Pentair
Annual Report 2004

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four simple words Pentair, Inc. Summary Annual Report 2004 a1 financial highlights Pentair, Inc. and Subsidiaries Years ended December 31 (Dollars in thousands, except per-share data) 2004 2003 2002 2001 2000 Operations Net sales $ 2,278,129 $1,642,987 $ 1,488,453 $ 1,572,435 $ 1,675,972 Operating income 247,242 170,210 131,295 86,205 171,803 Excluding certain items (1) 247,242 170,210 131,295 154,098 218,367 Net income (cid:209) continuing operations Excluding certain items (1) Diluted EPS (cid:209) continuing operations Excluding certain items (1) 137,024 137,024 1.35 1.35 98,150 98,150 0.99 0.99 74,999 74,999 0.75 0.75 30,748 83,788 83,489 119,200 0.31 0.85 0.86 1.23 Net cash provided by operating activities 264,091 262,939 270,794 232,334 184,947 Capital expenditures (2) Free cash flow (3) 48,867 43,622 56,696 53,668 68,041 215,224 219,317 214,098 178,666 116,906 Number of employees at year end 12,900 9,000 8,600 8,700 9,900 Other financial data Total debt 736,105 806,493 735,085 723,706 913,974 Shareholders(cid:213) equity 1,447,794 1,261,478 1,105,724 1,015,002 1,010,591 Total debt as a percent of total capital Return on average shareholders(cid:213) equity 33.7% 12.6% 39.0% 11.9% 39.9% 12.3% 41.6% 3.2% 47.5% 5.6% Cash dividends declared per common share Closing stock price 0.43 43.56 0.41 22.85 0.37 17.28 0.35 18.26 0.33 12.09 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) (cid:209) (cid:209) (cid:209) (cid:209) (cid:209) (cid:209) (cid:209) (cid:209) (cid:209) (cid:209) (cid:209) (cid:209) (cid:209) (cid:209) (cid:209) (cid:209) (cid:209) 41,060 (11,291) 0.30 26,833 (3,861) 0.23 19,393 (7,384) 0.12 27,171 (3,768) 0.24 Weighted-average shares (cid:209) diluted 101,706 99,620 99,489 98,594 97,290 On May 17, 2004, our Board of Directors approved a 2-for-1 stock split in the form of a 100 percent stock dividend payable on June 8, 2004, to shareholders of record as of June 1, 2004. All share and per share information presented has been retroactively restated to reflect the effect of this stock split. Effective after the close of business October 2, 2004, we completed the sale of the Tools Group to The Black & Decker Corporation. Our consolidated financial statements have been restated to reflect the Tools Group as a discontinued operation for all periods presented. (1) Excludes restructuring charge, cumulative change in accounting principle, and goodwill amortization net of any related tax effects. (2) 2002 includes $23.0 million for the acquisition of a previously leased facility. (3) Free cash flow defined 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 indefinite life no longer be amortized. This standard did not require restatement of prior period amounts to be consistent with the current year presentation. Certain financial 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. Pentair is a focused diversified industrial manufacturing company headquartered in Minnesota. Its Water Group is a global leader in providing innovative products and systems used worldwide in the movement, treatment, storage and enjoyment of water. Pentair(cid:213)s Enclosures Group is a leader in the global enclosures market, designing and manufacturing standard, modified, and custom enclosures that house and protect sensitive electronics and electrical components. With 2004 revenues of $2.28 billion, Pentair has approximately 13,000 employees worldwide. Pentair is a superior operating company driving growth (cid:209) both organic and acquired with a proven talent base discipline drive talent action and boldly managing the portfolio 1 to our shareholders Discipline, drive, talent, action. These four simple words represent the core strategies that generated total returns of 92.3 percent (share price appreciation and dividends) for Pentair shareholders in 2004. This outstanding performance reflects an enviable list of accomplishments. Included among them are the following: Æ We traded the earnings of the Tools Group, and its prospects, for the earnings of WICOR Inc., and water market prospects, for a net cost of approximately $100 million. With the WICOR acquisition, we will nearly double our water technology revenue and expand our global reach. We completed the transactions earlier than expected, and finished the year with a considerably stronger balance sheet. Æ We achieved sales growth of 39 percent for the year, or 14 percent on an organic basis (removing the effects of acquisitions and excluding favorable foreign currency exchange). Total revenues were $2.3 billion, or $3.1 billion including the discontinued businesses. This demonstrates the value of the organic growth initiatives we instituted two years ago, and supports our belief that we have positioned the Company for growth in the global water and enclosures markets. So, even while the transformation was a huge undertaking, we clearly kept our eyes on the customer. Æ Earnings Per Share from continuing operations totaled $1.35, up 36 percent over the prior year. We also improved the earnings quality of our Company, moving margins from 10.4 percent in 2003 to 10.9 percent in 2004. At the Group level, 2004 margins in Water, excluding the impact of the WICOR acquisition, increased 40 basis points over those of 2003. In Enclosures, margins in 2004 were 350 basis points higher than in 2003. Our lean enterprise program (cid:209) known as the Pentair Integrated Management System (PIMS) (cid:209) and supply management activities continue to drive margin improvement. 2 Æ Our integration of both the Everpure and the former WICOR water businesses is proceeding well. Everpure has met our aggressive expectations in the first full year of ownership and the former WICOR businesses are being integrated efficiently and effectively. Æ We generated $215 million of free cash flow (cash flow from operating activities less capital expenditures). Higher margins, coupled with on-going improvement in working capital productivity, continue to improve our ability to consistently generate positive cash flows. Æ We reduced our outstanding debt by $70 million during 2004, while completing the largest acquisition in our history. At the end of 2004, Pentair(cid:213)s debt-to-total-capital ratio was 33.7 percent (cid:209) approximately five points lower than what it was in late 2003. Clearly, we have the financial resources necessary to further expand our Water and Enclosures businesses. Æ We announced a dividend rate increase of 18 percent to an annualized rate of $0.52 per share effective in February 2005, and implemented a two-for-one stock split in June 2004. The dividend increase was the 29th consecutive annual increase that Pentair has delivered to its shareholders. These are no small feats. Many companies try to transform themselves and fail. Pentair, however, has had three successful transformations since 1966. More importantly, we maintained our momentum in 2004, accomplishing many other key projects and meeting our operating objectives (cid:209) even while completing the largest transformation in our Company(cid:213)s history. These actions were consistent with our strategy to drive shareholder value by focusing on attractive growth markets where we can better control our own destiny, and building and executing a set of key operating disciplines to make Pentair a high performance company. 3 discipline During the past three years, Pentair has worked to establish and maintain a set of operating disciplines designed to impart structure and accountability throughout the organization. Included among them is a commitment to deliver ever-improving results with measurements to track sales, operating income, earnings per share, receivables and inventories, free cash flow, debt, and a variety of market measures. Pentair has advanced this process by adopting key operating practices such as comprehensive standardized internal reporting processes; robust command and control mechanisms; and, more recently, the mechanism of strategy deployment as a means of linking actions, strategies, and goals. Applying these disciplines to our strategic initiatives, we are more effectively managing our cash flow, supply management and PIMS/lean enterprise processes, talent management, and organic growth initiatives across Pentair. 4 e 5 We are completing the integration of the former WICOR businesses and continuing our journey to a high performance company. We continue to drive our operating disciplines (cid:209) honed over the past four years at what are now our highest-performing businesses (cid:209) into all of our operations. We are reinforcing our efforts to build our talent base and equip our employees with the skills and tools they need to help grow Pentair. And, we have focused greater attention on the engines that will drive that growth, both organically and through acquisitions, in the future. Accelerating international growth, operating initiatives We have already taken many actions to accelerate growth at Pentair and continue to identify attractive new opportunities to strengthen shareholder value. Our vital next steps in building a fast-growing, global company include developing new growth platforms and seizing opportunities in markets beyond North America. To assist in these efforts, we named Richard Cathcart as vice chairman of Pentair in February 2005. Rick has taken on primary responsibility for strategic growth initiatives, particularly international growth and business development. That means he will drive our strategic action for organic growth and accelerate sales around the world. In 2004, Pentair(cid:213)s sales into international markets were 23 percent of total sales; over the next five years, we intend to increase that percentage to 40 percent. We believe this objective is achievable, as we now have two attractive businesses (cid:209) Water and Enclosures (cid:209) that are global in nature. Rick is the right person for this important role, having identified water as a growth platform for Pentair in 1995. In just 10 years, Rick led Pentair(cid:213)s water business from $100 million of sales to a $2 billion global leader. In 2004, he led the integration of the WICOR Inc. businesses, effectively doubling the size of our Water Group. And, throughout these significant transitions, he led a continued focus on results. Your board of directors and management team are confident Rick will strive for even greater success in Pentair(cid:213)s growth initiatives through his proven leadership, intellect, integrity and commitment. 6 drive Pentair focuses on capturing organic and acquired growth opportunities across the organization. Growing organically requires that we focus on the customer and identify new and different opportunities to serve them. We are applying our growth evaluation framework (cid:209) which we call our growth (cid:210)trees(cid:211) (cid:209) to prioritize and track performance. These actions have proven-out in our successful efforts to segment distribution, enter new markets, and work with customers to identify emerging markets and new products. We must also capture opportunities for acquired growth. In identifying these opportunities, we will employ comprehensive financial evaluations, work to articulate the strategic role of the acquired business within Pentair, and form clear and concrete integration and leadership plans that deliver increased value for our shareholders. Pentair is building on the strengths of its proven talent base. Through our shared values, our Code of Business Conduct, and our ongoing desire not just to win, but to win right, Pentair has established a talent strong and supportive cultural foundation. We are building on that foundation by training our employees to succeed in our high-performance organizations, by nurturing and educating future leaders of the organization, by sharing best practices in professional development, and by employing the use of leadership and functional area councils that share and implement performance-enhancing strategies. 8 Growth plans target customers, channel management, new geographies, and new products The organic growth emphasis at Pentair is centered on four elements: building a stronger customer focus, more effectively managing the channels of distribution, entering new geographies, and developing innovative new products. In early 2005, for example, we announced an important strategic alliance with Ecolab (cid:209) the leading global developer and marketer of premium cleaning, sanitizing, pest elimination, maintenance and repair products for a broad array of industries. Under the agreement, Ecolab is delivering Pentair(cid:213)s market-leading water treatment and filtration solutions to the foodservice and hospitality markets through Ecolab(cid:213)s world-class sales and service organization. The great breadth and depth of Pentair(cid:213)s product lines, combined with Ecolab(cid:213)s sales, marketing and service capabilities, will strengthen our position and increase our volume by providing filtration and water conditioning customers with higher levels of service and a broader product offering. Steps we took in recent years to segment distribution in our North American electrical enclosures markets serve as another example of how Pentair can grow by addressing the needs of the customer. We strengthened our leading position in electrical enclosures by segmenting our distribution according to end-industry markets. This allowed us to tailor distribution to end markets such as industrial, commercial and networking, and added hundreds of new distributors to the base. The segmentation process has resulted in more than $50 million of sales from new distributors added since 1999, with about 30 percent of those added sales coming from targeted growth markets. An example of how product development plays a role in our growth plans can be found in our Enclosures Group(cid:213)s Advanced Telecommunications Computing Architecture (ATCA) packaging system. This product is the industry(cid:213)s first open architecture platform specification for carrier-grade central office equipment. Our global Enclosures business was directly involved in the establishment of the standard and was the first in the industry to provide a complete range of fully functional units, less than 12 months after approval of the standard. The ATCA standard reflects the innovative thinking that typifies the strong organic growth results in our Enclosures business. Pentair will continue to grow by addressing customer needs, by more effectively managing distribution channels, by entering new geographies, and by introducing new and innovative products throughout the world. 9 t action Pentair has made three successful transformations since its inception in 1966. Of these, the most recent transformed Pentair to a water-led diversified manufacturer from a tools-led manufacturer and, in the process, added more than $2 billion to Pentair(cid:213)s market capitalization. Through bold portfolio management and by targeting our most attractive markets, we have achieved higher performance levels and delivered higher returns to our shareholders, thereby positioning the Company for new growth and added value. 10 Driving high performance Looking ahead, our plans center on actions in five key areas: 1. Achieve excellence in our operating initiatives In 2001, Pentair began improving its operating practices through three key strategic initiatives: our PIMS lean enterprise practices, supply management, and cash flow. By working these initiatives hard, we established consistently high levels of free cash flow in each of the past four years, reduced our costs, improved productivity, and crafted a stronger operating entity overall. Today, we are working to further institutionalize these processes, making them part of our culture. 2. Craft a stronger global orientation Our international strategy is a work in progress. At this stage, we are building the leadership necessary to drive international growth and marshal the resources to support it. While most of our resources are deployed in our key established markets, the greatest growth opportunities reside in other regions of the globe. We are actively working to align our resources and investments with these bright opportunities, particularly those in Asia and Eastern Europe. 11 3. Grow through internal development and acquisitions In 2002, Pentair launched an initiative to exploit our growth prospects, setting a five-year goal of achieving organic sales growth of five to eight percent annually. The results thus far are encouraging, with both of our operating groups recording positive organic growth in 2003 and double-digit organic growth in 2004. As previously mentioned, we believe we can accelerate organic growth through our emphasis on customers, channels, geographies, and products. Acquisitions will continue to play a role in our growth strategy. We are confident we have built a good acquisition capability, and we are institutionalizing that capability so that it can be sustained and repeated with each new acquisition. Our disciplines require that we have a well-articulated strategic fit, a strong rationale for our ownership, a clear leadership plan, and a detailed integration plan, in addition to the bottom-up financial analysis. 4. Maintain our values My shorthand for Pentair(cid:213)s ethics and business conduct consists of two words: Win Right. By that, I mean that Pentair sets its sights on winning in all aspects of business but, more importantly, we want to win only in ways that are consistent with our high standards of ethics. Underlying our aggressive plans for 2005 is an ongoing commitment to remaining forthright and ethical in all aspects of our business, and especially so in matters related to finance and accounting practices. We worked hard to make certain that we were in compliance with Section 404 of the Sarbanes-Oxley Act during 2004, and we are proud to report that we had no material weaknesses and received an unqualified opinion from our external auditor on the effectiveness of our internal control over financial reporting. For 38 years, Pentair has enjoyed a reputation as a conservative, no-nonsense company that operates in accordance with a long-standing Code of Business Conduct. We all place great value in that reputation. We will win, but we will win right. 12 5. Build talent to drive results The talent management initiative launched in 2001 has grown to encompass a variety of programs and best practices that will nurture talent across the organization over the long term. Short term, we have strengthened our human resources function to support general management in this critical area. For example, we upgraded the talent in our supply management organization, enabling us to achieve purchasing synergies from acquisitions. Further, we are focusing on sharing our operating disciplines enterprise-wide, supporting professional development, and building competencies in international management and in other key functional areas, such as engineering and strategic marketing. This new, more proactive talent management process will be a central part of driving Pentair(cid:213)s high performance culture in the years ahead. A new understanding In summary, we believe we have the business mix, the leadership, and the resources to substantially improve our performance in 2005 and beyond. We will achieve our goals by remaining close to our businesses, staying grounded and practical in our outlook, practicing our proven competencies, and expanding our skill sets. Our future is made more secure through efforts to expand internationally, to achieve organic growth and balance it with disciplined acquisitions, and to extend our reach through new channels of commerce and product offerings. Discipline, drive, talent, action. Our performance in 2004 reflects the potential that these words (cid:209) and the underlying value proposition they represent (cid:209) offer for Pentair shareholders. We enter 2005 with a new understanding of what is possible and with greater confidence in our abilities to drive shareholder value by focusing on attractive growth markets where we can better control our own destiny and execute our operating disciplines. We at Pentair look forward to the future and thank you for your support. R a n da l l J. H o g a n Chairman and Chief Executive Officer 13 overview groups markets offerings brands Water Pump Systems Residential, commercial and municipal applications for sump, well and waste water; turf and agricultural spraying and irrigation; fire protection; car wash; marine; HVAC; water treatment; foodservice; water feature; pressure cleaning; and general commercial and industrial applications. Filtration and Purification Residential, commercial, industrial, municipal, foodservice, recreational vehicles, aviation, and marine. Pool and Spa Residential, commercial, and municipal markets for domestic and international in-ground and above-ground pools, spas, jetted tubs, aquarium, pond and aquaculture applications. Products range from light-duty diaphragm pumps to high-flow turbine pumps and solid handling pumps designed for water and wastewater applications, agricultural spraying, as well as pressure tanks for residential applications. Control valves; residential, commercial, and industrial filtration housings; replaceable cartridge elements; carbon block filtration; drinking water filtration system components; fiberglass wound pressure tanks and vessels, brine cabinets, and storage tanks; pumps for recreational vehicles, marine, industrial applications and foodservice. A complete line of commercial and residential pool/spa equipment and accessories including pumps, filters, heaters, lights, automation, automatic pool cleaners, commercial deck equipment, barbeque deck equipment, aquatic pond products and accessories, pool tile and interior finishing surfaces, maintenance equipment, spa/jetted tub hydrotherapy fittings and pool/spa accessories. STA-RITE¤, Myers¤, Flotec¤, Aurora¤, Hypro¤, Hydromatic¤, Fairbanks Morse¤, Berkeley¤, AermotorTM, Water Ace¤, Layne & BowlerTM, Simer¤, Verti-lineTM, Sherwood¤, SherTech¤, DiamondTM, FoamPro¤, OngaTM, NocchiTM, Shur-Dri¤, SHURflo¤, and Edwards¤. Fleck¤; SIATATM; CodeLine¤; StructuralTM; WellMateTM; American Plumber¤, Armor¤, Everpure¤, PentekTM, OMNIFILTER¤, Park InternationalTM, SHURflo¤, and FibredyneTM. Pentair Pool Products¤, Pentair Water Pool and SpaTM, National Pool Tile Group¤, Pentair Aquatics¤, STA-RITE¤, Paragon Aquatics¤, Pentair Spa & BathTM, Kreepy Krauly¤, Compool¤, WhisperFlo¤, PoolShark¤, LegendTM, RainbowTM, Ultra Jet¤, Vico¤, FIBERworks¤, and IntellitouchTM. Enclosures Electrical Automotive; petroleum and petrochemical; food and beverage; machine tool and other industrial manufacturing customers; defense and security; and commercial construction. Enclosures, cabinets, data networking and communications, structural support, and thermal protection solutions to protect electrical and electronic control components, and instruments. Electronic Telecom, computer networks, data communication, industrial controls, transport, test and measurement, medical, defense, and aerospace. Electronic OEMs Datacom, telecom, medical, security/defense, test and measurement, general industrial and semiconductor equipment. 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, modified and custom electronic enclosure solutions ranging from Schroff brand electronic products to stamped chassis, custom indoor and outdoor cabinets, aluminum enclosures and slide rail/cable management solutions. Solutions offered include prototype through high-volume production, soft-tool fabrication through stage/progressive tooling, and complete system integration capabilities from Level 1 through 5. Hoffman¤ Schroff¤ Schroff¤, TaunusTM, Pentair Electronic PackagingTM. 14 } } customers Professional distributors, plumbing wholesalers, catalog distributors, hardware co-op distributors, supply houses, contractors, original equipment manufacturers, home centers, independent dealers, vertically integrated dealers, food and beverage companies, builders, specialty pool retailers, service companies, and swimming pool buying groups. Industrial/Electrical MRO, OEM, electrical and data contractors; Motorola, Ericsson, Siemens, Intel, Philips, and electronic components distributors; Dell, HP, Motorola, Lucent, Abbott Labs, General Electric, Applied Materials, and ASML. } } competitors locations Astral, Cuno, Ebara, Ecowater, Flexcon, Flint & Walling, Flowserve, Gormann Rupp, Grundfos, Hayward, ITT, Jandy, Osmonics/GE, Pall, Peerless, Raypak, Wayne, and Zodiac. Ashland and Chardon, Ohio; North Aurora and Hanover Park, Illinois; Kansas City, Kansas; Delavan, Brookfield and Sheboygan, Wisconsin; Murrieta, Cypress, and Long Beach, California; Grand Island, Nebraska; New Brighton, Minnesota; Portland, Oregon; Dover, New Hampshire; Monterrey and Reynosa, Mexico; Buc and Colombes, France; Herentals, Belgium; Pisa, Florence, and Milan, Italy; Longstanton Cambridge and Billingham, England; Melbourne, Australia; Coimbatore, New Delhi, and Goa, India; Suzhou and Shanghai, China. APW, Cooper B-Line, Elma, Hammond, Kn(cid:159)rr, Rittal, Saginaw, Sanmina, Wiegmann, and regional competitors. Mt. Sterling, Kentucky; Anoka, Minnesota; Warwick, Rhode Island; Des Plaines, Illinois; Scarborough, Ontario, Canada; Reynosa and Mexico City, Mexico; Boituva, Brazil; Straubenhardt, Germany; Hemel Hempstead, United Kingdom; Betschdorf, France; Skarpn(cid:138)ck, Sweden; Varese, Italy; Shinyokohama, Japan; Singapore; Qingdao, China. 15 debt debt debt receivables receivables receivables inventories inventories inventories 1,200 1,000 800 600 400 200 0 1,200 1,200 60% 1,000 1,000 50% 800 600 800 40% 600 30% 400 400 20% 200 200 10% 0 0 0 400 60% 60% 50% 50% 40% 40% 200 30% 30% 350 300 250 150 100 50 20% 20% 10% 10% 0 0 0 400 350 300 250 200 150 100 50 0 400 70 350 60 300 50 250 40 200 30 150 20 100 10 50 0 0 350 300 250 200 150 100 50 0 70 60 50 40 30 20 10 0 70 60 50 40 30 20 10 0 350 300 250 200 150 100 50 0 350 80 70 300 60 250 50 200 40 150 30 100 20 50 10 0 0 80 70 60 50 40 30 20 10 0 80 70 60 50 40 30 20 10 0 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 2,500 2,000 1,500 1,000 500 0 100% 60% 400 40% 350 300 20% 250 200 0% 150 100 50 0 60% 50% 40% 30% 20% 10% 0 8 7 2 , 2 8 1 2 4 5 1 1 3 1 oi % 6 . 8 3 1 250 200 150 100 50 0 140% 120% 100% 80% 60% 40% 20% 0% 1,200 1,000 800 600 400 200 0 2,500 2,000 1,500 1,000 500 0 100% 80% 60% 40% 20% 0% sales % 6 . 0 9 debt 80% receivables 1,200 1,200 80% 1,200 80% 6 7 6 , 1 2 7 5 , 1 8 8 4 , 1 2,500 8 7 2 , 2 2,500 250 3 4 2,000 6 , 1 6 7 2,000 6 1 , 6 2 7 200 7 6 5 , 1 1 , 1,500 1,500 150 8 1 2 2 7 5 , 1 8 8 4 1 , 3 4 6 1 , 8 8 4 4 5 , 1 1 8 7 2 , 2 3 4 6 , 1 1 3 1 7 4 2 250 8 7 2 , 2 200 0 7 1 150 1,200 1,000 1,000 100 500 500 50 0 0 0 250 8 1 2 200 1.50 8 1 2 debt 1.25 3 2 debt . 1 4 5 1 1 3 1 4 1.00 5 1 0.75 0.50 150 1,200 100 1,000 0 7 1 5 8 . 1 0 3 1 7 4 2 0 7 1 5 7 . 0 7 4 2 1.50 5 3 . 1 1.25 1.00 9 9 . 0 1.50 3 2 1.25 1 . 1.00 250 3 2 . 1 200 5 8 150 0 . 60% 0.75 60% 0.75 50% 0.50 50% 0.50 5 8 . 0 7 400 1 1 5 7 0 . 5 7 . 0 400 100 350 350 50 800 50 800 0.25 600 0 600 0 0 40% 0.25 40% 0.25 50 300 300 250 250 30% 0 30% 0 0 200 200 100 1,000 . 250 5 3 1 5 3 9 5 . 4 1 1 1 1 2 2 2 receivables receivables 9 200 9 7 9 1 . 0 9 9 . 0 250 200 9 7 1 inventories inventories 4 1 2 9 1 2 4 1 2 5 1 2 9 1 2 5 1 2 9 7 1 70 60 50 40 7 70 1 1 60 50 40 150 100 50 0 150 7 1 1 100 50 0 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 400 400 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 150 ’00 ’01 ’02 ’03 ’04 150 ’00 ’01 ’02 ’03 ’04 eps 100 free cash flow 100 cash fl ($ in millions) 50 50 cash fl 30 30 ’00 ’01 ’02 ’03 ’04 20 cash fl 10 20 10 sales % 6 0 9 . net sales sales ($ in millions) sales debt debt 100% 100% debt % 6 140% . 0 9 % 6 . 0 9 oi % 6 . 8 3 1 200 0 oi adjusted operating eps income ($ in millions) oi 200 % 6 receivables 0 8 3 ’00 ’01 ’02 ’03 ’04 1 receivables ’00 ’01 ’02 ’03 ’04 % 6 . 8 3 1 receivables . 140% 140% 20% 20% 10% 10% eps 0 0 120% 100% 80% 60% 40% 20% 0% 60% 70 40% 60 50 20% 40 0% 30 1,000 1,000 1,000 60% 800 600 800 600 % 0 400 9 800 40% 600 20% % 400 1 3 0% 200 200 Pentair S&P 500 DJIA 0 400 200 0 . . 0 60% 60% 50% 50% 40% 120% inventories 60% 400 100% 350 50% 80% 300 120% 400 100% 350 80% 300 400 350 300 40% 60% 250 60% 250 2,500 2,500 250 350 40% 300 30% 250 % % 0 20% . 1 9 200 . 3 30% % 0 20% . 9 30% 200 40% % 150 20% 6 7. 100 0% 50 Pentair S&P 500 DJIA % 20% 1 . 3 % 6 5 10% . 10% 10% 150 Pentair S&P 500 DJIA 0 0 100 Pentair S&P 500 DJIA 0 20 0 , 2 7 8 % % 5 8 6 6 4 1 . 7. , 5 1 200 6 7 2,000 6 % 150 1 6 . 5 100 200 40% 2,000 150 20% 100 1,500 0% 50 50 Pentair S&P 500 DJIA 1,000 0 0 10 Pentair S&P 500 DJIA 0 30 % 6 20 7. 3 4 6 8 , 8 1 4 1 1,000 1,500 40 30 , , 70 60 50 40 8 7 2 2 , 3 4 6 1 , 70 60 50 8 7 2 40 2 , 30 20 10 0 350 70 300 60 250 50 250 200 8 40 1 2 250 200 150 30 200 150 100 20 150 50 10 100 0 100 0 80 70 6 60 2 7 7 6 5 1 50 , 1 , 20 0 inventories 0 inventories inventories 0 0 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 350 300 250 8 200 1 2 150 4 100 5 1 50 4 5 1 1 3 1 350 300 250 200 150 0 7 1 100 1 3 50 1 7 4 2 7 4 2 0 7 1 80 70 60 50 1.50 40 1.25 30 1.00 20 1.50 3 2 1.25 1 . 1.00 80 70 60 50 40 30 20 3 2 1 . 5 8 0 . 10 0.75 0.75 10 0 0 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 0 0.50 0 0.50 ’00 ’01 ’02 ’03 ’04 0.25 days on hand (13 month moving average) 0 0.25 0 50 0 50 inventories ($ in millions) 0 350 350 300 300 250 250 200 200 150 150 100 100 50 50 0 0 80 70 60 50 40 30 20 10 0 80 70 60 50 40 30 20 10 0 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 5 3 . 1 250 250 9 4 1 1 2 2 9 5 1 1 2 2 5 1 2 4 1 2 9 7 1 9 7 1 7 1 1 200 200 150 150 7 1 1 100 100 50 50 0 0 cash fl cash fl 80 70 60 50 40 30 5 8 20 5 0 7 . 0 10 . 0 5 3 . 1 9 9 . 0 9 9 0 . 5 7 0 . ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 total debt 0 ($ in millions) 1y ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 1y 10 ’00 ’01 ’02 ’03 ’04 1y 3y 50 debt/total capital 0 3y 500 ’00 ’01 ’02 ’03 ’04 3y ’00 ’01 ’02 ’03 ’04 500 accounts receivable 0 ’00 ’01 ’02 ’03 ’04 ($ in millions) days sales outstanding (13 month moving average) ’00 ’01 ’02 ’03 ’04 0 10 0 2,500 2,500 2,500 8 7 2 , 2 8 7 2 2 , 250 8 7 2 , 2 250 8 1 2 250 8 1 2 8 1 2 7 sales 4 2 sales 7 4 1.50 2 6 7 6 , 1 2 7 5 , 1 3 4 6 , 1 8 8 4 , 1 2,000 7 4 2 1,500 0 7 1 1,000 6 7 2,000 6 1 , 2 7 5 1.50 1 , 1,500 1.25 2 7 5 , 1 , 6 7 2,000 6 8 8 1 4 , 1 3 1,500 2 . 1 1,000 1.00 1,000 500 500 0.75 500 0 0.50 0 0 6 7 6 3 4 6 , , 1 1 8 8 4 , 1 3 4 6 , 1 2 7 5 , 1 5 8 . 0 5 7 . 0 8 8 4 , 1 9 9 . 0 3 4 200 6 5 , 1 3 . 1 150 200 150 250 4 5 1 200 200 100% 4 5 1 150 1 3 1 80% 100 100 100 150 100 60% 7 1 50 1 40% 50 0 50 0 0 7 100% 1 1 3 80% 1 9 7 1 60% 40% 0 7 1 . % 6 4 0 5 4 9 1 1 2 . % 6 0 9 9 1 2 1 3 1 1.25 0 7 1 1.00 5 1 2 0.75 7 4 1.50 2 3 2 1.25 1 . 1.50 3 2 1.25 1 . 1.00 5 8 . 0 0.75 140% 5 1.00 8 5 . 0 7 120% . 0 0.75 oi 5 3 1 . . % 6 8 3 1 9 9 . 0 5 8 . 0 3 2 1 . 9 9 140% . 0 5 7 120% . 0 oi 5 3 1 . . % 6 8 3 1 5 7 . 0 250 200 9 9 . 0 150 100 5 3 1 . 250 200 9 7 1 eps eps 9 1 2 5 1 2 4 1 2 9 1 2 4 1 2 5 1 2 9 1 2 5 1 2 9 7 1 250 4 1 2 200 9 7 1 150 7 1 1 100 150 7 1 1 100 7 1 1 0.50 0.50 0.25 0.25 100% 100% 0.50 80% 80% 0.25 60% 60% 50 0 50 0 50 0 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 % 6 7. cash fl % 6 . 5 % 6 7. cash fl cash fl eps 0% Pentair S&P 500 DJIA Pentair S&P 500 DJIA ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 sales sales 0 sales 100% % 6 100% 0 9 . % adjusted diluted eps eps 6 ($ per share) 140% 100% 0 9 % 6 0 9 . . oi % 6 . 8 3 1 140% 0 oi 0% oi 0% Pentair S&P 500 DJIA % 6 1-year stock price 8 3 appreciation 1 1y ’00 ’01 ’02 ’03 ’04 % 6 8 cash fl 3 140% 1 1y . . Pentair S&P 500 DJIA eps eps 0% 3-year stock price appreciation 3y 3y ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 0.25 50 0 20% % 20% ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 % 0 . 1 9 . 3 40% % ’00 ’01 ’02 ’03 ’04 20% 6 . 5 % 0 . 9 20% % 1 . 3 0 40% 0 0 80% 80% 80% 60% 60% 60% 40% 16 40% 40% 20% 20% 0% 0% % 20% 0 . 9 0% 120% 120% 120% 100% 100% 100% 80% 60% 40% 20% 0% % 1 . 3 80% 60% 40% 20% 0% 80% 60% 40% % 20% 6 . 5 0% % % 0 . 1 9 . 3 % % 0 . 1 9 . 3 % % 6 6 7. . 5 % % 6 6 . 7. 5 % 6 7. % 0 . 9 % 1 . 3 % 6 . 5 % 6 7. Pentair S&P 500 DJIA Pentair S&P 500 DJIA Pentair S&P 500 DJIA Pentair S&P 500 DJIA Pentair S&P 500 DJIA Pentair S&P 500 DJIA Pentair S&P 500 DJIA Pentair S&P 500 DJIA 1y 1y 1y 3y 3y 3y 1y 3y Pentair has an ongoing commitment to remaining forthright and ethical in all aspects of business, and especially so in matters related to finance and accounting practices. We worked hard to make certain that we were in compliance with Section 404 of the Sarbanes-Oxley Act during 2004, and we are proud to report that we had no material weaknesses and received an unqualified opinion from our external auditor on the effectiveness of our internal control over financial reporting. enclosures enclosures enclosures 31% 31% 31% water 69% water 69% enclosures enclosures water enclosures 31% 31% 69% 31% water 69% water 69% water 69% Asia and other Asia and other 4% 4% Asia and other 4% Europe 14% Europe 14% Europe 14% 2004 net sales by business segment 2004 = $2.3 billion 2004 operating income by business segment 2004 geographic sales from point of origin USA and Canada USA and Canada USA and Canada 82% 82% 82% 7 4 . 2 2 $ 6 5 . 6 2 $ 1 1 . 9 2 $ 1 5 . 9 2 $ 4 3 . 0 3 $ 3 6 . 2 3 $ 3 1 . 1 3 $ 8 4 . 4 3 $ 1 8 . 4 3 $ 7 2 7. 3 $ 8 6 . 0 4 $ 3 4 . 3 4 $ $44 $42 $40 $38 $36 $34 $32 $30 $28 $26 $24 $22 $44 $42 $40 $38 $36 $34 $32 $30 $28 $26 $24 $22 jan feb mar apr may jun jul aug sep oct nov dec Pentair stock price ($ per share) CERTIFICATIONS The Company has filed as exhibits to its Annual Report on Form 10-K for the fiscal year ended December 31, 2004 the certifications of its Chief Executive Officer and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act. The Company submitted to the New York Stock Exchange during 2004 the Annual CEO Certification required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual. 17 financial overview Pentair, Inc. is a focused diversified industrial manufacturing company comprised of two operating segments: Water and Enclosures. Our Water Group is a global leader in providing innovative products and systems used worldwide in the movement, treatment, storage and enjoyment of water. The Water Group offers a broad array of products and systems to multiple markets and customers. We have identified a target water industry totaling $50 billion, with a primary focus on three markets: Pump (approximately 40% in sales), Pool & Spa (approximately 30% of sales) and Filtration (approximately 30% of sales). The Pump market is addressed with products ranging from light duty diaphragm pumps to high-flow turbine pumps and solid handling pumps designed for water and wastewater applications, agricultural spraying, as well as pressure tanks for residential applications. Applications for our broad range of products include pumps for residential and municipal wells, water treatment, wastewater solids handling, pressure boosting, engine cooling, fluid delivery, circulation and transfer. The Pool & Spa market is addressed with a complete line of commercial and residential pool/spa equipment and accessories including pumps, filters, heaters, lights, automatic controls, automatic pool cleaners, commercial deck equipment, barbeque deck equipment, aquatic pond products and accessories, pool tile and interior finishing surfaces, maintenance equipment, spa/jetted tub hydrotherapy fittings and pool/spa accessories. Applications for our pool products include commercial/resi- dential pool and spa construction, maintenance, repair, service and retail. The Filtration market is addressed with control valves, filtration components, tanks, pressure vessels, and specialty dispensing pumps and provide flow solutions for specific end-user market applications including foodservice, recreation vehicles, marine and aviation. Filtration products are used in the manufacture of water softners; filtration, deionization, and desalination systems; and industrial and residential water filtration applications. Our Enclosures Group is a leader in the global enclosures market, designing and manufacturing standard, modified and custom enclosures that house and protect sensitive electronics and electrical components. The Enclosures Group focuses its business portfolio on four primary industries: Commercial & Industrial (35% of segment), Telecom and Datacom (35% of segment), Electronics (25% of segment), and Networking (5% of segment). The segment goes to market under four primary trade marks: Hoffman¤, Schroff¤, Pentair Electronic PackagingTM, and TaunusTM. Products and related accessories include metallic and composite enclosures, cabinets, cases, subracks, backplanes, and associated thermal management systems. Applications served include industrial machinery, data communications, networking, telecommunications, test and measurement, automotive, medical, security, defense, and general electronics. water (Dollars in thousands) Net sales Sales growth % Operating income as reported Add back goodwill amortization Operating income excluding goodwill amortization % of net sales Percentage point change Net sales 2004 2003 2002 2001 2000 $ 1,563,394 $ 1,060,303 $ 932,420 $ 882,615 $ 898,247 47.4% 13.7% 5.6% (1.7%) 55.1% $ $ 197,310 (cid:209) 197,310 $ $ 143,962 $ 126,559 $ 109,792 $ 120,732 (cid:209) (cid:209) 18,560 18,074 143,962 $ 126,559 $ 128,352 $ 138,806 12.6% (1.0) 13.6% 0.0 13.6% (0.9) 14.5% (1.0) 15.5% 0.6 The 47.4 percent increase in Water segment sales in 2004 from 2003 was primarily the result of: Æ an increase in sales volume driven by our July 31, 2004 acquisition of WICOR and our December 31, 2003 acquisition of Everpure; 18 Æ higher organic growth for pool and spa equipment by capturing a larger share of the increasing spend on the home environment, primarily through the expansion of our product offerings, including the introduction of several new innovative products and product systems; Æ strong sales of pumps for residential water systems and sump pumps, somewhat driven by North American weather patterns, combined with strong demand for commercial and engineered pumping systems; Æ significant growth in international markets; Æ an increase in the sales of water filtration products including residential and industrial tanks and valves in the U.S. and European markets, which was driven particularly in the first half of 2004 by rebounding economic conditions consistent with increased housing starts and the low interest rate environment; Æ favorable foreign currency effects; and Æ selective increases in selling prices to mitigate inflationary cost increases. The 13.7 percent increase in Water segment sales in 2003 from 2002 was primarily the result of: Æ sales attributable to our September 30, 2002 acquisition of Plymouth Products; Æ higher sales of residential pumps and pool equipment; Æ an increase in European sales, particularly commercial valves, water condition- ing and pool products; Æ continued growth in the developing markets of Asia and India; and Æ favorable foreign currency effects. 1,500 1,250 1,000 750 500 250 0 16% 14% 12% 10% 8% 6% 4% 2% 0 1,500 1,250 1,000 750 500 250 0 14% 12% 10% 8% 6% 4% 2% 0 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 Operating income The 1.0 percentage point decline in Water segment operating income as a percent of net sales water ($ in millions) operating income % (as adjusted) enclosur es net sales in 2004 from 2003 was primarily the result of: Æ lower initial margins associated with our July 31, 2004 acquisition of WICOR; Æ inflationary cost increases, particularly as it related to the costs of motors and resins; Æ cost of outside support for integration planning and communications related to the WICOR acquisition; Æ the expensing of fair market value inventory adjustments related to inventory acquired in the Everpure and WICOR trans- actions; and Æ expenses related to factory capacity rationalization. These decreases were partially offset by: Æ favorable operating leverage provided by supply management savings and productivity gains from higher sales volume; Æ selective increases in selling prices to mitigate inflationary cost increases; and Æ higher margins associated with our December 31, 2003 acquisition of Everpure. The unchanged Water segment operating income as a percent of net sales in 2003 from 2002 was primarily the result of: Æ benefits from the continued success of our PIMS and supply management initiatives; Æ increased volume in our expanding markets of Europe, Asia, and India; and Æ favorable foreign currency effects. These benefits were offset by: Æ increased selling and R&D expense; Æ higher insurance costs in 2003; and Æ price and volume declines related to our desalination (Codeline¤) product line and costs associated with downsizing the Chardon, Ohio operation and moving most of this product line to our factory in India. 19 enclosures (Dollars in thousands) Net sales Sales growth % Operating income as reported Add back goodwill amortization Add back restructuring charge Operating income excluding goodwill 2004 2003 2002 2001 2000 $ 714,735 $ 582,684 $ 556,033 $ 689,820 $ 777,725 22.7% 4.8% (19.4%) (11.3%) 18.3% $ 87,844 $ 51,094 $ 29,942 $ 1,857 $ 96,268 (cid:209) (cid:209) (cid:209) (cid:209) (cid:209) (cid:209) 8,273 39,382 9,097 (1,625) amortization and restructuring charge $ 87,844 $ 51,094 $ 29,942 $ 49,512 $ 103,740 % of net sales Percentage point change 12.3% 3.5 8.8% 3.4 5.4% (1.8) 7.2% (6.1) 13.3% 2.4 Net sales The 22.7 percent increase in Enclosures segment sales in 2004 from 2003 was primarily the result of: Æ higher sales due to the addition of new distributors, new products, and higher demand from established industrial markets, as well as security, medical, networking, and commercial markets; Æ some recovery in North American telecom and datacom demand; Æ an increase in European sales volume due to new customers and improved business activity at large OEMs, particularly in the test and measurement, automation and control, and telecom markets, offset by a slowing European economy; Æ selective increases in selling prices to mitigate inflationary cost increases, principally for steel; and Æ favorable foreign currency effects. The 4.8 percent increase in Enclosures segment sales in 2003 from 2002 was primarily the result of: Æ favorable foreign currency effects; and Æ growth in targeted areas such as networking, security, and medical markets. Operating income The 3.5 percentage point increase in Enclosures segment operating income as a percent of net sales in 2004 from 2003 was primarily the result of: Æ leverage gained on volume expansion; Æ savings from the continued success of PIMS and supply management activities; Æ selective increases in selling prices to mitigate inflationary cost increases; and Æ the absence of expenses associated with downsizing included in the comparable prior period. These increases were partially offset by: Æ material cost inflation, primarily steel. 1,500 16% 14% The 3.4 percentage point increase in Enclosures segment operating income 12% 1,250 as a percent of net sales in 2003 from 2002 was primarily due to: 1,000 10% Æ efficiencies resulting from our continued implementation of PIMS and 8% 750 stronger sourcing practices; Æ volume-related efficiencies and improved product mix; and Æ shifting more production to lower-cost labor markets. 250 500 6% 4% 2% 0 1,500 1,250 1,000 750 500 250 0 14% 12% 10% 8% 6% 4% 2% 0 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 water net sales es enclosur ($ in millions) operating income % (as adjusted) These increases were partially offset by: Æ expenses related to downsizing. 0 20 management(cid:213)s report on internal control over financial reporting Management of Pentair, Inc. and its subsidiaries ((cid:210)the Company(cid:211)) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934. The Company(cid:213)s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company(cid:213)s internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company(cid:213)s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company(cid:213)s internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2004, the Company(cid:213)s internal control over financial reporting was effective based on those criteria. Management has excluded from its assessment the internal control over financial reporting at WICOR, Inc. which was acquired on July 31, 2004, and whose financial statements reflect total assets and total revenues constituting 37 and 13 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2004. Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on management(cid:213)s assessment of the Company(cid:213)s internal control over financial reporting for December 31, 2004. That attestation report is referred to in the report of Deloitte & Touche LLP included herein. R a n da l l J. H o g a n Chairman and Chief Executive Officer Dav i d D. H a r r i s o n Executive Vice President and Chief Financial Officer 21 report of independent registered public accounting firm 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, 2004 and 2003, 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, 2004. We have also audited management’s assessment of the effectiveness of the Company(cid:213)s internal control over financial reporting and the effectiveness of the Company(cid:213)s internal control over financial reporting as of December 31, 2004. Such consolidated financial statements, management’s assessment of the effectiveness of the Company(cid:213)s internal control over financial reporting, and our reports thereon dated March 10, 2005, expressing unqualified opinions (which are not included herein), are included in the Annual Report on Form 10-K of the Company for the year ended December 31, 2004. The accompanying condensed consolidated financial statements are the responsibility of the Company(cid:213)s management. Our responsibility is to express an opinion on such condensed consolidated financial statements in relation to the complete consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheets as of December 31, 2004 and 2003, and the related condensed consolidated statements of income and of cash flows for each of the three years in the period ended December 31, 2004, is fairly stated in all material respects in relation to the basic consolidated financial statements from which it has been derived. Minneapolis, Minnesota March 10, 2005 22 condensed consolidated statements of income Pentair, Inc. and Subsidiaries (Dollars in thousands, except per-share data) Net sales Cost of goods sold Gross profit Selling, general and administrative Research and development Operating income Interest income Interest expense Income from continuing operations before income taxes Provision for income taxes Income from continuing operations Income from discontinued operations, net of tax Loss on disposal of discontinued operations, net of tax Years ended December 31 2004 2003 2002 $ 2,278,129 $ 1,642,987 $ 1,488,453 1,623,419 1,196,757 1,107,212 654,710 376,015 31,453 247,242 721 37,931 210,032 73,008 137,024 40,248 (6,047) 446,230 253,088 22,932 170,210 386 26,781 143,815 45,665 98,150 46,138 (2,936) 381,241 230,994 18,952 131,295 661 29,073 102,883 27,884 74,999 54,903 (cid:209) Net income $ 171,225 $ 141,352 $ 129,902 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 $ $ $ $ 1.38 0.34 1.72 1.35 0.33 1.68 $ $ $ $ 1.00 0.44 1.44 0.99 0.43 1.42 $ $ $ $ 0.76 0.56 1.32 0.75 0.56 1.31 99,316 101,706 97,876 99,620 98,471 99,489 These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in Pentair(cid:213)s Annual Report on Form 10-K. 23 condensed consolidated balance sheets 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 $35,968 and $23,844, respectively Inventories Current assets of discontinued operations Deferred tax assets Prepaid expenses and other current assets Total current assets December 31 2004 2003 $ 31,495 $ 47,989 396,459 323,676 (cid:209) 49,074 24,433 825,137 251,475 166,862 313,399 30,871 18,854 829,450 Property, plant and equipment, net 336,302 233,106 Other assets Non-current assets of discontinued operations Goodwill Intangibles, net Other Total other assets Total assets Liabilities and shareholders(cid:213) equity Current liabilities Current maturities of long-term debt Accounts payable Employee compensation and benefits Accrued product claims and warranties Current liabilities of discontinued operations Income taxes Accrued rebates and sales incentives Other current liabilities Total current liabilities Long-term debt Pension and other retirement compensation Post-retirement medical and other benefits Deferred tax liabilities Other non-current liabilities Non-current liabilities of discontinued operations Total liabilities Commitments and contingencies Shareholders(cid:213) equity Common shares par value $0.16 2/3; 100,967,385 and 99,005,084 shares issued and outstanding, respectively Additional paid-in capital Retained earnings Unearned restricted stock compensation Accumulated other comprehensive income Total shareholders(cid:213) equity Total liabilities and shareholders(cid:213) equity 393 1,620,404 258,126 80,213 539,892 997,183 98,490 82,556 1,959,136 1,718,121 $ 3,120,575 $ 2,780,677 11,957 195,289 104,821 42,524 192 27,395 41,618 103,083 526,879 724,148 135,356 69,667 142,873 70,804 3,054 73,631 93,043 61,213 24,427 155,898 14,912 14,103 60,224 497,451 732,862 100,234 26,227 60,636 62,208 39,581 1,672,781 1,519,199 16,828 517,369 889,063 (7,872) 32,406 8,250 492,619 760,966 (6,189) 5,832 1,447,794 1,261,478 $ 3,120,575 $ 2,780,677 These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in Pentair(cid:213)s Annual Report on Form 10-K. 24 condensed consolidated statements of cash flows Adjustments to reconcile net income to net cash provided by operating activities Pentair, Inc. and Subsidiaries (Dollars in thousands, except per-share data) Operating activities: Net income Net income from discontinued operations Loss on disposal of discontinued operations Depreciation Amortization Deferred income taxes Stock compensation Years ended December 31 2004 2003 2002 $ 171,225 $ 141,352 $ 129,902 (40,248) (46,138) (54,903) 6,047 47,063 13,846 16,736 (cid:209) 2,936 40,809 4,074 31,319 306 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 discontinued operations Net cash provided by operating activities Investing activities Capital expenditures Acquisition of previously leased facility Acquisitions, net of cash acquired Divestitures Equity investments Other 26,918 (51,996) 2,176 17,274 4,596 2,993 6,352 8,879 11,508 6,794 250,163 13,928 264,091 (48,867) (cid:209) (869,155) 773,399 60 (cid:209) (5,080) 13,174 (4,781) (12,758) 4,813 (1,756) 5,437 (3,336) (2,108) 6,769 175,032 87,907 262,939 (43,622) (cid:209) (229,094) (2,400) (5,294) 48 (cid:209) 38,577 5,720 23,594 (cid:209) 28,094 25,883 5,786 (19,445) 976 (849) (3,483) (17,248) (6,111) 13,191 169,684 101,110 270,794 (33,744) (22,952) (170,270) 1,744 (9,383) (7) Net cash used for investing activities (144,563) (280,362) (234,612) Financing activities Net short-term (repayments) borrowings Proceeds from the Bridge Facility Repayment of the Bridge Facility Proceeds from long-term debt Repayment of long-term debt Proceeds from exercise of stock options Repurchases of common stock Dividends paid Net cash (used for) provided by financing activities Effect of exchange rate changes on cash Change in cash and cash equivalents Cash and cash equivalents, beginning of period (4,162) 850,000 (850,000) 343,316 (440,518) 10,862 (4,200) (43,128) (137,830) 1,808 (16,494) 47,989 (873) (cid:209) (cid:209) 780,857 (709,886) 5,795 (1,589) (40,494) 33,810 (8,046) 8,341 39,648 665 (cid:209) (cid:209)- 462,599 (468,161) 2,730 (cid:209) (36,420) (38,587) 2,209 (196) 39,844 Cash and cash equivalents, end of period $ 31,495 $ 47,989 $ 39,648 These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in Pentair(cid:213)s Annual Report on Form 10-K. 25 selected financial data Pentair, Inc. and Subsidiaries (Dollars in thousands, except per-share data) Statement of operations Net sales Sales growth Cost of goods sold Gross profit 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 Loss on disposal of 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 2004 2003 2002 2001 2000 1999 1998 1997 Years ended December 31 $ 2,278,129 $ 1,642,987 $ 1,488,453 $ 1,572,435 $ 1,675,972 $ 1,236,736 $ 1,025,639 $ 1,033,274 38.7% 1,623,419 654,710 28.7% 376,015 31,453 (cid:209) 247,242 10.9% 10.9% (cid:209) 37,210 (cid:209) 73,008 137,024 40,248 (6,047) (cid:209) 171,225 (cid:209) 171,225 1.38 1.35 0.43 100% 43.56 396,459 323,676 336,302 1,620,404 3,120,575 736,105 1,447,794 33.7% 47,063 (cid:209) (cid:209) (cid:209) 13,846 264,091 48,867 12,900 52 62 10.4% (5.3%) 1,196,757 446,230 1,107,212 381,241 27.2% 25.6% (6.2%) 35.5% 26.0% 28.5% 253,088 22,932 (cid:209) 170,210 10.4% 10.4% (cid:209) 26,395 (cid:209) 45,665 98,150 46,138 (2,936) (cid:209) 141,352 (cid:209) 141,352 1.00 0.99 0.41 (cid:209) 22.85 251,475 166,862 233,106 997,183 2,780,677 806,493 1,261,478 230,994 18,952 (cid:209) 131,295 8.8% 8.8% (cid:209) 28,412 (cid:209) 27,884 74,999 54,903 (cid:209) (cid:209) 129,902 (cid:209) 129,902 0.76 0.75 0.37 (cid:209) 17.28 223,778 165,389 236,322 843,243 2,514,450 735,085 1,105,724 39.0% 40,809 39.9% 38,577 (cid:209) (cid:209) (cid:209) 4,073 262,939 43,622 9,000 54 59 (cid:209) (cid:209) (cid:209) 5,720 270,794 56,696 8,600 58 64 1,163,001 409,434 266,229 15,941 40,105 86,205 5.5% 8.1% (cid:209) 40,325 2,985 12,147 30,748 26,768 (24,647) 32,869 (cid:209) (cid:209) 32,869 0.31 0.31 0.35 (cid:209) 18.26 229,455 178,464 231,615 743,499 2,372,198 723,706 1,015,002 42,641 26,833 (3,861) 0.24 5,568 232,334 53,668 8,700 65 72 1,199,122 476,850 267,518 18,138 19,393 171,803 10.3% 11.4% 46,435 (cid:209) (cid:209) 41,580 83,788 (27,872) (cid:209) (29) 55,887 (cid:209) 55,887 0.86 0.86 0.33 (cid:209) 12.09 284,674 208,267 248,576 786,984 2,644,025 913,974 1,010,591 42,491 27,171 (3,768) 0.25 2,683 184,947 68,041 9,900 65 64 20.6% 883,737 352,999 28.5% 231,100 11,927 16,743 93,228 7.5% 8.9% (cid:209) 30,467 (cid:209) 21,406 41,355 61,954 (cid:209) (cid:209) (cid:209) 103,309 103,309 0.47 0.47 0.32 (cid:209) 19.25 247,404 179,073 265,027 800,937 2,706,516 1,035,084 990,771 42,466 21,127 (3,453) 0.20 1,578 144,296 53,671 8,700 58 67 (0.7%) 747,976 277,663 27.1% 191,358 8,986 (cid:209) 77,319 7.5% 7.5% 16,698 (cid:209) (cid:209) 20,495 40,126 66,714 (cid:209) (cid:209) 106,840 (4,267) 102,573 0.52 0.46 0.30 (cid:209) 19.91 160,796 132,620 212,493 442,322 1,484,207 340,721 707,628 35,774 13,625 (2,441) 0.13 1,571 120,872 43,335 6,500 59 73 12.7% 765,291 267,983 25.9% 180,828 9,373 (cid:209) 77,782 7.5% 7.5% 10,313 16,621 (cid:209) 31,957 39,517 52,083 (cid:209) (cid:209) 91,600 (4,867) 86,733 0.46 0.45 0.27 (cid:209) 17.97 169,063 137,030 206,760 410,068 1,413,494 328,538 627,653 37,913 13,357 (2,274) 0.12 1,669 107,896 69,364 6,600 58 77 41.6% 47.5% 51.1% 32.5% 34.4% Refer to the footnotes in the financial highlights (inside front cover) for drivers behind historical restatements for purposes of comparison. 26 2001 2000 1999 1998 1997 Years ended December 31 $ 1,572,435 $ 1,675,972 $ 1,236,736 $ 1,025,639 $ 1,033,274 (6.2%) 35.5% 1,163,001 409,434 1,199,122 476,850 26.0% 28.5% 266,229 15,941 40,105 86,205 5.5% 8.1% (cid:209) 40,325 2,985 12,147 30,748 26,768 (24,647) (cid:209) 32,869 (cid:209) 32,869 0.31 0.31 0.35 (cid:209) 18.26 229,455 178,464 231,615 743,499 2,372,198 723,706 1,015,002 267,518 18,138 19,393 171,803 10.3% 11.4% (cid:209) 46,435 (cid:209) 41,580 83,788 (27,872) (cid:209) (29) 55,887 (cid:209) 55,887 0.86 0.86 0.33 (cid:209) 12.09 284,674 208,267 248,576 786,984 2,644,025 913,974 1,010,591 20.6% 883,737 352,999 28.5% 231,100 11,927 16,743 93,228 7.5% 8.9% (cid:209) 30,467 (cid:209) 21,406 41,355 61,954 (cid:209) (cid:209) 103,309 (cid:209) 103,309 0.47 0.47 0.32 (cid:209) 19.25 247,404 179,073 265,027 800,937 2,706,516 1,035,084 990,771 (0.7%) 747,976 277,663 27.1% 191,358 8,986 (cid:209) 77,319 7.5% 7.5% (cid:209) 16,698 (cid:209) 20,495 40,126 66,714 (cid:209) (cid:209) 106,840 (4,267) 102,573 0.52 0.46 0.30 (cid:209) 19.91 160,796 132,620 212,493 442,322 1,484,207 340,721 707,628 12.7% 765,291 267,983 25.9% 180,828 9,373 (cid:209) 77,782 7.5% 7.5% 10,313 16,621 (cid:209) 31,957 39,517 52,083 (cid:209) (cid:209) 91,600 (4,867) 86,733 0.46 0.45 0.27 (cid:209) 17.97 169,063 137,030 206,760 410,068 1,413,494 328,538 627,653 41.6% 47.5% 51.1% 32.5% 34.4% 42,641 26,833 (3,861) 0.24 5,568 232,334 53,668 8,700 65 72 42,491 27,171 (3,768) 0.25 2,683 184,947 68,041 9,900 65 64 42,466 21,127 (3,453) 0.20 1,578 144,296 53,671 8,700 58 67 35,774 13,625 (2,441) 0.13 1,571 120,872 43,335 6,500 59 73 37,913 13,357 (2,274) 0.12 1,669 107,896 69,364 6,600 58 77 27 corporate leadership Board of Directors Corporate Officers G ly n i s A . B rya n (1), 46 Chief Financial Officer of APL Logistics R a n da l l J. H o g a n Chairman and Chief Executive Officer Ba r ba r a B . G ro g a n (2,3,4), 57 Former Chairman and President of Western Industrial Contractors, Inc. R i c h a r d J. Cat h c a rt Vice Chairman C h a r l e s A . H ag g e rt y (2,3,4), 63 Chief Executive Officer of LeConte Associates, LLC Dav i d D. H a r r i s o n Executive Vice President and Chief Financial Officer R a n da l l J. H o g a n (4), 49 Chairman and Chief Executive Officer of Pentair, Inc. M i c h a e l V. S c h ro c k President and Chief Operating Officer, Enclosures Dav i d A . Jo n e s (1), 55 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 (2,3), 59 Former Director of Manufacturing Operations for Vehicle Operations, Ford Motor Company Jac k J. D e m p s e y Senior Vice President, Operations and Technology 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 M i c h a e l G . M e y e r Vice President, Treasury and Tax Au g u s to M e o z z i (1,4), 65 President of the European operations of ISOLA Group Ro n a l d L . M e r r i m a n (1), 60 Managing Partner of Merriman Partners Wi l l i a m T. M o n a h a n (2, 3, 4), 57 Former Chairman of the Board and Chief Executive Officer of Imation Corp. K a r e n E . We l k e (1,4), 60 Former Group Vice President for Medical Markets, 3M Company (1) Audit and Finance Committee (2) Compensation Committee (3) Governance Committee (4) International Committee 28 code of business conduct As an independent, publicly owned company, Pentair created the Code of Business Conduct and Ethics to guide its development and the conduct of its business. Æ We will manage our business according to the highest business, ethical, moral and civic standards that apply to a public company. Æ We will operate our businesses to earn the respect of our shareholders, employees, plant communities, customers, suppliers and all others with a stake in our success. Æ We intend to make Pentair a top-performing company, managed and operated for the long-term benefit of all its constituents. As a company, by following the spirit of the Code, Pentair creates an operating environment where management sets clear goals, company leadership is engaged, and all operations are accountable for their performance and practices. Our business style is practical, with an emphasis on openness, informality and candid, conversational exchanges among employees. We expect all employees equally to uphold the Company(cid:213)s standards for ethics, integrity and work practices. The full text of Pentair(cid:213)s Code of Business Conduct and Ethics can be found at http://www.pentair.com/code.html 29 investor information Common stock data 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 2004. There were 3,995 shareholder accounts on December 31, 2004. Price range and dividends of common stock ($) 2004 1Q 2Q 3Q 4Q High 29.60 33.64 35.03 44.03 Low 22.52 28.48 30.90 34.27 Close 29.60 32.95 35.03 43.56 Div. 0.105 0.105 0.110 0.110 2003 1Q 2Q 3Q 4Q High 18.78 20.95 21.77 23.29 Low 16.40 17.86 19.29 18.43 Close 18.24 19.69 19.72 22.85 Div. 0.095 0.105 0.105 0.105 Common dividends Dividends are currently $0.13 per share paid quarterly in February, May, August, and November. Pentair has now paid 116 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, 625 Fourth Avenue South, Minneapolis, Minnesota, at 10:00 a.m. on April 29, 2005. 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 Independent registered public accounting firm Deloitte & Touche LLP, Minneapolis, MN 55402 30 passion passion 5500 Wayzata Boulevard Suite 800 Golden Valley Minnesota 55416-1261 763.545.1730 tel www.pentair.com

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