities in the water industry as evidenced by four product line acquisitions in our
Water segment in 2003 as well as the acquisition of Everpure on December 31, 2003. In February 2004, we
announced our agreement to acquire WICOR, the completion of which would mark a dramatic shift in our water
segment. We anticipate that the assimilation of these acquisitions into our business operations will create a $2
billion business in the water industry.

Our Enclosures segment operates in a large global market with significant headroom in the industry niches such
as defense, security, medical, and networking. We believe we have the largest industrial and commercial
distribution network in North America and highest brand recognition in the industry. During the past few years,
the Enclosures segment experienced significantly lower sales volumes as a result of severely reduced capital
spending in the industrial market and over-capacity and weak demand in the datacom and telecom markets.
However, this segment did experience growth in 2003 across the electrical and electronic markets and we believe
it is well-positioned to continue improved performance. In addition, through the success of our Pentair Integrated
Management System (PIMS) and supply management initiatives we have increased Enclosures segment margins
for the eighth sequential quarter.

Our Tools segment has been operating in a very competitive marketplace during the past few years. Pricing
pressures and higher raw material costs have caused our operating margins to decline. In February 2004, we
announced our intent to explore strategic alternatives for our Tools segment. We will continue to operate the
Tools segment for the long-term and provide all appropriate management support and resources. We continue to
seek opportunities to expand operating margins through cost reductions and productivity improvements as part of
our PIMS initiatives. In addition, we plan to continue to launch innovative new products and pursue significant
incremental volume opportunities.

Key Trends and Uncertainties
The following trends and uncertainties affected our financial performance in 2003 and will likely impact our
results in the future:

(cid:139) We have experienced a decrease in average selling prices and declines in operating margins in our Tools

segment due to increased promotional programs. We expect these competitive pressures to lessen somewhat,
but still persist in 2004.

(cid:139) We expect all three segments to continue to benefit from our key initiatives, including supply management and

PIMS.

(cid:139) Expenses related to downsizing are anticipated to continue as we identify more efficient means to manufacture

and distribute our products.

(cid:139) Free cash flow, defined as cash flow from operating activities less capital expenditures, including both

continuing and discontinued operations, exceeded $200 million for the second straight year and is expected to
exceed $200 million in 2004. See our discussion of Other financial measures under the caption (cid:141)Liquidity and
Capital Resources(cid:142) of this report.

(cid:139)

In 2003, we experienced favorable foreign currency effects, primarily for the U.S. dollar against the Euro,
which may not trend favorably in the future.

(cid:139) Before any effects of our planned acquisition of WICOR, we expect our effective tax rate on continuing

operations to be approximately 34 percent in 2004. Our ultimate effective tax rate will depend on the timing of
the planned WICOR acquisition and WICOR(cid:144)s actual tax attributes.

(cid:139) Following the planned acquisition of WICOR, we will need to fund the repayment of our Bridge Facility by

December 31, 2004 through a disposition of our Tools Group or through equity issuance.

Business Transformation
On February 3, 2004, we entered into an agreement to acquire WICOR Inc. ((cid:141)WICOR(cid:142)), a unit of Wisconsin
Energy Corporation, Milwaukee, Wisconsin. WICOR, which manufactures water system, filtration, and pool
equipment products under the Sta-Rite, SHURflo, and Hypro brands, generated sales of approximately
$746 million in 2003. The $850 million cash transaction, which we plan to complete in the second or third
quarter of 2004, is subject to satisfaction of customary conditions and applicable regulatory approvals. As part of
the transaction, we will assume approximately $24 million of WICOR debt.

The water industry is structurally attractive as a result of its large global market, approximating $350 billion, and
a growing demand for clean water. Our vision is to become the leading global provider of innovative products
and systems used in the movement, treatment, storage, and enjoyment of water.

We expect to achieve $30 million in synergies with respect to the WICOR acquisition in the first 18 months of
operations via key initiatives including PIMS, material cost savings and administrative cost savings. We also
expect to achieve significant working capital reductions, fixed asset reductions and capital expenditure savings as
a result of the acquisition.

We also announced that we have engaged Goldman Sachs to explore strategic alternatives for our Tools segment,
comprising the Porter-Cable, Delta, DeVilbiss Air Power Company, Oldham Saw and Flex businesses with
$1,081.4 in net sales in 2003.

Outlook
In 2004, our operating objectives include the following:

(cid:139)

Integrate the December 31, 2003 Everpure acquisition;

(cid:139) Complete and integrate the WICOR acquisition;

(cid:139) Complete the review of strategic alternatives for our Tools segment; and

(cid:139) Continue to drive our five strategic initiatives: cash flow, supply management, PIMS, talent management, and

organic sales growth.

Financial Measures
In our Management(cid:144)s Discussion and Analysis, we make reference to certain non-GAAP (generally accepted
accounting principles) financial measures, including gross profit, operating income, selling, general and
administrative (SG&A), income from continuing operations before income taxes, and provision for income taxes,
in each case (cid:141)excluding goodwill amortization and restructuring charges(cid:142) or (cid:141)excluding restructuring charge.(cid:142)
We believe that these non-GAAP financial measures are useful to investors because they provide investors with

other measures to consider, in conjunction with the GAAP results, which may be helpful to meaningfully
compare our operating performance between periods. We also use these non-GAAP financial measures when
assessing our own operating performance. A description of the accounting standards applicable to the elimination
of the amortization of goodwill is included below under (cid:141)New Accounting Standards.(cid:142) A description of the
restructuring charges that we exclude from GAAP results is included below under (cid:141)Results of Operations (cid:133)
Restructuring Charges.(cid:142) In each case below when we make reference to a non-GAAP financial measure, we also
provide reconciliation to the comparable GAAP financial measure.

RESULTS OF OPERATIONS

Net sales
The components of the net sales change were:

Percentages

Volume
Price
Currency

Total

2003 vs. 2002

2002 vs. 2001

4.4
(1.0)
2.2

5.6

0.2
(0.3)
0.4

0.3

Net sales in 2003 totaled $2,724 million, compared with $2,581 million in 2002, and $2,574 million in 2001. In
2003, volume increased by approximately 4.4 percent primarily due to increased demand in our Water segment
and acquisitions in both our Water and Tools segments. Price declined by approximately 1.0 percent driven by
promotional programs for our Tools segment products. In addition, the continued weakening of the U.S. dollar
against the Euro in 2003 favorably impacted the dollar value of sales at our foreign subsidiaries by about 2.2
percent.

In 2002, volume increased by 0.2 percent primarily due to increased demand and acquisitions in both our Tools
and Water segments. These increases were mostly offset by the continued weak demand for our Enclosures
segment products. Price declined by 0.3 percent primarily due to the introduction of lower price point products
and promotional programs for our Tools segment products. In addition, the continued weakening of the U.S.
dollar in 2002 favorably impacted the dollar value of sales by about 0.4 percent.

Sales by segment and the year-over-year changes were as follows:

In thousands

Water
Enclosures
Tools

Total

2003

2002

2001

2003 vs. 2002
$ change % change

2002 vs. 2001
$ change % change

$1,060,303
582,684
1,081,378

$ 932,420
556,032
1,092,331

$ 882,615
689,820
1,001,645

$127,883
26,652
(10,953)

13.7% $ 49,805
4.8% (133,788)
90,686
(1.0%)

5.6%
(19.4%)
9.1%

$2,724,365

$2,580,783

$2,574,080

$143,582

5.6% $

6,703

0.3%

Water
The 13.7 percent increase in Water segment sales in 2003 from 2002 was primarily due to:

(cid:139) sales attributable to the fourth quarter 2002 acquisition of Plymouth Products;

(cid:139) higher sales of residential pumps and pool equipment;

(cid:139) an increase in European sales, particularly commercial valves, water conditioning and pool products;

(cid:139) continued growth in the developing markets of Asia and India; and

(cid:139)

favorable foreign currency effects.

The 5.6 percent increase in Water segment sales in 2002 from 2001 was primarily due to:
(cid:139) higher pump sales, with most of the growth coming from residential retail and municipal products;
(cid:139)

the fourth quarter 2002 acquisition of Plymouth Products; and

(cid:139) higher sales volume in our pool and spa equipment business.

Enclosures
The 4.8 percent increase in Enclosures segment sales in 2003 from 2002 was primarily due to:
(cid:139)

favorable foreign currency effects; and

(cid:139) share growth in targeted areas such as networking, security, and medical.

The 19.4 percent decline in Enclosures segment sales in 2002 from 2001 was primarily due to:
(cid:139)

lower sales volume reflecting severely reduced capital spending in the industrial market; and

(cid:139) over-capacity and weak demand in the datacom and telecom markets.

These decreases were partially offset by:
(cid:139)

favorable foreign currency effects.

Tools
The 1.0 percent decrease in Tools segment sales in 2003 from 2002 was primarily due to:
(cid:139)

lower organic sales volume due to the effects of a slow economy and competitive marketplace; and

(cid:139) a decline in average selling prices due to increased promotional pricing.

These decreases were partially offset by:
(cid:139) sales attributable to the fourth quarter 2002 acquisition of Oldham Saw.

The 9.1 percent increase in Tools segment sales in 2002 from 2001 was primarily due to:
(cid:139) higher sales volume in our DeVilbiss Air Power Company (DAPC) business, particularly for pressure washers;
(cid:139) higher sales volume in our Delta business as a result of our new sub-branding strategy through the creation of
Delta Shopmaster(cid:146) and Delta Industrial(cid:146) brands. The Delta Shopmaster(cid:146) brand is targeted toward the entry-
level do-it-yourselfer and the Delta Industrial(cid:146) brand is targeted toward the professional craftsman; and

(cid:139)

the fourth quarter 2002 acquisition of Oldham Saw.

These increases were partially offset by:
(cid:139) declines in average selling prices due to the introduction of lower price point products for the Delta

Shopmaster(cid:146) brand and heavy second-half 2002 promotional pricing in a more competitive marketplace.

Gross profit
In thousands

Gross profit

2003

% of sales

2002

% of sales

2001(1)

% of sales

$679,038

24.9% $615,707

23.9% $606,135

23.5%

Percentage point change

1.0 pts

0.4 pts

(1)

Includes $1 million of inventory charges related to the 2001 restructuring charge for our Enclosures segment.

The 1.0 percentage point increase in gross profit as a percent of sales in 2003 from 2002 was primarily the result
of:
(cid:139) savings generated from our supply management and lean enterprise initiatives;
(cid:139)

improved productivity in our Enclosure and Water segments, particularly in our Pump business; and

(cid:139)

lower costs as a result of general downsizing throughout Pentair.

These increases were offset by:
(cid:139) price declines, primarily in our Tools segment due to increased promotional pricing; and
(cid:139) volume declines in our Tools segment.

The 0.4 percentage point increase in gross profit as a percent of sales in 2002 from 2001 was primarily the result
of:
(cid:139) savings generated from our supply management and lean enterprise initiatives, as well as cost savings realized

from restructuring programs;

(cid:139) volume increases in our Tools and Water segments; and
(cid:139)

the fourth quarter 2002 acquisitions of Oldham Saw and Plymouth Products.

These increases were partially offset by:
(cid:139) volume declines in our Enclosures segment; and
(cid:139) unfavorable selling prices due to increased promotional discounting in our Tools segment.

Selling, general and administrative (SG&A)
In thousands

SG&A as reported
Less goodwill amortization

2003

% of sales

2002

% of sales

2001

% of sales

$375,586
(cid:132)

13.8% $342,806
(cid:132)

n/a

13.3% $377,098
(36,107)

n/a

14.6%
(1.4%)

SG&A excluding goodwill amortization

$375,586

13.8% $342,806

13.3% $340,991

13.2%

Percentage point change

0.5 pts

0.1 pts

The 0.5 percentage point increase in SG&A expense as a percent of sales in 2003 from 2002 was primarily the
result of:
(cid:139) higher spending for promotional costs primarily in our Tools segment;
(cid:139) expenses related to downsizing throughout Pentair;
(cid:139) anticipated settlement and defense costs for a class action suit launched against the compressor industry for

alleged mislabeling; and
(cid:139) strategic growth initiatives.

These increases were partially offset by:

(cid:139)

favorable foreign currency effects; and

(cid:139) productivity improvements from lean enterprise initiatives in non-manufacturing areas.

The 0.1 percent point increase in SG&A expense as a percent of sales in 2002 from 2001 was primarily the result
of:
(cid:139) higher bad debt expense offset by lower spending for process improvement investments.

Research and development (R&D)
In thousands

R&D

Percentage point change

2003

% of sales

2002

% of sales

2001

% of sales

$43,898

1.6% $36,909

1.4% $31,171

1.2%

0.2 pts

The 0.2 percentage point increase in R&D expense as a percent of sales in 2003 from 2002 and in 2002 from
2001 was primarily the result of:
(cid:139) additional investments related to new product development initiatives in all three segments.

Restructuring charge
In the fourth quarter of 2001, we initiated a restructuring program designed to consolidate manufacturing
operations and eliminate non-critical support facilities in our Enclosures segment. We also wrote off internal-use
software development costs at corporate for the abandonment of a company-wide human resource system.
Consequently, we recorded a restructuring charge of $42.8 million, of which $1 million is included in cost of
goods sold on the consolidated statement of income for the write-down of inventory on certain custom enclosures
product that were discontinued as a result of plant closures. In the fourth quarter of 2001, we also recorded a final
change in estimate related to our 2000 restructuring charge that reduced the restructuring charge by $1.7 million
primarily due to favorable negotiation of contract termination costs. As of the end of 2001, the restructuring
program initiated in 2000 was complete.

Included in other current liabilities on the consolidated balance sheets is the remaining portion of the
restructuring charge liability of $3.3 million, primarily related to severance obligations not yet paid to certain
terminated individuals and other charges as we are awaiting the results of pending and threatened claims by
former employees of the affected facilities. Therefore, we are uncertain when this remaining liability will be
paid. Payments in 2003 of $0.3 million are comprised of the payout of severance obligations and legal expenses.
Funding of future payments will be paid from cash generated from operating activities.

See ITEM 8, Note 4 of the Notes to Consolidated Financial Statements for further information regarding
restructuring charges.

Operating income

Water
The following table and discussion provides a comparison of our Water segment operating income as reported,
and those results excluding goodwill amortization.

In thousands

2003

% of sales

2002

% of sales

2001

% of sales

Operating income as reported
Add back goodwill amortization

$143,962
(cid:132)

13.6% $126,559
(cid:132)

n/a

13.6% $109,792
18,560

n/a

12.4%
2.1%

Operating income excluding goodwill

amortization

Percentage point change

$143,962

13.6% $126,559

13.6% $128,352

14.5%

0.0 pts

(0.9) pts

The unchanged operating income percentage in the Water segment as a percent of net sales in 2003 from 2002
was primarily due to:
(cid:139) benefits from the continued success of our PIMS and supply management initiatives;
(cid:139)

increased volume in our expanding markets of Europe, Asia, and India; and

(cid:139)

favorable foreign currency effects.

These benefits were offset by:

(cid:139)

increased selling and R&D expense;
(cid:139) higher insurance costs in 2003; and
(cid:139) price and volume declines related to our reverse osmosis product line and costs associated with downsizing the

Chardon, Ohio operation and moving most of this product line to our factory in India.

The 0.9 percentage point decline in Water segment operating income as a percent of net sales in 2002 from 2001
was primarily due to:
(cid:139) unfavorable product mix as a result of higher sales of lower margin residential retail pumps;
(cid:139) higher costs at certain pump and water treatment businesses; and

(cid:139) price declines, primarily related to large international water treatment projects for reverse osmosis housings.

Enclosures
The following table and discussion provides a comparison of our Enclosures segment operating income as
reported, and those results excluding goodwill amortization and restructuring charges.

In thousands

2003

% of sales

2002

% of sales

2001

% of sales

Operating income as reported
Add back goodwill amortization
Add back restructuring charge

Operating income excluding goodwill

$51,094
(cid:132)
(cid:132)

8.8% $29,942
(cid:132)
n/a
(cid:132)
n/a

5.4% $ 1,857
8,273
n/a
39,382
n/a

0.3%
1.2%
5.7%

amortization and restructuring charge

$51,094

8.8% $29,942

5.4% $49,512

7.2%

Percentage point change

3.4 pts

(1.8) pts

The 3.4 percentage point increase in Enclosures segment operating income as a percent of net sales in 2003 from
2002 was primarily due to:

(cid:139) efficiencies resulting from our continued implementation of PIMS and stronger sourcing practices;

(cid:139) volume-related efficiencies and improved product mix; and

(cid:139) shifting more production to lower-cost labor markets.

These increases were partially offset by:

(cid:139)

expenses related to downsizing.

The 1.8 percentage point decline in Enclosures segment operating income as a percent of net sales in 2002 from
2001 was primarily due to:

(cid:139)

lower sales volume due to continuing significant industry-wide sales declines, resulting in unabsorbed
overhead despite reductions in overall cost structure.

The decline was partially offset by:

(cid:139) savings realized as part of our restructuring program, net of one-time nonrecurring costs.

Tools
The following table and discussion provides a comparison of our Tools segment operating income as reported,
and those results excluding goodwill amortization.

In thousands

2003

% of sales

2002

% of sales

2001

% of sales

Operating income as reported
Add back goodwill amortization

Operating income excluding goodwill

amortization

Percentage point change

$81,774
(cid:132)

7.6% $97,598
(cid:132)
n/a

8.9% $63,232
9,274
n/a

6.3%
0.9%

$81,774

7.6% $97,598

8.9% $72,506

7.2%

(1.3) pts

1.7 pts

The 1.3 percentage point decrease in Tools segment operating income as a percent of net sales in 2003 from
2002 was primarily due to:

(cid:139) a decline in average selling prices due to increased promotional pricing;

(cid:139)

lower sales volumes;

(cid:139) higher ocean transportation costs and higher raw material prices;

(cid:139) anticipated settlement and defense costs for a class action suit launched against the compressor industry for

alleged mislabeling; and

(cid:139) expenses related to capacity downsizing.

These decreases were partially offset by:

(cid:139) cost savings as a result of our supply management and PIMS initiatives;

(cid:139)

lower distribution and outbound freight costs.

The 1.7 percentage point increase in Tools segment operating income as a percent of net sales in 2002 from 2001
was primarily due to:

(cid:139) higher sales volume, partially offset by price declines due to promotional discounting;

(cid:139) cost savings as a result of our supply management and PIMS initiatives; and

(cid:139)

the fourth quarter 2002 acquisition of Oldham Saw.

Net interest expense
In thousands

Net interest expense

Percentage point change

2003

% of sales

2002

% of sales

2001

% of sales

$40,936

1.5% $43,545

1.7% $61,488

2.4%

(0.2) pts

(0.7) pts

The 0.2 percentage point decrease in interest expense in 2003 from 2002 was primarily the result of:

(cid:139)

lower interest rates partially offset by interest expense related to the financing of our 2003 acquisitions and a
$1.6 million charge for accrued interest on the judgment in the Horizon litigation discussion in Item 3.

The 0.7 percentage point decrease in interest expense in 2002 from 2001 was primarily the result of:

(cid:139)

lower average borrowings driven by our strong cash flow performance in both 2002 and 2001, and lower
interest rates on our variable rate debt.

Provision for income taxes
The following table and discussion provides a comparison of our provision for income taxes for continuing
operations as reported, and those results excluding goodwill amortization.

In thousands

Income from continuing operations before income taxes
Add back goodwill amortization

Income from continuing operations before income taxes,

excluding goodwill amortization

Provision for income taxes as reported
Effective tax rate as reported
Tax effect of goodwill amortization

2003

2002

2001

$218,618
(cid:132)

$192,447
(cid:132)

$ 93,288
36,107

$218,618

$192,447

$129,395

$ 74,330

$ 62,545

$ 35,772

34.0%
(cid:132)

32.5%
(cid:132)

38.3%
4,064

Provision for income taxes excluding goodwill amortization

$ 74,330

$ 62,545

$ 39,836

Effective tax rate excluding goodwill amortization

34.0%

32.5%

30.8%

The 1.5 percentage point increase in the tax rate in 2003 from 2002 was primarily the result of:

(cid:139)

the increase and mix of our 2003 domestic and foreign earnings coupled with our tax savings programs that are
relatively fixed in nature.

The 1.7 percentage point increase in the tax rate in 2002 from 2001 was primarily the result of:
(cid:139)

increased percentage of earnings taxed in countries with higher marginal rates.

Before any effects of our planned acquisition of WICOR, we expect our effective tax rate on continuing
operations to be approximately 34 percent in 2004. Our ultimate effective tax rate will depend on the timing of
the planned WICOR acquisition and WICOR(cid:144)s actual tax attributes.

LIQUIDITY AND CAPITAL RESOURCES

Cash requirements for working capital, capital expenditures, equity investments, acquisitions, debt repayments,
and dividend payments are generally funded from cash generated from operations, availability under existing
committed revolving credit facilities, and in certain instances, equity and debt transactions.

The following table presents selected working capital measurements calculated from our monthly operating
results based on a 13-month moving average and indicates our emphasis on working capital management:

Days

Days of sales in accounts receivable
Days inventory on hand
Days in accounts payable
Cash conversion cycle

December 31
2003

December 31
2002

December 31
2001

56
63
51
68

59
63
53
69

65
75
59
81

Operating activities
Operating activities provided cash flow of $262.9 million in 2003, compared with $270.8 million in 2002 and
$232.3 million in 2001. The $7.9 million decrease in 2003 from 2002 was primarily due to smaller benefits from
working capital improvements offset by an increase in net income. The $38.5 million increase in 2002 from 2001
was primarily due an increase in net income and better working capital management.

Investing activities
Capital expenditures in 2003, 2002, and 2001 were $43.6 million or 1.6 percent of sales, $56.7 million (including
$23.0 million for the acquisition of a previously leased facility) or 2.2 percent of sales, and $53.7 million or 2.1
percent of sales, respectively. We anticipate capital expenditures in 2004 to be approximately $50.0 million
primarily in the areas of new product development and general maintenance capital.

In the first quarter of 2003, we received $1.9 million in purchase price adjustments relative to our fourth quarter
2002 acquisition of Plymouth Products. The adjustments primarily related to final determination of closing date
net assets.

In January 2003, we paid $2.4 million for a final adjustment to the selling price related to the disposition of
Lincoln Industrial. This had no effect on earnings for the twelve months ended December 31, 2003 as the amount
was offset by previously established reserves.

In the fourth quarter of 2002, we acquired Plymouth Products and Oldham Saw for $174.7 million total
consideration, including debt assumed of $2.7 million and cash acquired of $1.7 million.

We periodically review our array of businesses in comparison to our overall strategic and performance
objectives. As part of this review, we may routinely acquire or divest certain businesses.

Financing activities
Net cash provided by financing activities approximated $33.8 million in 2003 compared with net cash used by
financing activities of $38.6 million in 2002 and $222.9 million in 2001. Financing activities in 2003 were
comprised of a $200 million private placement of senior notes with 10-year maturities and a new committed
$500 million revolving credit facility (the (cid:141)Credit Facility(cid:142)) which matures in three years. The $500 million
Credit Facility replaced two existing revolving credit facilities totaling $652 million of credit availability. Interest
rates and fees on the Credit Facility vary based on our credit ratings. The $200 million private placement
included $100 million of variable rate senior notes with an interest rate equal to the three-month LIBOR rate plus
1.15 percent and $100 million of fixed rate senior notes with an average interest rate of 4.98 percent. We used the
$200 million proceeds received in the second half of 2003 from the private placement to pay down debt under the
Credit Facility.

Financing activities included draw downs and repayments on the revolver to fund our operations in the normal
course of business. We used the revolver to fund our acquisitions of Everpure for $217.3 million in 2003 and
Plymouth Products and Oldham Saw for $174.7 million in 2002.

We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit
Facility. The Credit Facility is used as back-up liquidity to support 100% of commercial paper outstanding. As of
December 31, 2003, we have $64.8 million of commercial paper outstanding that matures within 30 days. All of
the commercial paper is classified as long-term as we intend and have the ability to refinance such obligations on
a long-term basis.

Credit available under our Credit Facility, as limited by our most restrictive financial covenant, was
approximately $228 million and is based on a ratio of total debt to EBITDA (Earnings Before Interest, Taxes,
Depreciation, and Amortization). In addition, our debt agreements contain certain financial covenants that restrict
the amount we may pay for dividends and require us to maintain certain financial ratios and a minimum net
worth. We were in compliance with all covenants as of December 31, 2003.

In addition to the Credit Facility, we have $55 million of uncommitted credit facilities, under which we had $10
million outstanding as of December 31, 2003.

At December 31, 2003, our capital structure consisted of $806.5 million in total indebtedness and
$1,261.5 million in shareholders(cid:144) equity. The ratio of debt-to-capital was 39.0 percent, compared with
39.9 percent at December 31, 2002. Our targeted debt-to-total capital ratio range is approximately 40 percent. We
will exceed this target from time to time as needed for operational purposes and/or acquisitions.

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

In thousands

2004

2005

2006

2007

2008

More than
5 Years

Total

Payments Due by Period

Long-term debt obligations
Capital lease obligations
Operating lease obligations, net of

sublease rentals
Purchase obligations
Other long-term liabilities

Total contractual cash
obligations, net

$ 72,465
(cid:132)

396
(cid:132)

$240,092
(cid:132)

$37,822
(cid:132)

(cid:132) $450,000
(cid:132)
(cid:132)

$800,775
(cid:132)

25,977
(cid:132)
4,466

21,362
(cid:132)
4,639

15,975
(cid:132)
4,802

10,233
(cid:132)
4,034

7,914
(cid:132)
2,392

18,737
(cid:132)
924

100,198
(cid:132)
21,257

$102,908

$26,397

$260,869 $52,089

$10,306

$469,661

$922,230

A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally
binding on us that specifies all significant terms. The purchase obligation amounts do not represent our total
anticipated future purchases, but represent those purchases for which we are contractually obligated. As of
December 31, 2003, we did not have any purchase obligations requiring cash outflows of $1 million or greater
per year.

Dividends paid in 2003 were $40.5 million, compared with $36.4 million in 2002, and $34.3 million in 2001. The
year-over-year increases reflect an increase in our annual per-share dividend of $0.82 in 2003, compared with
$0.74 in 2002, and $0.70 in 2001. We have paid dividends for the past 28 years and anticipate paying future
dividends.

On February 4, 2004, we announced that we had entered into an agreement to acquire WICOR Inc. ((cid:141)WICOR(cid:142)),
a unit of Wisconsin Energy Corporation, Milwaukee, Wisconsin. We expect to fund the WICOR acquisition
through our currently available and newly committed lines of credit. We have obtained a commitment, subject to
customary conditions, in the aggregate amount of $850 million (the (cid:141)Bridge Facility(cid:142)), for the payment of the
purchase price. The Bridge Facility is available for a period up to the earlier of (i) September 1, 2004, (ii) the
closing of the acquisition without the use of the Bridge Facility or (iii) the sale of the Pentair Tools Group.

The term loan to be made under the Bridge Facility (the (cid:141)Loan(cid:142)), pursuant to a formal loan agreement to be
negotiated, is contemplated to be available in a single disbursement upon closing of the WICOR acquisition and
is for the purpose of payment of the purchase price and related fees and expenses. The closing of the Loan must
occur before September 1, 2004. Any balance due under the Loan is repayable in full, with accrued interest, no
later than December 31, 2004. We will need to fund the repayment of the Bridge Facility by December 31, 2004
through a disposition of our Tools Group or through equity issuance.

As a result of our announcement of an agreement to acquire WICOR, see Note 18, Moody(cid:144)s Investor Services
has confirmed our long-term bank rating of Baa3 and changed the outlook to negative from stable. At the same
time, Standard and Poor(cid:144)s Rating Services has placed our BBB corporate credit and other ratings on CreditWatch
with negative implications. The change in rating outlook to negative from stable reflects the increased financial
and integration risks associated with the planned acquisition of WICOR. In addition, the timing and nature of any
outcome resulting from the exploration of strategic alternatives for the Tools segment remains uncertain and

subject to execution risk. In a related action, Moody(cid:144)s Investor Services placed the Baa3 senior unsecured rating
on our $250 million notes and the Baa3 rating on senior notes under our $225 million shelf registration under
review for possible downgrade, due to the structural subordination thereof. Existing lenders under our Credit
Facility and private placement notes benefit from guarantees from our domestic subsidiaries, while the
$250 million senior note holders do not benefit from such guarantees. We are putting in place a similar guarantee
for the benefit of the $250 million senior note holders to avoid the downgrade due to the structural subordination.

We are seeking to obtain an amendment to the Credit Facility to allow an increase to the ratio of total debt to
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for the period of the Bridge Facility,
which we believe will be granted by the banks participating in our Credit Facility. In addition, during the period
the Bridge Facility is outstanding, additional limitations will be placed on share repurchases, dividends,
acquisitions and sales of assets.

In 2004, interest expense will be primarily driven by the timing of the closing of the WICOR acquisition and any
strategic alternative we pursue for our Tools segment.

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. In order to meet these cash requirements, we
intend to use available cash and internally generated funds and to borrow under our committed and uncommitted
credit facilities.

Long-term debt and lines of credit are explained in detail in ITEM 8, Note 9 of the Notes to Consolidated
Financial Statements. Operating leases are explained in detail in ITEM 8, Note 16 of the Notes to Consolidated
Financial Statements.

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. Free
cash flow is a non-GAAP financial measure that we use to assess our cash flow performance and have a long-
term goal to consistently generate free cash flow that equals or exceeds 100 percent conversion of net income.
We believe our ability to convert net income into free cash flow gives us opportunities to invest in new growth
initiatives to create shareholder value. 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 fund acquisitions and repay debt. In addition, free cash flow is used as criteria to measure and pay
compensation-based incentives. The following table is a reconciliation of free cash flow with cash flows from
operating activities:

In thousands

Cash flow provided by operating activities
Capital Expenditures

Free Cash Flow

Twelve Months Ended December 31
2002

2001

2003

$262,939
(43,622)

$270,794
(33,744)

$232,334
(53,668)

$219,317

$237,050

$178,666

Before any effects of our planned acquisition of WICOR, we expect 2004 free cash flow to exceed $200 million.

Off-balance sheet arrangements
At December 31, 2003, we had no off-balance sheet financing arrangements.

COMMITMENTS AND CONTINGENCIES

status. To date, none of these claims have resulted in cleanup costs, fines, penalties, or damages in an amount
material to our financial position or results of operations. We have disposed of a number of businesses over the
past ten years and in certain cases, such as the disposition of the Cross Pointe Paper Corporation uncoated paper
business in 1995, the disposition of the Federal Cartridge Company ammunition business in 1997, and the
disposition of Lincoln Industrial in 2001, we have retained responsibility and potential liability for certain
environmental obligations. We have received claims for indemnification from purchasers both of the paper
business and the ammunition business and have established what we believe to be adequate accruals for potential
liabilities arising out of retained responsibilities. We have recently settled one such claim in 2003 and our
recorded accrual was adequate.

In addition, there are pending environmental issues concerning a limited number of sites, including one site
acquired in the acquisition of Essef Corporation in 1999 that relates to operations no longer carried out at that
site. We have established what we believe to be adequate accruals for remediation costs at this and other sites.
We do not believe that projected response costs will result in a material liability.

We may be named as a PRP at other sites in the future, for both divested and acquired businesses. When it has
been possible to provide reasonable estimates of our liability with respect to environmental sites, provisions have
been made in accordance with generally accepted accounting principles in the United States. As of December 31,
2003, our reserve for such environmental liabilities was approximately $11.2 million, measured on an
undiscounted basis. We cannot ensure that environmental requirements will not change or become more stringent
over time or that our eventual environmental cleanup costs and liabilities will not exceed the amount of our
current reserves.

Stand-by letters of credit
In the ordinary course of business, predominantly in our pumps business, we are required to commit to bonds that
require payments to our customers for any non-performance. The outstanding face value of the bonds fluctuates
with the value of our projects in process and in our backlog. In addition, we issue financial stand-by letters of
credit to secure our performance to third parties under self-insurance programs and certain legal matters. As of
December 31, 2003 and 2002, the outstanding value of these instruments totaled $35.0 million and $19.8 million,
respectively.

NEW ACCOUNTING STANDARDS

See ITEM 8, Note 1 of the Notes to Consolidated Financial Statements 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. Our significant accounting policies are more fully
described in Item 8, Note 1 to our 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:

(cid:139)

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

(cid:139) 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
The fair value of each of our reporting units was estimated by an independent third party using a combination of
the discounted cash flow, market comparable, and market capitalization approaches. The test for impairment
requires us to make several estimates about projected future cash flows and appropriate discount rates. If these
estimates change, we may incur charges for impairment of goodwill. During the fourth quarter of 2003, we
completed our annual impairment test of goodwill and determined there was no impairment.

Impairment of Long-lived Assets Including Cost and Equity Method Investments
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.

At the end of 2003, we have $57.4 million invested in certain privately held companies accounted for under the
equity and cost methods. We write down or write off an investment and recognize a loss when events or
circumstances indicate there is impairment in the investment that is other-than-temporary. This requires
significant judgment, including assessment of the investees(cid:144) financial condition, and in certain cases the
possibility of subsequent rounds of financing, as well as the investees(cid:144) historical results of operations, and
projected results and cash flows. If the actual outcomes for the investees are significantly different from
projections, we may incur future charges for the impairment of these investments.

Pension
We sponsor domestic and foreign 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 Consolidated
Financial Statements. Changes to these assumptions will affect pension expense.

Discount rate
The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of
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 AA or higher bonds available in the marketplace, adjusted to
eliminate the effects of call provisions. As a relatively young company, with a longer duration of liabilities than
older companies with more mature workforces, this produced a discount rate of 6.25 percent. There are no known
or anticipated changes in our discount rate assumption that will impact our pension expense in 2004. A 25 basis
point decrease (increase) in our discount rate, holding constant our expected long-term return on plan assets and
other assumptions, would increase (decrease) pension expense by approximately $1.4 million per year. We
elected to utilize a 25 basis point hypothetical change as the assumption difference to demonstrate the sensitivity
of our pension expense to a change in the discount rate.

Expected rate of return
The expected rate of return on plan assets 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 ten year compounded return of 9.5 percent, with consideration given to forecasted
economic conditions, our asset allocations, input from external consultants and broader longer term market
indices. In 2003, the pension plan assets yielded a positive return of 24.8 percent, compared to negative returns of
10.5 percent and 4.1 percent in 2002 and 2001, respectively. Our expected rate of return in 2003 equaled 8.5
percent, which remained unchanged from 2002 and 2001. In 2003, the significant difference between our
expected return on plan assets of $24.7 million compared to our actual return on plan assets of $55.5 million was
primarily due to the economic recovery and the resurgence of the financial markets. There are no known or
anticipated changes in our return assumption that will impact our pension expense in 2004. A one percent
decrease (increase) in the expected return on plan assets assumption, holding constant our discount rate and other
assumptions, would increase (decrease) pension expense by approximately $3.1 million per year. We elected to
use a one percent hypothetical change as the assumption difference facilitates extrapolation of changes in the
expected rate of return assumption.

We base our determination of pension expense or income on a market-related valuation of assets which reduces
year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year
period from the year in which they occur. Investment gains or losses for this purpose are the difference between
the expected return calculated using the market-related value of assets and the actual return based on the market-
related value of assets. Since the market-related value of assets recognizes gains or losses over a five-year-period,
the future value of assets will be impacted as previously deferred gains or losses are recorded.

Pension-related adjustments to equity
In 2002, our discount rate was lowered from 7.25 percent to 6.25 percent and we realized a negative 10.5 percent
return on plan assets which caused the accumulated benefit obligation to exceed the fair market value of plan
assets as of December 31, 2002. This unfunded accumulated benefit obligation, plus the existing prepaid asset,
was the primary cause of a $29.2 million net-of-tax charge to shareholders(cid:144) equity for 2002. The recovery of the
financial markets in 2003 and positive return on plan assets of 24.8 percent eliminated $20.9 million of the
charge to shareholders(cid:144) equity. The charge did not impact earnings.

Net periodic benefit cost
Total net periodic pension benefits cost was $15.7 million in 2003, $12.6 million in 2002, and $10.6 million in
2001. Total net periodic pension benefits cost is expected to be approximately $17.0 million in 2004. The
increasing trend in net periodic pension cost from 2001 forward is largely driven by the downturn in the financial
markets in 2002 and 2001 and the decrease in the discount rate in 2002. The net periodic pension benefit cost for
2004 has been estimated assuming a discount rate of 6.25 percent and an expected return on plan assets of 8.5
percent.

Unrecognized pension losses
As of December 31, 2003 measurement date, our pension plans have $75.7 million of cumulative unrecognized
losses of which approximately $20 million relates to the use of the market related value method and is not
immediately subject to amortization. The remaining unrecognized loss, to the extent it exceeds 10% of the
projected benefit obligation, will be amortized into expense each year on a straight-line basis over the remaining
expected future-working lifetime of active participants (currently approximately 12 years). The amount included
in pension expense for loss amortization in 2003 was $0.5 million.

Contributions
Pension contributions in 2003 total $19.1 million, including $15.1 million of contributions to domestic defined
benefit pension plans. In 2002, pension contributions totaled $18.9 million, including $15.3 million of
contributions to domestic defined benefit plans. The contributions in 2003 and 2002 exceeded the minimum
funding requirement. Our 2004 pension contributions are expected to be in the range of $10 million to $15
million.

Asset allocation
Our actual overall asset allocation for the plans as compared to our investment policy goals is as follows:

Asset Class

Large Capitalization U.S. Stocks
Small/Mid Capitalization, U.S. Stocks
Pentair Stock
International (Non-U.S.) Stocks
Private Equity
Fixed Income (Bonds)
Other Investments
Cash

(1) Actual asset allocation as of December 31, 2003.

Investment Policy

Actual(1) Target Minimum Maximum

21%
22%
8%
12%
1%
17%
12%
7%

25%
20%
5%
15%
5%
20%
10%
0%

20%
15%
3%
10%
0%
15%
5%
0%

30%
25%
7%
20%
10%
25%
15%
0%

We regularly review our asset allocation and periodically rebalance our investments to our targeted allocation
when considered appropriate. Our cash balance is higher than normal due to a $15.1 million contribution made to
our domestic defined benefit plans as of December 31, 2003. From time to time, we may be outside our targeted
ranges by amounts we deem acceptable.

Equity securities include Pentair common stock in the amount of $21.6 million (8 percent of total plan assets)
and $16.3 million (7 percent of total plan assets) at December 31, 2003, and 2002, respectively.

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk
Market risk is the potential economic loss that may result from adverse changes in the fair value of financial
instruments. We are exposed to various market risks, including changes in interest rates and foreign currency
rates. We use derivative financial instruments to manage and reduce the impact of some of these risks. We do not
hold or issue derivative financial instruments for speculative or trading purposes.

Interest rate risk
We are exposed to changes in interest rates primarily as a result of our borrowing activities used to fund
operations. Interest rate swaps are used to manage a portion of our interest rate risk. The table below presents
principal cash flows and related interest rates by year of maturity for variable rate and fixed rate debt obligations.
Variable interest rates disclosed represent the weighted-average rate of the portfolio at each period end. Notional
amounts and related interest rate of interest rate swaps are presented by year of maturity. For the swaps, variable
rates are the average forward rates for the term of each contract.

Dollars in thousands

2004

2005

2006

2007

2008

Thereafter

Total

Fair
value

Expected year of maturity

Long-term debt, including current

portion
Variable rate
Average interest rate
Fixed rate
Average interest rate

Portion subject to interest rate swaps

Variable to fixed
Average rate to be received
Average rate to be paid
Fixed to variable
Average rate to be received
Average rate to be paid

$ 20,000

$ (cid:132) $239,006

$ (cid:132) $ (cid:132) $100,000

$359,006

1.96%

52,465

6.39%

(cid:132)
396
1.83%

2.16%

1,086

(cid:132)
37,822

1.83%

6.61%

20,000

1.23%
6.31%
(cid:132)
(cid:132)
(cid:132)

2.55%
6.31%
(cid:132)
(cid:132)
(cid:132)

(cid:132)
(cid:132)
(cid:132)
(cid:132)
(cid:132)
(cid:132)

(cid:132)
(cid:132)
(cid:132)

(cid:132)
(cid:132)
(cid:132)
(cid:132)
(cid:132)
(cid:132)

2.26%

2.17%

350,000

441,769

483,233

7.03%

6.90%

(cid:132)
(cid:132)
(cid:132)
100,000

40,000

(1,865)

1.61%
6.31%

100,000

(987)

7.85%
8.01%

Foreign currency risk
We are exposed to foreign exchange risk as a result of transactions in currencies other than the functional
currency of certain subsidiaries, including subsidiary debt. We have entered into foreign currency forward
exchange agreements with a major financial institution to hedge firm foreign currency commitments. In 2003, the
following forward exchange agreements matured: receive $50.0 million U.S. dollars, pay $69.4 million Canadian
dollars, receive $69.4 million Canadian dollars, and pay $45.3 million Euros. As of December 31, 2003, the
following table presents principal cash flows and fair values of our open currency forward exchange agreements:

In thousands

2004

2005

2006

2007

2008

Thereafter

Total

Expected year of maturity

Forward exchange agreements (1)

Pay Euros
Pay Singapore dollars
Pay Swiss Francs
Pay British Pounds
Receive USD

Total exchange loss

$(13,844) $ (cid:132) $

(20)
(1,202)
(4,286)
25,744

(cid:132)
(cid:132)
(cid:132)
(cid:132)

(cid:132) $ (cid:132) $ (cid:132) $ (cid:132) $(13,844)
(20)
(cid:132)
(1,202)
(cid:132)
(4,286)
(cid:132)
25,744
(cid:132)

(cid:132)
(cid:132)
(cid:132)
(cid:132)

Fair
value

(327)

(1)

Foreign exchange information is presented in local currency by maturity, however, the fair value is presented in U.S. dollars.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF MANAGEMENT

We are responsible for the integrity and objectivity of the financial information presented in this report. The
financial statements have been prepared in conformity with accounting principles generally accepted in the
United States of America and include certain amounts based on our best estimates and judgment.

We are also responsible for establishing and maintaining our accounting systems and related internal controls,
which are designed to provide reasonable assurance that assets are safeguarded and transactions are properly
recorded. These systems and controls are reviewed by the internal auditors. In addition, our code of conduct
states that our affairs are to be conducted under the highest ethical standards.

The independent auditors provide an independent review of the financial statements and the fairness of the
information presented therein. The Audit and Finance Committee of the Board of Directors, composed solely of
outside directors, meets regularly with us, our internal auditors, and our independent auditors to review audit
activities, internal controls, and other accounting, reporting, and financial matters. Both the independent auditors
and internal auditors have unrestricted access to the Audit and Finance Committee.

Randall J. Hogan
Chairman and Chief Executive Officer

David D. Harrison
Executive Vice President and Chief Financial Officer

Golden Valley, Minnesota
March 4, 2004

INDEPENDENT AUDITORS(cid:144) REPORT

Board of Directors and Shareholders of Pentair, Inc.

We have audited the accompanying consolidated balance sheets of Pentair, Inc. and subsidiaries (the
(cid:141)Company(cid:142)) as of December 31, 2003 and 2002, and the related consolidated statements of income, cash flows,
and changes in shareholders(cid:144) equity for each of the three years in the period ended December 31, 2003. Our
audits also included the financial statement schedule listed in the Index at Item 15. These financial statements
and the financial statement schedule are the responsibility of the Company(cid:144)s management. Our responsibility is
to express an opinion on the financial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial
position of Pentair, Inc. and subsidiaries at December 31, 2003 and 2002, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

Minneapolis, Minnesota
March 4, 2004

Pentair, Inc. and Subsidiaries
Consolidated Statements of Income

In thousands, except per-share data

Net sales
Cost of goods sold

Gross profit
Selling, general and administrative
Research and development
Restructuring charge

Operating income
Interest income
Interest expense
Other expense, write-off of investment

Income from continuing operations before income taxes
Provision for income taxes

Income from continuing operations
Loss from discontinued operations, net of tax

Net income

Earnings per common share
Basic
Continuing operations
Discontinued operations

Basic earnings per common share

Diluted
Continuing operations
Discontinued operations

Diluted earnings per common share

Weighted average common shares outstanding
Basic
Diluted

Years ended December 31
2002

2001

2003

$2,724,365
2,045,327

$2,580,783
1,965,076

$2,574,080
1,967,945

679,038
375,586
43,898
(cid:132)

259,554
654
41,590
(cid:132)

218,618
74,330

144,288
(2,936)

615,707
342,806
36,909
(cid:132)

235,992
793
44,338
(cid:132)

192,447
62,545

129,902
(cid:132)

606,135
377,098
31,171
40,105

157,761
960
62,448
2,985

93,288
35,772

57,516
(24,647)

$ 141,352

$ 129,902

32,869

2.95
(0.06)

2.89

2.90
(0.06)

2.84

2.64
(cid:132)

2.64

2.61
(cid:132)

2.61

1.17
(0.50)

0.67

1.17
(0.50)

0.67

48,938
49,810

49,235
49,744

49,047
49,297

See accompanying notes to consolidated financial statements.

Pentair, Inc. and Subsidiaries
Consolidated Balance Sheets

In thousands, except share and per-share data

Assets

Current assets
Cash and cash equivalents
Accounts and notes receivable, net of allowance of $15,359 and $16,676, respectively
Inventories
Deferred tax assets
Prepaid expenses and other current assets

Total current assets

Property, plant and equipment, net
Other assets
Goodwill
Intangibles, net
Other

Total other assets

Total assets

Liabilities and Shareholders(cid:144) Equity

Current liabilities
Short-term borrowings
Current maturities of long-term debt
Accounts payable
Employee compensation and benefits
Accrued product claims and warranties
Income taxes
Other current liabilities

Total current liabilities
Long-term debt
Pension and other retirement compensation
Post-retirement medical and other benefits
Deferred tax liabilities
Other noncurrent liabilities

Total liabilities
Commitments and contingencies
Shareholders(cid:144) equity
Common shares par value $0.16 2(cid:135) 3;

49,502,542 and 49,222,450 shares issued and outstanding, respectively

Additional paid-in capital
Retained earnings
Unearned restricted stock compensation
Accumulated other comprehensive income (loss)

Total shareholders(cid:144) equity

Total liabilities and shareholders(cid:144) equity

See accompanying notes to consolidated financial statements.

December 31

2003

2002

47,989
420,403
285,577
50,989
24,493

829,451

39,648
403,793
293,202
55,234
18,931

810,808

343,550

351,316

1,373,549
108,118
126,009

1,218,341
19,194
114,791

1,607,676

1,352,326

$2,780,677

$2,514,450

(cid:132) $

73,631
170,077
84,587
37,148
13,198
118,810

497,451
732,862
101,704
42,134
78,532
66,516

686
60,488
171,709
84,965
36,855
12,071
109,426

476,200
673,911
124,301
42,815
31,728
59,771

1,519,199

1,408,726

8,250
492,619
760,966
(6,189)
5,832

8,204
482,695
660,108
(5,138)
(40,145)

1,261,478

1,105,724

$2,780,677

$2,514,450

Pentair, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

In thousands

Operating activities
Net income
Depreciation
Other amortization
Goodwill amortization
Deferred income taxes
Restructuring charge
Stock compensation
Other expense, write-off of investment
Loss from discontinued operations
Changes in assets and liabilities, net of effects of

business acquisitions and dispositions

Accounts and notes receivable
Inventories
Prepaid expenses and other current assets
Accounts payable
Employee compensation and benefits
Accrued product claims and warranties
Income taxes
Other current liabilities
Pension and post-retirement benefits
Other assets and liabilities

Net cash provided by continuing operations
Net cash provided by (used for) discontinued operations

Net cash provided by operating activities

Investing activities
Capital expenditures
Acquisition of previously leased facility
Proceeds (payments) from sale of businesses
Acquisitions, net of cash acquired
Equity investments
Other

Net cash used for investing activities

Financing activities
Net short-term borrowings (repayments)
Proceeds from long-term debt
Repayment of long-term debt
Proceeds from exercise of stock options
Repurchases of common stock
Dividends paid

Net cash provided by (used for) financing activities

Effect of exchange rate changes on cash

Change in cash and cash equivalents
Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

Years ended December 31
2002

2001

2003

$ 141,352
61,129
4,514
(cid:132)
33,134
(cid:132)
306
(cid:132)
2,936

$ 129,902
58,833
5,869
(cid:132)
29,677
(cid:132)
(cid:132)
(cid:132)
(cid:132)

$ 32,869
62,674
5,568
36,107
(4,916)
41,060
(cid:132)
2,985
24,647

9,400
25,782
(2,779)
(15,530)
(6,423)
(1,012)
2,349
3,135
5,621
(179)

25,535
29,717
8,147
(18,356)
6,289
(1,704)
5,863
(18,384)
(4,787)
10,667

70,057
87,840
383
(68,488)
(12,919)
(4,468)
9,942
(51,025)
16,816
(6,950)

263,735
(796)

267,268
3,526

242,182
(9,848)

262,939

270,794

232,334

(43,622)
(cid:132)
(2,400)
(229,094)
(5,294)
48

(33,744)
(22,952)
1,744
(170,270)
(9,383)
(7)

(53,668)
(cid:132)
70,100
(1,937)
(25,438)
(186)

(280,362)

(234,612)

(11,129)

(873)
780,857
(709,886)
5,795
(1,589)
(40,494)

33,810
(8,046)

8,341
39,648

665
462,599
(468,161)
2,730
(cid:132)
(36,420)

(38,587)
2,209

(196)
39,844

(108,336)
2,811
(84,525)
2,913
(1,458)
(34,327)

(222,922)
6,617

4,900
34,944

$ 47,989

$ 39,648

$ 39,844

See accompanying notes to consolidated financial statements.

Pentair, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders(cid:144) Equity

In thousands, except share and per-share data

Number

Amount

Common shares

Additional
paid-in
capital

Retained
earnings

Unearned
restricted
stock
compensation

Accumulated
other
comprehensive
income (loss)

Total

Comprehensive
income

48,711,955 $8,119 $468,425 $568,084
32,869

$(7,285)

$(26,752) $1,010,591
32,869

$ 32,869

Balance (cid:132) December 31, 2000
Net income
Cumulative effect of accounting change

(SFAS 133)

Change in cumulative translation adjustment
Adjustment in minimum pension liability, net

of $399 tax benefit

Changes in market value of derivative

financial instruments

Comprehensive income

Tax benefit of stock options
Cash dividends (cid:132) $0.70 per common share
Share repurchases
Exercise of stock options, net of 174,407

shares tendered for payment
Issuance of restricted shares, net of

cancellations

Amortization of restricted shares
Stock compensation

Balance (cid:132) December 31, 2001
Net income
Change in cumulative translation adjustment
Adjustment in minimum pension liability, net

of $18,670 tax benefit

Changes in market value of derivative

financial instruments

Comprehensive income

Tax benefit of stock options
Cash dividends (cid:132) $0.74 per common share
Exercise of stock options, net of 45,547

shares tendered for payment
Issuance of restricted shares, net of

cancellations

Amortization of restricted shares
Shares surrendered by employees to pay taxes

Balance (cid:132) December 31, 2002
Net income
Change in cumulative translation adjustment
Adjustment in minimum pension liability, net

of $13,339 tax expense

Changes in market value of derivative

financial instruments

Comprehensive income

Tax benefit of stock options
Cash dividends (cid:132) $0.82 per common share
Share repurchases
Exercise of stock options, net of 104,189

shares tendered for payment
Issuance of restricted shares, net of

cancellations

Amortization of restricted shares
Shares surrendered by employees to pay taxes
Stock compensation

601

(34,327)

(50,000)

(8)

(1,450)

128,254

320,650

2,892

7,662

411

49,110,859

8,193

478,541

6,739
(9,468)

(625)

1,188

$ 30,703

601
(34,327)
(1,458)

2,913

(cid:132)
5,568
411

(7,723)
5,568

566,626
129,902

(9,440)

(28,918)

25,659

1,015,002
129,902
25,659

$129,902
25,659

(29,201)

(7,685)

$118,675

(36,420)

1,014

2,721

980

96,026

28,233

(984)
5,286

(12,668)

(2)

(561)

49,222,450

8,204

482,695

660,108
141,352

(5,138)

(40,145)

27,220

1,014
(36,420)

2,730

5,286
(563)

1,105,724
141,352
27,220

$141,352
27,220

20,864

(2,107)

$187,329

1,696

(40,494)

(40,000)

(7)

(1,582)

224,150

127,366

(31,424)

(5)

5,758

4,727

(1,094)
419

(4,748)
3,697

1,696
(40,494)
(1,589)

5,795

(cid:132)
3,697
(1,099)
419

Balance (cid:132) December 31, 2003

49,502,542 $8,250 $492,619 $760,966

$(6,189)

$ 5,832

$1,261,478

See accompanying notes to consolidated financial statements.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements

Summary of Significant Accounting Policies

Fiscal year
Our fiscal year ends on December 31. Additionally, we report our interim quarterly periods on a 13-week basis
ending on a Saturday.

Principles of consolidation
The accompanying consolidated financial statements include the accounts of Pentair and all subsidiaries, both
U.S. and non-U.S., that we control. Intercompany accounts and transactions have been eliminated. Investments in
companies of which we own 20 percent to 50 percent of the voting stock and have the ability to exercise
significant influence over operating and financial policies of the investee are accounted for using the equity
method of accounting and, as a result, our share of the earnings or losses of such equity affiliates is included in
the statement of income. The cost method of accounting is used for investments in which Pentair has less than a
20 percent ownership interest and we do not have the ability to exercise significant influence. These investments
are carried at cost and are adjusted only for other-than-temporary declines in fair value.

Certain reclassifications have been made to the prior years(cid:144) consolidated financial statements to conform to the
current year(cid:144)s presentation.

Use of estimates
The preparation of our consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America (GAAP) requires us to make estimates and assumptions that affect the
amounts reported in these consolidated financial statements and accompanying notes. Due to the inherent
uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts
that could differ from those estimates. The critical accounting policies that require our most significant estimates
and judgments include:

(cid:128) the assessment of recoverability of long-lived assets, including goodwill, and cost and equity method

investments; and

(cid:128) accounting for pension benefits, because of the importance in making the estimates necessary to apply these

policies.

Revenue recognition
We recognize revenue when it is realized or realizable and has been earned. Revenue is recognized when
persuasive evidence of an arrangement exists; shipment or delivery has occurred (depending on the terms of the
sale); the seller(cid:144)s price to the buyer is fixed or determinable; and collectibility is reasonably assured.

Generally, there is no post-shipment obligation on product sold other than warranty obligations in the normal,
ordinary course of business. In the event significant post-shipment obligations were to exist, revenue recognition
would be deferred until substantially all obligations were satisfied.

Sales returns
The right of return may exist explicitly or implicitly with our customers. Revenue from a transaction is
recognized only if our price is fixed and determinable at the date of sale; the customer has paid or is obligated to
pay; the customer(cid:144)s obligation would not be changed in the event of theft or physical destruction or damage of
the product, the customer has economic substance apart from our Company; we do not have significant
obligations for future performance to directly bring about resale of the product by the customer; and the amount
of returns can reasonably be estimated.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

In general, our return policy allows for customer returns only upon our authorization. Goods returned must be
product we continue to market and must be in salable condition. Returns of custom or modified goods are
normally not allowed.

At the time of sale, we reduce revenue for the estimated effect of returns. Estimated sales returns include
consideration of historical sales levels, the timing and magnitude of historical sales return levels as a percent of
sales, type of product, type of customer, and a projection of this experience into the future.

Pricing and sales incentives
We record estimated reductions to revenue for customer programs and incentive offerings including pricing
arrangements, promotions, and other volume-based incentives at the later of the date revenue is recognized or the
incentive is offered. Sales incentives given to our customers is recorded as a reduction of revenue unless we (1)
receive an identifiable benefit for the goods or services in exchange for the consideration and (2) we can
reasonably estimate the fair value of the benefit received. The following represents a description of our pricing
arrangements, promotions, and other volume-based incentives:

Pricing arrangements
Pricing is established up front with our customers and we record sales at the agreed upon net selling price.
However, one of our businesses allows customers to apply for a refund of a percentage of the original
purchase price if they can demonstrate sales to a qualifying OEM customer. At the time of sale, we estimate
the anticipated refund to be paid based on historical experience and reduce sales for the probable cost of the
discount. The cost of these refunds is recorded as a reduction in gross sales.

Promotions
Our primary promotional activity is what we refer to as cooperative advertising. Under this cooperative
advertising program, we agree to pay the customer a fixed percentage of sales as an allowance to be used to
advertise and promote our products. The customer is not required to provide evidence of the advertisement
or promotion. We recognize the cost of this cooperative advertising at the time of sale. The cost of this
program is recorded as a reduction in gross sales.

Volume-based incentives
These incentives involve rebates that are negotiated up front with the customer and are redeemable only if
the customer achieves a specified cumulative level of sales. Under these incentive programs, at the time of
sale, we reforecast the anticipated rebate to be paid based on forecasted sales levels. These forecasts are
updated at least monthly, for each customer and sales are reduced for the anticipated cost of the rebate. If
the forecasted sales for a customer changes, the accrual for rebates is adjusted to reflect the new amount of
rebates expected to be earned by the customer.

There has been no material accounting revisions for revenue-recognition related estimates.

Shipping and handling costs
Amounts billed to customers for shipping and handling is recorded in net sales in the accompanying consolidated
statements of income. Shipping and handling costs incurred by Pentair for the delivery of goods to customers are
included in cost of goods sold in the accompanying consolidated statements of income.

Cash equivalents
We consider highly liquid investments with original maturities of three months or less to be cash equivalents.

Trade receivables and concentration of credit risk
We record an allowance for doubtful accounts, reducing our receivables balance to an amount we estimate is
collectible from our customers.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

We perform periodic credit evaluations of our customer(cid:144)s financial condition and generally do not require
collateral. In addition, we encounter a certain amount of credit risk as a result of a concentration of receivables
among a few significant customers. Approximately 23 percent and 25 percent of our receivables were due from
three large home improvement retailers as of December 31, 2003 and 2002, respectively.

Inventories
Inventories are stated at the lower of cost or market. Inventories of United States subsidiaries are generally
determined by the last-in, first-out (LIFO) method. Inventories of foreign-based subsidiaries are determined by
the first-in, first-out (FIFO) and moving average methods.

Property, plant, and equipment
Property, plant, and equipment is stated at historical cost. We compute depreciation by the straight-line method
based on the following estimated useful lives:

Land improvements
Buildings and leasehold improvements
Machinery and equipment

Years

5 to 20
5 to 50
3 to 15

Significant improvements that add to productive capacity or extend the lives of properties are capitalized. Costs
for repairs and maintenance are charged to expense as incurred. When property is retired or otherwise disposed
of, the cost and related accumulated depreciation are removed from the accounts and any related gains or losses
are included in income.

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.

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

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other
Intangible Assets. Under the provisions of this statement, effective January 1, 2002, goodwill is no longer
amortized but tested for impairment on an annual basis. During the fourth quarter of 2003, we completed our
annual impairment test of goodwill and determined no impairment charge was necessary. The fair value of each
of our reporting units was estimated by an independent third party using a combination of the discounted cash
flow, market comparable, and market capitalization approaches.

The primary identifiable intangible assets of Pentair include trademarks and trade names acquired in business
combinations, patents, non-compete agreements, proprietary technology and customer relationships. Under the
provisions of SFAS No. 142, 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

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

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. The impairment test consists of a comparison of the fair value of the intangible asset
with its carrying amount. During the fourth quarter of 2003, we completed our annual impairment test for those
identifiable assets not subject to amortization and determined there was no impairment charge.

The following table illustrates the pro forma impact of the adoption of SFAS No. 142 on our income from
continuing operations as well as basic and diluted earnings per share:

In thousands, except per-share data

Income from continuing operations
Add back goodwill amortization
Less income taxes

Adjusted income from continuing operations

Reported earnings per share (cid:132) basic (continuing operations)
Goodwill amortization, net of taxes

Adjusted earnings per share (cid:132) basic (continuing operations)

Reported earnings per share (cid:132) diluted (continuing operations)
Goodwill amortization, net of taxes

Adjusted earnings per share (cid:132) diluted (continuing operations)

Weighted average common shares outstanding
Basic
Diluted

2003

2002

2001

$144,288
(cid:132)
(cid:132)

$129,902

$57,516
(cid:132) 36,107
(cid:132) (4,064)

$144,288

$129,902

$89,559

2.95
(cid:132)

2.95

2.90
(cid:132)

2.90

2.64
(cid:132)

2.64

2.61
(cid:132)

2.61

1.17
0.65

1.82

1.17
0.65

1.82

48,938
49,810

49,235
49,744

49,047
49,297

Our accounting policy prior to the adoption of SFAS No. 142 was to amortize goodwill on a straight-line basis
over the estimated future periods to be benefited, principally between 25 and 40 years.

Cost and equity method investments
We have investments that are accounted for at historical cost or, if we have significant influence over the
investee, using the equity method. Pentair(cid:144)s proportionate share of income or losses from investments accounted
for under the equity method is recorded in the consolidated statements of income. We write down or write off an
investment and recognize a loss when events or circumstances indicate there is impairment in the investment that
is other-than-temporary. This requires significant judgment, including assessment of the investees(cid:144) financial
condition, and in certain cases the possibility of subsequent rounds of financing, as well as the investees(cid:144)
historical results of operations, and projected results and cash flows. If the actual outcomes for the investees are
significantly different from projections, we may incur future charges for the impairment of these investments.

Income taxes
Pentair uses the asset and liability approach to account for income taxes. Under this method, deferred tax assets
and liabilities are recognized for the expected future tax consequences of differences between the carrying
amounts of assets and liabilities and their respective tax basis using enacted tax rates in effect for the year in
which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a
valuation allowance 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. Changes in valuation allowances from period to period are included in
our tax provision in the period of change.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

Environmental
We recognize environmental cleanup liabilities on an undiscounted basis when a loss is probable and can be
reasonably estimated. Such liabilities generally are not subject to insurance coverage. The cost of each
environmental cleanup is estimated by engineering, financial, and legal specialists based on current law. Such
estimates are based primarily upon the estimated cost of investigation and remediation required and the
likelihood that, where applicable, other potentially responsible parties (PRPs) will be able to fulfill their
commitments at the sites where Pentair may be jointly and severally liable. For closed or closing plants owned by
Pentair and properties being sold, an estimated liability is typically recognized at the time the closure decision is
made or sale is recorded and is based on an environmental assessment of the plant property. The process of
estimating environmental cleanup liabilities is complex and dependent primarily on the nature and extent of
historical information and physical data relating to a contaminated site, the complexity of the site, the uncertainty
as to what remedy and technology will be required, and the outcome of discussions with regulatory agencies and
other PRPs at multi-party sites. In future periods, new laws or regulations, advances in cleanup technologies, and
additional information about the ultimate cleanup remedy that is used could significantly change our estimates.

Insurance subsidiary
We insure general and product liability, property, workers(cid:144) compensation, and automobile liability risks through
our wholly owned captive insurance subsidiary. Reserves for policy claims are established based on actuarial
projections of ultimate losses. As of the end of 2003 and 2002, reserves for policy claims were $32.4 million
($10.0 million included in accrued product claims and warranties and $22.4 million included in other
noncurrent liabilities) and $27.0 million ($10.0 million included in accrued product claims and warranties and
$17.0 million included in other noncurrent liabilities).

Stock-based compensation
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, we apply the recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, to our stock options and other stock-based
compensation plans.

In accordance with APB Opinion No. 25, cost for stock based compensation is recognized in income based on
the excess, if any, of the quoted market price of the stock at the grant date of the award or other measurement
date over the amount an employee must pay to acquire the stock. The exercise price for stock options granted to
employees equals the fair market value of Pentair(cid:144)s common stock at the date of grant, thereby resulting in no
recognition of compensation expense by Pentair. Restricted stock awards are recorded as compensation cost over
the requisite vesting periods based on the market value on the date of grant. Unearned compensation cost on
restricted stock awards is shown as a reduction to shareholders(cid:144) equity.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

The following table illustrates the effect on income from continuing operations and earnings per share if we had
applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. The
estimated fair value of each Pentair option is calculated using the Black-Scholes option-pricing model.

In thousands, except per-share data

Income from continuing operations (cid:132) as reported
Less estimated stock-based employee compensation determined under fair

value based method, net of tax

Income from continuing operations (cid:132) pro forma

Earnings per common share (cid:132) continuing operations
Basic (cid:132) as reported
Less estimated stock-based employee compensation determined under fair

value based method, net of tax

Basic (cid:132) pro forma

Diluted (cid:132) as reported
Less estimated stock-based employee compensation determined under fair

value based method, net of tax

Diluted (cid:132) pro forma

Weighted average common shares outstanding
Basic
Diluted

2003

2002

2001

$144,288

$129,902

$57,516

(5,601)

(3,412)

(3,900)

$138,687

$126,490

$53,616

2.95

2.64

1.17

(0.11)

(0.07)

(0.08)

2.84

2.90

2.57

2.61

1.09

1.17

(0.11)

(0.07)

(0.08)

2.79

2.54

1.09

48,938
49,810

49,235
49,744

49,047
49,297

The weighted-average fair value of options granted in 2003, 2002, and 2001 was $11.49, $10.37, and $7.17 per
option, respectively. We estimated the fair values using the Black-Scholes option-pricing model, modified for
dividends and using the following assumptions:

Percentages

Risk-free interest rate
Dividend yield
Expected stock price volatility
Expected lives

2003

2002

2001

2.86%
2.10%
40.00%
5.0 yrs.

3.75%
2.10%
38.00%
5.5 yrs.

4.00%
1.90%
42.00%
5.0 yrs.

Earnings per common share
Basic earnings per share are computed by dividing net income by the weighted-average number of common
shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted average
number of common shares outstanding, including the dilutive effects of stock options and restricted stock. Unless
otherwise noted, references are to diluted earnings per share.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

Basic and diluted earnings per share were calculated using the following:

In thousands, except per-share data

Earnings per common share (cid:132) basic
Continuing operations
Discontinued operations

Net income

Continuing operations
Discontinued operations

Basic earnings per common share

Earnings per common share (cid:132) diluted
Continuing operations
Discontinued operations

Net income

Continuing operations
Discontinued operations

Diluted earnings per common share

Weighted average common shares outstanding (cid:132) basic
Dilutive impact of stock options and restricted stock

2003

2002

2001

$144,288
(2,936)

$129,902

$ 57,516
(cid:132) (24,647)

$141,352

$129,902

$ 32,869

2.95
(0.06)

2.89

2.64
(cid:132)

2.64

1.17
(0.50)

0.67

$144,288
(2,936)

$129,902

$ 57,516
(cid:132) (24,647)

$141,352

$129,902

$ 32,869

2.90
(0.06)

2.84

2.61
(cid:132)

2.61

1.17
(0.50)

0.67

48,938
872

49,235
509

49,047
250

Weighted average common shares outstanding (cid:132) diluted

49,810

49,744

49,297

Stock options excluded from the calculation of diluted earnings per share
because the exercise price was greater than the average market price of the
common shares

623

749

1,327

Derivative financial instruments
Effective January 1, 2001, we adopted the provisions of SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended. These standards require us to recognize all derivatives, including those
embedded in other contracts, as either assets or liabilities at fair value in our balance sheet. If the derivative is
designated as a fair-value hedge, the changes in the fair value of the derivative and the hedged item are
recognized in earnings. If the derivative is designated and is effective as a cash-flow hedge, changes in the fair
value of the derivative are recorded in other comprehensive income (OCI) and are recognized in the consolidated
statements of income when the hedged item affects earnings. SFAS No. 133 defines new requirements for
designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to
use hedge accounting. For a derivative that is not designated as or does not qualify as a hedge, changes in fair
value are reported in earnings immediately.

Foreign currency translation
The financial statements of subsidiaries located outside of the United States are measured using the local
currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of
exchange at the balance sheet date. The resultant translation adjustments are included in accumulated other
comprehensive income, a separate component of stockholders(cid:144) equity. Income and expense items are translated
at average monthly rates of exchange.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

Cumulative effect of accounting change
The adoption of SFAS No. 133 on January 1, 2001, resulted in an increase to other assets and other noncurrent
liabilities of $7.5 million and $0.8 million, respectively, and a cumulative transition adjustment of $6.7 million in
OCI. The transition adjustment relates to our hedging activities through December 31, 2000. Prior to the adoption
of SFAS No. 133, financial instruments designated as hedges were not recorded in the financial statements, but
cash flows from such contracts were recorded as adjustments to earnings as the hedged items affected earnings.

We use derivative financial instruments for the purpose of hedging interest rate and currency exposures, which
exist as part of ongoing business operations. All hedging instruments are designated and effective as hedges, in
accordance with the provisions of SFAS No. 133, as amended. We do not hold or issue derivative financial
instruments for trading or speculative purposes. All other contracts that contain provisions meeting the definition
of a derivative also meet the requirements of, and have been designated as, normal purchases or sales. Our policy
is to not enter into contracts with terms that cannot be designated as normal purchases or sales.

Other newly adopted accounting standards
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This new standard
addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The adoption of this standard on January 1, 2003 did not
have a material impact on our consolidated financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
This new standard nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No.
146 requires that a liability for a cost associated with an exit activity that does not involve an entity newly
acquired in a business combination or with a disposal activity covered by SFAS No. 144, be recognized when the
liability is incurred, rather than the date of an entity(cid:144)s commitment to an exit plan. SFAS No. 146 is effective for
exit or disposal activities that are initiated after December 31, 2002, with earlier application encouraged. The
adoption of this standard on January 1, 2003 did not have a material impact on our consolidated financial
position or results of operations.

In November 2002, the FASB issued Interpretation No. 45, Guarantor(cid:144)s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. Interpretation No. 45
elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies
that at the time an entity issues a guarantee, the issuing entity must recognize an initial liability for the fair value
of the obligations it assumes under that guarantee. However, the provisions related to recognizing a liability at
inception of the guarantee for the fair value of the guarantor(cid:144)s obligations does not apply to product warranties,
guarantees accounted for as derivatives, or other guarantees of an entity(cid:144)s own future performance. We have
adopted the disclosure requirements of the interpretation as of December 31, 2002. The initial recognition and
initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31,
2002. The adoption of the initial recognition and measurement provisions were not material to our consolidated
financial position or results of operations.

In December 2003, the FASB revised SFAS No. 132, Employers(cid:144) Disclosures about Pensions and Other Post-
retirement Benefits. The revised standard requires new disclosures in addition to those required by the original
standard about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

and other defined benefit post-retirement plans. As revised, SFAS No. 132 is effective for financial statements
with fiscal years ending after December 15, 2003. The interim-period disclosures required by this standard are
effective for interim periods beginning after December 15, 2003. However, disclosure of the estimated future
benefit payments is effective for fiscal years ending after June 15, 2004. See Item 8, Note 12 for disclosures
regarding our defined benefit pension plans and other post-retirement benefits.

New accounting standards to be adopted in the future
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (VIE), an
Interpretation of ARB No. 51, which requires all VIEs to be consolidated by the primary beneficiary. The primary
beneficiary is the entity that holds the majority of the beneficial interests in the VIE.

In December 2003, the FASB revised FIN 46, delaying the effective dates for certain entities created before
February 1, 2003, and making other amendments to clarify application of the guidance. For potential variable
interest entities other than any Special Purpose Entities (SPEs), the revised FIN 46 (FIN 46R) is now required to
be applied no later than the end of the first fiscal year or interim reporting period ending after March 15, 2004.
The original guidance under FIN 46 is still applicable, however, for all SPEs created prior to February 1, 2003 at
the end of the first interim or annual reporting period ending after December 15, 2003. FIN 46 may be applied
prospectively with a cumulative-effect adjustment as of the date it is first applied, or by restating previously
issued financial statements with a cumulative-effect adjustment as of the beginning of the first year restated. FIN
46R also requires certain disclosures of an entity(cid:144)s relationship with variable interest entities. We will adopt FIN
46R for non-SPE entities in our first quarter ending April 3, 2004. We have not yet determined the effect of
adopting the provisions of FIN 46R. However, we do not believe it will have a material effect on our
consolidated financial position or results of operations.

On January 12, 2004, the FASB issued FASB Staff Position (FSP) No. 106-1, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The FSP
permits a sponsor of a post-retirement health care plan that provides a prescription drug benefit to make a one-
time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003. We do not believe the FSP will have a material effect on our financial statements
because we do not expect to receive significant subsidies under the Act.

2. Acquisitions

On December 31, 2003, we acquired all of the common stock of Everpure, Inc. (Everpure), from United States
Filter Corporation, a unit of Veolia Environnement, for $217.3 million in cash, including cash acquired of $5.5
million. We believe Everpure will enhance our future growth in the commercial filtration segment. It is
anticipated Everpure(cid:144)s strong trade name, industry leading technology, rapid product development capabilities,
and broad footprint in North America, Europe, and Asia, will leverage the strengths of our Water segment and
accelerate the long-term growth and profitability of Pentair.

The initial allocation of purchase price for the Everpure acquisition was based on preliminary estimates and may
be revised as better information becomes available in 2004. The closing date balance sheet is expected to be
delivered by March 31, 2004.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

The initial purchase price of Everpure has been allocated based on management(cid:144)s estimates and independent
appraisals as follows:

In thousands

Current assets
Property, plant, and equipment
Intangible assets
Goodwill
Other noncurrent assets

Total assets acquired

Current liabilities
Deferred taxes

Total liabilities assumed

Net assets acquired

Estimated
Fair Value

$ 22,358
4,993
91,100
105,328
147

$223,926

$ (6,505)
(170)

(6,675)

$217,251

A preliminary valuation of the acquired intangible assets was performed by a third party valuation specialist to
assist us in determining the fair value of each identifiable intangible. Standard valuation procedures were utilized
in determining the fair value of the acquired intangibles. The following table summarizes the identified intangible
asset categories and their weighted average amortization period:

In thousands

Finite-life intangible assets
Patents
Non-compete agreements
Proprietary technology
Customer relationships

Indefinite-life intangible assets
Trade marks and trade names
Goodwill

Amortization
Period

Fair Value

10 Years
4 Years
15 Years
20 Years

9,100
2,300
12,900
25,000

Weighted average amortization period

16 Years

$ 49,300

n/a
n/a

$ 41,800

105,328*

$147,128

Approximately $104 million of goodwill is tax deductible.

During 2003, we also completed four product line acquisitions in our Water segment for total consideration of
approximately $21.4 million in cash.

(cid:139) HydroTemp Manufacturing Co., Inc. (HydroTemp) designs and manufactures heat pumps for swimming

pool applications.

(cid:139) Letro Products, Inc. (Letro Products) designs and manufactures swimming pool accessories including

cleaners.

(cid:139) Certain assets of TwinPumps, Inc. (TwinPumps) are used in the design and manufacture of vortex and

chopper pumps for municipal wastewater applications.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

(cid:139) Certain assets of K&M Plastics, Inc., (K&M Plastics) are used in the design and manufacture of blow-

molded brine tanks and pressure vessels for residential and commercial water conditioning and filtration
applications.

We acquired HydroTemp and Letro Products in March 2003 to complement our existing pool and spa equipment
business of our Water segment. We acquired certain assets of TwinPumps in July 2003. We will combine the
assets of TwinPumps with our existing pump business of our Water segment to pursue replacement parts,
replacement pumps, and new projects in the municipal wastewater business. We acquired certain assets of K&M
Plastics, in July 2003, with the intent of establishing pressure vessel manufacturing capacity in China to better
serve the fast growing Asian water market. The aggregated annual revenue of the acquired businesses is
approximately $22.0 million.

The allocation of the purchase price of these four product line acquisitions resulted in goodwill of $17.3 million,
all of which is tax deductible. We continue to evaluate the initial purchase accounting allocations for these
acquisitions and will adjust the allocations as additional information relative to the fair market values of the
assets and liabilities of the businesses become known.

In the first quarter of 2003, we received $1.9 million in purchase price adjustments relative to our fourth quarter
2002 acquisition of Plymouth Products, Inc. (Plymouth Products) which was credited to reduce goodwill initially
recorded at closing. The adjustments primarily related to final determination of closing date net assets.

On September 30, 2002, we acquired all of the common stock of Plymouth Products and affiliated entities from
USF Consumer & Commercial WaterGroup, a unit of Vivendi Environnement (now Veolia Environnement), for
total consideration of $121.7 million, including debt assumed of $1.2 million. Plymouth Products is a
manufacturer of water filtration products used in residential, commercial, and industrial applications. Identifiable
intangible assets acquired as part of the acquisition were $8.0 million. Goodwill recorded as part of the initial
purchase price allocation was $79.7 million as of December 31, 2003. The purchase price allocation was
finalized in the fourth quarter of 2003.

On October 1, 2002, we acquired all of the common stock of privately-held Oldham Saw Co., Inc. and affiliated
entities (Oldham Saw) for total consideration of $53.0 million cash, including debt assumed of $1.5 million and
cash acquired of $1.7 million. Oldham Saw designs, manufactures, and markets router bits, circular saw blades,
and related accessories for the do-it-yourself (DIY) and professional power tool markets. Identifiable intangible
assets acquired as part of the acquisition were $9.6 million. Goodwill recorded as part of the initial purchase
price allocation was $29.9 million. Pursuant to an earn-out provision, the purchase price could increase
depending on Oldham Saw achieving certain net sales and EBITDA (Earnings Before Interest, Taxes,
Depreciation, and Amortization) targets in 2003 and 2004. In 2003, there were no contingent payments made. In
2004, the maximum total contingent payments based on these targets could be $1 million.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

The following pro forma consolidated condensed financial results of operations for the years ended December
31, 2003, and 2002 are presented as if the acquisitions had been acquired at the beginning of each period
presented.

In thousands, except per-share data

Net sales
Income from continuing operations
Loss on disposal of discontinued operations, net of tax
Net income

Earnings per common share
Basic
Continuing operations
Discontinued operations

Basic earnings per common share

Diluted
Continuing operations
Discontinued operations

Diluted earnings per common share

Weighted average common shares outstanding
Basic
Diluted

Years ended December 31

2003

2002

$2,795,720
150,234
(2,936)
147,298

$2,765,190
138,977
(cid:132)
138,977

3.07
(0.06)

3.01

3.02
(0.06)

2.96

2.82
(cid:132)

2.82

2.79
(cid:132)

2.79

48,938
49,810

49,235
49,744

These pro forma consolidated condensed financial results have been prepared for comparative purposes only and
include certain adjustments, such as increased interest expense on acquisition debt. They do not reflect the effect
of synergies that would have been expected to result from the integration of these acquisitions. The pro forma
information does not purport to be indicative of the results of operations that actually would have resulted had the
combination occurred on January 1 of each year presented, or of future results of the consolidated entities.

3. Discontinued Operations/Divestitures

In December 2000, we adopted a plan to sell our Equipment segment businesses, Service Equipment (Century
Mfg. Co./Lincoln Automotive Company) and Lincoln Industrial, Inc. (Lincoln Industrial). In October 2001, we
completed the sale of the Service Equipment businesses to Clore Automotive, LLC for total consideration of
$18.2 million. In December 2001, we completed the sale of Lincoln Industrial to affiliates of The Jordan
Company LLC (Jordan), other investors, and members of management of Lincoln Industrial for total
consideration of $78.4 million, including a preferred stock interest. The selling price of Lincoln Industrial was
subject to a final purchase price adjustment that was finalized in January 2003, in which we paid Jordan $2.4
million which was charged to a previously established reserve.

Our financial statements have been restated to reflect the Equipment segment as a discontinued operation for all
periods presented. Operating results of the discontinued Equipment segment are summarized below. The amounts
exclude general corporate overhead previously allocated to the Equipment segment. The amounts include an
allocation of interest based on a ratio of the net assets of the discontinued operations to the total net assets of
Pentair.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

In the fourth quarter of 2003, we reported an additional loss from discontinued operations of $2.9 million
primarily due to a reduction in estimated proceeds related to exiting two remaining facilities. One facility is
owned and the other facility is under an operating lease.

In thousands

Net sales

Pre-tax loss on disposal of discontinued businesses
Tax benefit

Loss from discontinued operations, net of tax

2003

2002

2001

$ (cid:132) $ (cid:132) $189,782

(4,517)
1,581

(cid:132) (36,298)
11,651
(cid:132)

$(2,936) $ (cid:132) $ (24,647)

Net (liabilities) assets of the discontinued Equipment segment consisted of the
following:

In thousands

Current assets
Property, plant, and equipment, net
Current liabilities
Long-term liabilities

Net (liabilities) assets of discontinued operations

2003

2002

$ (cid:132) $
2,088
(685)
(3,393)

190
2,312
(703)
(cid:132)

$(1,990) $ 1,799

The net liabilities or assets of discontinued operations are included in the respective categories of other current
assets, other current liabilities and other long-term liabilities in the consolidated balance sheets for 2003 and
2002.

At December 31, 2003, accruals totaling $4.1 million represent the estimated future cash outflows associated
with the exit from the leased facility. The owned facility is recorded at its estimated net realizable value.

4. Restructuring Charge

In the fourth quarter of 2001, we initiated a restructuring program designed to consolidate manufacturing
operations and eliminate non-critical support facilities in our Enclosures segment. We also wrote off internal-use
software development costs at corporate for the abandonment of a company-wide human resource system.
Consequently, we recorded a restructuring charge of $42.8 million, of which $1 million is included in cost of
goods sold on the consolidated statement of income for the write-down of inventory on certain custom enclosures
product that were discontinued as a result of plant closures. In the fourth quarter of 2001, we also recorded a final
change in estimate related to our 2000 restructuring charge that reduced the restructuring charge by $1.7 million
primarily due to favorable negotiation of contract termination costs. As of the end of 2001, the restructuring
program initiated in 2000 was complete.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

The major components of the 2001 restructuring charges and remaining restructuring liability follows:

In thousands

December 31, 2000 liability

Employee
termination
Benefits

Non-cash
asset
disposals

Impaired
goodwill

Exit
costs

Total

$ 7,888

(cid:132) $ (cid:132) $ 8,307

$ 16,195

Change in estimate (fourth quarter)
2001 restructuring charge (fourth quarter)
Utilization of 2000 and 2001 restructuring charges

991
16,696
(11,343)

(cid:132)
11,050
(11,050)

(cid:132) (2,688)
7,649
(6,388)

7,362
(7,362)

(1,697)
42,757
(36,143)

December 31, 2001 liability

Change in estimate (fourth quarter)
Utilization of 2001 restructuring charge

December 31, 2002 liability
Utilization of 2001 restructuring charge

14,232

(1,942)
(8,721)

3,569
(292)

(cid:132)

(477)
477

(cid:132)
(cid:132)

(cid:132) 6,880

21,112

(cid:132) 2,419
(cid:132) (9,299)

(cid:132)
(17,543)

(cid:132)
(cid:132)

3,569
(292)

December 31, 2003 liability

$ 3,277

(cid:132) $ (cid:132) $ (cid:132) $ 3,277

Included in other current liabilities on the consolidated balance sheets is the remaining portion of the
restructuring charge liability of $3.3 million, primarily related to severance obligations not yet paid to certain
terminated individuals and other charges as we are awaiting the results of pending and threatened claims by
former employees of the affected facilities. Therefore, we are uncertain when this remaining liability will be
paid. Payments in 2003 are comprised of the payout of severance obligations and legal expenses. Funding of
future payments will be paid from cash generated from operating activities.

Workforce reductions related to the 2001 restructuring charge are for approximately 870 employees, terminated
primarily in 2001 and 2002. Employee termination benefits consist primarily of severance and outplacement
counseling fees. Employee termination benefits for the 2001 restructuring charge includes a $0.4 million non-
cash charge for the intrinsic value of stock options modified as part of a severance agreement.

Non-cash asset disposals for the 2001 restructuring charges were for the write-down of equipment, leasehold
improvements, and inventory as a direct result of our decisions to exit certain facilities and the abandonment of
internal use software under development. Exit costs are primarily related to contract and lease termination costs.

The following table summarizes the components of the 2001 restructuring charges by segment, net of changes in
estimates:

In thousands

Employee termination benefits
Non-cash asset disposals
Impaired goodwill
Exit costs

2001 restructuring charge

Enclosures

Other

Total

$14,754
7,198
7,362
10,068

991
3,375
(cid:132)
(2,688)

$15,745
10,573
7,362
7,380

$39,382

$ 1,678

$41,060

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

5. Goodwill and Other Identifiable Intangible Assets

The changes in the carrying amount of goodwill for the year ended December 31, 2003 by segment is as follows:

In thousands

Balance December 31, 2002
Acquired
Foreign currency translation
Net purchase adjustments

Balance December 31, 2003

Water

Enclosures

Tools

Consolidated

$663,940
122,586
11,975
5,072

$179,303
(cid:132)
14,307
(cid:132)

$375,098
(cid:132)
676
592

$1,218,341
122,586
26,958
5,664

$803,573

$193,610

$376,366

$1,373,549

The detail of acquired intangible assets consisted of the following:

In thousands

Finite-life intangible assets
Patents
Non-compete agreements
Proprietary technology
Customer relationships
Other

Gross
carrying
amount

$16,647
6,199
12,900
25,250
3,573

2003

2002

Accumulated
amortization

Net

Gross
carrying
amount

Accumulated
amortization

Net

$(1,096)
(3,111)
(cid:132)
(116)
(1,167)

$ 15,551
3,088
12,900
25,134
2,406

$ 7,318
3,899
(cid:132)
(cid:132)
3,953

$ (270)
(2,567)
(cid:132)
(cid:132)
(898)

$ 7,048
1,332
(cid:132)
(cid:132)
3,055

Total finite-life intangible assets

$64,569

$(5,490)

$ 59,079

$15,170

$(3,735)

$11,435

Indefinite-life intangible assets
Trademarks

Total intangibles, net

$49,039

$ (cid:132) $ 49,039

$ 7,759

$ (cid:132) $ 7,759

$108,118

$19,194

Amortization expense in 2003 was $1.8 million. The estimated future amortization expense for identifiable
intangible assets during the next five years is as follows:

In thousands

Estimated amortization expense

2004

2005

2006

2007

2008

$5,554

$5,263

$4,833

$4,618

$4,042

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

6. Supplemental Balance Sheet Information

In thousands

Inventories
Raw materials and supplies
Work-in-process
Finished goods

Total inventories

Property, plant and equipment
Land and land improvements
Buildings and leasehold improvements
Machinery and equipment
Construction in progress

Total property, plant and equipment
Less accumulated depreciation and amortization

Property, plant and equipment, net

Other assets
Equity method investments
Cost method investments
Other

Total other assets

2003

2002

$ 73,187
34,251
178,139

$ 83,670
39,840
169,692

$285,577

$293,202

$ 18,300
196,829
589,218
19,674

$ 16,973
161,515
567,999
37,178

824,021
480,471

783,665
432,349

$343,550

$351,316

$ 28,967
28,400
68,642

$ 25,369
28,400
61,022

$126,009

$114,791

Certain inventories are valued at LIFO. If all inventories were valued at FIFO as of the end of 2003 and 2002,
inventories would have been $287.2 million and $296.7 million, respectively.

Equity method investments
We have invested approximately $30.5 million to acquire a 49 percent interest in the joint venture operations of a
long time Asian supplier for bench top power tools, of which $5.6 million was paid in 2003, $4.5 million was
paid in 2002 and $20.4 million was paid in 2001. In February 2004, we signed a letter of intent to purchase the
remaining 51 percent ownership interest in this supplier. Our portion of the losses for these joint ventures is
included in cost of goods sold; however, it is not material.

Cost method investments
As part of the sale of Lincoln Industrial in 2001, we received 37,500 shares of 5% Series C Junior Convertible
Redeemable Preferred Stock convertible into a 15 percent equity interest in the new organization(cid:132)LN Holdings
Corporation. The preferred stock is recorded at $18.4 million, which represents the estimated fair value of that
investment at the time of sale.

In July 2002, we invested an additional $5.0 million for a total investment of $10.0 million in the preferred stock
of a privately held developer and manufacturer of laser leveling and measuring devices.

7. Supplemental Cash Flow Information

The following table summarizes supplemental cash flow information:
In thousands

Interest payments
Income tax payments

2003

2002

2001

$40,251
46,598

$41,935
20,412

$69,411
3,224

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

Supplemental disclosure of non-cash investing and financing activities
As part of the sale of Lincoln Industrial in 2001, we received 37,500 shares of 5% Series C Junior Convertible
Redeemable Preferred Stock convertible into a 15 percent equity interest in the new organization (cid:133) LN Holdings
Corporation. The preferred stock is recorded at $18.4 million, which represents the estimated fair value of that
investment at the time of sale.

8. Accumulated Other Comprehensive Income (Loss)

Components of accumulated other comprehensive income (loss) consist of the following:

In thousands

Minimum pension liability adjustments, net of tax
Foreign currency translation adjustments
Market value of derivative financial instruments

Accumulated other comprehensive income (loss)

2003

2002

2001

$(11,395) $(32,259) $ (3,058)
(33,787)
7,927

19,092
(1,865)

(8,128)
242

$ 5,832

$(40,145) $(28,918)

In 2003, the minimum pension liability adjustment decreased by $20.9 million largely due to improved pension
asset performance. In 2002, the decrease in the discount rate and poor pension plan asset performance caused the
$29.2 million increase in the minimum pension liability adjustment. The net foreign currency translation gain in
2003 and 2002 of $27.2 million and $25.2 million, respectively, was primarily the result of the continued
weakening of the U.S. dollar against the Euro and Canadian dollar currencies. Changes in the market value of
derivative financial instruments was impacted primarily by the maturities of derivatives and changing interest
rates. Fluctuations in the value of hedging instruments are generally offset by changes in the cash flows of the
underlying exposures being hedged.

9. Debt

Long-term debt and the average interest rate on debt outstanding as of December 31 is summarized as follows:

In thousands

Commercial paper, maturing within 30 days
Revolving credit facilities
Private placement (cid:132) fixed rate
Private placement (cid:132) floating rate
Senior notes
Other

Total contractual debt obligations
Interest rate swap monetization deferred income
Fair value of interest rate swap

Total long-term debt, including current portion per

balance sheet

Less current maturities

Long-term debt

Average
interest rate
December 31, 2003

Maturity
(Year)

1.95%
2.22%
5.83%
2.26%
7.85%
1.83%

2004 - 2006
2004 - 2013
2013
2009
2004 - 2009

2003

2002

$ 64,806
184,200
183,910
100,000
250,000
17,859

800,775
6,705
(987)

(cid:132)
$
330,400
132,628
(cid:132)
250,000
12,345

725,373
7,872
1,154

806,493
(73,631)

734,399
(60,488)

$732,862

$673,911

On July 25, 2003, we completed new financing arrangements totaling $700 million, comprised of a $200 million
private placement of senior notes with 10-year maturities (of which $150 million was funded during the third
quarter and $50 million was funded during the fourth quarter of 2003) and a new committed $500 million

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

revolving credit facility (the (cid:141)Credit Facility(cid:142)) which matures in three years. The $500 million Credit Facility
replaced two existing revolving credit facilities totaling $652 million of credit availability. Interest rates and fees
on the Credit Facility vary based on our credit ratings. The $200 million private placement included $100 million
of variable rate senior notes with an interest rate equal to the three-month LIBOR rate plus 1.15 percent and $100
million of fixed rate senior notes with an average interest rate of 4.98 percent. We used the $200 million
proceeds received in the second half of 2003 from the private placement to pay down debt under the Credit
Facility.

In addition to the Credit Facility, we have $55 million of uncommitted credit facilities, under which we had $10
million outstanding as of December 31, 2003.

Our current credit ratings are as follows:

Rating Agency

Standard & Poor(cid:144)s
Moody(cid:144)s

Long-Term Debt Rating

BBB
Baa3

As a result of our announcement of an agreement to acquire WICOR (see Note 18), Moody(cid:144)s Investor Services
has confirmed the our long-term bank rating of Baa3 and changed our outlook to negative from stable. At the
same time, Standard and Poor(cid:144)s Rating Services has place our BBB corporate credit and other ratings on
CreditWatch with negative implications. The change in rating outlook to negative from stable reflects the
increased financial and integration risks associated with the planned acquisition of WICOR. In addition, the
timing and nature of any outcome resulting from the exploration of strategic alternatives for the Tools segment
remains uncertain and subject to execution risk. In a related action, Moody(cid:144)s Investor Services placed the Baa3
senior unsecured rating on our $250 million notes and the Baa3 rating on our senior notes under our $225 million
shelf registration under review for possible downgrade, due to structural subordination thereof. Existing lenders
under our Credit Facility and private placement notes benefit from guarantees from our domestic subsidiaries,
while the $250 million senior note holders do not benefit from such guarantees. We are pursuing putting in place
a similar guarantee for the benefit of the $250 million senior note holders to avoid the downgrade due to the
structural subordination.

We expect to fund the WICOR acquisition through our currently available and newly committed lines of credit.
We have obtained a commitment, subject to customary conditions, in the aggregate amount of $850 million (the
(cid:141)Bridge Facility(cid:142)) for the payment of the purchase price. The Bridge Facility is available for a period up to the
earlier of (i) September 1, 2004, (ii) the closing of the acquisition without the use of the Bridge Facility or
(iii) the sale of the Pentair Tools Group.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

is for the purpose of payment of the purchase price and related fees and expenses. The closing of the Loan must
occur before September 1, 2004. Any balance due under the Loan is repayable in full, with accrued interest, no
later than December 31, 2004. We will need to fund the repayment of the Bridge Facility by December 31, 2004
through a disposition of our Tools Group or through equity issuance.

In 2004, interest expense will be primarily driven by the timing of the closing of the WICOR acquisition and any
strategic alternative we pursue for our Tools segment.

Long-term debt outstanding at December 31, 2003 matures as follows (excluding anticipated effects of the new
facility or term loan):

In thousands

2004

2005

2006

2007

2008

Thereafter

Total

Contractual debt obligation maturities
Other maturities

$72,465
1,166

$ 396
1,166

$240,092
1,166

$37,822
1,166

$ (cid:132) $450,000
(112)
1,166

$800,775
5,718

Total maturities

$73,631

$1,562

$241,258

$38,988

$1,166

$449,888

$806,493

10. Derivative and Financial Instruments

Cash-flow hedges
We have entered into interest rate swap agreements with a major financial institution to exchange variable rate
interest payment obligations for fixed rate obligations without the exchange of the underlying principal amounts
in order to manage interest rate exposures. As of the end of 2003, we had variable to fixed rate swap agreements
outstanding with an aggregate notional amount of $40 million that expire in various amounts through June 2005.
The swap agreements have a fixed interest rate of 6.31 percent. The fair value of this swap was a liability of $1.9
million at December 31, 2003.

The variable to fixed interest rate are designated as and are effective as cash-flow hedges. The fair values of these
swaps are recorded on the balance sheet, with changes in fair values included in other comprehensive income
(OCI). Derivative gains and losses included in OCI are reclassified into earnings at the time the related interest
expense is recognized or the settlement of the related commitment occurs. We estimate $1.4 million of net
derivative losses will be reclassified into earnings in 2004. No hedging relationships were de-designated during
2003.

Fair value hedge
In March 2002, we entered into an interest rate swap agreement to effectively convert interest rate expense on
$100 million of Senior notes for the term of the notes (maturing October 2009) from a 7.85 percent fixed annual
rate to a floating annual rate equal to the six-month LIBOR rate plus 2.49 percent. This swap agreement was
designated and accounted for as a fair value hedge. In September 2002, we terminated this swap agreement and
received $8.2 million. This amount, net of accumulated amortization, is recorded as a premium to the carrying
amount of the notes in the consolidated balance sheets and is being amortized as a reduction of interest expense
over the remaining term of the Senior notes. The $8.2 million was illustrated in the 2002 consolidated statement
of cash flows as an increase in other assets and liabilities.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

Concurrent with the termination of the interest rate swap, we entered into a new interest rate swap agreement to
effectively convert $100 million of Senior notes for the term of the notes (maturing October 2009) from a 7.85
percent fixed annual rate to a floating annual rate equal to the six-month LIBOR rate plus 3.69 percent. The fair
value of the swap was a liability of $1.0 million at December 31, 2003. This swap agreement has been designated
and accounted for as a fair value hedge. Since this swap qualifies for the short-cut method under SFAS No. 133,
changes in the fair value of the swap (included in other long-term liabilities in the consolidated balance sheets)
are offset by changes in the fair value of the designated debt being hedged. Consequently, there is no impact on
net income or shareholders(cid:144) equity.

Fair value of financial instruments
The recorded amounts and estimated fair values of financial instruments, including derivative financial
instruments, were as follows:

In thousands

Long-term debt, including current portion
Variable rate
Fixed rate

Total

Derivative financial instruments
Variable to fixed interest rate swap liability
Fixed to variable interest rate swap asset
Forward exchange agreements

2003

2002

Recorded
amount

Fair
value

Recorded
amount

Fair
value

$359,006
441,769

$359,006
483,233

$330,400
394,973

$330,400
441,464

$800,775

$842,239

$725,373

$771,864

$ (1,865) $ (1,865) $ (3,809) $ (3,809)
1,154
4,051

1,154
4,051

(987)
(cid:132)

Market value of derivative financial instruments

$ (2,852) $ (2,852) $

1,396

The following methods were used to estimate the fair values of each class of financial instrument:
(cid:139) short-term financial instruments (cash and cash equivalents, accounts and notes receivable, accounts and notes
payable, and short-term borrowings) (cid:132) recorded amount approximates fair value because of the short maturity
period;

(cid:139)

long-term debt, including current maturities (cid:132) fair value is based on market quotes available for issuance of
debt with similar terms;

interest rate swap agreements (cid:132) fair value is based on market or dealer quotes; and

forward exchange agreements (cid:132) fair value is not material due to the short term nature of these agreements

11.

Income Taxes

Income from continuing operations before income taxes consisted of the following:

In thousands

United States
International

Income from continuing operations before taxes

2003

2002

2001

$184,981
33,637

$180,371
12,076

$103,446
(10,158)

$218,618

$192,447

$ 93,288

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

The provision for income taxes from continuing operations consisted of the following:

In thousands

Currently payable
Federal
State
International

Total current taxes
Deferred
Federal
International

Total deferred taxes

Total provision for income taxes

2003

2002

2001

$31,537
5,049
2,594

$33,841
5,679
(3,571)

$19,790
3,131
6,849

39,180

35,949

29,770

24,163
10,987

18,246
8,350

13,573
(7,571)

35,150

26,596

6,002

$74,330

$62,545

$35,772

Reconciliation of the U.S. statutory income tax rate to our effective tax rate for continuing operations follows:

Percentages

U.S. statutory income tax rate
State income taxes, net of federal tax benefit
Tax effect of international operations
Non-deductible goodwill
ESOP dividend benefit
Non-deductible restructuring charge items
Tax credits
All other, net

Effective tax rate on continuing operations

2003

2002

2001

35.0
2.3
(1.4)
(cid:132)
(0.3)
(cid:132)
(1.4)
(0.2)

34.0

35.0
2.9
(2.8)
(cid:132)
(0.4)
(cid:132)
(1.6)
(0.6)

32.5

35.0
3.7
(7.6)
9.4
(0.9)
3.3
(3.4)
(1.2)

38.3

Deferred taxes arise because of different treatment between financial statement accounting and tax accounting,
known as (cid:141)temporary differences.(cid:142) We record the tax effect of these temporary differences as (cid:141)deferred tax
assets(cid:142) (generally items that can be used as a tax deduction or credit in future periods) and (cid:141)deferred tax
liabilities(cid:142) (generally items that we received a tax deduction for, but not yet been recorded in the consolidated
statements of income).

United States income taxes have not been provided on undistributed earnings of international subsidiaries. It is
our intention to reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to
do so. Accordingly, we believe that any U.S. tax on repatriated earnings would be substantially offset by U.S.
foreign tax credits.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

The tax effects of the major items recorded as deferred tax assets and liabilities are as follows:

In thousands

Accounts receivable allowances
Inventory reserves
Accelerated depreciation/amortization
Accrued product claims and warranties
Employee benefit accruals
Goodwill
Other, net

Total deferred taxes

Net deferred tax (liability) asset

2003 Deferred tax
Assets

Liabilities

2002 Deferred tax
Assets

Liabilities

$ 6,654
6,314
(cid:132)
30,107
47,141
(cid:132)
(cid:132)

(cid:132) $
(cid:132)
30,274
(cid:132)
(cid:132)
70,199
17,286

9,448
7,070

$ (cid:132)
(cid:132)
(cid:132) 26,988
(cid:132)
(cid:132)
(cid:132) 61,546
(cid:132)

29,288
62,329

3,905

$ 90,216

$117,759

$112,040

$88,534

$(27,543)

$ 23,506

The determination of annual income tax expense takes into consideration amounts, which may be needed to
cover exposures for open tax years. The Internal Revenue Service (IRS) has examined our U.S. federal income
tax returns through 1997 with no material adjustments and is currently auditing 1998 to 2001. We do not expect
any material impact on earnings to result from the resolution of matters related to open tax years; however, actual
settlements may differ from amounts accrued.

At December 31, 2003, approximately $11.0 million non-U.S. tax losses were available for carryforward.
Valuation allowances in the amount of $1.5 million have been set up on these tax losses. No valuation allowance
existed at December 31, 2002. We believe that sufficient taxable income will be generated in the respective
countries to allow us to fully recover the remainder of the tax losses.

We made net cash payments for income taxes in fiscal 2003, 2002, and 2001 of $46.6 million, $20.4 million, and
$3.2 million, respectively.

12. Benefit Plans

Pension and post-retirement benefits
We sponsor domestic and foreign defined-benefit pension and other post-retirement plans. Pension benefits are
based principally on an employee(cid:144)s years of service and/or compensation levels near retirement. In addition, we
also provide certain post-retirement health care and life insurance benefits. Generally, the post-retirement health
care and life insurance plans require contributions from retirees. We use a December 31 measurement date.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

Obligations and Funded Status

The following tables present reconciliations of the benefit obligation of the plans, the plan assets of the pension
plans, and the funded status of the plans:

In thousands
Change in benefit obligation
Benefit obligation beginning of year
Service cost
Interest cost
Plan amendments
Liability transfer
Actuarial (gain) loss
Translation loss
Benefits paid

Benefit obligation end of year

Change in plan assets
Fair value of plan assets beginning of year
Actual return on plan assets
Company contributions
Translation loss
Benefits paid

Fair value of plan assets end of year

Funded status
Plan assets less than benefit obligation
Unrecognized cost:

Net transition obligation
Net actuarial (gain) loss
Prior service cost (benefit)

Net amount recognized

Pension benefits

Post-retirement

2003

2002

2003

2002

$ 389,431
15,262
23,890
(cid:132)
(588)
2,878
7,663
(18,920)

$ 328,859
13,165
22,980
409
(cid:132)
39,346
4,914
(20,242)

$ 37,760
558
2,273
(cid:132)
(cid:132)
(1,097)
(cid:132)
(2,591)

$ 34,829
521
2,425
(cid:132)
(cid:132)
2,700
(cid:132)
(2,715)

$ 419,616

$ 389,431

$ 36,903

$ 37,760

$ 239,104
55,477
19,113
625
(18,920)

$ 268,438
(28,603)
18,898
613
(20,242)

(cid:132) $
(cid:132)
2,591
(cid:132)
(2,591)

(cid:132)
(cid:132)
2,715
(cid:132)
(2,715)

$ 295,399

$ 239,104

(cid:132) $

(cid:132)

$(124,217) $(150,327) $(36,903) $(37,760)

139
75,668
2,014

143
103,245
2,663

(cid:132)
(3,680)
(1,551)

(cid:132)
(2,582)
(2,473)

$ (46,396) $ (44,276) $(42,134) $(42,815)

Of the $124.2 million underfunding at December 31, 2003, $78.6 million relates to foreign pension plans and our
supplemental executive retirement plan which are not commonly funded.

Amounts recognized in the consolidated balance sheets of:

In thousands

Prepaid benefit cost
Accrued benefit liability
Intangible asset
Accumulated other comprehensive income (cid:132) pre-tax

Net amount recognized

Pension benefits

Post-retirement

2003

2002

2003

2002

$ 17,334
(83,776)
1,365
18,681

$ 10,124
(109,946)
2,662
52,884

(cid:132) $

(42,134)
(cid:132)
(cid:132)

(cid:132)
(42,815)
(cid:132)
(cid:132)

$ (46,396) $ (44,276) $(42,134) $(42,815)

The accumulated benefit obligation for all defined benefit plans was $363,374 and $339,053 at December 31,
2003, and 2002, respectively.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

Information for pension plans with an accumulated benefit obligation or projected benefit obligation in excess of
plan assets are as follows:

In thousands

Pension plans with an accumulated benefit obligation in excess of plan assets:

Fair value of plan assets
Accumulated benefit obligation

Pension plans with a projected benefit obligation in excess of plan assets:

Fair value of plan assets
Projected benefit obligation

Components of net periodic benefit cost are as follows:

2003

2002

$ 41,545
118,699

$237,699
337,820

$288,855
414,123

$237,699
388,198

In thousands

Service cost
Interest cost
Expected return on plan assets
Amortization of transition (asset) obligation
Amortization of prior year service cost (benefit)
Recognized net actuarial (gain) loss
Special termination benefits

Net periodic benefit cost

Continuing operations
Discontinued operations

Net periodic benefit cost

Additional Information

In thousands

Pension benefits
2002

2003

2001

2003

Post-retirement
2002

2001

$ 15,262
23,890
(24,748)
20
650
672
(cid:132)

$ 13,165
22,980
(24,342)
18
659
156
(cid:132)

$ 13,467
23,802
(26,897)
25
867
(1,196)
482

$ 558
2,273
(cid:132)
(cid:132)
(922)

$ 521
2,425
(cid:132)
(cid:132)
(869)
(cid:132) (129)
(cid:132)
(cid:132)

$ 494
2,596
(cid:132)
(cid:132)
(906)
(374)
(cid:132)

$ 15,746

$ 12,636

$ 10,550

$1,909

$1,948

$1,810

$ 15,746
(cid:132)

$ 12,636
(cid:132)

$ 10,162
388

$1,909
(cid:132)

$1,948
(cid:132)

$1,606
204

$ 15,746

$ 12,636

$ 10,550

$1,909

$1,948

$1,810

Pension benefits
2002
2003

Decrease (increase) in minimum liability included

in other comprehensive income, net of tax

$ 20,864

$(29,201)

Assumptions
Weighted-average assumptions used to determine benefit obligations at December 31 are as follows:

Percentages

Discount rate
Rate of compensation increase

Pension benefits
2002

2003

Post-retirement

2001

2003

2002

2001

6.25
5.00

7.25
5.00

6.25

7.25

Weighted-average assumptions used to determine net periodic benefit cost for years ending December 31 are as
follows:

Percentages

Discount rate
Expected long-term return on plan assets
Rate of compensation increase

Pension benefits

Post-retirement

2003

2002

2001

2003

2002

2001

6.25
8.50
5.00

7.25
8.50
5.00

7.75
8.50
5.00

6.25

7.25

7.75

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

Net periodic benefit cost
Total net periodic pension benefits cost was $15.7 million in 2003, $12.6 million in 2002, and $10.6 million in
2001. Total net periodic pension benefits cost is expected to be approximately $17.0 million in 2004. The
increasing trend in net periodic pension cost from 2001 forward is largely driven by increasing service and
interest costs, the downturn in the financial markets in 2002 and 2001, and the decrease in the discount rate in
2002. The net periodic pension benefit cost for 2004 has been estimated assuming a discount rate of 6.25 percent
and an expected return on plan assets of 8.5 percent.

Unrecognized pension losses
As of the December 31, 2003 measurement date, our pension plans have $75.7 million of cumulative
unrecognized losses of which approximately $20 million relates to the use of the market related value method
and is not immediately subject to amortization. The remaining unrecognized loss, to the extent it exceeds 10% of
the projected benefit obligation, will be amortized into expense each year on a straight-line basis over the
remaining expected future-working lifetime of active participants (currently approximately 12 years). The
amount included a pension expense for loss amortization in 2003 was $0.5 million.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

The assumed health care cost trend rates at December 31 are as follows:

Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
Year that the rate reaches the ultimate trend rate

2003

9.14%
4.50%
2024

2002

9.14%
4.50%
2023

The assumed health care cost trend rates have a significant effect on the amounts reported for health care plans.
A one-percentage-point change in the assumed health care cost trend rates would have the following effects:

In thousands

Effect on total of service and interest cost
Effect on postretirement benefit obligation

Plan Assets

1-Percentage-
Point Increase

1-Percentage-
Point Decrease

48
714

42
617

Objective
The primary objective of our pension plans is to meet commitments to our employees at a reasonable cost to the
company. This is primarily accomplished through growth of capital and safety of the funds invested. The plans
will therefore be actively invested to achieve real growth of capital over inflation through appreciation of
securities held and through the accumulation and reinvestment of dividend and interest income.

Asset allocation
Our actual overall asset allocation for the plans as compared to our investment policy goals is as follows:

Asset Class

Large Capitalization U.S. Stocks
Small/Mid Capitalization, U.S. Stocks
Pentair Stock
International (Non-U.S.) Stocks
Private Equity
Fixed Income (Bonds)
Other Investments
Cash

(1) Actual asset allocation as of December 31, 2003.

Investment Policy

Actual (1) Target Minimum Maximum

21%
22%
8%
12%
1%
17%
12%
7%

25%
20%
5%
15%
5%
20%
10%
0%

20%
15%
3%
10%
0%
15%
5%
0%

30%
25%
7%
20%
10%
25%
15%
0%

Cash Flows

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

contributions to domestic defined benefit plans. The contributions in 2003 and 2002 exceeded the minimum
funding requirement. Our 2004 pension contributions are expected to be in the range of $10 million to $15
million.

Savings plan
We have a 401(k) plan (the plan) with an employee stock ownership (ESOP) bonus component, which covers
certain union and nearly all-nonunion U.S. employees who meet certain age requirements. Under the plan,
eligible U.S. employees may voluntarily contribute a percentage of their eligible compensation. Matching
contributions are made in cash to employees who meet certain eligibility and service requirements. Our matching
contribution is based on our financial performance and ranges from 30 percent to 90 percent of eligible employee
contributions, limited to 4 percent of compensation contributed by employees.

In addition to the matching contribution, all employees who meet certain service requirements receive a
discretionary ESOP contribution equal to 1.5 percent of annual eligible compensation.

Our combined expense for the 401(k) and ESOP were approximately $9.8 million, $9.0 million, and $9.8 million
in 2003, 2002, and 2001, respectively.

13. Shareholders(cid:144) Equity

Authorized shares
We may issue up to 250 million shares of common stock. Our Board of Directors may designate up to 15 million
of those shares as preferred stock.

Common share purchase rights
We have a ten-year Rights Agreement dated July 31, 1995. Under this agreement, each outstanding share of our
common stock has one common share purchase right attached to it and entitles the holder to purchase one share
of our common stock, currently at a price of $80 per share, subject to adjustment. However, these rights are not
exercisable unless certain change-in-control events transpire, such as a person acquiring or obtaining the right to
acquire beneficial ownership of 15 percent or more of our outstanding common stock.

The rights are redeemable by us for $0.01 per right until ten business days after certain defined change-in-control
events transpire, or at any time prior to the expiration of the rights.

Share repurchases
In 2003, the Board of Directors authorized the development of a program and process to annually purchase up to
500,000 shares of our common stock in open market or negotiated transactions to partially offset dilution due to
normal grants of restricted shares and options to employees. In 2003, we repurchased 40,000 shares of our
common stock. In 2002 and 2001, respectively, we repurchased no shares and 50,000 shares of our common
stock under similar plans.

14. Stock Plans

Omnibus stock incentive plan
In April 2003, the Omnibus Stock Incentive Plan as Amended and Restated (the Plan) was approved. The Plan
authorizes the issuance of additional shares of our common stock and extends through February 2006. The Plan
allows for the granting of:

(cid:128)
(cid:128)
(cid:128)
(cid:128)

nonqualified stock options;
incentive stock options;
restricted stock;
rights to restricted stock;

incentive compensation units (ICUs);
stock appreciation rights;
performance shares; and
performance units.

(cid:128)
(cid:128)
(cid:128)
(cid:128)

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

The Plan is administered by our Compensation Committee (the Committee), which is made up of independent
members of our Board of Directors. Employees eligible to receive awards under the Plan are managerial,
administrative, or other key employees who are in a position to make a material contribution to the continued
profitable growth and long-term success of Pentair. The Committee has the authority to select the recipients of
awards, determine the type and size of awards, establish certain terms and conditions of award grants, and take
certain other actions as permitted under the Plan. The Plan provides that no more than 20 percent of the total
shares available for issuance under the Plan may be used to make awards other than stock options and limits the
Committee(cid:144)s authority to reprice awards or to cancel and reissue awards at lower prices.

Incentive stock options
Under the Plan we may grant stock options to any eligible employee with an exercise price equal to the
market value of the shares on the dates the options were granted. Options generally vest over a three-year
period commencing on the first anniversary of the grant date and expire ten years after the grant date.

Restricted stock, rights to restricted stock and ICUs
Under the Plan, eligible employees are awarded restricted shares or rights to restricted shares (awards) of
our common stock and ICUs. Restrictions on awards and ICUs generally expire from two to five years after
issuance, subject to continuous employment and certain other conditions. Restricted stock awards are
recorded at market value on the date of the grant as unearned compensation. Unearned compensation is
shown as a reduction of shareholders(cid:144) equity in our consolidated financial statements and is being amortized
to expense over the restriction period. The value of ICUs is based on a matrix, which takes into account
growth in operating income and return on invested capital. Annual expense for the value of restricted stock
and ICUs was $4.6 million in 2003, $7.9 million in 2002, and $5.8 million in 2001.

Outside directors nonqualified stock option plan
Nonqualified stock options are granted to outside directors under the Outside Directors Nonqualified Stock
Option Plan (the Directors Plan) with an exercise price equal to 100 percent of the market value of the shares on
the dates the options were granted. Options generally vest over a three-year period commencing on the first
anniversary of the grant date and expire ten years after the grant date. The Directors Plan extends to January
2008.

Stock options
The following table summarizes stock option activity under all plans:

Options Outstanding

Balance January 1
Granted
Exercised
Canceled

2003

2002

2001

2,743,238
876,940
(328,339)
(147,359)

Exercise
price (1)

$33.39
35.68
30.91
35.42

2,262,488
766,324
(141,573)
(144,001)

Exercise
price (1)

$31.65
37.42
31.11
29.82

1,826,356
840,025
(302,661)
(101,232)

Exercise
price (1)

$35.07
23.36
30.38
28.35

Balance December 31

3,144,480

$34.19

2,743,238

$33.39

2,262,488

$31.65

Options exercisable December 31

1,721,202

$33.98

1,487,552

$33.94

1,231,183

$34.60

Shares available for grant December 31

1,537,302

2,400,645

2,819,434

(1) Weighted average

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

The following table summarizes information concerning stock options outstanding as of the end of 2003 under all
plans:

Range of exercise prices

$ 20.01 (cid:133) $ 25.00
30.00
35.00
40.00
45.00
50.00

25.01 (cid:133)
30.01 (cid:133)
35.01 (cid:133)
40.01 (cid:133)
45.01 (cid:133)

(1) Weighted average

15. Business Segments

Options outstanding

Options exercisable

574,290
8,985
932,162
1,474,878
112,649
41,516

3,144,480

Remaining
life (1)
(in years)

5.9
2.5
7.3
6.2
8.2
5.7

6.5

Exercise
price (1)

$22.75
28.92
34.85
37.38
41.37
45.86

384,281
8,876
273,374
978,168
42,987
33,516

Exercise
price (1)

$22.75
28.92
34.77
37.49
41.75
45.56

$34.19

1,721,202

$33.98

We classify our continuing operations into the following business segments:

(cid:139) Water (cid:132) manufactures and markets essential products and systems used in the movement, treatment, storage

(cid:139) Tools (cid:132) designs, manufactures and markets power tool products positioned at the mid to upper-end of the
market and targets non-professional DIY, upscale hobbyists, and professional end users. Tools segment
products include woodworking machinery, portable power tools, power tool accessories, metal and
stoneworking tools, pneumatic tools, compressors, generators, and pressure washers.

(cid:139) Other (cid:132) is primarily composed of unallocated corporate expenses, our captive insurance subsidiary,

intermediate finance companies, divested operations and intercompany eliminations.

The accounting policies of our operating segments are the same as those described in the summary of significant
accounting policies. We evaluate performance based on the operating income of the segment and use a variety of
ratios to measure performance. These results are not necessarily indicative of the results of operations that would
have occurred had each segment been an independent, stand-alone entity during the periods presented.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

Financial information by reportable business segment is included in the following summary:

In thousands

Water
Enclosures
Tools
Other

Consolidated

Water
Enclosures
Tools
Other (1)

Consolidated

Water
Enclosures
Tools
Other

Consolidated

2003

2002
Net sales to external customers

2001

2003

2002
Operating income (loss)

2001

$1,060,303
582,684
1,081,378
(cid:132)

$ 932,420
556,032
1,092,331
(cid:132)

$ 882,615
689,820
1,001,645

$143,962
51,094
81,774
(cid:132) (17,276)

$126,559
29,942
97,598
(18,107)

$109,792
1,857
63,232
(17,120)

$2,724,365

$2,580,783

$2,574,080

$259,554

$235,992

$157,761

Identifiable assets (1)

Depreciation

$1,321,128
462,837
851,338
145,374

$1,056,335
467,862
870,883
119,370

$ 930,759
481,311
794,908
165,220

$ 20,517
19,721
20,320
571

$ 19,478
19,026
20,256
73

$ 19,472
23,008
20,033
161

$2,780,677

$2,514,450

$2,372,198

$ 61,129

$ 58,833

$ 62,674

Amortization

Capital expenditures (2)

1,543
(cid:132)
440
2,531

650
(cid:132)
149
5,070

18,560
8,273
9,274
5,568

$ 17,831
7,014
14,618
4,159

$ 15,037
9,153
32,350
156

$ 16,705
22,311
14,290
362

4,514

5,869

41,675

$ 43,622

$ 56,696

$ 53,668

(1) All cash and cash equivalents are included in Other.
(2)

Tools segment capital expenditures in 2002 includes $23.0 million for the acquisition of a previously leased facility.

Operating income

Enclosures segment operating income includes:

(cid:139)

restructuring charge expense of $39.4 million in 2001.

Other segment operating loss includes:

(cid:139)

restructuring charge expense of $1.7 million in 2001.

The following table presents certain geographic information:

In thousands

United States
Germany
Canada
France
China
Japan
India
All other

Consolidated

2003

2002
Net sales to external customers

2001

2003

2002
Long-lived assets

2001

$2,319,301
130,914
77,519
60,287
18,926
11,600
7,201
98,617

$2,242,250
103,318
67,539
46,110
15,642
11,079
3,960
90,885

$2,200,156
121,455
63,011
51,586
829
13,216
2,747
121,080

$274,936
42,442
1,101
1,842
4,889
4,474
5,530
8,336

$291,308
36,960
902
1,763
2,227
4,206
4,114
9,836

$270,498
32,523
719
5,271
1,499
4,039
3,992
10,959

$2,724,365

$2,580,783

$2,574,080

$343,550

$351,316

$329,500

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

Net sales are based on the location in which the sale originated. Long-lived assets represent property, plant, and
equipment, net of related depreciation.

We sell our products through various distribution channels including home centers and retail chains. In our Water
segment, two customers accounted for about 17 percent of segment sales in 2003 and 2002 and 18 percent of
segment sales in 2001. In our Enclosure segment, no single customer accounted for more than 10 percent of
segment sales in 2003, 2002, or 2001. Three customers accounted for about 56 percent of our Tools segment net
sales in 2003 and 62 percent and 58 percent, respectively, in 2002 and 2001. In 2003, sales to The Home Depot, a
major customer of our Tools segment, accounted for approximately 14 percent of total consolidated net sales.
Sales to The Home Depot accounted for approximately 13 percent of total consolidated net sales in 2002 and
2001. If these customers were lost, it would have a material adverse effect on our business.

16. Commitments and Contingencies

Operating lease commitments
Net rental expense under operating leases follows:

In thousands

Gross rental expense
Sublease rental income

Net rental expense

2003

2002

2001

$33,788
(698)

$35,162
(1,456)

$ 32,343
(239)

$33,090

$33,706

$ 32,104

Future minimum lease commitments under non-cancelable operating leases, principally related to facilities,
vehicles, and machinery and equipment, is as follows:

In thousands

2004

2005

2006

2007

2008

Thereafter

Total

Minimum lease payments
Minimum sublease rentals

Net future minimum lease

commitments

$26,665
(688)

$22,066
(704)

$16,679
(704)

$10,956
(723)

$ 8,637
(723)

$19,400
(663)

$104,403
(4,205)

$25,977

$21,362

$15,975

$10,233

$ 7,914

$18,737

$100,198

Environmental
We have been named as defendants, targets, or potentially responsible parties (PRPs) in a small number of
environmental cleanups, in which our current or former business units have generally been given de minimis
status. To date, none of these claims have resulted in cleanup costs, fines, penalties, or damages in an amount
material to our financial position or results of operations. We have disposed of a number of businesses over the
past ten years and in certain cases, such as the disposition of the Cross Pointe Paper Corporation uncoated paper
business in 1995, the disposition of the Federal Cartridge Company ammunition business in 1997, and the
disposition of Lincoln Industrial in 2001, we have retained responsibility and potential liability for certain
environmental obligations. We have received claims for indemnification from purchasers both of the paper
business and the ammunition business and have established what we believe to be adequate accruals for potential
liabilities arising out of retained responsibilities. We have recently settled one such claim in 2003 and our
recorded accrual was adequate.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

We may be named as a PRP at other sites in the future, for both divested and acquired businesses. When it has
been possible to provide reasonable estimates of our liability with respect to environmental sites, provisions have
been made in accordance with generally accepted accounting principles in the United States. As of December 31,
2003, our reserve for such environmental liabilities was approximately $11.2 million, measured on an
undiscounted basis. We cannot ensure that environmental requirements will not change or become more stringent
over time or that our eventual environmental cleanup costs and liabilities will not exceed the amount of our
current reserves.

Litigation
We are occasionally a party to litigation arising in the normal course of business. We regularly analyze current
information and, as necessary, provide accruals for probable liabilities based on the expected eventual disposition
of these matters. We believe the effect on our consolidated results of operations and financial position, if any, for
the disposition of all currently pending matters will not be material.

Warranties and guarantees
From time to time in connection with the disposition of businesses or product lines, Pentair may agree to
indemnify purchasers for various potential liabilities relating to the sold business, such as pre-closing tax,
product liability, warranty, environmental, or other obligations. The subject matter, amounts, and duration of any
such indemnification obligations vary for each type of liability indemnified and may vary widely from
transaction to transaction. Pentair currently has outstanding indemnification obligations for environmental
matters relating to certain sold businesses that have four- to five-year indemnification periods, and one that lasts
indefinitely. Other currently outstanding indemnity obligations have a one-year duration. The maximum potential
payment for these obligations is unlimited.

We accrue for costs associated with guarantees when it is probable that a liability has been incurred and the
amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of
currently available facts, and where no amount within a range of estimates is more likely, the minimum is
accrued.

We provide service and warranty policies on our products. Liability under service and warranty policies is based
upon a review of historical warranty and service claim experience. Adjustments are made to accruals as claim
data and historical experience warrant. In addition, we incur discretionary costs to service our products in
connection with product performance issues.

The changes in the carrying amount of service and product warranties for the year ended December 31, 2003
and 2002 are as follows:

In thousands

Balance at beginning of the year
Service and product warranty provision
Payments
Acquired
Translation

Balance at end of the year

2003

2002

$ 26,855
43,191
(44,379)
733
748

$ 27,590
38,481
(39,886)
161
509

$ 27,148

$ 26,855

Stand-by letters of credit
In the ordinary course of business, predominantly in our pump business, we are required to commit to bonds that
require payments to our customers for any non-performance. The outstanding face value of the bonds fluctuates

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

with the value of our projects in process and in our backlog. In, addition, we issue financial stand-by letters of
credit to secure our performance to third parties under self-insurance programs and certain legal matters. As of
December 31, 2003 and 2002, the outstanding value of these instruments totaled $35.0 million and $19.8 million,
respectively.

17. Selected Quarterly Financial Data (Unaudited)

In thousands, except per-share data

Net sales
Gross profit
Operating income
Income from continuing operations
Loss from discontinued operations, net of tax
Net income

Earnings per common share (1)
Basic
Continuing operations
Discontinued operations

Basic earnings per common share

Diluted
Continuing operations
Discontinued operations

Diluted earnings per common share

In thousands, except per-share data

Net sales
Gross profit
Operating income
Income from continuing operations
Loss from discontinued operations, net of tax
Net income

Earnings per common share (1)
Basic
Continuing operations
Discontinued operations

Basic earnings per common share

Diluted
Continuing operations
Discontinued operations

Diluted earnings per common share

First

Second

$637,516
155,291
52,188
27,849
(cid:132)
27,849

$718,989
183,488
76,332
43,887
(cid:132)
43,887

2003
Third

$685,014
167,007
67,745
38,375
(cid:132)
38,375

Fourth

Year

$682,846
173,252
63,289
34,177
(2,936)
31,241

$2,724,365
679,038
259,554
144,288
(2,936)
141,352

0.56
(cid:132)

0.56

0.56
(cid:132)

0.56

0.89
(cid:132)

0.89

0.88
(cid:132)

0.88

0.78
(cid:132)

0.78

0.77
(cid:132)

0.77

0.70
(0.06)

0.64

0.69
(0.06)

0.63

2.95
(0.06)

2.89

2.90
(0.06)

2.84

First

Second

$603,063
137,011
45,727
21,438
(cid:132)
21,438

$708,116
175,980
74,592
42,976
(cid:132)
42,976

2002
Third

$629,301
148,969
61,822
37,403
(cid:132)
37,403

Fourth

Year

$640,303
153,747
53,851
28,085
(cid:132)
28,085

$2,580,783
615,707
235,992
129,902
(cid:132)
129,902

0.44
(cid:132)

0.44

0.43
(cid:132)

0.43

0.87
(cid:132)

0.87

0.86
(cid:132)

0.86

0.76
(cid:132)

0.76

0.75
(cid:132)

0.75

0.57
(cid:132)

0.57

0.57
(cid:132)

0.57

2.64
(cid:132)

2.64

2.61
(cid:132)

2.61

(1) Amounts may not total to annual earnings because each quarter and year are calculated separately based on basic and diluted weighted-

average common shares outstanding during that period.

Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:132) (continued)

18. Subsequent Events

On February 3, 2004, we entered into an agreement to acquire WICOR Inc. ((cid:141)WICOR(cid:142)), a unit of Wisconsin
Energy Corporation, Milwaukee, Wisconsin. WICOR, which manufactures water system, filtration and pool
equipment products under the Sta-Rite, SHURflo and Hypro brands, generated sales of approximately $746
million in 2003. The $850 million cash transaction, which we plan to complete in the second or third quarter of
2004, is subject to satisfaction of customary conditions and regulatory approvals. As part of the transaction, we
will assume approximately $24 million of WICOR debt.

We are seeking to obtain an amendment to the Credit Facility for our most restrictive financial covenant to
increase our required ratio of total debt to EBITDA (Earnings Before Interest, Taxes, Depreciation, and
Amortization) as a result of the Bridge Facility, which we believe will be granted by the banks participating in
our Credit Facility. In addition, during the period the Bridge Facility is outstanding, additional limitations will be
placed on share repurchases, dividends, acquisitions and sales of assets.

In February 2004, we signed a letter of intent to purchase the remaining 51 percent ownership interest in the joint
venture operations of a long time Asian supplier for bench top power tools.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial
Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end
of the year ended December 31, 2003, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934.
Based upon their evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of the year ended December 31, 2003 in timely alerting
them to material information relating to Pentair, Inc. (including its consolidated subsidiaries) required to be
included in reports we file with the Securities and Exchange Commission.

(b) Changes in Internal Control over Financial Reporting

There was no significant change in our internal control over financial reporting that occurred during the
quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.

PART III

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

Information required under this item with respect to directors is contained in our Proxy Statement for our 2004
annual meeting of shareholders under the captions (cid:141)Corporate Governance Matters(cid:142), (cid:141)Election of Directors(cid:142) and
(cid:141)Section 16(a) Beneficial Ownership Reporting Compliance(cid:142) and is incorporated herein by reference.

Information required under this item with respect to executive officers is contained in Part I of this Form 10-K
under the caption (cid:141)Executive Officers of the Registrant.(cid:142)

Our Board of Directors has adopted Pentair(cid:144)s Code of Business Conduct and Ethics and designated it as the code
of ethics for the Company(cid:144)s Chief Executive Officer and senior financial officers in accordance with SEC rules.
The Code of Business Conduct and Ethics also applies to all employees and directors in accordance with New
York Stock Exchange Listing Standards. We have posted a copy of Pentair(cid:144)s Code of Business Conduct and
Ethics on our website at www.pentair.com/corp.html. Pentair(cid:144)s Code of Business Conduct and Ethics is also
available in print to any shareholder who requests it in writing from our Secretary. We intend to satisfy the
disclosure requirements under Item 10 of Form 8-K regarding amendments to, or waivers from, Pentair(cid:144)s Code of
Business Conduct and Ethics by posting such information on our website at www.pentair.com/corp.html.

Our Board of Directors has also adopted Corporate Governance Principles and written charters for our Audit and
Finance Committee, Compensation Committee, Governance Committee and International Committee. We have
posted copies of those documents on our website at www.pentair.com/corp.html. Copies of these documents are
also available in print to any shareholder who requests them in writing from our Secretary.

We are not including the information contained on our website as part of, or incorporating it by reference into,
this report.

ITEM 11. EXECUTIVE COMPENSATION

Information required under this item is contained in our Proxy Statement for our 2004 annual meeting of
shareholders under the captions (cid:141)Election of Directors(cid:142) and (cid:141)Executive Compensation(cid:142) and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

Information required under this item is contained in our Proxy Statement for our 2004 annual meeting of
shareholders under the captions (cid:141)Security Ownership of Management and Beneficial Ownership(cid:142) and (cid:141)Securities
Authorized for Issuance under Equity Compensation Plans(cid:142) and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

No matters require disclosure here.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required under this item is contained in our Proxy Statement for our 2004 annual meeting of
shareholders under the captions (cid:141)Independent Auditor Fees(cid:142) and is incorporated herein by reference.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

PART IV

(a)

List of documents filed as part of this report:

(1)

Financial Statements

Consolidated Statements of Income for the Years Ended December 31, 2003, 2002, and
2001

Consolidated Balance Sheets as of December 31, 2003 and December 31, 2002

Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002, and
2001

Consolidated Statements of Changes in Shareholders(cid:144) Equity for the Years Ended
December 31, 2003, 2002, and 2001

Notes to Consolidated Financial Statements

(2)

Financial Statement Schedules

Schedule II (cid:132) Valuation and Qualifying Accounts

All other schedules for which provision is made in the applicable accounting regulations of
the Securities and Exchange Commission have been omitted because they are not applicable
or the required information is shown in the financial statements or notes thereto.

(3)

Exhibits

The exhibits of this Annual Report on Form 10-K included herein are set forth on the
attached Exhibit Index beginning on page 79.

(b)

Reports on Form 8-K

Pentair filed a Form 8-K dated October 16, 2003 reporting under Item 9 and Item 12 the
earnings results for the third quarter and first nine months of 2003.

Pentair filed a Form 8-K dated November 24, 2003 reporting under Item 5 the appointment
of David A. Jones and Glynis Bryan to the Board of Directors of the Company and the
resignation of William H. Hernandez from the Board of Directors of the Company.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 4,
2004.

PENTAIR, INC.

By /s/ David D. Harrison

David D. Harrison
Executive Vice President and Chief
Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated, on March 4, 2004

Signature

Title

/s/ Randall J. Hogan

Randall J. Hogan

/s/ David D. Harrison

David D. Harrison

Glynis A. Bryan

Barbara B. Grogan

Charles A. Haggerty

David A. Jones

Stuart Maitland

Augusto Meozzi

William T. Monahan

Karen E. Welke

*By /s/ Louis L. Ainsworth

Louis L. Ainsworth
Attorney-in-fact

Chairman and Chief Executive Officer

Executive Vice President and Chief Financial Officer

Director

Schedule II (cid:132) Valuation and Qualifying Accounts
Pentair, Inc. and subsidiaries

In thousands

Allowances for doubtful accounts
Year ended December 31, 2003
Year ended December 31, 2002
Year ended December 31, 2001

(1) Uncollectible accounts written off, net of recoveries.
(2) Result of acquisitions and foreign currency effects.

Balance
beginning
of period

Additions
charged to
costs and
expenses

Deductions (cid:132)
describe

Other
changes
add (deduct)
describe

Balance
end of
period

$16,676
$14,142
$18,636

$3,315
$6,209
$1,884

$6,236(1)
$4,942(1)
$6,601(1)

$1,604(2)
$1,267(2)
$ 223(2)

$15,359
$16,676
$14,142

Exhibit Index

Exhibit
Number

Exhibit

2.1

3.1

3.2

4.1

4.2

4.3

10.1

10.2

10.3

10.4

10.5

10.6

10.7

Stock Purchase Agreement among Pentair, Inc., WICOR, Inc., and Wisconsin Energy Corporation
dated February 3, 2004 (Incorporated by reference to Exhibit 99.2 contained in Pentair(cid:144)s Current
Report on Form 8-K dated February 3, 2004).

Second Restated Articles of Incorporation as amended through May 1, 2002 (Incorporated by
reference to Exhibit 3.1 contained in Pentair(cid:144)s Quarterly Report on Form 10-Q for the quarterly
period ended March 30, 2002).

Third Amended and Superceding By-Laws as amended effective through May 1, 2002 (Incorporated
by reference to Exhibit 3.2 contained in Pentair(cid:144)s Quarterly Report on Form 10-Q for the quarterly
period ended March 30, 2002).

Rights Agreement as of July 21, 1995 between Norwest Bank N.A. and Pentair, Inc. (Incorporated by
reference to Exhibit 4.1 contained in Pentair(cid:144)s Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1995).

Form of Indenture, dated June 1, 1999, between Pentair, Inc. and U.S. Bank National Association, as
Trustee Agent (Incorporated by reference to Exhibit 4.2 contained in Pentair(cid:144)s Annual Report on
Form 10-K for the year ended December 31, 2000).

Note Purchase Agreement dated as of July 25, 2003 for $50,000,000 4.93% Senior Notes, Series A,
due July 25, 2013, $100,000,000 Floating Rate Senior Notes, Series B, due July 25, 2013, and
$50,000,000 5.03% Senior Notes, Series C, due October 15, 2013 (Incorporated by reference to
Exhibit 10.22 contained in Pentair(cid:144)s Current Report on Form 8-K dated July 25, 2003).

Pentair(cid:144)s Supplemental Employee Retirement Plan as Amended and Restated effective August 23,
2000 (Incorporated by reference to Exhibit 10.1 contained in Pentair(cid:144)s Current Report on Form 8-K
filed September 21, 2000).*

Pentair(cid:144)s 1999 Supplemental Executive Retirement Plan as Amended and Restated effective August
23, 2000 (Incorporated by reference to Exhibit 10.2 contained in Pentair(cid:144)s Current Report on Form 8-
K filed September 21, 2000).*

Pentair(cid:144)s Restoration Plan as Amended and Restated effective August 23, 2000 (Incorporated by
reference to Exhibit 10.3 contained in Pentair(cid:144)s Current Report on Form 8-K filed September 21,
2000).*

Pentair, Inc. Omnibus Stock Incentive Plan as Amended and Restated, effective January 1, 2003
(Incorporated by reference to Appendix 2 contained in Pentair(cid:144)s Proxy Statement for its 2003 annual
meeting of shareholders).*

Fourth Amended and Restated Compensation Plan for Non-Employee Directors (Incorporated by
reference to Exhibit 10.12 contained in Pentair(cid:144)s Annual Report on Form 10-K for the year ended
December 31, 1996).*

Amendment effective August 23, 2000 to Pentair(cid:144)s Fourth Amended and Restated Compensation
Plan for Non-Employee Directors (Incorporated by reference to Exhibit 10.5 contained in Pentair(cid:144)s
Current Report on Form 8-K filed September 21, 2000).*

Amended and Restated Pentair, Inc. Outside Directors Nonqualified Stock Option Plan as amended
through February 27, 2002 (Incorporated by reference to Exhibit 10.7 contained in Pentair(cid:144)s Annual
Report on Form 10-K for the year ended December 31, 2001).*

10.8

10.9

10.10

10.11

10.12

10.13

10.14

10.15

10.16

10.17

10.18

10.19

10.20

Pentair, Inc. Non-Qualified Deferred Compensation Plan effective January 1, 1996 (Incorporated by
reference to Exhibit 10.17 contained in Pentair(cid:144)s Annual Report on Form 10-K for the year ended
December 31, 1995).*

Trust Agreement for Pentair, Inc. Non-Qualified Deferred Compensation Plan between Pentair, Inc.
and State Street Bank and Trust Company (Incorporated by reference to Exhibit 10.18 contained in
Pentair(cid:144)s Annual Report on Form 10-K for the year ended December 31, 1995).*

Amendment effective August 23, 2000 to Pentair(cid:144)s Non-Qualified Deferred Compensation Plan
effective January 1, 1996 (Incorporated by reference to Exhibit 10.8 contained in Pentair(cid:144)s Current
Report on Form 8-K filed September 21, 2000).*

Pentair, Inc. Executive Officer Performance Plan as Amended and Restated, effective January 1, 2003
(Incorporated by reference to Appendix 1 contained in Pentair(cid:144)s Proxy Statement for its 2003 annual
meeting of shareholders).*

Pentair(cid:144)s Management Incentive Plan as amended and restated January 1, 2002 (Incorporated by
reference to Exhibit 10.16 contained in Pentair(cid:144)s Annual Report on Form 10-K for the year ended
December 31, 2001).*

Amendment effective January 1, 2003 to Pentair(cid:144)s Management Incentive Plan (Incorporated by
reference to Exhibit 10.15 contained in Pentair(cid:144)s annual Report on Form 10-K for the year ended
December 31, 2003).*

Employee Stock Purchase and Bonus Plan as amended and restated effective January 1, 1992
(Incorporated by reference to Exhibit 10.16 contained in Pentair(cid:144)s Annual Report on Form 10-K for
the year ended December 31, 1991).*

Pentair(cid:144)s Flexible Perquisite Program as amended effective January 1, 1989 (Incorporated by reference
to Exhibit 10.20 contained in Pentair(cid:144)s Annual Report on Form 10-K for the year ended December 31,
1989).*

Form of Key Executive Employment and Severance Agreement effective August 23, 2000 for Randall
J. Hogan (Incorporated by reference to Exhibit 10.11 contained in Pentair(cid:144)s Current Report on Form 8-
K filed September 21, 2000).*

Form of Key Executive Employment and Severance Agreement effective August 23, 2000 for Louis
Ainsworth, Richard J. Cathcart, Michael V. Schrock, Karen A. Durant, David D. Harrison, Charles M.
Brown, Frederick S. Koury and others (Incorporated by reference to Exhibit 10.13 contained in
Pentair(cid:144)s Current Report on Form 8-K filed September 21, 2000).*

Term Loan Agreement dated as of August 8, 2002, by and between Pentair and Credit Lyonnais New
York Branch (Incorporated by reference to Exhibit 10.26 contained in Pentair(cid:144)s Quarterly Report on
Form 10-Q for the quarterly period ended September 28, 2002).

Employment Agreement dated October 17, 2001, between Pentair, Inc. and Richard J. Cathcart.
(Incorporated by reference to Exhibit 10.31 contained in Pentair(cid:144)s Quarterly Report on Form 10-Q for
the quarterly period ended September 29, 2001).*

Facility Commitment Letter for $850 million Senior Term Loan Facility among Bank of America,
N.A., Banc of America Securities LLC, U.S. Bank National Association and Pentair Inc. (Incorporated
by reference to Exhibit 99.3 contained in Pentair(cid:144)s Current Report on Form 8-K dated February 3,
2004).

10.21

31.1

31.2

32.1

32.2

Amended and Restated Credit Agreement dated as of July 25, 2003 among Pentair, Inc., various
subsidiaries of Pentair, Inc., and various financial institutions listed therein, and Bank of America,
N.A., as Administrative Agent (Incorporated by reference to Exhibit 10.21 contained in Pentair(cid:144)s
Current Report on Form 8-K dated July 25, 2003).

List of Pentair subsidiaries.

Consent of Independent Auditors (cid:132) Deloitte & Touche LLP

Power of Attorney

Certification required by Rule 13a-14(a).

Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

A management contract or compensatory contract.

P R I C E

Sandy Allen

$50

$40

$30

$20

$10

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Max Cornwallis

Mitch Miller

Brian Wong

jan (cid:213)03 feb mar apr may jun jul aug sep oct nov dec jan (cid:213)04 feb

5500 Wayzata Boulevard
Suite 800
Golden Valley
Minnesota 55416
763.545.1730 tel