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
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2,500
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100%
60%
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350
300
20%
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150
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0
60%
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40%
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0
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1,200
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200
0
2,500
2,000
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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
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1
8
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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