Annual Report 2005
financial highlights
Pentair, Inc. and Subsidiaries
Years ended December 31
(Dollars in thousands, except per-share data)
2005
2004
2003
2002
2001
Operations
Net sales
$ 2,946,579 $2,278,129 $ 1,642,987 $ 1,488,453 $ 1,572,435
Operating income
323,072
247,242
170,210
131,295
86,205
Adjusted operating income (1)
339,460
247,242
170,210
131,295
154,098
Net income — continuing operations
185,049
137,024
98,150
74,999
Adjusted continuing net income (1)
197,047
137,024
98,150
74,999
Diluted EPS — continuing operations
Adjusted continuing diluted EPS (1)
1.80
1.92
1.35
1.35
0.99
0.99
0.75
0.75
30,748
83,489
0.31
0.85
Net cash provided by operating activities
247,858
264,091
262,939
270,794
232,334
Capital expenditures (2)
62,471
48,867
43,622
56,696
53,668
Proceeds from sale of property and equipment
17,111
—
—
—
—
Free cash flow (3)
202,498
215,224
219,317
214,098
178,666
Number of employees at year end
14,700
12,900
9,000
8,600
8,700
Other financial data
Total debt
752,614
736,105
806,493
735,085
723,706
Shareholders’ equity
1,555,610
1,447,794
1,261,478
1,105,724
1,015,002
Total debt as a percent of total capital
Return on average shareholders’ equity
32.6%
12.3%
33.7%
12.6%
39.0%
11.9%
39.9%
12.3%
41.6%
3.2%
Cash dividends declared per common share
Closing stock price
0.52
34.52
0.43
43.56
0.41
22.85
0.37
17.28
0.35
18.26
Effect of SFAS 123R adoption (4)
Tax effect of SFAS 123R adoption (4)
16,387
(4,389)
Diluted EPS effect of SFAS 123R adoption (4)
0.12
Restructuring charge
Tax effect of restructuring charge
Diluted EPS effect of restructuring charge
Goodwill amortization (5)
Tax effect of goodwill amortization (5)
Diluted EPS effect of goodwill amortization (5)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
41,060
(11,291)
0.30
26,833
(3,861)
0.24
Weighted-average shares — diluted
102,618
101,706
99,620
99,489
98,594
(1) Certain financial information has been presented to exclude the impact of the adoption of SFAS No. 123R on the current year expense to be comparable
to prior year presentation. Prior year amounts exclude restructuring charges and goodwill amortization. (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 plus proceeds from sale of
property and equipment. (4) Effective January 1, 2005 we adopted SFAS No. 123R which requires the fair value of stock-based compensation to be
expensed. The standard did not require restatement of prior period amounts to be consistent with the current year presentation. The amounts reflected in
2005 represent the impact of adoption only, total pre-tax stock-based compensation in 2005 was $24.2 million. (5) 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.
letter to our shareholders
Pentair delivered in 2005 one of the best years in our 40-year history. We are proud of our results
and even more excited about the future. Today, with our powerful combination of talented
employees, clear strategic initiatives, and Pentair’s Integrated Management System (PIMS), we are
better situated than ever to drive high performance.
2005 Results: Win Right We measure winning through performance, and assess right by how we
do what we do. For 2005, we decisively met our double-digit earnings-per-share (EPS) growth
goal, delivering $1.92 (excluding the impact of the adoption of Statement of Financial Accounting
Standards (SFAS) 123R), a 42 percent increase over 2004. Thus, we not only met our strategic
and financial goals of replacing our
former Tools Group and its earnings,
Pentair is a diversified operating company headquartered
but also added an additional 14 percent
of EPS. Simultaneously, we accomplished
the key elements of our comprehensive
integration plan for the Company’s largest
acquisition ever.
Highlights of our 2005 success include:
· Revenues of $2.95 billion, an increase of
29 percent or 6 percent on a pro forma
basis assuming we had acquired the
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’s Technical Products Group is a leader in global
enclosures and thermal management markets, designing
and manufacturing thermal management products and
standard, modified, and custom enclosures that house and
protect sensitive electronics and electrical components.
With 2005 revenues of $2.95 billion, Pentair employs
approximately 15,000 people worldwide.
WICOR businesses at the beginning of 2004 and excluding the recent Thermal Management
acquisition and effects of foreign currency translation. The 6 percent growth was within our
5-8 percent organic growth goal.
· Earnings quality improvement, with increased operating margins of 60 basis points as compared
to 2004 even with higher raw material costs and the investments we have made for growth.
· Free cash flow of $211 million, excluding the impact of the adoption of SFAS 123R, which
exceeded our $200 million goal and represented 107 percent conversion of net income,
exceeding our goal of 100 percent.
· Return on invested capital of 15.3 percent, our highest level since mid-2000.
· The completion of two acquisitions and an increase in dividends, for the 30th year in a row, with
no increase in net debt. At the end of 2005, Pentair’s debt-to-total-capital ratio was 32.6 percent,
110 basis points lower than what it was at the end of 2004.
Pentair’s 2005 performance reflect the commitment to customers and dedication to quality of our
15,000 employees worldwide. I thank them for their efforts and results.
1
letter to our shareholders [ C O N T I N U E D ]
We win right by adhering to Pentair’s values. Last year, Pentair employees demonstrated their
allegiance to our values by responding to the needs of our customers with commitment (as
evidenced by our sales growth), and their communities with compassion. In the course of the year,
employees donated more than $230,000 to tsunami relief efforts in Asia and hurricane relief efforts
in the United States. Pentair and The Pentair Foundation matched these gifts; equally important,
Pentair businesses donated products and technical expertise to assist relief agencies providing safe,
clean water for the disasters’ victims. It was for extraordinary efforts such as these, as well as our
daily commitment to our customers and communities, that Pentair was honored with Minnesota’s
2005 Business Ethics Award. This annual recognition is given to companies which exemplify and
promote ethical conduct for the benefit of the workplace, the marketplace, the environment, and
the community.
Pentair’s 2005 results are the culmination of our transformation to a water-led company with a
leadership position in two attractive business segments. Just five years ago, we faced two critical
questions: where will we compete, and how will we compete? To address the strategic question of
where we compete, we considered whether our businesses had attractive growth prospects, and
whether we could control our destiny in them. Our answers to these fundamental questions led us
to the strategic repositioning of our business portfolio. Today, we have two attractive businesses —
Water and Technical Products — where we can control our destiny.
Focus: 2006 Strategic Initiatives While we are proud of our 2005 accomplishments, we are not
resting on our laurels. Now, our task is to achieve the attractive growth prospects in our businesses
and drive higher profitability. We will do so by focusing on three strategic initiatives:
· Excellence in operations. Pentair must be a truly excellent operating company, as measured
against the best performing companies in the world.
· International success. Pentair must be as successful in other geographic markets as we have been
in North America.
· Growth. We must achieve sustainable growth at a consistent level above market growth rates.
Our ability to execute against these strategic initiatives will determine our future success; our action
plans for each are elaborated upon in the pages that follow.
2
Sustainable Success: Pentair’s Integrated Management System How we compete, the second
critical question we faced only five years ago, demanded that we operate more effectively. To meet
this challenge, we began by implementing Pentair’s first cash flow initiative, then added supply
management and lean manufacturing disciplines to our approach.
Today, these efforts have evolved into PIMS to drive high performance. The first element of PIMS
is Strategy Deployment. This system aligns our actions at the operating level with our business
strategies to more effectively realize our targets. It also enables common processes and metrics
throughout the Company. The second element of PIMS is Lean Enterprise, which we believe is
the most powerful operating philosophy in existence today. Lean eliminates waste and variability
from every aspect of our business, and has become the real cultural lever for us to achieve
excellence in operations. The third element of PIMS is IGNITE, our process to drive growth at
a pace faster than the market. It focuses on getting customer insights and expanding what we do
and where we do it, beyond the tried and true. PIMS is the center of Pentair’s sustainable success: it
drives high performance; high performance helps us attract top
talent, and that top talent will continue to employ PIMS to drive
even higher performance.
Talent: Ahead of Results Talent must come before results. That’s
why we are committed to attracting, developing, and retaining top
talent. In 2005, we strengthened our talent base and our global
infrastructure. Now, more than ever, Pentair is focused on talent
management programming to provide employees new challenges
and opportunities worldwide.
Appreciation In 2006, we will mark Pentair’s 40th anniversary. For the past five years, you have
entrusted me to lead your Company. Each day, I have been energized and motivated by our
15,000 employees, and I would like to thank them. Our strong heritage of employees dedicated to
winning right is the foundation of our success, and it endures. I am confident that the powerful
combination of our talented employees, our strong portfolio of businesses, and PIMS will result in
a future even more successful than that which we’ve already achieved.
Sincerely,
R a n da l l J. H o g a n
Chairman and Chief Executive Officer
3
operating excellence in action
In 2001, Pentair began focusing on its operating practices through three key
strategic initiatives: cash flow, supply management, and lean enterprise. Today,
Pentair’s operating disciplines drive greater employee safety, higher quality, faster
delivery, lower cost, and higher cash flow. Based on three lean enterprise
platforms — supply management, cash management, and lean operations — these
disciplines continue to advance productivity in all aspects of our business.
Supply management The goal of Pentair’s supply management activities is to lower
the total cost of ownership for purchased goods and services by more than five percent
annually. This is accomplished by buying
across business units; working more closely
with suppliers, including those in low-cost
regions; improving efficiency in the use of
goods and services; and working with
suppliers to lower costs.
Cash management Cash flow has
benefited from expanding margins, more
effective capital expenditures (and an
emphasis on putting creativity before
cash), and working capital productivity,
Nancy Fuller, one of several lean enterprise leaders in Pentair,
particularly in receivables and inventories.
helped business teams apply lean enterprise practices to their
functions during 2005. Pentair staff participating in a business
process kaizen event led by Nancy include, left to right, Director
Lean enterprise The essence of lean
enterprise is the relentless elimination of
of Management Accounting, Tom Samlaska; Executive Vice
waste and variability from every business
President and CFO, Dave Harrison; and Manager of General
Accounting and Planning, Mark Burgoyne.
process, with the ultimate goal of providing
excellent quality, delivery, and service to
customers at the lowest possible cost. By reducing floor space, improving quality,
accelerating on-time delivery, cutting lead-times, and increasing inventory turns, Pentair has
increased productivity, sales-per-employee, and margins.
Applying these disciplines to Pentair’s operating initiatives, the Company is more
effectively managing cash flow, supply management, and lean enterprise processes
across Pentair.
4
Putting Pentair’s operating disciplines into practice during
2005 helped boost productivity and throughput at Hoffman
Enclosures’ Reynosa, Mexico facility approximately 20 percent
and 50 percent, respectively. This improvement was crucial to
Reynosa’s ability to meet a 30 percent increase in demand for
key product lines in 2005.
expanding Pentair’s international reach
Creating new business platforms within existing operations, expanding
product lines, entering new markets, and establishing businesses in new
geographic markets are all growth vectors Pentair is pursuing in its effort to
expand international sales to 40 percent of total revenues in the next four years.
Pentair believes its greatest growth opportunities are in Asia and Eastern Europe. In
2005, Pentair developed new growth platforms and built capacity to meet demand from the
rapidly expanding economies of these regions. Included among these efforts
were several steps designed to better
align resources and investments with the
greatest opportunities:
· Reinforcing international management,
sales, engineering, supply management
and manufacturing talent.
· Expanding the global manufacturing
footprint with the addition of operations
in Eastern Europe and the ramping up of
operations in China and Mexico.
· Strengthening product development
Grazyna Nycz is one of a growing number of
employees in the Pentair water products facility in
capabilities to meet the unique needs
Poland. A new Pentair plant to be constructed in
of customers in new geographies. For
example, Pentair’s Indian and Chinese
that nation will add manufacturing capacity for both
Pentair’s Water and Technical Products groups.
engineering centers have 100 engineers whose responsibilities include designing products
specifically for their respective markets.
· Establishing supply management expertise in low cost countries to reduce procurement
costs. In 2005, about 17 percent of Pentair material purchases came from low cost countries.
· Implementing a unified business system infrastructure in Europe that will streamline and
strengthen the organization’s financial reporting and measurement while supporting all
other functional areas.
Through these actions, Pentair is building a global enterprise with a corporate culture
that supports talent management and allocation of resources throughout the world to best
serve customers and achieve the greatest competitive advantage.
6
Pentair Water has amassed engineering expertise in India
and China to develop new products for their respective
markets. Left to right, Pentair Suzhou Engineers Lianbo Lin,
Eva Qian and Xiaoli Wang test a locally designed filtration
product that will provide high-quality drinking water.
building a framework for growth
To grow, both organically and by acquisition, Pentair strives for leadership in
new vertical markets through powerful customer insights, effective sales and
marketing, and differentiated core competencies throughout the globe. By
defining concrete initiatives and driving execution for top-line results, Pentair
targets organic sales growth of five to eight percent on a sustained basis.
Central to Pentair’s growth initiative is the
IGNITE growth program. IGNITE drives growth
through data-driven market intelligence and
effective sales and marketing strategies linked to
clearly defined core competencies. IGNITE consists
of an intensive four-month program of training,
customer interaction, strategy development, and
action at each Pentair business, wherein best-in-
class proprietary analytical templates, tools, and
process maps are used to institutionalize the growth
process. IGNITE was implemented at the Filtration
and Pentair Electronic Packaging businesses during
2005 and is expected to be in place company wide
From right, Ram Ramakrishnan, Mukund Vasudevan, and
Abid Ahmed lead hundreds of Pentair employees who share
responsibility for implementing Pentair’s IGNITE program
by the end of 2006.
throughout the organization. Chief Operating Officer of
Technical Products and Filtration, Mike Schrock, left, helped
establish IGNITE at Pentair Electronic Packaging.
For example, IGNITE’s analysis of Pentair
Electronic Packaging’s markets
identified
five
avenues for growth: 1) develop a global quotation
center; 2) strengthen strategic account management; 3) establish a new product introduction
center in the Chicago operations; 4) enhance engineering and develop common processes;
and 5) reorganize the marketing and product management structure to focus on vertical
markets. Collectively, these approaches have already generated new opportunities in China,
Brazil and Europe, as well as in new vertical markets including Communications, Government
and Medical.
Pentair remains alert to strategic acquisition targets as well as “bolt-on” acquisition
opportunities. Pentair completed two acquisitions in 2005: Delta Environmental, a
manufacturer of wastewater treatment products for the residential and commercial
onsite treatment markets; and the Thermal Management businesses of APW, Ltd., which
provide thermal management solutions and integration services to a broad range of
industrial customers.
8
Pentair rolled out new automation control systems for pools and spas in 2005, including a
wireless Digital Remote Tablet for the IntelliTouch™ control system. These products result
from efforts to make the customer’s life simpler, and represent significant investments in
new product development. Pentair also is making investments for growth in new customer
relationships; international management, sales, engineering, and manufacturing talent;
European business system infrastructure; and the Faradyne Motors joint venture.
overview
markets
r
e
t
a
W
Pump Systems Residential,
commercial and municipal;
turf, agricultural and irrigation;
fire protection; car wash; marine;
HVAC; water treatment;
foodservice; water feature;
pressure cleaning; general
commercial and industrial
applications.
products
Products range from light-duty
diaphragm pumps to high-flow
turbine pumps and solid
handling pumps designed for
water and wastewater
applications, agricultural
spraying, pressure tanks for
residential applications, as well
as residential and commercial
on-site treatment.
brands
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®,
Edwards®, Riva-flo and Delta
Environmental.
customers
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.
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.
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.
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.
competitors
Astral, Cuno/3M, Ebara, Ecowater, Flexcon, Flowserve, Franklin Electric, Gormann Rupp, Grundfos, Hayward,
ITT, Jandy, Osmonics/GE, Pall, Peerless, Raypak, Wayne, and Zodiac.
locations
Ashland and Chardon, Ohio; North Aurora and Hanover Park, Illinois; Kansas City, Kansas; Delavan,
Brookfield and Sheboygan, Wisconsin; Cypress, California; Grand Island, Nebraska; New Brighton,
Minnesota; Portland, Oregon; Dover, New Hampshire; Denham Springs, Louisiana; Monterrey and Reynosa,
Mexico; Buc and Colombes, France; Herentals, Belgium; Pisa, Florence, and Milan, Italy; Longstanton
Cambridge and Billingham, England; Melbourne, Australia; Auckland, New Zealand; Coimbatore, New
Delhi, and Goa, India; Suzhou and Shanghai, China.
10
10
markets
s
t
c
u
d
o
r
p
l
a
c
i
n
h
c
e
T
Electrical Automotive;
petroleum and petrochemical;
food and beverage; machine
tool and other industrial
manufacturing customers;
defense and security; and
commercial construction.
Electronic Telecom, computer
networks, data communication,
industrial controls, transport, test
and measurement, medical,
security, defense, aerospace,
general industrial, and
semiconductor equipment.
Thermal Management
Industrial markets, including
machine tool and automotive,
as well as test equipment,
telecommunications, data
communications, and medical
markets.
Standard, modified and custom
enclosures consisting of
19-inch racks, subracks and
cabinets as structural parts for
electrical and electronic
devices/installations, as well as
stamped chassis, custom indoor
and outdoor cabinets, aluminum
enclosures, slide rail/cable
management solutions, and
integrated solutions with power
supplies and backplanes.
Standard and custom thermal
management solutions,
including air conditioners, heat
exchangers, fan trays, motorized
impellers, single and dual
packaged blowers, AC and
brushless DC motors, electronic
controls, and filter fans.
Schroff®, Taunus™, Pentair
Electronic Packaging™,
Electronic Solutions™, and
Birtcher™.
McLean®, Hoffman®, Aspen Motion
Technologies™, and Schroff®.
products
Enclosures, cabinets,
data networking and
communications, structural
support, and thermal protection
solutions to protect electrical
and electronic control
components, and instruments.
brands
Hoffman®
customers
Telecom and datacom OEMs; test and measurement OEMs; water treatment OEMs and integrators; medical
equipment OEMs; aerospace and defense contractors; food and beverage equipment OEMs; industrial
systems integrators; industrial facility managers; material handling equipment OEMs; other miscellaneous
industrial users/contractors; electrical distributors; datacom distributors.
competitors
Cooper B-Line, Elma, Hammond, Knürr, Rittal, Saginaw, Sanmina, Wiegmann, Pfannenberg and
regional competitors.
locations
Mt. Sterling, Kentucky; Anoka and Champlin, Minnesota; Warwick, Rhode Island; Des Plaines, Illinois;
Poway, California; Radford, Virginia; Scarborough, Ontario, Canada; Reynosa and Mexico City, Mexico;
Boituva, Brazil; Straubenhardt, Germany; Hemel Hempstead, United Kingdom; Betschdorf, France;
Skarpnäck, Sweden; Shinyokohama, Japan; Singapore; Shanghai and Qingdao, China.
11
corporate leadership
Board of Directors
Corporate Officers
G ly n i s A . B rya n (1), 47
Executive Vice President and Chief Financial Officer
of Swift Transportation
R i c h a r d J. Cat h c a rt (4), 61
Vice Chairman of Pentair, Inc.
Ba r ba r a B . G ro g a n (2, 3, 4), 58
Former Chairman and President of
Western Industrial Contractors, Inc.
C h a r l e s A . H ag g e rt y (2, 3, 4), 64
Chief Executive Officer of LeConte Associates, LLC
R a n da l l J. H o g a n (4), 50
Chairman and Chief Executive Officer of Pentair, Inc.
Dav i d A . Jo n e s (2, 3), 56
Chairman and Chief Executive Officer of Spectrum Brands
Au g u s to M e o z z i (1, 4), 66
President of the European operations of ISOLA Group
Ro n a l d L . M e r r i m a n (1), 61
Managing Partner of Merriman Partners
Wi l l i a m T. M o n a h a n (2, 3, 4), 58
Former Chairman of the Board and Chief Executive Officer
of Imation Corp.
K a r e n E . We l k e (1, 4), 61
Former Group Vice President for Medical Markets, 3M Company
(1) Audit and Finance Committee
(2) Compensation Committee
(3) Governance Committee
(4) International Committee
R a n da l l J. H o g a n
Chairman and Chief Executive Officer
R i c h a r d J. Cat h c a rt
Vice Chairman
Dav i d D. H a r r i s o n
Executive Vice President and Chief Financial Officer
C h a r l e s M . B row n
President and Chief Operating Officer, Pump and Pool
M i c h a e l V. S c h ro c k
President and Chief Operating Officer,
Technical Products and Filtration
L o u i s L . A i n swo rt h
Senior Vice President, General Counsel, and Secretary
Jac k J. D e m p s e y
Senior Vice President, Operations and Technology
K a r e n A . D u r a n t
Senior Vice President, Finance and Analysis
Fr e d e r i c k S . Ko u ry
Senior Vice President, Human Resources
M i c h a e l G . M e y e r
Vice President, Treasury and Tax
12
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 years 2004
and 2005. There were 3,922 shareholder accounts on December 31, 2005.
Price range and dividends of common stock ($)
2005
1Q
2Q
3Q
4Q
High
44.32
46.03
45.17
38.41
Low
38.39
37.45
36.11
30.80
Close
39.14
42.62
36.50
34.52
Div.
0.13
0.13
0.13
0.13
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
0.11
0.11
Common dividends Dividends are currently $0.14 per share paid quarterly in February, May, August, and November.
Pentair has now paid 120 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’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 May 4, 2006. Management and directors
encourage all shareholders to attend the annual meeting.
Form 10-K available Copies of the Company’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 online 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. See Section 1A of the Company’s 2005 Annual Report
on Form 10-K, which is included with this report.
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’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
Certified public accountants Deloitte & Touche LLP, Minneapolis, MN 55402
13
13
7
4
9
,
2
8
7
2
,
2
2
7
5
,
1
8
8
4
,
1
3
4
6
,
1
9
3
3
7
4
2
0
7
1
4
5
1
1
3
1
350
300
250
200
150
100
50
0
12%
10%
%
8
.
9
%
4
.
0
% 1
8
.
8
%
5
.
1
1
%
9
.
0
1
8%
6%
4%
2%
0%
’01 ’02
’03 ’04 ’0 5
’01
’02
’03 ’04 ’0 5
’01 ’02 ’03 ’04 ’0 5
net sales
($ in millions)
adjusted operating income*
($ in millions)
adjusted operating income
margin*
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
450
400
350
300
250
200
150
100
50
0
70
60
50
40
30
20
10
0
350
300
250
200
150
100
50
0
80
70
60
50
40
30
20
10
0
3,0 00
2,5 00
2,00 0
1,5 00
1,00 0
500
0
900
800
700
600
500
400
300
200
100
0
’01 ’02 ’03 ’04 ’0 5
’01
’02
’03 ’04 ’0 5
’01 ’02
’03 ’04 ’0 5
total debt
($ in millions)
debt/total capital
accounts
receivable
($ in millions)
days sales
outstanding
(13 month moving average)
inventories
($ in millions)
days on hand
(13 month moving average)
4
1
2
9
1
2
5
1
2
2
0
2
9
7
1
2
9
.
1
5
3
.
1
2.00
1.50
1.00
5
8
.
0
9
9
.
5 0
7
.
0
0.50
0
250
200
150
100
50
0
%
8
.
9
9
100%
80%
60%
40%
20%
0%
%
9
.
1
4
%
5
.
8
2
’01 ’02 ’03 ’04 ’0 5
’01
’02
’03 ’04 ’0 5
Pentair S&P 5 00 DJI A
adjusted diluted eps*
($ per share)
free cash flow
($ in millions)
3-year stock price
appreciation
*As defined in the financial highlights section on the inside front cover of this 2005 Pentair Annual Report.
CERTIFICATIONS The Company has filed as exhibits to its Annual Report on Form 10-K for the fiscal year ended December 31, 2005 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 2005
the Annual CEO Certification required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual.
14
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11625
Pentair, Inc.
(Exact name of Registrant as specified in its charter)
Minnesota
41-0907434
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification number)
5500 Wayzata Boulevard, Suite 800, Golden Valley, Minnesota
(Address of principal executive offices)
55416-1259
(Zip code)
Registrant’s telephone number, including area code: (763) 545-1730
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares, $0.16 2/3 par value
Preferred Share Purchase Rights
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in PART III
of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in
Rule 12b-2 of the Act). Large accelerated filer
Non-accelerated filer
Accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
Aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of
$42.62 per share as reported on the New York Stock Exchange on July 2, 2005 (the last day of Registrant’s most recently completed
second quarter): $4,077,996,205
The number of shares outstanding of Registrant's only class of common stock on February 17, 2006 was 101,456,370.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the company’s definitive proxy statement for its annual meeting to be held on May 4, 2006, are incorporated by reference in
this Form 10-K in response to Part III, ITEM 10, 11, 12 and 14.
2
Pentair, Inc.
Annual Report on Form 10-K
For the Year Ended December 31, 2005
PART I
ITEM 1.
Business
ITEM 1A.
Risk Factors
ITEM 1B. Unresolved Staff Comments
ITEM 2.
Properties
ITEM 3.
Legal Proceedings
ITEM 4.
Submission of Matters to a Vote of Security Holders
PART II
ITEM 5.
Market for Registrant’s Common Stock, Related Security Holder Matters and Issuer Purchases of
Equity Securities
ITEM 6.
Selected Financial Data
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
ITEM 8.
Financial Statements and Supplementary Data
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
ITEM 9A. Controls and Procedures
ITEM 9B. Other Information
PART III
ITEM 10. Directors and Executive Officers of the Registrant
ITEM 11.
Executive Compensation
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management
ITEM 13. Certain Relationships and Related Transactions
ITEM 14.
Principal Accounting Fees and Services
PART IV
ITEM 15.
Exhibits and Financial Statement Schedules
Signatures
3
Page
4
8
11
11
11
12
14
15
17
31
32
74
74
74
75
75
75
75
75
76
ITEM 1. BUSINESS
PART I
GENERAL
Pentair, Inc. is a focused diversified industrial manufacturing company comprised of two operating segments: Water and
Technical Products. Our Water Group is a global leader in providing innovative products and systems used worldwide in the
movement, treatment, storage and enjoyment of water. Our Technical Products Group, formerly referred to as 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; thermal management products; and accessories.
Pentair Strategy
Our basic operating strategies include:
(cid:120)
The Pentair Integrated Management System (PIMS) consisting of strategy deployment, lean enterprise, and IGNITE, which
is our process to drive organic growth;
long-term growth in sales, income and cash flows, driven by internal growth initiatives and acquisitions;
new product development and ongoing product enhancement;
focus on attractive growth markets, particularly international;
multi-channel distribution; and
proactive portfolio management of our businesses, including consideration of new business platforms.
Pentair Financial Objectives
Our long-term financial objectives are to:
(cid:120)
(cid:120)
Achieve 5-8% organic sales growth, plus acquisitions
Achieve benchmark financial performance:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Achieve 5% annual productivity improvement on core business cost
EBIT Margin
Return on Invested Capital (ROIC)(pre-tax)
Free Cash Flow (FCF)
EPS Growth
Debt/Total Capital
14%
20%
100% conversion of net income
10+% (sales growth plus margin expansion)
<40%
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Unless the context otherwise indicates, references herein to “Pentair”, the “Company,” and such words as “we,” “us,” and “our”
include Pentair, Inc. and its subsidiaries. Pentair is a Minnesota corporation incorporated in 1966.
BUSINESS AND PRODUCTS
WATER GROUP
Our Water Group is a global leader in providing innovative products and systems used worldwide in the movement, treatment,
storage, and enjoyment of water. Our 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 our current primary focus on three markets:
Pump (approximately 40% of segment sales), Pool & Spa (approximately 30% of segment sales), and Filtration (approximately
30% of segment sales).
Pump Market
We address the Pump market with products ranging from light duty diaphragm pumps to high-flow turbine pumps and solid handling
pumps designed for water and wastewater applications, and 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.
Brand names for the Pump market include STA-RITE®, Myers®, Flotec®, Aurora®, Hypro®, Hydromatic®, Fairbanks
Morse®, Berkeley®, Aermotor™, Water Ace®, Layne & Bowler®, Simer®, Verti-line®, Sherwood®, SherTech®, Diamond®,
FoamPro®, Onga™, Nocchi™, Shur-Dri®, SHURflo®, and Edwards®.
Pool & Spa Market
We address the Pool & Spa market 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 and residential pool and spa construction,
maintenance, repair, service, and retail.
4
Brand names for the Pool & Spa market include Pentair Pool Products®, Pentair Water Pool and Spa™, National Pool Tile
Group®, Pentair Aquatics®, STA-RITE®, Paragon Aquatics®, Pentair Spa & Bath™, Kreepy Krauly®, Compool®,
WhisperFlo®, PoolShark®, Legend™, Rainbow™, Ultra Jet®, Vico®, FIBERworks®, and IntelliTouch™.
Filtration Market
We address the Filtration market with control valves, filtration components, tanks, pressure vessels, and specialty dispensing pumps
providing flow solutions for specific end-user market applications including residential, commercial, foodservice, recreation
vehicles, marine, and aviation. Filtration products are used in the manufacture of water softeners; filtration, deionization, and
desalination systems; and industrial and residential water filtration applications.
Brand names for the Filtration market include Fleck®, SIATA™, CodeLine®, Structural™, WellMate™, American Plumber®,
Armor®, Everpure®, Pentek®, OMNIFILTER®, Park International™, SHURflo®, and Fibredyne™.
Customers
Our Water Group distributes its products through wholesale distributors, retail distributors, original equipment manufacturers,
and home centers. Information regarding significant customers in our Water Group is contained in ITEM 8, Note 14 of the Notes to
Consolidated Financial Statements, included in this Form 10-K.
Seasonality
We experience seasonal demand in a number of markets within our Water Group. End user demand for pool/spa equipment follows
warm weather trends and is at seasonal highs from March to July. The magnitude of the sales spike is partially mitigated by effective
use of the distribution channel by employing some advance sales programs (generally including extended payment terms and/or
additional discounts). Demand for residential and agricultural water systems is also impacted by weather patterns particularly related
to heavy flooding and droughts.
Competition
Our Water Group faces numerous domestic and international competitors, some of which have substantially greater resources.
Consolidation, globalization, and outsourcing are continuing trends in the water industry. Competition in commercial and residential
pump markets focuses on brand names, product performance, quality, and price. While home center and national retailers are
important for residential lines of water and wastewater pumps, they are much less important for commercial pumps. For municipal
pumps, competition focuses on performance to meet required specifications, service, and price. Competition in water treatment and
filtration components focuses on product performance and design, quality, delivery, and price. For pool and spa equipment, there are a
significant number of competitors. We compete by offering a wide variety of innovative and high-quality products, which are
competitively priced. We believe our distribution channels and reputation for quality also contribute to our continuing industry
penetration.
TECHNICAL PRODUCTS GROUP
Our Technical Products Group, formerly referred to as our Enclosures Group, is a global leader in the global enclosures market
that designs, manufactures, and markets standard, modified, and custom enclosures that house and protect sensitive controls,
components; thermal management products; and accessories. We have identified a target market in excess of $30 billion. Our
Technical Products Group focuses its business portfolio on four primary industries: Commercial & Industrial (55% of segment
sales), Telecom and Datacom (25% of segment sales), Electronics (15% of segment sales), and Networking (5% of segment
sales). The primary brand names for the Technical Products Group are: Hoffman®, Schroff®, Pentair Electronic Packaging™,
and Taunus™. The thermal businesses we acquired in December 2005 go to market under four brand names: McLean®,
Electronic Solutions™, Birtcher™, and Aspen Motion™. Products and related accessories of the Technical Products Group
include metallic and composite enclosures, cabinets, cases, subracks, backplanes, heat exchangers, and blowers. Applications
served include industrial machinery, data communications, networking, telecommunications, test and measurement, automotive,
medical, security, defense, and general electronics.
Customers
Our Technical Products Group distributes its products through original equipment manufacturers, electrical and data contractors,
and electrical and electronic components distributors. Information regarding significant customers in our Technical Products Group
is contained in ITEM 8, Note 14 of the Notes to Consolidated Financial Statements, included in this Form 10-K.
Seasonality
Our Technical Products Group is not significantly impacted by seasonal demand fluctuations.
Competition
Competition in the technical products markets can be intense, particularly in telecom and datacom markets, where product design,
prototyping, global supply, price competition, and customer service are significant factors. Our Technical Products Group has
continued to focus on cost control and improving profitability on a sequential quarter to quarter basis. Recent growth in the Technical
Products Group is a result of continued channel penetration, growth in targeted market segments, new product development,
geographic expansion, acquisitions, and overall market growth. Consolidation, globalization, and outsourcing are visible trends in the
5
technical products marketplace and typically play to the strengths of a large and globally positioned supplier. We believe our
Technical Products Group has the broadest array of enclosures products available for commercial and industrial uses.
Business segment and geographical financial information is contained in ITEM 8, Note 14 of the Notes to Consolidated Financial
Statements, included in this Form 10-K.
RECENT DEVELOPMENTS
Growth of our business
We continually look at each of our businesses to determine whether they fit with our evolving strategic vision. Our primary focus is on
businesses with strong fundamentals and growth opportunities, especially in international markets. We seek growth through product
and service innovation, market expansion, and acquisitions. Acquisitions have played an important part in the growth of our business,
and we expect acquisitions will continue to be an important part of our growth in the future.
Acquisitions
On December 1, 2005, we acquired McLean Thermal Management, Aspen Motion Technologies, and Electronic Solutions
businesses from APW, Ltd. (collectively, “Thermal”) for $140.0 million, including a cash payment of $138.9 million and
transaction costs of $1.1 million. These businesses provide thermal management solutions and integration services to the
telecommunications, data communications, medical, and security markets as part of our Technical Products Group. Goodwill
recorded as part of the initial purchase price allocation was $93.7 million, all of which is tax deductible. Preliminary estimates of
identifiable intangible assets acquired as part of the acquisition were $18.9 million, including definite-lived intangibles, such as
proprietary technology and customer relationships, of $9.8 million with a weighted average amortization period of 10.0 years.
We continue to evaluate the purchase price allocation for the Thermal acquisition, including intangible assets, contingent
liabilities, plant rationalization costs, and property, plant and equipment. We expect to revise the purchase price allocation as
better information becomes available in 2006.
On February 23, 2005, we acquired certain assets of Delta Environmental Products, Inc. and affiliates (collectively, “DEP”), a
privately-held company, for $10.3 million, including a cash payment of $10.0 million, transaction costs of $0.2 million, and debt
assumed of $0.1 million. The DEP product line addressees the water and wastewater markets and is part of our Water Group.
Goodwill recorded as part of the initial purchase price allocation was $9.3 million, all of which is tax deductible.
Effective July 31, 2004, we completed the acquisition of all of the shares of capital stock of WICOR, Inc. (“WICOR”) from
Wisconsin Energy Corporation (“WEC”) for $874.7 million, including a cash payment of $871.1 million, transaction costs of
$11.2 million, and debt assumed of $21.6 million, less a favorable final purchase price adjustment of $14.0 million and less cash
acquired of $15.2 million. This includes an additional $0.4 million in transaction costs recorded in the first three quarters of
2005. WICOR manufactures water system, filtration, and pool equipment products primarily under the STA-RITE®, SHURflo®
and Hypro® brands.
On December 31, 2003, we acquired all of the common stock of Everpure, Inc. (“Everpure”), from United States Filter
Corporation, a unit of Veolia Environnement, for $218.9 million in cash, less cash acquired of $5.5 million and transaction costs
of $2.2 million. Everpure is a leading global provider of water filtration products for the commercial and consumer sectors.
During 2003, we also completed four product line acquisitions in our Water Group for total consideration of $21.4 million in cash
including transaction costs: Hydrotemp Manufacturing Co., Inc., Letro Products, Inc. and certain assets of TwinPumps, Inc., and
K&M Plastics, Inc.
Also refer to ITEM 7, Management's Discussion and Analysis, and ITEM 8, Note 2 of the Notes to Consolidated Financial Statements,
included in this Form 10-K.
Discontinued operations/divestitures
Effective after the close of business October 2, 2004, we completed the sale of our former Tools Group to The Black & Decker
Corporation (“BDK”) for approximately $796.8 million in cash, including a $21.8 million interim net asset value increase,
subject to post-closing adjustments. The Tools Group was comprised of the Porter-Cable®, Delta®, DeVilbiss Air Power,
Oldham Saw, and FLEX® brands, among others. We used the proceeds from the Tools Group sale and borrowings under our
credit facility to repay, on October 4, 2004, an $850 million bridge facility used to acquire WICOR. In the fourth quarter of
2004, we recorded a loss on the disposal of the Tools Group of $6.0 million, net of a tax provision of $9.0 million. In July 2005,
we paid $10.4 million to BDK in purchase price adjustments related to the sale of our former Tools Group. We currently have an
outstanding dispute with BDK over the net asset value of the Tools Group and may be required to repay additional proceeds. We
believe our accrual at December 31, 2005 is an adequate reserve amount for any potential liability. We expect resolution of this matter
in the first quarter of 2006.
In 2001, we completed the sale of the Service Equipment businesses (Century Mfg. Co./Lincoln Automotive Company) to Clore
Automotive, LLC for total consideration of $18.2 million and we completed the sale of Lincoln Industrial to affiliates of The Jordan
Company LLC (Jordan), other investors, and members of management of Lincoln Industrial for total consideration of $78.4 million,
6
including the retention of a preferred stock interest. In January 2003, we paid $2.4 million for a final adjustment to the selling price
related to the disposition of Lincoln Industrial, which was offset by a previously established reserve. In the fourth quarter of 2003, we
reported an additional loss from discontinued operations of $2.9 million primarily due to a reduction in estimated proceeds related to
exiting two remaining facilities.
Also refer to ITEM 7, Management's Discussion and Analysis, and ITEM 8, Note 3 of the Notes to Consolidated Financial Statements,
included in this Form 10-K.
INFORMATION REGARDING ALL BUSINESS SEGMENTS
Backlog
Our backlog of orders from continuing operations as of December 31 by segment was:
In thousands
Water
Technical Products
Total
2005
2004
$ change
% change
$
$
165,737
106,587
272,324
$
$
172,607
75,151
247,758
$
$
(6,870)
31,436
24,566
(4.0%)
41.8%
9.9%
The $6.9 million decrease in Water Group backlog was primarily due to the timing of filtration and pool product orders. The $31.4
million increase in Technical Products Group backlog reflects the acquisition of the thermal management businesses from APW,
as well as order growth in the Group’s Asian businesses, particularly China. Due to the relatively short manufacturing cycle and
general industry practice, backlog, which typically represents approximately 30 days of shipments, is not deemed to be a significant
item for our business. A substantial portion of our revenues result from orders received and product sold in the same month. We
expect that most of our backlog at December 31, 2005 will be filled in 2006.
Research and development
We conduct research and development activities in our own facilities, which consist primarily of the development of new products,
product applications, and manufacturing processes. Research and development expenditures during 2005, 2004, and 2003 were $46.0
million, $31.5 million, and $22.9 million, respectively.
Environmental
Environmental matters are discussed in ITEM 3, ITEM 7, and in ITEM 8, Note 15 of the Notes to Consolidated Financial Statements,
included in this Form 10-K.
Raw materials
The principal materials used in the manufacturing of our products are electric motors, mild steel, stainless steel, electronic components,
plastics (resins, fiberglass, epoxies), and paint (powder and liquid). In addition to the purchase of raw materials, we purchase some
finished goods for distribution through our sales channels.
The materials used in the various manufacturing processes are purchased on the open market, and the majority are available through
multiple sources and are in adequate supply. We have not experienced any significant work stoppages to-date due to shortages of
materials. We have certain long-term commitments, principally price commitments, for the purchase of various component parts and
raw materials and believe that it is unlikely that any of these agreements would be terminated prematurely. Alternate sources of supply
at competitive prices are available for most materials for which long-term commitments exist, and we believe that the termination of
any of these commitments would not have a material adverse effect on operations.
Certain commodities, such as steel and resin, are subject to market and duty-driven price fluctuations. We manage these fluctuations
through several mechanisms, including long-term agreements with escalator / de-escalator clauses. Prices for raw materials, such as
steel, carbon, and resins, may continue to trend higher in the future.
Intellectual property
Patents, non-compete agreements, proprietary technologies, customer relationships, trade marks, trade names, and brand names are
important to our business. However, we do not regard our business as being materially dependent upon any single patent, non-
compete agreement, proprietary technology, customer relationship, trade mark, trade name, or brand name.
Patents, patent applications, and license agreements will expire or terminate over time by operation of law, in accordance with
their terms or otherwise. We do not expect the termination of patents, patent applications, and license agreements to have a
material adverse effect on our financial position, results of operations or cash flows.
7
Employees
As of December 31, 2005, Pentair, Inc. and its subsidiaries employed an aggregate of approximately 14,700 people worldwide. Total
employees in the United States were approximately 10,700, of whom approximately 900 are represented by six different trade unions
having collective bargaining agreements. Generally, labor relations have been satisfactory.
Captive Insurance Subsidiary
We insure general and product liability, property, workers’ compensation, and automobile liability risks through our regulated
wholly-owned captive insurance subsidiary, Penwald Insurance Company (Penwald). Reserves for policy claims are established
based on actuarial projections of ultimate losses. Accruals with respect to liabilities insured by third parties, such as liabilities
retained from acquired businesses, pre-1992 liabilities and those of certain foreign operations, are established without regard to
the availability of insurance.
Matters pertaining to Penwald are discussed in ITEM 3 and ITEM 8, Note 1 of the Notes to Consolidated Financial Statements,
included in this Form 10-K.
Available information
We make available free of charge (other than an investor’s own Internet access charges) through our Internet website
(http://www.pentair.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and if
applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
Reports of beneficial ownership filed by our directors and executive officers pursuant to Section 16(a) of the Securities Exchange Act
of 1934 are also available on our website. We are not including the information contained on our website as part of, or incorporating it
by reference into, this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
You should carefully consider the following risk factors and warnings before making an investment decision. If any of the risks
described below actually occur, our business, financial condition, results of operations or prospects could be materially adversely
affected. In that case, the price of our securities could decline and you could lose all or part of your investment. You should also refer
to the other information set forth in this document.
Demand for our products will be affected by general economic conditions.
Demand for our residential and commercial products is influenced by many economic conditions, including but not limited to new
construction activity and the level of repair and remodeling activity. The level of new construction and repair and remodeling activity
is affected by a number of factors beyond our control, such as the overall strength of the economy (including confidence in the
economy by our customers), the strength of the residential and commercial real estate markets, institutional building activity, the age of
existing housing stock, unemployment rates, availability of consumer financing and interest rates. Any declines in new housing or
commercial construction starts or demand for replacement building and home improvement products may adversely impact us, and
there can be no assurance that any such adverse effects would not be material and would not continue for an indeterminate period of
time. Further, while we attempt to minimize our exposure to economic or market fluctuations by serving a balanced mix of end
markets and geographic regions, we cannot assure you that a significant or sustained downturn in a specific end market or geographic
region would not have a material adverse effect on us.
Our businesses operate in highly competitive markets, so we may be forced to cut prices or to incur additional costs.
Our businesses generally face substantial competition in each of their respective markets. Competition may force us to cut prices or to
incur additional costs to remain competitive. We compete on the basis of product design, quality, availability, performance, customer
service and price. Present or future competitors may have greater financial, technical or other resources which could put us at a
disadvantage in the affected business or businesses. We cannot assure you that these and other factors will not have a material adverse
effect on our results of operations.
Our inability to sustain consistent organic growth could adversely affect our financial performance.
In 2005, our organic growth was generated in part from expanding international sales, entering new distribution channels, and
introducing new products. To grow more rapidly than our end markets, we will have to continue to expand our geographic reach,
further diversify our distribution channels, continue to introduce new products, and increase sales of existing products to our
customer base. We may not be able to successfully meet those challenges, which could adversely affect our ability to sustain
consistent organic growth. If we are unable to sustain consistent organic growth, we will be less likely to meet our stated revenue
growth targets, which could adversely affect our net income growth, and, in turn, the market price of our stock.
Our inability to complete or successfully complete and integrate acquisitions could adversely affect our financial performance.
8
A significant percentage of our net sales growth in 2005 and 2004 was generated as a result of acquisitions completed during those
periods, including our acquisition of WICOR and Everpure. We may not be able to sustain this level of growth from acquisition
activity in the future. We intend to continue to evaluate strategic acquisitions primarily in our current business segments, and we may
consider acquisitions outside of these segments as well. Our ability to expand through acquisitions is subject to various risks, including
the following:
(cid:120) increased competition for acquisitions, especially in the water industry;
(cid:120) higher acquisition prices;
(cid:120) lack of suitable acquisition candidates in targeted product or market areas;
(cid:120) diversion of management time and attention to acquisitions and acquired businesses;
(cid:120) inability to integrate acquired businesses effectively or profitably; and
(cid:120) inability to achieve anticipated synergies or other benefits from acquisitions.
Acquisitions could have a material adverse effect on our operating results, particularly in the fiscal quarters immediately following the
acquisitions, while we attempt to integrate operations of the acquired businesses into our operations. Once integrated, acquired
operations may not achieve the levels of profitability originally anticipated.
Material cost inflation could adversely affect our results of operations.
We are experiencing material cost inflation in a number of our businesses . We are striving for greater productivity improvements and
implementing selective increases in selling prices to help mitigate cost increases in base materials such as steel, resins, ocean freight
and fuel, health care and insurance. We also are continuing to implement our excellence in operations initiatives in order to
continuously reduce our costs. We cannot assure you, however, that these actions will be successful to manage our costs or increase
our productivity. Continued cost inflation or failure of our initiatives to generate cost savings or improve productivity may negatively
impact our results of operations.
Seasonality of sales and weather conditions may adversely affect our financial results.
We experience seasonal demand in a number of markets within our Water Group. End-user demand for pool/spa equipment follows
warm weather trends and is at seasonal highs from March to July. The magnitude of the sales spike is partially mitigated by effective
use of the distribution channel by employing advance sales programs (generally including extended payment terms and/or additional
discounts). Demand for residential and agricultural water systems is also impacted by water patterns particularly related to heavy
flooding and droughts. We cannot assure you that seasonality and weather conditions will not have a material adverse effect on our
results of operations.
Intellectual property challenges may hinder product development and marketing.
Patents, non-compete agreements, proprietary technologies, customer relationships, trade marks, trade names, and brand names are
important to our business. Intellectual property protection, however, may not preclude competitors from developing products similar
to ours or from challenging our names or products. Over the past few years, we have noticed an increasing tendency for participants in
our markets to use conflicts over and challenges to intellectual property as a means to compete. Patent and trademark challenges
increase our costs to develop, engineer and market our products.
Our results of operations may be negatively impacted by litigation.
Our business exposes us to potential litigation, especially product liability suits that are inherent in the design, manufacture, and sale of
our products. While we currently maintain what we believe to be suitable product liability insurance, we cannot be assured that we will
be able to maintain this insurance on acceptable terms or that this insurance will provide adequate protection against potential
liabilities. In addition, we self-insure a portion of product liability claims. A series of successful claims against us could materially and
adversely affect our product reputation and our financial condition, results of operations, and cash flows.
We may be required to make payments in respect of businesses that we have sold.
We have sold a number of businesses over the last ten years, including the sale of our former Tools Group to BDK in October 2004. In
this and other dispositions, we typically agree to indemnify the buyers with respect to certain matters relating to the businesses that we
have sold, and we may from time to time be required to make payments to the buyers under those indemnities. To the extent we are
required to make any such payments in the future, those payments could be substantial, which could require us to borrow additional
9
amounts at unfavorable borrowing terms and cause a significant decrease in our liquidity, both of which could severely harm our
business.
The availability and cost of capital could have a negative impact on our continued growth.
Our plans to continue our growth in our chosen markets will require additional capital for future acquisitions, capital expenditures for
existing businesses, growth of working capital, and continued international and regional expansion. In the past, we have financed our
growth primarily through debt financings. Any significant future acquisitions will require us to expand our debt financing resources or
to issue equity securities. Our financial results may be adversely affected if interest costs under our debt financings are higher than the
income generated by acquisitions or other internal growth. In addition, future acquisitions could be dilutive to your equity investment
if we issue additional stock to fund acquisitions. We cannot be assured that we will be able to issue equity securities or to obtain future
debt financing at favorable terms. Without sufficient financing, we will not be able to pursue our growth strategy, which will limit our
growth and revenues in the future.
Our international operations are subject to foreign market and currency fluctuation risks.
We expect the percentage of sales outside of North America to increase in the future. Over the past few years, the economies of many
of the foreign countries in which we do business have had slower growth than the U.S. economy. The European Union currently
accounts for the majority of our foreign sales and income. Our most significant European market is Germany, where the capital goods
market has been very slow. We cannot predict how changing European market conditions will impact our financial results.
We are also exposed to the risk of fluctuation of foreign currency exchange rates which may affect our financial results. As of
December 31, 2005, we held immaterial positions in foreign exchange-forward contracts.
We are exposed to political, economic and other risks that arise from operating a multinational business.
Sales outside of North America, including export sales from North American businesses, accounted for approximately 22% of our net
sales in 2005. Further, certain of our businesses obtain raw materials and finished goods from foreign suppliers. Accordingly, our
business is subject to the political, economic and other risks that are inherent in operating in numerous countries. These risks include:
(cid:120) the difficulty of enforcing agreements and collecting receivables through foreign legal systems;
(cid:120) trade protection measures and import or export licensing requirements;
(cid:120) tax rates in certain foreign countries that exceed those in the U.S. and the imposition of withholding requirements on foreign
earnings;
(cid:120) the imposition of tariffs, exchange controls or other restrictions;
(cid:120) difficulty in staffing and managing widespread operations and the application of foreign labor regulations;
(cid:120) the protection of intellectual property in foreign countries may be more difficult;
(cid:120) required compliance with a variety of foreign laws and regulations; and
(cid:120) changes in general economic and political conditions in countries where we operate, particularly in emerging markets.
Our business success depends in part on our ability to anticipate and effectively manage these and other risks. We cannot assure you
that these and other factors will not have a material adverse effect on our international operations or on our business as a whole.
We are exposed to potential environmental liabilities and litigation.
Compliance with environmental regulations could require us to discharge environmental liabilities, increase the cost of manufacturing
our products or otherwise adversely affect our business, financial condition and results of operations. We are subject to federal, state,
local and foreign laws and regulations governing public and worker health and safety and the indoor and outdoor environment. Any
violations of these laws by us could cause us to incur unanticipated liabilities that could harm our operating results and cause our
business to suffer. We are also required to comply with various environmental laws and maintain permits, some of which are subject
to discretionary renewal from time to time, for many of our businesses, and we could suffer if we are unable to renew existing permits
or to obtain any additional permits that we may require.
We have been named as defendants, targets, or potentially responsible parties (PRPs) in a number of environmental clean-ups relating
to our current or former business units. We have disposed of a number of businesses over the last ten years and, in certain cases, we
10
have retained responsibility and potential liability for certain environmental obligations. We have received claims for indemnification
from certain purchasers. We may be named as a PRP at other sites in the future for existing business units, as well as both divested and
acquired businesses.
We cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual
environmental clean-up costs and liabilities will not exceed the amount of our current reserves.
Provisions of our Restated Articles of Incorporation, Bylaws and Minnesota law could deter takeover attempts.
Anti-takeover provisions in our charter documents, under Minnesota law and in our shareholder rights plan could prevent or delay
transactions that our shareholders may favor.
Our Restated Articles of Incorporation and Bylaws include provisions relating to the election, appointment and removal of directors, as
well as shareholder notice and shareholder voting requirements which could delay, prevent or make more difficult a merger, tender
offer, proxy contest or other change of control. In addition, our common share purchase rights could cause substantial dilution to a
person or group that attempts to acquire us, which could deter some acquirers from making takeover proposals or tender offers. Also,
the Minnesota Business Corporations Act contains control share acquisition and business combination provisions which could delay,
prevent or make more difficult a merger, tender offer, proxy contest or other change of control. Our shareholders might view any such
a transaction as being in their best interests since the transaction could result in a higher stock price than the current market price for
our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive office is in leased premises located in Golden Valley, Minnesota. Our Water Group manufacturing operations
are carried out at approximately 25 plants located throughout the United States and at 22 plants located in 11 other countries. In
addition, our Water Group has 54 distribution facilities and 17 sales offices located in numerous countries throughout the world. Our
Technical Products Group operations are carried out at approximately 8 plants located throughout the United States and 8 plants
located in 6 other countries.
numerous countries throughout the world.
In addition, our Technical Products Group has 9 distribution facilities and 28 sales offices located in
We believe that our production facilities are suitable for their purpose and are adequate to support our businesses.
ITEM 3. LEGAL PROCEEDINGS
We have been made parties to a number of actions filed or have been given notice of potential claims relating to the conduct of
our business, including those pertaining to commercial disputes, product liability, environmental, safety and health, patent
infringement, and employment matters.
We comply with the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for
Contingencies, and related guidance, and record liabilities for an estimated loss from a loss contingency where the outcome of the
matter is probable and can be reasonably estimated. Factors that are considered when determining whether the conditions for
accrual have been met include the (a) nature of the litigation, claim, or assessment, (b) progress of the case, including progress
after the date of the financial statements but before the issuance date of the financial statements, (c) opinions of legal counsel, and
(d) management’s intended response to the litigation, claim, or assessment. Where the reasonable estimate of the probable loss is
a range, we record the most likely estimate of the loss. When no amount within the range is a better estimate than any other
amount, however, the minimum amount in the range is accrued. Gain contingencies are not recorded until realized.
While we believe that a material adverse impact on our consolidated financial position, results of operations, or cash flows from
any such future charges is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future adverse
ruling or unfavorable development could result in future charges that could have a material adverse impact. We do and will
continue to periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make
appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates
of the potential impact on our consolidated financial position, results of operations, and cash flows for the proceedings and claims
described in “Legal Proceedings” could change in the future.
Environmental
We have been named as defendants, targets, or potentially responsible parties (PRPs) in a small number of environmental clean-ups, in
which our current or former business units have generally been given de minimis status. To date, none of these claims have resulted in
clean-up costs, fines, penalties, or damages in an amount material to our financial position or results of operations. We have disposed
of a number of businesses over the last ten years and in certain cases, such as the disposition of the Cross Pointe Paper Corporation
uncoated paper business in 1995, the disposition of the Federal Cartridge Company ammunition business in 1997, the disposition of
11
Lincoln Industrial in 2001, and the disposition of the Tools Group in 2004, we have retained responsibility and potential liability for
certain environmental obligations. We have received claims for indemnification from purchasers both of the paper business and the
ammunition business and have established what we believe to be adequate accruals for potential liabilities arising out of retained
responsibilities. We settled some of the claims in 2005 and 2003 and our recorded accrual was adequate.
In addition, there are pending environmental issues at a limited number of sites, including one site acquired in the acquisition of Essef
Corporation in 1999, which relates to operations no longer carried out at that site. We have established what we believe to be adequate
accruals for remediation costs at this and other sites. We do not believe that projected response costs will result in a material liability.
We may be named as a PRP at other sites in the future, for both divested and acquired businesses. When it is probable and it is
possible to provide reasonable estimates of our liability, with respect to environmental sites, provisions have been made in accordance
with generally accepted accounting principles in the United States. As of December 31, 2005 and 2004, our reserves for such
environmental liabilities were approximately $6.4 million and $9.4 million, respectively, measured on an undiscounted basis. We
cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmental
clean-up costs and liabilities will not exceed the amount of our current reserves.
Product liability claims
We are subject to various product liability lawsuits and personal injury claims. A substantial number of these lawsuits and claims
are insured and accrued for by Penwald, our captive insurance subsidiary. See discussion in ITEM 1 and ITEM 8, Note 1 of the
Notes to Consolidated Financial Statements – Insurance subsidiary. Penwald records a liability for these claims based on
actuarial projections of ultimate losses. For all other claims, accruals covering the claims are recorded, on an undiscounted basis,
when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing
information. The accruals are adjusted periodically as additional information becomes available. We have not experienced
significant unfavorable trends in either the severity or frequency of product liability lawsuits or personal injury claims.
Horizon litigation
Twenty-eight separate lawsuits involving 29 primary plaintiffs, a class action, and claims for indemnity by Celebrity Cruise Lines, Inc.
(Celebrity) were brought against Essef Corporation (Essef) and certain of its subsidiaries prior to our acquisition of Essef in August
1999. Celebrity has alleged that it had sustained economic damages due to loss of use of the M/V Horizon while it was dry-docked.
The claims against Essef and its involved subsidiaries were based upon the allegation that Essef designed, manufactured, and marketed
two sand swimming pool filters that were installed as a part of the spa system on the Horizon, and allegations that the spa and filters
contained Legionnaire’s disease bacteria that infected certain passengers on cruises from December 1993 through July 1994.
The individual and class claims by passengers were tried and resulted in an adverse jury verdict finding liability on the part of the Essef
defendants (70%) and Celebrity and its sister company, Fantasia (together 30%).
After expiration of post-trial appeals, we paid all outstanding punitive damage awards of $7.0 million in the Horizon cases, plus
interest of approximately $1.6 million in January 2004. We had reserved for the amount of punitive damages awarded at the time of
the Essef acquisition. A reserve for the $1.6 million interest cost was recorded in 2003. All of the personal injury cases have now been
resolved through either settlement or trial.
The only remaining unresolved claims in this case are those brought by Celebrity for damages resulting from the outbreak. Celebrity
filed an amended complaint seeking attorney fees and costs for prior litigation as well as out-of-pocket losses, lost profits, and
loss of business enterprise value. Discovery commenced late in 2004, and was completed in August 2005. Celebrity’s claims for
damages exceed $185 million. Assuming matters of causation, standing, contribution and proof are decided against it, Essef’s
experts believe that damages should amount to no more than approximately $16 to $25 million. Dispositive motions in this
matter were filed in August 2005, which were decided in December 2005. Celebrity’s motion for indemnity from Essef for
payments made by Celebrity for passenger claims of approximately $2.3 million was denied. Essef’s motion for dismissal of
certain damage claims was denied without prejudice to renewal in conjunction with both parties’ motions to exclude certain
expert testimony. We expect these motions to be adjudicated in March 2006. Trial has been scheduled for April 24, 2006. We
believe our reserves for any liability to Celebrity are adequate and intend to vigorously defend against these claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
EXECUTIVE OFFICERS OF THE REGISTRANT
Current executive officers of Pentair, their ages, current position, and their business experience during at least the past five years are
as follows:
Name
Randall J. Hogan
Current Position and Business Experience
Age
50 Chief Executive Officer since January 2001 and Chairman of the Board effective May 1, 2002; President and
Chief Operating Officer, December 1999 – December 2000; Executive Vice President and President of
Pentair’s Electrical and Electronic Enclosures Group, March 1998 – December 1999; United Technologies'
1994 – 1997: Carrier Transicold President 1995 – 1997; Pratt & Whitney Industrial Turbines Vice President
and General Manager 1994 – 1995; General Electric various executive positions 1988 – 1994; McKinsey &
Company consultant 1981 – 1987.
Richard J. Cathcart
61 Vice Chairman of Pentair since February 2005; President and Chief Operating Officer of Water Technologies
segment January 2001 - January 2005; Executive Vice President and President of Pentair’s Water
Technologies Group, February 1996 – December 2000; Executive Vice President, Corporate Development,
March 1995 – January 1996.
David D. Harrison
58
Executive Vice President and Chief Financial Officer since February 2000; Executive Vice President and
Chief Financial Officer of The Scotts Company, August 1999 – February 2000; Executive Vice President and
Chief Financial Officer of Coltec Industries, August 1996 – August 1999; Executive Vice President and Chief
Financial Officer of Pentair, Inc., March 1994 – July 1996; Senior Executive with General Electric Technical
Services organization, January 1990 – March 1994. Various executive positions with General Electric
Plastics/Borg-Warner Chemicals 1972-1990.
Michael V. Schrock
53
President and Chief Operating Officer of Filtration and Technical Products since October 2005; President and
Chief Operating Officer of Enclosures October 2001 – September 2005; President, Pentair Water
Technologies – Americas, January 2001 – October 2001; President, Pentair Pump and Pool Group, August
2000 – January 2001; President, Pentair Pump Group, January 1999 – August 2000; Vice President and
General Manager, Aurora, Fairbanks Morse and Pentair Pump Group International, March 1998 – December
1998; Divisional Vice President and General Manager, Honeywell Inc., 1994 – 1998.
Charles M. Brown
47
President and Chief Operating Officer of Pump and Pool Operations since April 2005; President Pentair Tools
Group Integration with The Black and Decker Corporation August 2004 - March 2005; President and Chief
Operating Officer of Pentair Tools Group August 2003 - August 2004; President of Aqua Glass Corporation
March 1996 - August 2003; Vice President of Marketing for Delta Faucet May 1993 - March 1996.
Louis L. Ainsworth
58
Senior Vice President and General Counsel since July 1997 and Secretary since January 2002; Shareholder
and Officer of the law firm of Henson & Efron, P.A., November 1985 – June 1997.
Jack J. Dempsey
44
Senior Vice President of Operations and Technology effective April 2005; Director, McKinsey and Company
July 1999 - March 2005; Prior McKinsey and Company experience: Principal, July 1993 - June 1999,
Consultant, August 1987 - June 1993; Chase Manhattan Bank, various retail banking roles September 1983 -
August 1985.
Frederick S. Koury
45
Senior Vice President, Human Resources, since August 2003; Vice President of Human Resources of the
Victoria’s Secret Stores unit of Limited Brands, September 2000 – August 2003; PepsiCo, Inc., various
executive positions, June 1985 – September 2000.
Karen A. Durant
46
Senior Vice President of Finance and Analysis since January 2006; Vice President of Finance and Controller
April 2002 – December 2005; Vice President, Controller, September 1997 – March 2002; Controller, January
1996 – August 1997; Assistant Controller, September 1994 – December 1995; Director of Financial Planning
and Control of Hoffman Enclosures Inc. (subsidiary of Pentair), October 1989 – August 1994; various finance
and accounting positions with Honeywell Inc., 1981-1989.
Michael G. Meyer
47 Vice President of Treasury and Tax since April 2004; Treasurer, January 2002 - March 2004; Assistant
Treasurer, September 1994 - December 2001. Various executive positions with Federal-Hoffman, Inc. (former
subsidiary of Pentair), August 1985 - August 1994.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK, RELATED SECURITY HOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Pentair’s common stock is listed for trading on the New York Stock Exchange and trades under the symbol “PNR.” As of December
31, 2005, there were 3,922 shareholders of record.
The high, low, and closing sales price for our common stock and the dividends declared for each of the quarterly periods for 2005 and
2004 were as follows:
2005
2004
First
Second
Third
Fourth
First
Second
Third
Fourth
High
Low
Close
Dividends declared
$
$
$
$
44.32
38.39
39.14
0.130
$
$
$
$
46.03
37.45
42.62
0.130
$
$
$
$
45.17
36.11
36.50
0.130
$
$
$
$
38.41
30.80
34.52
0.130
$
$
$
$
29.60
22.52
29.60
0.105
$
$
$
$
33.64
28.48
32.95
0.105
$
$
$
$
35.03
30.90
35.03
0.110
$
$
$
$
44.03
34.27
43.56
0.110
Pentair has paid 120 consecutive quarterly dividends.
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 in this Form 10-K has
been retroactively restated to reflect the effect of this stock split.
Purchases of Equity Securities
The following table provides information with respect to purchases made by Pentair of common stock during the fourth quarter of
2005:
Period
October 2 - October 29, 2005
October 30 - November 27, 2005
November 28 - December 31, 2005
Total
(a) Total
Number of
Shares
Purchased
(b) Average
Price Paid per
Share
(c) Total Number of
Shares Purchased as Part
of Publicly Announced
Plans or Programs
(d) Approximate Dollar
Value of Shares that May
Yet Be Purchased Under
the Plans or Programs
3,861
22,595
1,637
28,093
$35.99
$36.67
$36.92
100,000
655,663
—
755,663
$21,872,220
$0
$0
(a)
The purchases in this column include only those shares deemed surrendered to us by plan participants to satisfy the exercise price
or withholding of tax obligations related to the exercise price of employee stock options.
(b)
The average price paid in this column includes only those shares deemed surrendered to us by plan participants to satisfy the
exercise price or withholding of tax obligations related to the exercise price of employee stock options.
(c)
(d)
The number of shares in this column represents the number of shares repurchased as part of our publicly announced plan to
repurchase up to $25 million of our common stock annually.
In December 2004, our Board of Directors authorized the development of a program and process to annually repurchase shares of
our common stock up to a maximum dollar limit of $25 million. There is no expiration associated with the authorization granted.
As of December 31, 2005 we had repurchased 755,663 shares for $25 million pursuant to this program, the average price paid per
share was $33.08.
From January 1, 2006 to February 17, 2006, no shares have been repurchased pursuant to this program and accordingly, we have
the authority to repurchase shares up to a maximum dollar limit of $25 million during the remainder of 2006.
14
ITEM 6. SELECTED FINANCIAL DATA
Dollars in thousands, except per-share data
2005(1)
2004
2003
2002
2001
2000
1999
1998
Years ended December 31
Statement of operations
Net sales
Water
Technical Products
Other
Total
Sales growth
Cost of goods sold
Gross profit
Margin %
Selling, general and administrative
Research and development
Restructuring charge
Water
Technical Products
Other
Operating income
Total
Water
Technical Products
Other
Total
Margin %
Net interest expense
(Gain) loss on sale 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 – continuing operations
Basic EPS – discontinued operations
Basic EPS – net income
Diluted EPS – continuing operations
Diluted EPS – discontinued operations
Diluted EPS – net income
Cash dividends declared per common share
Stock dividends declared per common share
Market value per share (December 31)
$
$
2,131,505
815,074
—
$
1,563,394
714,735
—
$
1,060,303
582,684
—
$
932,420
556,033
—
$
882,615
689,820
—
$
898,247
777,725
—
$
579,236
657,500
—
438,810
586,829
—
2,946,579
2,278,129
1,642,987
1,488,453
1,572,435
1,675,972
1,236,736
1,025,639
29.3%
38.7%
10.4%
(5.3%)
(6.2%)
35.5%
20.6%
(0.7%)
2,098,558
848,021
28.8%
1,623,419
654,710
28.7%
1,196,757
446,230
27.2%
1,107,212
381,241
25.6%
1,163,001
409,434
26.0%
1,199,122
476,850
28.5%
376,015
31,453
—
—
—
—
197,310
87,844
(37,912)
247,242
10.9%
37,210
—
73,008
137,024
253,088
22,932
—
—
—
—
143,962
51,094
(24,846)
230,994
18,952
—
—
—
—
126,559
29,942
(25,206)
170,210
131,295
10.4%
26,395
—
45,665
98,150
8.8%
28,412
—
27,884
74,999
266,229
15,941
—
38,427
1,678
40,105
109,792
1,857
(25,444)
86,205
5.5%
40,325
2,985
12,147
30,748
267,518
18,138
—
(1,625)
21,018
19,393
120,732
96,268
(45,197)
171,803
10.3%
46,435
—
41,580
83,788
883,737
352,999
28.5%
231,100
11,927
—
16,743
—
16,743
73,362
46,346
(26,480)
93,228
7.5%
30,467
—
21,406
41,355
747,976
277,663
27.1%
191,358
8,986
—
—
—
—
56,264
46,026
(24,971)
77,319
7.5%
16,698
—
20,495
40,126
40,248
46,138
54,903
26,768
(27,872)
61,954
66,714
(6,047)
(2,936)
—
(24,647)
—
—
—
—
171,225
—
171,225
—
141,352
—
141,352
—
129,902
—
129,902
1.38
0.34
1.72
1.35
0.33
1.68
0.43
100%
43.56
1.00
0.44
1.44
0.99
0.43
1.42
0.41
—
22.85
0.76
0.56
1.32
0.75
0.56
1.31
0.37
—
17.28
—
32,869
—
32,869
0.31
0.02
0.33
0.31
0.02
0.33
0.35
—
18.26
(29)
55,887
—
55,887
0.86
(0.29)
0.57
0.86
(0.29)
0.57
0.33
—
12.09
—
103,309
—
103,309
—
106,840
(4,267)
102,573
0.47
0.71
1.18
0.47
0.70
1.17
0.32
—
19.25
0.52
0.87
1.39
0.46
0.77
1.23
0.30
—
19.91
478,907
46,042
—
—
—
—
267,138
109,229
(53,295)
323,072
11.0%
44,989
(5,435)
98,469
185,049
—
—
—
185,049
—
185,049
1.84
—
1.84
1.80
—
1.80
0.52
—
34.52
(1)
*
In 2005 we early adopted SFAS 123R retroactively to January 1, 2005 and the results of operations for 2005 include after tax expense of $12.0 million, or ($0.12) diluted EPS.
All share and per share information presented in this Form 10-K have been retroactively restated to reflect the effect of a 100% stock dividend in 2004.
15
ITEM 6. SELECTED FINANCIAL DATA – (continued)
Dollars in thousands, except per-share data
2005
2004
2003
Years ended December 31
2001
2002
2000
1999
1998
Balance sheet data
Accounts receivable, net
Inventories
Property, plant and equipment, net
Goodwill
Total assets
Total debt
Shareholders' equity
Other data
Debt/total capital
Depreciation
Goodwill amortization (1)
Water
Technical Products
Other
Total
Water
Technical Products
Other
Total
Tax effect of goodwill amortization (1)
Diluted EPS effect of goodwill amortization (1)
Other amortization
Net cash provided by operating activities
Capital expenditures - continuing operations
Captial expenditures - discontinued operations
Capital expenditures - continuing and discontinued operations
Employees of continuing operations
Days sales outstanding in receivables (2)
Days inventory on hand (2)
423,847
349,312
311,839
1,718,207
3,253,755
752,614
1,555,610
396,459
323,676
336,302
1,620,404
3,120,575
736,105
1,447,794
251,475
166,862
233,106
997,183
2,780,677
806,493
1,261,478
223,778
165,389
236,322
843,243
2,514,450
735,085
1,105,724
229,455
178,464
231,615
743,499
2,372,198
723,706
1,015,002
284,674
208,267
248,576
786,984
2,644,025
913,974
1,010,591
247,404
179,073
265,027
800,937
2,706,516
1,035,084
990,771
160,796
132,620
212,493
442,322
1,484,207
340,721
707,628
32.6%
33.7%
39.0%
39.9%
41.6%
47.5%
51.1%
32.5%
35,842
19,318
1,405
56,565
—
—
—
—
—
—
15,995
247,858
62,471
—
62,471
14,700
54
70
26,751
19,408
904
47,063
—
—
—
—
—
—
7,501
264,091
43,107
5,760
48,867
12,900
52
62
20,517
19,721
571
40,809
—
—
—
—
—
—
377
262,939
29,004
14,618
43,622
9,000
54
59
19,478
19,026
73
38,577
—
—
—
—
—
—
434
270,794
24,346
32,350
56,696
8,600
58
64
19,472
23,008
561
43,041
18,560
8,273
—
26,833
(3,861)
0.24
—
232,334
37,008
16,660
53,668
8,700
65
72
19,157
20,701
2,633
42,491
18,074
9,088
—
27,162
(3,768)
0.25
8
184,947
42,238
25,803
68,041
9,900
65
64
15,453
26,846
167
42,466
12,714
8,413
—
21,127
(3,453)
0.20
—
144,296
23,694
29,977
53,671
8,700
58
67
9,163
26,453
158
35,774
7,793
5,832
—
13,625
(2,441)
0.13
—
120,872
18,590
24,745
43,335
6,500
59
73
(1)
Effective January 1, 2002 we adopted SFAS No. 142, Goodwill and Other Intangible Assets . This standard requires goodwill and intangible assets deemed to have an indefinite life no longer be amortized.
This standard did not require restatement of prior period amounts to be consistent with the current year presentation and therefore, we have not made any adjustments to the historical financial information
presented. However, we have provided supplemental tax and diluted EPS information as we believe it is necessary to the understanding of our financial performance trend.
(2)
Calculated using a 13-month average.
In 2005, we adopted SFAS 123R, Share Based Payment , which requires the fair value of stock options to be expensed. We did not restate prior period amounts to be consistent with the current year presentation
and therefore we have not made any adjustments to prior year information presented. The after tax expense impact of adoption was $12.0 million or ($0.12) diluted EPS.
In 2004, we divested our Tools Group. Our financial statements have been restated to reflect the Tools Group as a discontinued operation for all periods presented. The 2004 results reflect a pre-tax gain on the sale
of the Tools Group of $3.0 million ($6.0 million loss after tax).
In 2002, capital expenditures from discontinued operations included $23.0 million for the acquisition of a previously leased facility.
In 2000, we discontinued our Equipment segment (Century Mfg. Co./Lincoln Automotive and Lincoln Industrial businesses). Our financial statements have been restated to reflect the Equipment segment as a
discontinued operation for all periods presented. The 2001 results reflected a pre-tax loss on the sale of these businesses of $36.3 million ($24.6 million loss after tax).
In 2001, we adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , resulting in an increase to other assets and other noncurrent liabilities of $7.5 million and $0.8 million,
respectively, and a cumulative transition adjustment of $6.7 million in OCI. The transition adjustment relates to our hedging activities through December 31, 2000. Prior to the adoption of SFAS No. 133, financial
instruments designated as hedges were not recorded in the financial statements, but cash flows from such contracts were recorded as adjustments to earnings as the hedged items affected earnings.
In 2001, cost of goods sold included $1.0 million related to the 2001 restructuring charge for our Technical Products segment.
In 2000, operations reflected a non-cash pre-tax cumulative effect of accounting change related to revenue recognition that reduced income by $0.03 million, net of tax.
Our accounting policy prior to the adoption of SFAS No. 142 was to amortize goodwill on a straight-line basis over the estimated future periods to be benefited, principally between 25 and 40 years.
Reference should be made to the Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements give our current expectations or forecasts of future events.
Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,”
“expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” or the negative thereof or similar words. From
time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or
all of our forward-looking statements in this report and in any public statements we make could be materially different from
actual results. They can be affected by assumptions we might make or by known or unknown risks or uncertainties.
Consequently, we cannot guarantee any forward-looking statements. Investors are cautioned not to place undue reliance on any
forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and
should not consider the following list to be a complete statement of all potential risks and uncertainties.
The following factors may impact the achievement of forward-looking statements:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
the strength of product demand;
the intensity of competition, including foreign competitors;
pricing pressures;
changes in general economic and industry conditions, such as:
(cid:131)
(cid:131)
(cid:131)
(cid:131) market acceptance of new product introductions and enhancements;
the introduction of new products and enhancements by competitors;
(cid:131)
our ability to maintain and expand relationships with large customers;
(cid:131)
our ability to source raw material commodities from our suppliers without interruption and at reasonable prices;
(cid:131)
our ability to source components from third parties, in particular foreign manufacturers, without interruption and at
(cid:131)
reasonable prices; and
the financial condition of our customers;
(cid:131)
our ability to identify, complete, and integrate acquisitions successfully and to realize expected synergies on our anticipated
timetable;
changes in our business strategies, including acquisition, divestiture, and restructuring activities;
governmental and regulatory policies;
general economic and political conditions, such as political instability, the rate of economic growth in our principal
geographic or product markets, or fluctuations in exchange rates;
changes in operating factors, such as continued improvement in manufacturing activities and the achievement of related
efficiencies, cost reductions, and inventory risks due to shifts in market demand and costs associated with moving
production overseas;
unanticipated developments that could occur with respect to contingencies such as litigation, intellectual property matters,
product liability exposures and environmental matters;
our ability to continue to successfully generate savings from our excellence in operations initiatives consisting of lean
enterprise, supply management and cash flow practices;
our ability to accurately evaluate the effects of contingent liabilities such as taxes, product liability, environmental, and other
claims;
our ability to access capital markets and obtain anticipated financing under favorable terms; and
other risks specifically discussed under the heading “Risk Factors” under Part I of this report.
The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would
impact our business. We assume no obligation, and disclaim any duty, to update the forward-looking statements in this report.
Overview
We are a focused diversified industrial manufacturing company comprised of two operating segments: Water and Technical
Products. Our Water Group is a global leader in providing innovative products and systems used worldwide in the movement,
treatment, storage, and enjoyment of water. Our Technical Products Group is a global leader in the global enclosures market that
designs, manufactures, and markets standard, modified, and custom enclosures that house and protect sensitive controls,
components; thermal management products; and accessories. In 2006, our Water Group and Technical Products Group are
forecasted to generate approximately 70 percent and 30 percent of total revenues, respectively.
Our Water Group has progressively become a more important part of our business portfolio with sales increasing from $100
million in 1995 to approximately $2.1 billion in 2005. We believe the water industry is structurally attractive as a result of a
growing demand for clean water and the large global market size (of which we have identified a target industry segment totaling
$50 billion). Our vision is to become a leading global provider of innovative products and systems used in the movement,
treatment, storage, and enjoyment of water.
17
As of July 31, 2004, we continued the expansion of our global footprint in the water equipment industry through the acquisition
of WICOR, a manufacturer of pumps, filtration, and pool equipment marketed primarily under the STA-RITE®, SHURflo®, and
Hypro® brands. We initially funded the payment of the purchase price and related fees and expenses of the WICOR acquisition
with an $850 million committed line of credit (the “Bridge Facility”) and through additional borrowings available under our
existing credit facility. We used the proceeds from the Tools Group sale to repay, on October 4, 2004, the $850 million Bridge
Facility.
We realized $36 million in synergies net of integration costs in the first full year of ownership with respect to the WICOR
acquisition via key initiatives including facility rationalizations, lean enterprise, material cost savings, and administrative cost
savings. We also expect to achieve significant working capital reductions, net fixed asset reductions, and revenue synergies from
cross-selling opportunities during the first two years of ownership as a result of the acquisition. Integration of the former
WICOR businesses proceeded as expected during 2005 with 17 facilities closed or consolidated to date.
Our Technical Products Group operates in a large global market with significant potential for growth in industry segments such
as defense, security, medical, and networking. We believe we have the largest enclosures industrial and commercial distribution
network in North America and highest enclosures brand recognition in the industry. From mid-2001 through mid-2003, the
Technical Products Group experienced significantly lower sales volumes as a result of severely reduced capital spending in the
industrial and commercial markets and over-capacity and weak demand in the datacom and telecom markets. In 2004 and 2005,
sales volumes increased due to the addition of new distributors, new products, and higher demand in all targeted markets. In
addition, through the success of our PIMS initiatives, we have increased Technical Products segment margins for sixteen
consecutive quarters.
Key Trends and Uncertainties
The following trends and uncertainties affected our financial performance in 2005 and may impact our results in the future:
(cid:120)
In 2005, we achieved approximately six percent sales growth on a proforma basis, assuming we had acquired WICOR at the
beginning of 2004, excluding the recent Thermal acquisition, and excluding the effects of foreign currency translation.
(cid:120) We plan to drive strategic growth initiatives in both our Water and Technical Products platforms, with particular emphasis
on international growth.
(cid:120) We expect our operations to continue to benefit from our PIMS initiative: including strategy deployment; lean enterprise
with special focus on sourcing and supply management, cash management, and lean operations; and IGNITE, our process to
drive organic growth.
(cid:120) We are experiencing material cost inflation in a number of our businesses. We are striving for greater productivity
improvements and implementing selective increases in selling prices to help mitigate cost increases in base materials such as
steel, resins, ocean freight and fuel, health care, and insurance.
(cid:120)
(cid:120)
Free cash flow, which we define as cash flow from operating activities less capital expenditures, including both continuing
and discontinued operations, plus proceeds from sale of property and equipment, exceeded $200 million for the fourth
consecutive year and is expected to be approximately $200 million in 2006. See our discussion of Other financial measures
under the caption “Liquidity and Capital Resources” of this report.
In 2005, we experienced favorable foreign currency effects in the first half of the year and unfavorable in the second half of
the year. Overall, we experienced a slightly favorable foreign currency effect in 2005. Our currency effect is primarily for
the U.S. dollar against the Euro, which may not trend favorably in the future.
(cid:120) We expect our overall effective tax rate to be 36 percent in 2006. As a part of our acquisition and international strategies,
we are pursuing rate reduction opportunities, which could improve our effective tax rate.
(cid:120)
As anticipated, our Water Group operating income margins in each of the first two quarters of 2005 were lower compared to
the prior year comparable periods due to the lower former WICOR operating margins versus Pentair Water operating
margins. In the third quarter of 2005, the Water Group’s operating margins crossed over and both the third and fourth
quarter operating margins were higher than the same quarters in 2004. In the future, we intend to drive margins in the
expanded Water Group toward a goal of 15 percent, while capturing growth opportunities.
(cid:120) We experience seasonal demand in a number of markets within our Water Group. End-user demand for pool/spa equipment
follows warm weather trends and is at seasonal highs from March to July. The magnitude of the sales spike is partially mitigated
by effective use of the distribution channel by employing some advance sales programs (generally including extended payment
18
terms and/or additional discounts). Demand for residential and agricultural water systems is also impacted by weather patterns
particularly related to heavy flooding and droughts.
Outlook
In 2006, our operating objectives include the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Continue to use PIMS to drive the three key elements of our strategy: operating excellence, international expansion, and
growth, both organic and acquired;
Continue the integration of the WICOR and Thermal acquisitions and realize identified synergistic opportunities;
Continue proactive talent management process building competencies in international management and other key functional
areas;
Achieve significant organic sales growth (in excess of market growth), particularly in international markets; and
Continue to make strategic acquisitions to grow and expand our existing platforms in our Water and Technical Products
segments.
Our ability to achieve our operating objectives will depend, to a certain extent, on factors outside our control. See “Risk Factors”
under Part I of this report.
RESULTS OF OPERATIONS
Net sales
The components of the net sales change were:
Percentages
Volume
Price
Currency
Total
2005 vs. 2004
25.8
3.1
0.4
29.3
2004 vs. 2003
34.8
1.9
2.0
38.7
The 29.3 percent increase in consolidated net sales in 2005 from 2004 was primarily the result of:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
an increase in sales volume driven by our July 31, 2004 acquisition of WICOR, February 23, 2005 acquisition of DEP and
December 1, 2005 acquisition of thermal management businesses from APW;
proforma sales growth from continuing operations of approximately six percent, assuming we had acquired WICOR at the
beginning of 2004, excluding the recent Thermal acquisition, and excluding the effects of foreign currency translation;
selective increases in selling prices in our Water and Technical Products segments to mitigate inflationary cost increases;
and
favorable foreign currency effects as the weaker U.S. dollar increased the U.S. dollar value of foreign sales.
The 38.7 percent increase in consolidated net sales in 2004 from 2003 was primarily the result of:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
an increase in sales volume driven by our July 31, 2004 acquisition of WICOR and our December 31, 2003 acquisition of
Everpure;
organic sales growth from continuing operations of approximately 14 percent, removing the effects of acquisitions and
excluding foreign currency exchange;
selective increases in selling prices in our Water and Technical Products segments to mitigate inflationary cost increases;
and
favorable foreign currency effects as the weaker U.S. dollar increased the U.S. dollar value of foreign sales.
19
Sales by segment and the year-over-year changes were as follows:
In thousands
Water
Technical Products
Total
2005
2,131,505
815,074
2,946,579
2004
1,563,394
714,735
2,278,129
2003
1,060,303
582,684
1,642,987
$ change
$
$
568,111
100,339
668,450
$
$
$
$
$
$
% change
36.3%
14.0%
29.3%
$ change
$
$
503,091
132,051
635,142
% change
47.4%
22.7%
38.7%
2005 vs. 2004
2004 vs. 2003
Water
The 36.3 percent increase in Water segment sales in 2005 from 2004 was primarily the result of:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
an increase in sales volume driven by our July 31, 2004 acquisition of WICOR and our February 23, 2005 acquisition of
DEP;
selective increases in selling prices to mitigate inflationary cost increases;
sales growth on a proforma basis (assuming we had acquired WICOR at the beginning of 2004 and excluding the recent
Thermal acquisition and favorable foreign currency exchange) of approximately four percent for the year;
an increase in sales of pool and spa equipment due to market share gains, favorable weather conditions, and successful early
buy programs;
growth in international markets; and
favorable foreign currency effects.
The 47.4 percent increase in Water segment sales in 2004 from 2003 was primarily the result of:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
an increase in sales volume driven by our July 31, 2004 acquisition of WICOR and our December 31, 2003 acquisition of
Everpure;
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;
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;
significant growth in international markets;
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;
favorable foreign currency effects; and
selective increases in selling prices to mitigate inflationary cost increases.
Technical Products
The 14.0 percent increase in Technical Products segment sales in 2005 from 2004 was primarily the result of:
(cid:120)
(cid:120)
(cid:120)
Growth in new products including Advanced Telecommunications Computing Architecture (ATCA), slide rails for datacom
applications and a new cabinet line targeted toward the telecom and electronic markets;
improved service and delivery resulting in increased sales volume in North America with strong sales in commercial and
medical industry segments;
selective increases in selling prices to mitigate inflationary cost increases;
20
(cid:120)
(cid:120)
(cid:120)
an increase in sales volume driven by our December 1, 2005 acquisition of thermal management businesses from APW, Ltd;
higher sales in China; and
favorable foreign currency effects.
The 22.7 percent increase in Technical Products segment sales in 2004 from 2003 was primarily the result of:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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;
some recovery in North American telecom and datacom demand;
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;
selective increases in selling prices to mitigate inflationary cost increases, principally for steel; and
favorable foreign currency effects.
Gross profit
In thousands
Gross profit
Percentage point change
2005
848,021
$
% of sales
28.8%
0.1
2004
654,710
% of sales
28.7%
1.5
$
pts
$
pts
2003
446,230
% of sales
27.2%
The 0.1 percentage point increase in gross profit as a percent of sales in 2005 from 2004 was primarily the result of:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
selective increases in selling prices in our Water and Technical Products segments to mitigate inflationary cost increases;
savings generated from our PIMS initiatives including lean enterprise and supply management practices;
cost leverage from our increase in sales volume; and
synergy benefits, net of integration costs, related to the acquisition of the former WICOR businesses.
These increases were partially offset by:
(cid:120)
(cid:120)
(cid:120)
inflationary cost increases in our Water and Technical Products segments;
lower margins associated with our July 31, 2004 acquisition of WICOR; and
operating inefficiencies related to WICOR product moves, plant consolidations, and start-up costs in new water facilities.
The 1.5 percentage point increase in gross profit as a percent of sales in 2004 from 2003 was primarily the result of:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
cost leverage from our increase in sales volume;
savings generated from our key initiatives, supply management and PIMS;
selective increases in selling prices in our Water and Technical Products segments to mitigate inflationary cost increases;
lower costs as a result of engineered cost reductions throughout Pentair; and
higher gross margins associated with our December 31, 2003 acquisition of Everpure.
These increases were partially offset by:
(cid:120)
lower initial gross margins associated with our July 31, 2004 acquisition of WICOR; and
21
(cid:120)
the expensing of fair market value inventory adjustments related to inventory acquired in the Everpure and WICOR
transactions.
Selling, general and administrative (SG&A)
In thousands
SG&A
Percentage point change
2005
478,907
$
% of sales
16.2%
(0.3)
2004
376,015
% of sales
16.5%
1.1
$
pts
$
pts
2003
253,088
% of sales
15.4%
The 0.3 percentage point decrease in SG&A expense as a percent of sales in 2005 from 2004 was primarily the result of:
(cid:120)
favorable cost leverage from the combined larger company of Pentair and the former WICOR businesses.
These decreases are partially offset by:
(cid:120)
(cid:120)
(cid:120)
adoption of SFAS 123R which requires us to record expense for the fair value of stock-based compensation;
investments made to support future growth; and
higher amortization of intangibles due to acquisitions and amortization of a tax strategy-based investment.
The 1.1 percentage point increase in SG&A expense as a percent of sales in 2004 from 2003 was primarily the result of:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
increased selling expenses and management incentives due to strong sales growth in 2004;
increased amounts of sales incentives, including volume-based rebates, which are recorded as a reduction of net sales;
higher SG&A expense associated with our December 31, 2003 acquisition of Everpure;
cost of outside support for integration planning and communications related to the WICOR acquisition;
expenses related to the consolidation of certain pump related facilities in our Water segment;
higher corporate governance costs, including Sarbanes-Oxley compliance and external audit fees, and increased general
insurance costs;
less favorable foreign currency effects than in the prior comparable period; and
investments made to support future growth.
Research and development (R&D)
In thousands
R&D
Percentage point change
2005
$
46,042
% of sales
1.6%
0.2
2004
31,453
% of sales
1.4%
0.0
$
pts
$
pts
2003
22,932
% of sales
1.4%
The 0.2 percentage point increase in R&D expense as a percent of sales in 2005 from 2004 was primarily the result of:
(cid:120)
increased spending for new product and new markets, especially for water filtration.
The unchanged R&D expense as a percent of sales in 2004 from 2003 was primarily the result of:
(cid:120)
increased spending for new product development initiatives that paced with the increase in sales.
22
Operating income
Water
In thousands
Operating income
Percentage point change
2005
267,138
$
% of sales
12.5%
2004
197,310
$
% of sales
12.6%
2003
143,962
$
% of sales
13.6%
(0.1) pts
(1.0) pts
The 0.1 percentage point decline in Water segment operating income as a percent of net sales in 2005 from 2004 was primarily
the result of:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
lower initial margins associated with our July 31, 2004 acquisition of WICOR during the first half of 2005;
inflationary cost increases for certain production materials;
operating inefficiencies related to WICOR product moves, plant consolidations, and start-up costs associated with new water
facilities;
adoption of SFAS 123R which requires us to record expense for the fair value of stock-based compensation; and
investments made to support future growth.
These decreases were partially offset by:
(cid:120)
(cid:120)
(cid:120)
synergy benefits, net of integration costs, related to the acquisition of the former WICOR businesses;
favorable operating leverage provided by supply management savings and productivity gains from higher sales volume; and
selective increases in selling prices to mitigate inflationary cost increases.
The 1.0 percentage point decline in Water segment operating income as a percent of net sales in 2004 from 2003 was primarily
the result of:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
lower initial margins associated with our July 31, 2004 acquisition of WICOR;
inflationary cost increases, particularly as it related to the costs of motors and resins;
cost of outside support for integration planning and communications related to the WICOR acquisition;
the expensing of fair market value inventory adjustments related to inventory acquired in the Everpure and WICOR
transactions; and
expenses related to factory capacity rationalization.
These decreases were partially offset by:
(cid:120)
(cid:120)
(cid:120)
favorable operating leverage provided by supply management savings and productivity gains from higher sales volume;
selective increases in selling prices to mitigate inflationary cost increases; and
higher margins associated with our December 31, 2003 acquisition of Everpure.
23
Technical Products
In thousands
Operating income
Percentage point change
2005
109,229
$
% of sales
13.4%
2004
$
87,844
% of sales
12.3%
2003
$
51,094
% of sales
8.8%
1.1
pts
3.5
pts
The 1.1 percentage point increase in Technical Products segment operating income as a percent of net sales in 2005 from 2004
was primarily the result of:
(cid:120)
(cid:120)
(cid:120)
selective increases in selling prices to mitigate inflationary cost increases;
leverage gained on volume expansion through new product sales and market share growth; and
savings from the continued success of PIMS, including lean enterprise and supply management activities.
These increases were partially offset by:
(cid:120) material cost inflation, primarily aluminum and steel; and
(cid:120)
adoption of SFAS 123R which requires us to record expense for the fair value of stock-based compensation.
The 3.5 percentage point increase in Technical Products segment operating income as a percent of net sales in 2004 from 2003
was primarily the result of:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
leverage gained on volume expansion;
savings from the continued success of PIMS, including lean enterprise and supply management activities;
selective increases in selling prices to mitigate inflationary cost increases; and
the absence of expenses associated with downsizing included in the comparable prior period.
These increases were partially offset by:
(cid:120) material cost inflation, primarily steel.
Net interest expense
In thousands
Net interest expense
2005
44,989
2004
37,210
Difference % change
20.9%
$
7,779
$
$
2004
37,210
2003
26,395
Difference % change
41.0%
$
10,815
$
$
The 20.9 percent increase in interest expense from continuing operations in 2005 from 2004 was primarily the result of:
(cid:120)
(cid:120)
a portion of interest expense in 2004 was allocated to discontinued operations for our former Tools Group versus all the
interest expense in 2005 being attributed to continuing operations; and
higher interest rates in 2005.
The 41.0 percent increase in interest expense from continuing operations in 2004 from 2003 was primarily the result of:
(cid:120)
higher debt levels resulting from the Everpure and WICOR acquisitions, including the Bridge Facility financing, partially
offset by operating cash flows.
24
Provision for income taxes
In thousands
Income from continuing operations before income taxes
Provision for income taxes
Effective tax rate
2005
2004
2003
$
$
283,518
98,469
34.7%
$
210,032
73,008
34.8%
143,815
45,665
31.8%
The 0.1 percentage point decrease in the tax rate in 2005 from 2004 was primarily the result of:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
a favorable benefit of $1.4 million related to R&D tax credits;
a favorable settlement of an IRS audit for the periods 1998-2001 resulting in a release of tax contingency reserves in the
amount of $1.3 million;
a favorable adjustment of $1.0 million related to the filing of the 2004 Federal tax return; and
a benefit related to the deduction for qualified production activities.
These decreases were partially offset by:
(cid:120)
(cid:120)
an anticipated unfavorable settlement of $3.2 million recorded for a routine tax examination of prior years in Germany; and
higher effective tax rate due to the non-deductibility of certain SFAS 123R expenses related to stock options.
The 3.0 percentage point increase in the tax rate in 2004 from 2003 was primarily the result of:
(cid:120)
(cid:120)
(cid:120)
increased operating income coupled with the relatively fixed nature of many of our tax savings programs;
the mix of our 2004 U.S. and foreign earnings; and
our July 31, 2004 acquisition of WICOR which results in a higher effective tax rate.
We expect our full year effective tax rate in 2006 to be 36 percent. We will continue to pursue tax rate reduction opportunities.
LIQUIDITY AND CAPITAL RESOURCES
Cash requirements for working capital, capital expenditures, equity investments, acquisitions, debt repayments, and dividend
payments are generally funded from cash generated from operations, availability under existing committed revolving credit
facilities, and in certain instances, public and private debt and equity offerings. In 2005, we invested $151 million in
acquisitions, paid $53 million in dividends and repurchased $25 million of our stock; and increased our debt by only $17 million.
We experience seasonal cash flows primarily due to seasonal demand in a number of markets within our Water segment. End-user
demand for pool/spa equipment follows warm weather trends and is at seasonal highs from March to July. The magnitude of the sales
spike is partially mitigated by effective use of the distribution channel by employing some advance sales programs (generally including
extended payment terms and/or additional discounts). Demand for residential and agricultural water systems is also impacted by
weather patterns particularly related to heavy flooding and droughts.
The following table presents selected working capital measurements calculated from our monthly operating results based on a 13-
month moving average:
Days
Days of sales in accounts receivable
Days inventory on hand
Days in accounts payable
December 31
2005
December 31
2004
December 31
2003
54
70
56
52
62
57
54
59
54
Operating activities
Cash provided by operating activities was $247.9 million in 2005, or $16.2 million lower compared with the same period in 2004.
The decrease in cash provided by operating activities is due to working capital increases related to increased sales volume, the
rationalization of Water segment operations, and increases in various customer rebates. The increased days of sales in accounts
receivable as of December 31, 2005 compared to December 31, 2004 is the result of the differences in sales terms offered by the
25
former WICOR business compared to the terms offered by our former Tools Group and the sale of approximately a $22.0 million
interest in a pool of accounts receivable to a third-party financial institution in 2004. The increased days inventory on hand as of
December 31, 2005 compared to December 31, 2004 was driven by the increased inventory levels attributable to increased
sourcing out of Asia, higher value of inventories due to rising raw material input costs, and inventory redundancies associated
with the ramp-up of new facilities and the wind-down of old facilities. The working capital ratios as of December 31, 2005 versus
December 31, 2004 have increased, primarily for the same reasons. In the future, we expect our working capital ratios to
improve as we are able to capitalize on the anticipated success of our post-acquisition integration activities and PIMS initiatives.
Cash provided by operating activities was $264.1 million in 2004, or $1.2 million higher compared with the same period in 2003.
The increase in net cash provided by operating activities was primarily attributable to an increase in net income offset by higher
levels of inventory due to inventory builds to support customers during product transfers and plant consolidation activities in
Water. The WICOR acquisition has increased our working capital ratios, primarily inventory days, which will continue until our
post-acquisition integration activities are farther along and our PIMS initiatives are better established.
In December 2004, we sold an approximate $22.0 million interest in a pool of accounts receivable to a third-party financial
institution to mitigate the credit risk associated with the receivable balance of a large customer. In compliance with Statement of
Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, sales of accounts receivable are reflected as a reduction of accounts receivable in the consolidated balance sheets and
the proceeds are included in the cash flows from operating activities in the consolidated statement of cash flows. As the
estimated present value of the receivables sold approximated the carrying amount, no gain or loss was recorded in 2004. The
Accounts Receivable Purchase Agreement was not renewed in 2005.
Investing activities
Capital expenditures in 2005, 2004, and 2003 were $62.5 million, $48.9 million (including $43.1 million for continuing
operations) and $43.6 million (including $29.0 million for continuing operations), respectively. We anticipate capital
expenditures for fiscal 2006 to be approximately $80 to $85 million, primarily for expansion of low cost country manufacturing
facilities, implementation of a unified business systems infrastructure in Europe, selective increases in equipment capacity, new
product development, and general maintenance capital.
Cash proceeds from the sale of property and equipment of $17.1 million in 2005 was primarily related to the sale of three
facilities.
On December 1, 2005, we acquired McLean Thermal Management, Aspen Motion Technologies and Electronic Solutions
businesses from APW for approximately $140.0 million, including a cash payment of $138.9 million and transaction costs of
$1.1 million. These businesses provide thermal management solutions and integration services to the telecommunications, data
communications, medical and security markets as part of our Technical Products Group.
In the third quarter 2005, we paid $10.4 million in post-closing purchase price adjustments related to the October 2004 sale of our
former Tools Group to The Black & Decker Corporation.
In April 2005, we sold our interest in the stock of LN Holdings Corporation for cash consideration of $23.6 million, resulting in a
pre-tax gain of $5.2 million and an after tax gain of $3.3 million. The terms of the sale agreement establish two escrow accounts
totaling $14 million to be used for payment of any potential adjustments to the purchase price, transaction expenses, and
indemnification for certain losses such as environmental claims. In December 2005, we received $0.2M from the escrow accounts
which increased our gain from the sale. Any remaining escrow balances are to be distributed by April 2008 to the former
shareholders in accordance with their ownership percentages. Any funds received from settlement of escrows in future periods will
be accounted for as additional gain on the sale of this interest.
On February 23, 2005, we acquired certain assets of DEP, a privately held company, for $10.3 million, including a cash payment
of $10.0 million, transaction costs of $0.2 million, plus debt assumed of $0.1 million. The DEP product line addresses the water
and wastewater markets and is part of our Water Group.
Effective after the close of business October 2, 2004, we completed the sale of our Tools Group to BDK for approximately
$796.8 million in cash, including a $21.8 million interim net asset value increase, subject to post-closing adjustments.
Effective July 31, 2004, we completed the acquisition of all of the shares of capital stock of WICOR from Wisconsin Energy
Corporation for $874.7 million, including a cash payment of $871.1 million, transaction costs of $11.2 million, and debt
assumed of $21.6 million, less a favorable final purchase price adjustment of $14.0 million; and less cash acquired of $15.2
million. This includes an additional $0.4 million in transaction costs recorded in the first three quarters of 2005.
On April 5, 2004, we acquired all of the remaining stock of the Tools Group’s Asian joint venture for $21.8 million in cash, $6.4
million of which was paid following the sale of the Tools Group. The level of return on sales targets achieved in the second
26
quarter of 2004 required a payment of $0.9 million, which was recorded as an increase to goodwill. The acquisition included
cash acquired of $6.2 million and debt assumed of $9.0 million. The investment in the Tools Group’s Asian joint venture
business was sold as part of the Tools Group to BDK.
In the second quarter of 2004, we paid $3.9 million in purchase price adjustments related to the December 31, 2003 acquisition of
Everpure. The adjustment primarily related to the final determination of closing date net assets.
In the first quarter of 2004, we paid $2.3 million for acquisition fees primarily related to the December 31, 2003 acquisition of
Everpure.
Financing activities
Net cash used for financing activities was $43.8 million in 2005 compared to $137.8 million in 2004. Financing activities
included draw downs and repayments on our revolving credit facilities to fund our operations in the normal course of business,
dividend payments, share repurchases, and cash received from stock option exercises.
In March 2005, we amended and restated our multi-currency revolving Credit Facility, increasing the size of the facility from
$500 million to $800 million with a term of five years. The interest rate on the loans under the $800 million Credit Facility is
LIBOR plus 0.625%. Interest rates and fees on the Credit Facility vary based on our credit ratings.
We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We use the
Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. As of December 31, 2005, we had $144.7
million of commercial paper outstanding that matured within 54 days. All of the commercial paper was classified as long-term as
we have the intent and the ability to refinance such obligations on a long-term basis under the Credit Facility. Availability under
our Credit Facility at December 31, 2005, including outstanding commercial paper, was approximately $543.0 million.
Effective following the close of business on July 31, 2004, we completed the acquisition of WICOR. We funded the payment of
the purchase price and related fees and expenses of the WICOR acquisition with the Bridge Facility and through additional
borrowings available under our existing Credit Facility. The interest rate on the Bridge Facility and loans under the Credit
Facility during the period of the Bridge Facility was LIBOR plus 1.375%.
On October 4, 2004, we received approximately $796.8 million of proceeds from the sale of our Tools Group to BDK. As
required under the terms of the Bridge Facility, we used the proceeds from the Tools Group sale and additional borrowings under
the Credit Facility to pay off the Bridge Facility. Following payment of the Bridge Facility and based on our existing credit
ratings, the interest rate on loans under the Credit Facility decreased to LIBOR plus 1.125%.
In addition to the Credit Facility, we have $25 million of uncommitted credit facilities, under which we had no borrowings as of
December 31, 2005.
Our current credit ratings are as follows:
Rating Agency
Standard & Poor's
Moody's
Long-Term Debt
Rating
BBB
Baa3
Current Rating
Outlook
Stable
Stable
We believe the potential impact of a downgrade in our financial outlook is currently not significant to our liquidity exposure or
cost of debt. A credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial program. The credit rating takes into consideration the
creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the
currency in which the obligation is denominated. On the other hand, the ratings outlook highlights the potential direction of a
short or long-term rating. It focuses on identifiable events and short-term trends that cause ratings to be placed under observation
by the respective Rating Agencies. A change in rating outlook does not mean a rating change is inevitable. Prior changes in our
ratings outlook have had no immediate impact on our liquidity exposure or on our cost of debt.
We issue short-term commercial paper notes that are currently not rated by Standard & Poor’s or Moody’s. Even though our
short-term commercial paper is unrated, we believe a downgrade in our long-term debt rating could have a negative impact on
our ability to continue to issue unrated commercial paper.
We do not expect that a one rating downgrade of our long-term debt by either Standard & Poor’s or Moody’s would substantially
affect our ability to access the long term debt capital markets. However, depending upon market conditions, the amount, timing
and pricing of new borrowings could be adversely affected. If both of our long-term debt ratings were downgraded to below
27
BBB-/Baa3, our flexibility to access the term debt capital markets would be reduced. In the event of a downgrade of our long-
term debt rating, the cost of borrowing and fees payable under our Credit Facility and $35 million private placement fixed rate
note could increase. While the Credit Facility has a pricing grid based in part on credit ratings, we do not have any agreements
under which the obligations are accelerated in the event of a ratings downgrade.
As of December 31, 2005, our capital structure consisted of $752.6 million in total indebtedness and $1,555.6 million in
shareholders’ equity. The ratio of debt-to-total capital at December 31, 2005 was 32.6 percent, compared with 33.7 percent at
December 31, 2004. Our targeted debt-to-total capital ratio is 40 percent or less.
We expect to continue to have cash requirements to support working capital needs and capital expenditures, to pay interest and
service debt and to pay dividends to shareholders. In order to meet these cash requirements, we intend to use available cash and
internally generated funds and to borrow under our committed and uncommitted credit facilities.
We paid dividends in 2005 of $53.1 million, compared with $43.1 million in 2004 and $40.5 million in 2003. We anticipate
continuing the practice of paying dividends on a quarterly basis.
In December 2004, the Board of Directors authorized the development of a program and process to repurchase shares of our common
stock up to a maximum dollar limit of $25.0 million of our common stock annually. There is no expiration associated with the
authorization granted. In 2005, we repurchased 755,663 shares at $25 million under this plan. As of February 17, 2006, we had not
repurchased any additional shares under this plan and, accordingly, we have the authority in 2006 to repurchase shares up to a
maximum dollar limit of $25 million. In 2004 and 2003, respectively, we repurchased 105,500 shares and 80,000 shares of our
common stock under similar plans.
The following summarizes our significant contractual obligations that impact our liquidity:
Payments Due by Period
In thousands
Long-term debt obligations
Interest obligations on fixed-rate debt
Capital lease obligations
Operating lease obligations, net
of sublease rentals
Purchase obligations
Other long-term liabilities
Total contractual cash
obligations, net
2006
$
$
2,971
27
214
25,830
—
4,802
2007
37,910
26
132
20,571
—
4,034
2008
$
$
156
25
135
2009
250,129
15
80
$
2010
257,034
5
—
16,812
—
2,392
13,812
—
1,594
11,633
—
317
More than
5 Years
$
200,041
13
$
—
22,555
—
—
Total
748,241
111
561
111,213
—
13,139
$
33,844
$
62,673
$
19,520
$
265,630
$
268,989
$
222,609
$
873,265
In addition to the summary of significant contractual obligations, we will incur annual interest expense on outstanding variable
rate debt. As of December 31, 2005, variable interest rate debt was $357.0 million at a weighted average interest rate of 4.8%.
A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on us that
specifies all significant terms. The purchase obligation amounts do not represent our total anticipated future purchases, but
represent those purchases for which we are contractually obligated. As of December 31, 2005, we did not have any purchase
obligations requiring cash outflows of $1 million or greater per year.
We expect to make contributions in the range of $5 million to $10 million to our pension plans in 2006.
Other financial measures
In addition to measuring our cash flow generation or usage based upon operating, investing, and financing classifications
included in the consolidated statements of cash flows, we also measure our free cash flow and our conversion of net income.
Free cash flow and conversion of net income are non-GAAP financial measures that we use to assess our cash flow performance
and have a long-term goal to consistently generate free cash flow that equals or exceeds 100 percent conversion of net income.
We believe free cash flow and conversion of net income are important measures of operating performance because they provide
us and our investors a measurement of cash generated from operations that is available to pay dividends and repay debt. In
addition, free cash flow and conversion of net income are used as a criterion to measure and pay compensation-based incentives.
Our measure of free cash flow and conversion of net income may not be comparable to similarly titled measures reported by
other companies. The following table is a reconciliation of free cash flow and a calculation of the conversion of net income with
cash flows from continuing and discontinued operating activities:
28
In thousands
Cash flow provided by operating activities
Capital expenditures
Proceeds from sale of property and equipment
Free cash flow
Net income
Conversion of net income
Twelve Months Ended December 31
2004
2005
2003
$
$
247,858
(62,471)
17,111
202,498
185,049
109%
$
264,091
(48,867)
—
215,224
171,225
126%
262,939
(43,622)
—
219,317
141,352
155%
In 2006, we expect free cash flow to approximate $200 million.
Off-balance sheet arrangements
At December 31, 2005, we had no off-balance sheet financing arrangements.
COMMITMENTS AND CONTINGENCIES
Environmental
We have been named as defendants, targets, or potentially responsible parties (PRPs) in a small number of environmental clean-ups, in
which our current or former business units have generally been given de minimis status. To date, none of these claims have resulted in
clean-up costs, fines, penalties, or damages in an amount material to our financial position or results of operations. We have disposed
of a number of businesses over the last ten years and in certain cases, such as the disposition of the Cross Pointe Paper Corporation
uncoated paper business in 1995, the disposition of the Federal Cartridge Company ammunition business in 1997, the disposition of
Lincoln Industrial in 2001, and the disposition of the Tools Group in 2004, we have retained responsibility and potential liability for
certain environmental obligations. We have received claims for indemnification from purchasers both of the paper business and the
ammunition business and have established what we believe to be adequate accruals for potential liabilities arising out of retained
responsibilities. We settled some of the claims in 2005 and 2003 and our recorded accruals were adequate.
In addition, there are pending environmental issues at a limited number of sites, including one site acquired in the acquisition of Essef
Corporation in 1999, that relates to operations no longer carried out at that site. We have established what we believe to be adequate
accruals for remediation costs at this and other sites. We do not believe that projected response costs will result in a material liability.
We may be named as a PRP at other sites in the future, for both divested and acquired businesses. When it is probable and it is
possible to provide reasonable estimates of our liability with respect to environmental sites, provisions have been made in accordance
with generally accepted accounting principles in the United States. As of December 31, 2005 and 2004, our reserves for such
environmental liabilities were approximately $6.4 million and $9.4 million, respectively, measured on an undiscounted basis. We
cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmental
clean-up costs and liabilities will not exceed the amount of our current reserves.
Stand-by letters of credit
In the ordinary course of business, predominantly for contracts and bids involving municipal pump products, we are required to
commit to bonds that require payments to our customers for any non-performance. The outstanding face value of the bonds
fluctuates with the value of our projects in process and in our backlog. In addition, we issue financial stand-by letters of credit to
secure our performance to third parties under self-insurance programs and certain legal matters. As of December 31, 2005, the
outstanding value of these instruments totaled $38.8 million. As of December 31, 2004, the outstanding value of these
instruments totaled $64.9 million, which included a $38.9 million stand-by letter of credit pertaining to an indemnified legal
matter that was resolved in our favor during 2005, eliminating the bond requirement.
NEW ACCOUNTING STANDARDS
See ITEM 8, Note 1 of the Notes to Consolidated Financial Statements for information pertaining to recently adopted accounting
standards or accounting standards to be adopted in the future.
CRITICAL ACCOUNTING POLICIES
We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting
principles generally accepted in the United States. Our significant accounting policies are more fully described in ITEM 8, Note
1 to our consolidated financial statements. Certain of our accounting policies require the application of significant judgment by
management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are
subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts,
our observance of trends in the industry, and information available from other outside sources, as appropriate. We consider an
accounting estimate to be critical if:
29
(cid:120)
(cid:120)
it requires us to make assumptions about matters that were uncertain at the time we were making the estimate; and
changes in the estimate or different estimates that we could have selected would have had a material impact on our financial
condition or results of operations.
Our critical accounting estimates include the following:
Impairment of Goodwill
The fair value of each of our reporting units was estimated using a discounted cash flow approach. The test for impairment
requires us to make several estimates about projected future cash flows and appropriate discount rates. If these estimates change,
we may incur charges for impairment of goodwill. During the fourth quarter of 2005, we completed our annual impairment test
of goodwill and determined there was no impairment.
Impairment of Long-lived Assets
We review the recoverability of long-lived assets to be held and used, such as property, plant and equipment, when events or
changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The
assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the
expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are
less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and
carrying value. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values
are reduced for the cost to dispose of the assets. The measurement of impairment requires us to estimate future cash flows and
the fair value of long-lived assets.
Pension
We sponsor domestic and foreign defined-benefit pension and other post-retirement plans. The amounts recognized in our
consolidated financial statements related to our defined-benefit pension and other post-retirement plans are determined from
actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates, rate of
increase in future compensation levels, and health care cost trend rates. These assumptions are updated annually and are
disclosed in ITEM 8, Note 11 to the Consolidated Financial Statements. Changes to these assumptions will affect pension
expense.
Discount rate
The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based
on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to
payments from a stream of AA or higher bonds available in the marketplace, adjusted to eliminate the effects of call provisions.
This produced a discount rate for our U.S. plans of 5.75 percent in 2005 and 2004 and 6.25 percent in 2003. The discount rates
on our foreign plans ranged from 2.00% to 4.90% in 2005 versus a range of 2.00% to 5.25% in 2004. There are no known or
anticipated changes in our discount rate assumption that will impact our pension expense in 2006.
Expected rate of return
The expected rate of return on plan assets is designed to be a long-term assumption that may be subject to considerable year-to-
year variance from actual returns. In developing the expected long-term rate of return, we considered our historical ten-year
compounded annual return of 9.0 percent, with consideration given to forecasted economic conditions, our asset allocations, input
from external consultants and broader longer-term market indices. In 2005, the pension plan assets yielded a positive return of
4.2 percent, compared to positive returns of 17.6 percent in 2004 and 24.8 percent in 2003. Our expected rate of return in 2005
equaled 8.5 percent, which remained unchanged from 2004 and 2003. In 2005 our expected return on plan assets was higher than
our actual return on plan assets while in 2004 our expected return on plan assets was lower than our actual return on plans assets,
the significant difference between our expected return on plan assets compared to our actual return on plan assets in 2005 and
2004 is primarily attributable to the fluctuations of the Pentair common stock during the respective years. There are no known or
anticipated changes in our return assumption that will impact our pension expense in 2006.
We base our determination of pension expense or income on a market-related valuation of assets which reduces year-to-year
volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which
they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the
market-related value of assets and the actual return based on the market-related value of assets. Since the market-related value of
assets recognizes gains or losses over a five-year-period, the future value of assets will be impacted as previously deferred gains
or losses are recorded.
Pension-related adjustments to equity
In 2003, the financial markets recovered and resulted in a positive return on plan assets of 24.8 percent which eliminated $20.9
million of the 2002 $29.2 million charge to shareholders’ equity. The charge did not impact earnings. In 2004, our discount rate
was lowered from 6.25 percent to 5.75 percent. However, the change in the discount rate assumption was offset by higher than
30
anticipated returns on assets and thus, did not significantly affect our shareholders’ equity. In 2005, the lower discount rate for
our foreign plans and the lower return on plan assets resulted in an after-tax charge to equity of $5.7 million.
Net periodic benefit cost
Total net periodic pension benefit cost was $20.0 million in 2005, $19.2 million in 2004, and $15.7 million in 2003. Total net
periodic pension benefit cost is expected to be approximately $24.5 million in 2006. The increasing trend in net periodic pension
cost from 2003 forward is largely driven by the decrease in the discount rates and by actual returns on plan assets. The net
periodic pension benefit cost for 2006 has been estimated assuming a discount rate of 5.75 percent and an expected return on plan
assets of 8.5 percent.
Unrecognized pension losses
As of our December 31, 2005 measurement date, our pension plans have $93.4 million of cumulative unrecognized losses. To
the extent the unrecognized loss exceeds 10% of the projected benefit obligation, it will be amortized into expense each year on a
straight-line basis over the remaining expected future-working lifetime of active participants (currently approximating 12 years).
The amount included in pension expense for loss amortization in 2005 was $2.8 million.
See ITEM 8, Note 11 of the Notes to Consolidated Financial Statements for further information regarding pension plans.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk
Market risk is the potential economic loss that may result from adverse changes in the fair value of financial instruments. We are
exposed to various market risks, including changes in interest rates and foreign currency rates. We use derivative financial
instruments to manage or reduce the impact of some of these risks. Counterparties to all derivative contracts are major financial
institutions, thereby minimizing the risk of credit loss. All instruments are entered into for other than trading purposes. The
major accounting policies and utilization of these instruments is described more fully in ITEM 8, Note 1 of the Notes to
Consolidated Financial Statements.
Our derivatives and other financial instruments consist of long-term debt (including current portion), interest rate swaps, and
foreign exchange-forward contracts. The net market value of these financial instruments combined is referred to below as the net
financial instrument position. As of December 31, 2005 and December 31, 2004, the net financial instrument position was a
liability of $769.0 million and $766.5 million, respectively.
Interest rate risk
Our debt portfolio, including swap agreements, as of December 31, 2005, was primarily comprised of debt predominantly
denominated in U.S. dollars (99%). This debt portfolio is composed of 52% fixed-rate debt and 48% variable-rate debt,
considering the effects of our interest rate swaps. Taking into account the variable to fixed rate swap agreement we entered with
an effective date of April 2006, our debt portfolio would be comprised of 66% fixed-rate debt and 34% variable-rate debt.
Changes in interest rates have different impacts on the fixed and variable-rate portions of our debt portfolio. A change in interest
rates on the fixed portion of the debt portfolio impacts the net financial instrument position but has no impact on interest incurred
or cash flows. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows
but does not impact the net financial instrument position.
Based on the variable-rate debt included in our debt portfolio, including the interest rate swap agreements, as of December 31,
2005, a 100 basis point increase or decrease in interest rates would result in a $3.5 million increase or decrease in interest
incurred.
Foreign currency risk
We are exposed to market risks related to fluctuations in foreign exchange rates because some sales transactions, and the assets
and liabilities of our foreign subsidiaries, are denominated in foreign currencies, primarily the euro. We held immaterial
positions in foreign exchange-forward contracts as of December 31, 2005. We do not expect the effect of foreign exchange rates
to have a material impact on our operations.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Pentair, Inc. and its subsidiaries (“the Company”) 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’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’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’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’s internal control over financial reporting as of December 31, 2005. 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, 2005, the Company’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 the thermal management businesses acquired from APW, Ltd. on December 1, 2005 and whose financial statements reflect
total assets and total revenues constituting five percent and one percent, respectively, of the related consolidated financial
statement amounts of the Company as of and for the year ended December 31, 2005.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on management’s
assessment of the Company’s internal control over financial reporting for December 31, 2005. That attestation report is set forth
immediately following the report of Deloitte & Touche LLP on the financial statements included herein.
Randall J. Hogan
Chairman and Chief Executive Officer
David D. Harrison
Executive Vice President and Chief Financial Officer
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of Pentair, Inc.
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over
Financial Reporting, that Pentair, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). As described in
Management’s Report on Internal Control Over Financial Reporting, management excluded from their assessment the internal
control over financial reporting at the thermal management businesses acquired from APW, Ltd. on December 1, 2005, and
whose financial statements reflect total assets and revenues constituting 5 percent and 1 percent, respectively, of the related
consolidated financial statement amounts as of and for the year ended December 31, 2005. Accordingly, our audit did not include
the internal control over financial reporting at the thermal management business. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness
of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s
Board of Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America (“generally accepted accounting principles”). A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the 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 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’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of the 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.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of
December 31, 2005, is fairly stated, in all material respects, based on the criteria established in the COSO Framework. Also in
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December
31, 2005, based on the criteria established in the COSO Framework.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement schedule listed in the Index at ITEM 15 as of and for the year ended
December 31, 2005, of the Company, and our report dated February 27, 2006, expressed an unqualified opinion on those
financial statements and financial statement schedule and included an explanatory paragraph relating to the Company’s change in
2005 in its method of accounting for stock-based compensation.
Minneapolis, Minnesota
February 27, 2006
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of Pentair, Inc.
We have audited the accompanying consolidated balance sheets of Pentair, Inc. and subsidiaries (the “Company”) as of
December 31, 2005 and 2004, and the related consolidated statements of income, cash flows, and changes in shareholders’ equity
for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule
listed in the Index at ITEM 15. These financial statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the
Company at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Notes 1 and 13 to the consolidated financial statements, in 2005 the Company changed its method of accounting
for stock-based compensation to conform to Statement of Financial Accounting Standards No. 123 (R), Share-Based Payment.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on the criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 27, 2006 expressed an unqualified opinion on management’s assessment of the
effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
Minneapolis, Minnesota
February 27, 2006
34
Pentair, Inc. and Subsidiaries
Consolidated Statements of Income
In thousands, except per-share data
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative
Research and development
Operating income
Gain on sale of investment
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
Net income
Earnings per common share
Basic
Continuing operations
Discontinued operations
Basic earnings per common share
Diluted
Continuing operations
Discontinued operations
Diluted earnings per common share
Weighted average common shares outstanding
Basic
Diluted
$
$
$
$
$
$
$
$
Years ended December 31
2004
2,278,129
1,623,419
654,710
376,015
31,453
247,242
—
721
37,931
210,032
73,008
137,024
40,248
(6,047)
171,225
2005
2,946,579
2,098,558
848,021
478,907
46,042
323,072
5,435
576
45,565
283,518
98,469
185,049
—
—
185,049
$
$
2003
1,642,987
1,196,757
446,230
253,088
22,932
170,210
—
386
26,781
143,815
45,665
98,150
46,138
(2,936)
141,352
1.84
—
1.84
1.80
—
1.80
$
$
$
$
1.38
0.34
1.72
1.35
0.33
1.68
$
$
$
$
1.00
0.44
1.44
0.99
0.43
1.42
100,665
102,618
99,316
101,706
97,876
99,620
See accompanying notes to consolidated financial statements.
35
Pentair, Inc. and Subsidiaries
Consolidated Balance Sheets
In thousands, except share and per-share data
Assets
Current assets
Cash and cash equivalents
Accounts and notes receivable, net of allowance of $31,053 and $35,968, respectively
Inventories
Deferred tax assets
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Other assets
Non-current assets of discontinued operations
Goodwill
Intangibles, net
Other
Total other assets
Total assets
Liabilities and Shareholders' 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' equity
Common shares par value $0.16 2/3;
$
$
$
December 31
2005
2004
$
48,500
423,847
349,312
48,971
24,394
895,024
31,495
396,459
323,676
49,074
24,433
825,137
311,839
336,302
$
$
—
1,718,207
266,533
62,152
2,046,892
3,253,755
4,137
207,320
95,552
43,551
192
17,518
45,374
111,026
524,670
748,477
152,780
73,949
125,785
70,455
2,029
1,698,145
393
1,620,404
258,126
80,213
1,959,136
3,120,575
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
1,672,781
101,202,237 and 100,967,385 shares issued and outstanding, respectively
Additional paid-in capital
Retained earnings
Unearned restricted stock compensation
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
16,867
518,751
1,020,978
—
(986)
1,555,610
3,253,755
$
16,828
517,369
889,063
(7,872)
32,406
1,447,794
3,120,575
$
See accompanying notes to consolidated financial statements.
36
Pentair, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
In thousands
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities
Net income from discontinued operations
Loss on disposal of discontinued operations
Depreciation
Amortization
Deferred income taxes
Stock compensation
Excess tax benefits from stock-based compensation
Gain on sale of investment
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 (used for) provided by operating activities
of discontinued operations
Net cash provided by operating activities
Investing activities
Capital expenditures
Proceeds from sale of property and equipment
Acquisitions, net of cash acquired
Divestitures
Proceeds from sale of investment
Other
Net cash used for investing activities
Financing activities
Net short-term repayments
Proceeds from the Bridge Facility
Repayment of the Bridge Facility
Proceeds from long-term debt
Repayment of long-term debt
Excess tax benefits from stock-based compensation
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
Cash and cash equivalents, end of period
Years ended December 31
2004
2003
2005
$
185,049
$
171,225
$
141,352
—
—
56,565
15,995
5,898
24,186
(8,676)
(5,435)
(20,946)
(19,201)
(120)
6,629
(21,394)
(1,099)
10,357
4,609
16,512
(439)
248,490
(40,248)
6,047
47,063
7,501
16,736
6,345
—
—
26,918
(51,996)
2,176
17,274
4,596
2,993
6,352
8,879
11,508
6,794
250,163
(46,138)
2,936
40,809
377
31,319
4,003
—
—
(5,080)
13,174
(4,781)
(12,758)
4,813
(1,756)
5,437
(3,336)
(2,108)
6,769
175,032
(632)
247,858
13,928
264,091
87,907
262,939
(62,471)
17,111
(150,534)
(10,155)
23,835
(2,071)
(184,285)
—
—
—
413,279
(395,978)
8,676
8,380
(25,000)
(53,134)
(43,777)
(48,867)
—
(869,155)
773,399
—
60
(144,563)
(4,162)
850,000
(850,000)
343,316
(440,518)
—
10,862
(4,200)
(43,128)
(137,830)
(43,622)
—
(229,094)
(2,400)
—
(5,246)
(280,362)
(873)
—
—
780,857
(709,886)
—
5,795
(1,589)
(40,494)
33,810
(2,791)
17,005
31,495
48,500
$
1,808
(16,494)
47,989
31,495
$
(8,046)
8,341
39,648
47,989
$
See accompanying notes to consolidated financial statements.
37
Pentair, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Common shares
Number
Amount
Additional
paid-in
capital
98,444,900
8,204
482,695
Retained
earnings
660,108
141,352
Unearned
non-vested
stock
compensation
Accumulated
other
comprehensive
income (loss)
(5,138)
(40,145)
Total
1,105,724
141,352
$
1,696
(40,494)
(80,000)
(7)
(1,582)
448,300
254,732
37
21
5,758
4,727
(62,848)
(5)
99,005,084
$
8,250
$
(1,094)
419
492,619
$
(4,748)
3,697
760,966
171,225
$
(6,189)
$
5,832
$
In thousands, except share
and per-share data
Balance - December 31, 2002
Net income
Change in cumulative translation
adjustment
Adjustment in minimum pension
liability, net of $13,339 tax expense
Changes in market value of
derivative financial instruments
Comprehensive income
Tax benefit of stock options
Cash dividends - $0.41 per
common share
Share repurchases
Exercise of stock options, net of
208,378 shares tendered for payment
Issuance of restricted shares, net
of cancellations
Amortization of restricted shares
Shares surrendered by employees
to pay taxes
Stock compensation
Balance - December 31, 2003
Net income
Change in cumulative translation
adjustment
Adjustment in minimum pension
liability, net of $279 tax benefit
Changes in market value of
derivative financial instruments
Comprehensive income
Tax benefit of stock options
Cash dividends - $0.43 per
common share
Stock dividend
Share repurchases
Exercise of stock options, net of
Issuance of restricted shares, net
of cancellations
Amortization of restricted shares
Shares surrendered by employees
to pay taxes
Stock compensation
Balance - December 31, 2004
Net income
Change in cumulative translation
adjustment
Adjustment in minimum pension
liability, net of $3,645 tax benefit
Changes in market value of
derivative financial instruments
Comprehensive income
Effect of accounting change (SFAS 123R)
Tax benefit of stock options
Cash dividends - $0.13 per
common share
Share repurchases
Exercise of stock options, net of
1,150,623 shares tendered for payment
1,832,016
(43,128)
17,185
(8,276)
(4,183)
10,557
8,146
8,276
(17)
305
26
(7,675)
5,992
(105,500)
341,728
(105,943)
(12)
100,967,385
$
16,828
$
(3,085)
4,406
517,369
$
889,063
185,049
$
(7,872)
$
32,406
$
(7,872)
10,707
7,872
(755,663)
(126)
(24,874)
(53,134)
549,150 shares tendered for payment
747,282
125
1,371
Issuance of restricted shares, net
of cancellations
Shares surrendered by employees
to pay taxes
Stock compensation
Balance - December 31, 2005
289,764
(46,531)
48
(8)
101,202,237
$
16,867
$
248
(1,920)
23,722
518,751
$
1,020,978
$
—
$
(986)
$
See accompanying notes to consolidated financial statements.
38
Comprehensive
income
141,352
27,220
20,864
(2,107)
187,329
27,220
27,220
20,864
20,864
(2,107)
(2,107)
$
1,696
25,359
25,359
(437)
(437)
1,652
1,652
(28,406)
(28,406)
(5,702)
(5,702)
716
716
$
$
$
$
171,225
25,359
(437)
1,652
197,799
185,049
(28,406)
(5,702)
716
151,657
(40,494)
(1,589)
5,795
—
3,697
(1,099)
419
1,261,478
171,225
17,185
(43,128)
—
(4,200)
10,862
497
5,992
(3,097)
4,406
1,447,794
185,049
—
10,707
(53,134)
(25,000)
1,496
296
(1,928)
23,722
1,555,610
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements
Summary of Significant Accounting Policies
1.
Fiscal year
Our fiscal year ends on December 31. We report our interim quarterly periods on a 13-week basis ending on a Saturday.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of Pentair and all subsidiaries, both U.S. and non-U.S.,
that we control. Intercompany accounts and transactions have been eliminated. Investments in companies of which we own 20
percent to 50 percent of the voting stock or have the ability to exercise significant influence over operating and financial policies
of the investee are accounted for using the equity method of accounting and, as a result, our share of the earnings or losses of
such equity affiliates is included in the statement of income. The cost method of accounting is used for investments in which
Pentair has less than a 20 percent ownership interest and we do not have the ability to exercise significant influence. These
investments are carried at cost and are adjusted only for other-than-temporary declines in fair value.
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 in this Form 10-K 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 our former 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.
Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the current year’s
presentation.
Use of estimates
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America (GAAP) requires us to make estimates and assumptions that affect the amounts reported in these
consolidated financial statements and accompanying notes. Due to the inherent uncertainty involved in making estimates, actual
results reported in future periods may be based upon amounts that could differ from those estimates. The critical accounting
policies that require our most significant estimates and judgments include:
(cid:120)
(cid:120)
the assessment of recoverability of long-lived assets, including goodwill; and
accounting for pension benefits, because of the importance in making the estimates necessary to apply these policies.
Revenue recognition
We recognize revenue when it is realized or realizable and has been earned. Revenue is recognized when persuasive evidence of
an arrangement exists; shipment or delivery has occurred (depending on the terms of the sale); the seller’s price to the buyer is
fixed or determinable; and collectibility is reasonably assured.
Generally, there is no post-shipment obligation on product sold other than warranty obligations in the normal, ordinary course of
business. In the event significant post-shipment obligations were to exist, revenue recognition would be deferred until
substantially all obligations were satisfied.
Sales returns
The right of return may exist explicitly or implicitly with our customers. Revenue from a transaction is recognized only if our
price is fixed and determinable at the date of sale; the customer has paid or is obligated to pay; the customer’s obligation would
not be changed in the event of theft, physical destruction, or damage of the product; the customer has economic substance apart
from our Company; we do not have significant obligations for future performance to directly bring about resale of the product by
the customer; and the amount of returns can reasonably be estimated.
In general, our return policy allows for customer returns only upon our authorization. Goods returned must be product we
continue to market and must be in salable condition. Returns of custom or modified goods are normally not allowed.
At the time of sale, we reduce revenue for the estimated effect of returns. Estimated sales returns include consideration of
historical sales levels, the timing and magnitude of historical sales return levels as a percent of sales, type of product, type of
customer, and a projection of this experience into the future.
Pricing and sales incentives
We record estimated reductions to revenue for customer programs and incentive offerings including pricing arrangements,
promotions, and other volume-based incentives at the later of the date revenue is recognized or the incentive is offered. Sales
incentives given to our customers are recorded as a reduction of revenue unless we (1) receive an identifiable benefit for the
39
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
goods or services in exchange for the consideration and (2) we can reasonably estimate the fair value of the benefit received. The
following represents a description of our pricing arrangements, promotions, and other volume-based incentives:
Pricing arrangements
Pricing is established up front with our customers, and we record sales at the agreed upon net selling price. However, one of our
businesses allows customers to apply for a refund of a percentage of the original purchase price if they can demonstrate sales to a
qualifying OEM customer. At the time of sale, we estimate the anticipated refund to be paid based on historical experience and
reduce sales for the probable cost of the discount. The cost of these refunds is recorded as a reduction in gross sales.
Promotions
Our primary promotional activity is what we refer to as cooperative advertising. Under this cooperative advertising program, we
agree to pay the customer a fixed percentage of sales as an allowance to be used to advertise and promote our products. The
customer is not required to provide evidence of the advertisement or promotion. We recognize the cost of this cooperative
advertising at the time of sale. The cost of this program is recorded as a reduction in gross sales.
Volume-based incentives
These incentives involve rebates that are negotiated up front with the customer and are redeemable only if the customer achieves
a specified cumulative level of sales. Under these incentive programs, at the time of sale, we reforecast the anticipated rebate to
be paid based on forecasted sales levels. These forecasts are updated at least monthly, for each customer and sales are reduced
for the anticipated cost of the rebate. If the forecasted sales for a customer changes, the accrual for rebates is adjusted to reflect
the new amount of rebates expected to be earned by the customer.
There have been no material accounting revisions for revenue-recognition related estimates.
Shipping and handling costs
Amounts billed to customers for shipping and handling are recorded in net sales in the accompanying consolidated statements of
income. Shipping and handling costs incurred by Pentair for the delivery of goods to customers are included in cost of goods
sold in the accompanying consolidated statements of income.
Cash equivalents
We consider highly liquid investments with original maturities of three months or less to be cash equivalents.
Trade receivables and concentration of credit risk
We record an allowance for doubtful accounts, reducing our receivables balance to an amount we estimate is collectible from our
customers. Estimates used in determining the allowance for doubtful accounts are based on historical collection experience,
current trends, aging of accounts receivable, and periodic credit evaluations of our customers’ financial condition. We generally
do not require collateral. No customer receivable balances exceeded 10 percent of total net receivable balances as of December
31, 2005 and 2004, respectively.
In December 2004, we entered into a one-year Accounts Receivable Purchase Agreement whereby designated customer accounts
receivable may be sold without recourse to a third-party financial institution on a revolving basis. These receivables consisted of
specific invoices that were assigned and subject to a filed security interest. We acted as the agent for the third-party, providing
collections and claims services. Following the initial settlement period, we were required to transfer payments, make adjustment
to invoice amounts and pay interest (at LIBOR plus 1.05%) on the assigned receivables to the third-party on a monthly basis. We
were also required to maintain trade credit insurance on the sold receivables. Receivable sales could have occurred on the
settlement date or as the third-party permitted, up to a maximum total outstanding amount of $30 million, with the ability to make
additional sales as sold receivables are repaid. The Accounts Receivable Purchase Agreement was not renewed in 2005.
As of December 31, 2004, we had sold an approximate $22.0 million interest in our pool of accounts receivable to a third-party
financial institution to mitigate the credit risk associated with the receivable balance of a large customer. In compliance with
Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, sales of accounts receivable are reflected as a reduction of accounts receivable in the consolidated
balance sheets and the proceeds are included in the cash flows from operating activities in the consolidated statement of cash
flows. As the estimated present value of the receivables sold approximated the carrying amount, no gain or loss was recorded in
2004.
40
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
Inventories
Inventories are stated at the lower of cost or market. Inventories of United States subsidiaries are generally determined by the
last-in, first-out (LIFO) method. Inventories of foreign-based subsidiaries are determined by the first-in, first-out (FIFO) and
moving average methods.
Property, plant, and equipment
Property, plant, and equipment is stated at historical cost. We compute depreciation by the straight-line method based on the
following estimated useful lives:
Land improvements
Buildings and leasehold improvements
Machinery and equipment
Years
5 to 20
5 to 50
3 to 15
Significant improvements that add to productive capacity or extend the lives of properties are capitalized. Costs for repairs and
maintenance are charged to expense as incurred. When property is retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any related gains or losses are included in income.
We review the recoverability of long-lived assets to be held and used, such as property, plant and equipment, when events or
changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The
assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the
expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are
less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and
carrying value. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values
are reduced for the cost to dispose of the assets. The measurement of impairment requires us to estimate future cash flows and
the fair value of long-lived assets.
Goodwill and identifiable intangible assets
Goodwill represents the excess of the cost of acquired businesses over the fair value of identifiable tangible net assets and
identifiable intangible assets purchased.
Goodwill is tested for impairment on an annual basis. During the fourth quarter of 2005, we completed our annual impairment
test of goodwill and determined there was no impairment.
The primary identifiable intangible assets of Pentair include trade marks and trade names, brand names, patents, non-compete
agreements, proprietary technology, and customer relationships. Under the provisions of SFAS No. 142, identifiable intangibles
with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible
assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment
annually, or more frequently if events warrant. The impairment test consists of a comparison of the fair value of the intangible
asset with its carrying amount. During the fourth quarter of 2005, we completed our annual impairment test for those identifiable
assets not subject to amortization and determined there was no impairment.
Cost and equity method investments
We have investments that are accounted for at historical cost or, if we have significant influence over the investee, using the
equity method. Pentair’s proportionate share of income or losses from investments accounted for under the equity method is
recorded in the consolidated statements of income. We write down or write off an investment and recognize a loss when events
or circumstances indicate there is impairment in the investment that is other-than-temporary. This requires significant judgment,
including assessment of the investees' financial condition, and in certain cases the possibility of subsequent rounds of financing,
as well as the investees' historical results of operations and projected results and cash flows. If the actual outcomes for the
investees are significantly different from projections, we may incur future charges for the impairment of these investments.
41
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
Income taxes
Pentair uses the asset and liability approach to account for income taxes. Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and
their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Changes in valuation allowances from period to period are
included in our tax provision in the period of change.
Environmental
In accordance with SOP 96-1, Environmental Remediation Liabilities, we recognize environmental clean-up liabilities on an
undiscounted basis when a loss is probable and can be reasonably estimated. Such liabilities generally are not subject to
insurance coverage. The cost of each environmental clean-up is estimated by engineering, financial, and legal specialists based
on current law. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the
likelihood that, where applicable, other potentially responsible parties (PRPs) will be able to fulfill their commitments at the sites
where Pentair may be jointly and severally liable. The process of estimating environmental clean-up liabilities is complex and
dependent primarily on the nature and extent of historical information and physical data relating to a contaminated site, the
complexity of the site, the uncertainty as to what remedy and technology will be required, and the outcome of discussions with
regulatory agencies and other PRPs at multi-party sites. In future periods, new laws or regulations, advances in clean-up
technologies, and additional information about the ultimate clean-up remedy that is used could significantly change our estimates.
Accruals for environmental liabilities are included in other liabilities in the Consolidated Balance Sheets.
Insurance subsidiary
We insure general and product liability, property, workers’ compensation, and automobile liability risks through our wholly-
owned captive insurance subsidiary. Reserves for policy claims are established based on actuarial projections of ultimate losses.
As of December 31, 2005 and 2004, reserves for policy claims were $45.8 million ($10.0 million included in accrued product
claims and warranties and $35.8 million included in other noncurrent liabilities) and $38.8 million ($10.0 million included in
accrued product claims and warranties and $28.8 million included in other noncurrent liabilities), respectively.
Stock-based compensation
In the fourth quarter of 2005, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards
No. (SFAS) 123R (revised 2004), Share Based Payment, which revised SFAS 123, Accounting for Stock-Based Compensation
(SFAS 123) and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25)
requiring us to recognize expense related to the fair value of our stock-based compensation awards. We adopted SFAS 123R
effective January 1, 2005 using the modified retrospective transition method permitted by SFAS 123R. Under this transition
method, restatement of only the interim financial statements in the year of adoption is permitted. We did not restate the financial
information for 2004 and 2003 as a result of the adoption. In connection with the adoption, the expense in the proforma
disclosures related to stock-based compensation was corrected for immaterial errors, resulting in no change to previously
reported quarterly proforma earnings per share. The adoption of SFAS 123R in 2005 resulted in the recognition of incremental
pre-tax stock-based compensation expense of $16.4 million, a reduction in net income of $12.0 million, a reduction in basic and
diluted earnings per share of $.12, a reduction in cash flows from operating activities of $8.7 million and an increase in cash
flows from financing activities of $8.7 million. We additionally reclassified our unearned compensation on non-vested share
awards of $7.9 million to additional paid in capital. The cumulative effect adjustment for forfeitures related to non-vested share
awards was immaterial.
In accordance with SFAS 123R the estimated grant date fair value of each stock-based award is recognized in income on an
accelerated basis over the requisite service period (generally the vesting period). The estimated fair value of each Pentair option
is calculated using the Black-Scholes option-pricing model. From time to time, we have elected to modify the terms of the
original grant. These modified grants in 2005 have been accounted for as a new award and measured using the fair value method
under SFAS 123R, resulting in the inclusion of additional compensation expense in our consolidated statement of income. Non-
vested share awards are recorded as compensation cost over the requisite service periods based on the market value on the date of
grant.
Prior to January 1, 2005 we applied the recognition and measurement principles of APB 25 to our stock options and other stock-
based compensation plans as permitted pursuant to SFAS 123.
In accordance with APB 25, cost for stock-based compensation is recognized in income based on the excess, if any, of the quoted
market price of the stock at the grant date of the award or other measurement date over the amount an employee must pay to
acquire the stock. The exercise price for stock options granted to employees equals the fair market value of Pentair’s common
stock at the date of grant, thereby resulting in no recognition of compensation expense by Pentair. However, from time to time,
we have elected to modify the terms of the original grant. Those modified grants have been accounted for as a new award and
42
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
measured using the intrinsic value method under APB 25, resulting in the inclusion of compensation expense in our consolidated
statement of income. Non-vested share awards are recorded as compensation cost over the requisite service periods based on the
market value on the date of grant. Unearned compensation cost on non-vested share awards was shown as a reduction to
shareholders’ equity.
Earnings per common share
Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding.
Diluted earnings per share are computed by dividing net income by the weighted average number of common shares outstanding,
including the dilutive effects of stock options and non-vested shares. Unless otherwise noted, references are to diluted earnings
per share.
Basic and diluted earnings per share were calculated using the following:
In thousands, except per-share data
Earnings per common share — basic
Continuing operations
Discontinued operations
Net income
Continuing operations
Discontinued operations
Basic earnings per common share
Earnings per common share — diluted
Continuing operations
Discontinued operations
Net income
Continuing operations
Discontinued operations
Diluted earnings per common share
Weighted average common shares outstanding — basic
Dilutive impact of stock-based compensation
Weighted average common shares outstanding — diluted
Stock options excluded from the calculation of diluted earnings
per share because the exercise price was greater than the average
market price of the common shares
$
$
$
$
$
$
$
$
2005
2004
2003
$
$
$
$
$
$
$
$
185,049
—
185,049
1.84
—
1.84
185,049
—
185,049
1.80
—
1.80
100,665
1,953
102,618
$
$
$
$
$
$
$
$
137,024
34,201
171,225
1.38
0.34
1.72
137,024
34,201
171,225
1.35
0.33
1.68
99,316
2,390
101,706
98,150
43,202
141,352
1.00
0.44
1.44
98,150
43,202
141,352
0.99
0.43
1.42
97,876
1,744
99,620
1,040
42
1,246
Derivative financial instruments
We recognize all derivatives, including those embedded in other contracts, as either assets or liabilities at fair value in our
balance sheet. If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and the hedged
item are recognized in earnings. If the derivative is designated and is effective as a cash-flow hedge, changes in the fair value of
the derivative are recorded in other comprehensive income (OCI) and are recognized in the consolidated statements of income
when the hedged item affects earnings. If the underlying hedged transaction ceases to exist or if the hedge becomes ineffective,
all changes in fair value of the related derivatives that have not been settled are recognized in current earnings. For a derivative
that is not designated as or does not qualify as a hedge, changes in fair value are reported in earnings immediately.
We use derivative instruments for the purpose of hedging interest rate and currency exposures, which exist as part of ongoing
business operations. All hedging instruments are designated and effective as hedges, in accordance with the provisions of SFAS
133, as amended. We do not hold or issue derivative financial instruments for trading or speculative purposes. All other
contracts that contain provisions meeting the definition of a derivative also meet the requirements of, and have been designated
as, normal purchases or sales. Our policy is not to enter into contracts with terms that cannot be designated as normal purchases
or sales.
43
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
Foreign currency translation
The financial statements of subsidiaries located outside of the United States are measured using the local currency as the
functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date.
The resultant translation adjustments are included in accumulated other comprehensive income, a separate component of
shareholders' equity. Income and expense items are translated at average monthly rates of exchange.
New accounting standards to be adopted in the future
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 153, Exchanges of Nonmonetary Assets—An
Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. SFAS 153 eliminates the exception from fair
value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29,
Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15,
2005 and is required to be adopted by us on January 1, 2006. The adoption of SFAS 153 is not expected to have a material
impact on our consolidated financial position, results of operations or cash flow.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs—An Amendment of ARB No. 43, Chapter 4. SFAS 151
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that
items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period
charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151
requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the
production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted by us on
January 1, 2006. We are currently evaluating the effect that the adoption of SFAS 151 will have on our consolidated results of
operations and financial condition but do not expect SFAS 151 to have a material impact.
In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-1, “The Meaning of Other-Than-
Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 provides guidance on other-than-temporary
impairment models for marketable debt and equity securities accounted for under SFAS 115 and non-marketable equity securities
accounted for under the cost method. The EITF developed a basic three-step model to evaluate whether an investment is other-
than-temporarily impaired. In November 2005, the FASB approved the issuance of FASB Staff Position FAS No. 115-1 and FAS
124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The FSP addresses
when an investment is considered impaired, whether the impairment is other-than-temporary and the measurement of an
impairment loss. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary
impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary. The
FSP is effective for reporting periods beginning after December 15, 2005 and is required to be adopted by us on January 1, 2006.
The adoption of this accounting principle is not expected to have a significant impact on our financial position or results of
operations.
2. Acquisitions
On December 1, 2005, we acquired McLean Thermal Management, Aspen Motion Technologies, and Electronic Solutions
businesses from APW, Ltd. (collectively, “Thermal”) for $140.0 million, including a cash payment of $138.9 million and
transaction costs of $1.1 million. These businesses provide thermal management solutions and integration services to the
telecommunications, data communications, medical, and security markets as part of our Technical Products Group. Goodwill
recorded as part of the initial purchase price allocation was $93.7 million, all of which is tax deductible. Preliminary estimates of
identifiable intangible assets acquired as part of the acquisition were $18.9 million, including definite-lived intangibles of $9.8
million with a weighted average amortization period of 10.0 years. We continue to evaluate the purchase price allocation for the
Thermal acquisition, including intangible assets, contingent liabilities, plant rationalization costs, and property, plant and
equipment. We expect to revise the purchase price allocation as better information becomes available in 2006.
On February 23, 2005, we acquired certain assets of Delta Environmental Products, Inc. and affiliates (collectively, “DEP”), a
privately-held company, for $10.3 million, including a cash payment of $10.0 million, transaction costs of $0.2 million, and debt
assumed of $0.1 million. The DEP product line addressees the water and wastewater markets as part of our Water Group.
Goodwill recorded as part of the initial purchase price allocation was $9.3 million, all of which is tax deductible.
Effective July 31, 2004, we completed the acquisition of all of the shares of capital stock of WICOR, Inc. (“WICOR”) from
Wisconsin Energy Corporation (“WEC”) for $874.7 million, including a cash payment of $871.1 million, transaction costs of
$11.2 million, and debt assumed of $21.6 million, less a favorable final purchase price adjustment of $14.0 million, and cash
acquired of $15.2 million. This includes an additional $0.4 million of transaction costs recorded in the first three quarters of
2005. WICOR manufactures water system, filtration, and pool equipment products primarily under the STA-RITE®,
SHURflo®, and Hypro® brands. We funded the payment of the purchase price and related fees and expenses of the WICOR
44
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
acquisition with an $850 million committed line of credit (the “Bridge Facility”) and through additional borrowings available
under our existing credit facility.
Identifiable intangible assets acquired as part of the acquisition were $181.5 million, including $102.0 million of definite-lived
intangible assets, including patented and proprietary technology of $39.6 million with a weighted average amortization period of
11.6 years and customer relationships of $62.4 million with a weighted average amortization period of 18.0 years. We ascribed
useful lives to patented and proprietary technology based on an analysis of the legal and contractual provisions. In addition, we
ascribed a useful life of 18.0 years to customer relationships based on an analysis of customer attrition rates, the stability of
product technology, and the value of proven customer service in retaining long standing customers. Due to a relatively flat
forecasted attrition pattern, we will amortize the customer relationship balance on a straight-line basis over its estimated useful
life.
Goodwill recorded as part of the final purchase price allocation was adjusted to $612.4 million, of which $70.6 million is tax
deductible.
The following pro forma consolidated condensed financial results of operations for the years ended December 31, 2005, and 2004
are presented as if the acquisitions had been completed at the beginning of each period presented.
In thousands, except per-share data
Pro forma net sales from continuing operations
Pro forma net income from continuing operations
Pro forma net income
Pro forma earnings per common share - continuing operations
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted
$
$
$
Years ended December 31
2005
3,068,371
186,215
186,215
$
2004
2,091,238
152,156
186,357
1.85
1.81
$
$
1.53
1.50
100,665
102,618
99,316
101,706
These pro forma consolidated condensed financial results have been prepared for comparative purposes only and include certain
adjustments, such as increased interest expense on acquisition debt. The adjustments do not reflect the effect of synergies that
would have been expected to result from the integration of these acquisitions. The pro forma information does not purport to be
indicative of the results of operations that actually would have resulted had the combination occurred on January 1 of each year
presented, or of future results of the consolidated entities.
3. Discontinued Operations/Divestitures
Effective after the close of business October 2, 2004, we completed the sale of our former Tools Group to The Black & Decker
Corporation (“BDK”) for approximately $796.8 million in cash, including a $21.8 million interim net asset value increase,
subject to post-closing adjustments. We used the proceeds from the Tools Group sale and borrowings under our credit facility to
repay, on October 4, 2004, the $850 million Bridge Facility used to acquire WICOR. We retained certain insurance liabilities,
employee compensation and benefit liabilities, environmental liabilities, pension obligations, and post-retirement obligations of
the Tools Group. In the fourth quarter of 2004, we recorded a loss on the disposal of the Tools Group of $6.0 million, net of a tax
provision of $9.0 million. In July of 2005, we paid $10.4 million to BDK related to purchase price adjustments. We currently
have an outstanding dispute over the net asset value of the Tools Group and may be required to repay some portion of the proceeds to
BDK. We believe our accrual at December 31, 2005 is an adequate reserve amount for any potential liability. We expect resolution of
this matter in the first quarter of 2006.
In 2001, we completed the sale of our Service Equipment businesses (Century Mfg. Co./Lincoln Automotive Company) to Clore
Automotive, LLC for total consideration of $18.2 million and we completed the sale of Lincoln Industrial to affiliates of The Jordan
Company LLC (Jordan), other investors, and members of management of Lincoln Industrial for total consideration of $78.4 million,
including the retention of a preferred stock interest. In January 2003, we paid $2.4 million for a final adjustment to the selling price
related to the disposition of Lincoln Industrial, which was offset by a previously established reserve. In the fourth quarter of 2003,
we reported an additional loss from discontinued operations of $2.9 million primarily due to a reduction in estimated proceeds related
to exiting two remaining facilities.
45
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
Operating results of the discontinued operations are summarized below. The amounts exclude general corporate overhead previously
allocated to the Tools Group. The amounts include an allocation of interest based on a ratio of the net assets of the discontinued
operations to the total net assets of Pentair.
In thousands
Net sales
2005
2004*
$
—
$
842,110
$
2003
1,081,378
Income (loss) from discontinued operations before income taxes
Income tax (benefit) expense
Income from discontinued operations, net of income taxes
—
—
—
65,232
24,984
40,248
Gain (loss) on disposal of discontinued operations
Income tax (benefit) expense
Loss on disposal of discontinued operations, net of tax
(4,197)
(4,197)
—
$
2,990
9,037
(6,047)
$
$
* Includes discontinued operations through the date of divestiture, October 2, 2004.
74,803
28,665
46,138
(4,517)
(1,581)
(2,936)
During 2005 we recorded an additional loss on the disposal of discontinued operations of $4.2 million. The additional loss
relates to increased reserve requirements for product recalls and contingent purchase price adjustments associated with the sale of
our former Tools Group. We recorded a $4.2 million benefit in our income tax provision related to discontinued operations. The
effective tax rate in 2005 for discontinued operations differs from the statutory rate due primarily to research and development
tax credits and permanent book/tax differences.
During 2004 and 2003 our income tax provision related to discontinued operations was $34.0 million and $27.1 million,
respectively. The effective tax rate of the discontinued operations for 2004 and 2003 differs from the statutory rate due primarily
to state and foreign taxes. The tax provision resulting from the Tools Group sale transaction was $9.0 million. This amount,
reflected in the $34.0 million amount above, differs from the statutory rate due primarily to state and foreign taxes which were
impacted by the form of the transaction and the geographic locations of the assets that were sold.
Net (liabilities) assets of discontinued operations consist of the following:
In thousands
Property, plant, and equipment, net
Current liabilities
Other noncurrent liabilities
Total liabilities
Net (liabilities) assets of discontinued operations
2005
2004
—
$
393
192
2,029
2,221
(2,221)
$
192
3,054
3,246
(2,853)
$
$
At December 31, 2005 and 2004, the liabilities totaling $2.2 million and $3.2 million, respectively, represent the estimated future cash
outflows associated with the exit from a leased facility.
4. Goodwill and Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill for the year ended December 31, 2005 by segment is as follows:
In thousands
Balance at December 31, 2004
Acquired
Purchase accounting adjustments
Foreign currency translation
Balance at December 31, 2005
Water
1,422,175
9,270
13,773
(11,938)
1,433,280
$
$
$
$
Technical
Products
198,229
93,735
—
(7,037)
284,927
Consolidated
1,620,404
$
103,005
13,773
(18,975)
1,718,207
$
Purchase accounting adjustments recorded in 2005 relate to the WICOR, DEP, and ESSEF acquisitions. During 2005 we
finalized our evaluation of the purchase price allocation for the WICOR acquisition, the adjustments primarily related to
46
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
contingent liabilities, reserves for plant rationalizations, and deferred income taxes. During the fourth quarter of 2005 we made
an adjustment to reverse a pre-acquisition tax contingency reserve related to the ESSEF acquisition.
The detail of acquired intangible assets consisted of the following:
In thousands
Finite-life intangible assets
Patents
Non-compete agreements
Proprietary technology
Customer relationships
Total finite-life intangible assets
Indefinite-life intangible assets
Brand names
2005
2004
Gross
carrying
amount
Accumulated
amortization
Net
Gross
carrying
amount
Accumulated
amortization
Net
$
$
15,685
3,937
51,386
87,707
158,715
$
$
(4,135)
(2,021)
(5,107)
(8,647)
(19,910)
$
$
11,550
1,916
46,279
79,060
138,805
$
$
14,659
7,464
45,145
84,044
151,312
$
$
(2,239)
(4,237)
(1,896)
(3,451)
(11,823)
$
$
12,420
3,227
43,249
80,593
139,489
$
127,728
$
—
$
127,728
$
118,637
$
—
$
118,637
Total intangibles, net
$
266,533
$
258,126
Intangible asset amortization expense in 2005, 2004, and 2003 was $11.7 million, $7.5 million, and $1.5 million, respectively.
The increase in amortization expense between 2005 and 2004 was primarily the result of the WICOR acquisition. In the third
quarter of 2004, we recorded $102.0 million of finite-lived intangible assets, including patented and proprietary technology of
$39.6 million with a weighted average amortization period of 11.6 years and customer relationships of $62.4 million with a
weighted average amortization period of 18.0 years.
The estimated future amortization expense for identifiable intangible assets during the next five years is as follows:
In thousands
Estimated amortization expense
2006
2007
2008
2009
2010
$
12,278
$
11,959
$
11,046
$
10,864
$
10,360
5.
Supplemental Balance Sheet Information
In thousands
Inventories
Raw materials and supplies
Work-in-process
Finished goods
Total inventories
Property, plant and equipment
Land and land improvements
Buildings and leasehold improvements
Machinery and equipment
Construction in progress
Total property, plant and equipment
Less accumulated depreciation and amortization
Property, plant and equipment, net
2005
2004
146,389
49,418
153,505
349,312
24,432
168,776
483,639
21,326
698,173
386,334
311,839
$
$
$
$
126,816
34,993
161,867
323,676
34,230
167,989
464,974
23,336
690,529
354,227
336,302
$
$
$
$
Certain inventories are valued at LIFO. If all inventories were valued at FIFO as of the end of 2005 and 2004, inventories would
have been $351.1 million and $324.1 million, respectively.
Cost method investments
47
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
As part of the sale of Lincoln Industrial in 2001, we received 37,500 shares of 5% Series C Junior Convertible Redeemable Preferred
Stock convertible into a 15 percent equity interest in the new organization – LN Holdings Corporation. During the second quarter of
2005 we sold our interest in the stock LN Holdings Corporation for cash consideration of $23.6 million, resulting in a pre-tax gain of
$5.2 million or an after-tax gain of $3.5 million. The terms of the sale agreement establish two escrow accounts totaling $14 million.
We received payments from an escrow of $0.2 million during the fourth quarter of 2005, increasing our gain. Any remaining escrow
balances are to be distributed by April 2008 to former shareholders in accordance with their ownership percentages. Any funds
received from settlement of escrows in future periods will be accounted for as additional gain on sale of this interest. The preferred
stock was recorded at $18.4 million in other assets as December 31, 2004, which represented the estimated fair value of that
investment at the time of the Lincoln Industrial sale.
Equity method investments
We have a 50 percent investment in FARADYNE Motors LLC at December 31, 2005, a joint venture with ITT Water
Technologies, Inc. that began design, development, and manufacturing of submersible pump motors in 2005. We do not
consolidate the investment in our financial statements as we do not have a controlling interest over the investment. The
investment at December 31, 2005 was $1.2 million, which is net of our proportionate share of losses during 2005 of $1.2 million.
Our proportionate share of earnings or losses is recorded on a one-month lag.
Supplemental Cash Flow Information
6.
The following table summarizes supplemental cash flow information:
In thousands
Interest payments
Income tax payments
2005
2004
2003
$
$
44,403
79,414
$
49,339
63,488
41,962
46,598
7. Accumulated Other Comprehensive Income (Loss)
Components of accumulated other comprehensive income (loss) consist of the following:
In thousands
Minimum pension liability adjustments, net of tax
Foreign currency translation adjustments
Market value of derivative financial instruments, net of tax
Accumulated other comprehensive income (loss)
2005
2004
2003
$
$
(17,534)
16,045
503
(986)
$
$
(11,832)
44,451
(213)
32,406
$
$
(11,395)
19,092
(1,865)
5,832
In 2005, the minimum pension liability adjustment increased compared to the prior year despite no change in the discount rate for
the U.S. plans. The increase is attributable to lower than expected pension plan performance as well as a reduction in the discount
rates associated with our foreign defined benefit plans. In 2004, the minimum pension liability remained relatively consistent
compared to prior year despite the 50 basis point decrease in the discount rate to 5.75% as of December 31, 2004, as it was offset
by our pension plan asset performance. The net foreign currency translation loss in 2005 of $28.4 million was the result of the
weakening of the U.S. dollar against the Euro. The net foreign currency gain in 2004 of $25.4 million, was primarily the result of
a stronger U.S. dollar against the Euro and Canadian dollar currencies. Changes in the market value of derivative financial
instruments was impacted primarily by the maturities of derivatives and changing interest rates. Fluctuations in the value of
hedging instruments are generally offset by changes in the cash flows of the underlying exposures being hedged.
48
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
8. Debt
Long-term debt and the average interest rate on debt outstanding as of December 31 is summarized as follows:
In thousands
Commercial paper, maturing within 54 days
Revolving credit facilities
Private placement - fixed rate
Private placement - floating rate
Senior notes
Other
Total contractual debt obligations
Interest rate swap monetization deferred income
Fair value adjustment of hedged debt
Total long-term debt, including current
portion per balance sheet
Less current maturities
Long-term debt
Average
interest rate
December 31, 2005
4.74%
4.93%
5.50%
4.80%
7.85%
2.55%
Maturity
(Year)
December 31
2005
December 31
2004
2010
2007-2013
2013
2009
2006-2009
$
$
$
144,656
112,300
135,000
100,000
250,000
6,285
748,241
4,373
—
752,614
(4,137)
748,477
$
178,008
53,700
135,000
100,000
250,000
14,394
731,102
5,539
(536)
736,105
(11,957)
724,148
As of December 31, 2005, we had a $800 million multi-currency revolving credit facility (the “Credit Facility”) with various
banks expiring on March 4, 2010. The interest rate on the loans under the Credit Facility is LIBOR plus 0.625%. Interest rates
and fees on the Credit Facility vary based on our credit ratings.
In July 2005, we amended our floating rate private placement note purchase agreement, decreasing the interest rate on the notes
by .550% to LIBOR plus .600%. Additionally, the amendment extended the prepayment provisions of the note purchase
agreement permitting prepayment on or after July 25, 2006.
We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We use the
Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. As of December 31, 2005, we had $144.7
million of commercial paper outstanding that matured within 54 days. All of the commercial paper was classified as long-term as
we have the intent and the ability to refinance such obligations on a long-term basis under the Credit Facility. Availability under
our Credit Facility at December 31, 2005, including outstanding commercial paper, was approximately $543.0 million.
Effective following the close of business on July 31, 2004, we completed the acquisition of WICOR. We funded the payment of
the purchase price and related fees and expenses of the WICOR acquisition with an $850 million Bridge Facility and through
additional borrowings available under our existing Credit Facility. The interest rate on the Bridge Facility and loans under the
Credit Facility during the period of the Bridge Facility was LIBOR plus 1.375%.
On October 4, 2004, we received approximately $796.8 million of proceeds from the sale of our Tools Group to BDK. As
required under the terms of the Bridge Facility, we used the proceeds from the Tools Group sale and additional borrowings under
the Credit Facility to pay off the Bridge Facility. Following payment of the Bridge Facility and based on our existing credit
ratings, the interest rate on loans under the Credit Facility decreased to LIBOR plus 1.125%.
We were in compliance with all debt covenants as of December 31, 2005.
In addition to the Credit Facility, we have $25 million of uncommitted credit facilities, under which we had no borrowings as of
December 31, 2005.
Long-term debt outstanding at December 31, 2005, matures on a calendar year basis by contractual debt maturity as follows:
In thousands
Contractual debt obligation maturities
Other maturities
Total maturities
2006
2,971
1,166
4,137
$
$
2007
37,910
1,166
39,076
$
$
2008
$
$
156
1,166
1,322
2009
250,129
875
251,004
$
$
2010
257,034
—
257,034
$
$
Thereafter
200,041
$
—
200,041
$
Total
748,241
4,373
752,614
$
$
49
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
9. Derivative and Financial Instruments
Cash-flow hedges
We have a $100 million interest rate swap agreement with several major financial institutions, expiring July 2013, to exchange
variable rate interest payment obligations for fixed rate obligations without the exchange of the underlying principal amounts in
order to manage interest rate exposures. The swap becomes effective in April 2006, at the fixed interest rate of 4.68% plus .60%
interest rate spread over LIBOR, resulting in a fixed interest rate of 5.28%. The fair value of the swap was an asset of $0.8
million at December 31, 2005. At December 31, 2004 we had a variable to fixed interest rate swap agreement outstanding with
an aggregate notional amount of $20.0 million, with a fixed interest rate of 6.31 percent, this agreement expired in June 2005.
The fair value of this swap was a liability of $0.4 million at December 31, 2004.
The variable to fixed interest rate swap is designated as and is effective as a cash-flow hedge. The fair value of this swap is
recorded on the balance sheet, with changes in fair values included in other comprehensive income (OCI). Derivative gains and
losses included in OCI are reclassified into earnings at the time the related interest expense is recognized or the settlement of the
related commitment occurs. We estimate the net derivative gains or losses that will be reclassified into earnings during 2006 will
not be material. No hedging relationships were de-designated during 2005.
Fair value hedge
During 2002, we entered into a interest rate swap agreement to effectively convert $100 million of senior notes for the term of the
notes (maturing October 2009) from a 7.85 percent fixed annual rate to a floating annual rate equal to the six-month LIBOR rate
plus 3.69 percent. The fair value of the swap was a liability of $0.5 million at December 31, 2004. This swap agreement was
designated and accounted for as a fair value hedge. Since this swap qualified for the short-cut method under SFAS No. 133,
changes in the fair value of the swap (included in other long-term liabilities in the consolidated balance sheets) are offset by
changes in the fair value of the designated debt being hedged. Consequently, there was no impact on net income or shareholders’
equity. During 2005, we terminated this swap agreement resulting in a nominal amount of proceeds.
Fair value of financial instruments
The recorded amounts and estimated fair values of long-term debt, excluding the effects of derivative financial instruments, and
the recorded amounts and estimated fair value of those derivative financial instruments were as follows:
In thousands
Long-term debt, including current portion
Variable rate
Fixed rate
Total
Derivative financial instruments
Variable to fixed interest rate swap asset (liability)
Fixed to variable interest rate swap liability
Market value of derivative financial instruments
2005
2004
Recorded
amount
Fair
value
Recorded
amount
Fair
value
$
$
$
$
356,956
391,285
748,241
773
—
773
$
$
$
$
356,956
411,253
768,209
773
—
773
$
$
$
$
338,582
392,520
731,102
(350)
(536)
(886)
$
$
$
$
338,582
428,766
767,348
(350)
(536)
(886)
The following methods were used to estimate the fair values of each class of financial instrument:
(cid:120)
short-term financial instruments (cash and cash equivalents, accounts and notes receivable, accounts and notes payable, and
short-term borrowings) — recorded amount approximates fair value because of the short maturity period;
long-term debt, including current maturities — fair value is based on market quotes available for issuance of debt with
similar terms; and
interest rate swap agreements — fair value is based on market or dealer quotes.
(cid:120)
(cid:120)
10. Income Taxes
Income from continuing operations before income taxes consisted of the following:
In thousands
United States
International
Income from continuing operations before taxes
2005
2004
2003
$
$
219,556
63,962
283,518
$
$
159,679
50,353
210,032
$
$
119,331
24,484
143,815
50
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
The provision for income taxes for continuing operations consisted of the following:
In thousands
Currently payable
Federal
State
International
Total current taxes
Deferred
Federal and state
International
Total deferred taxes
Total provision for income taxes
2005
2004
2003
$
$
59,355
7,369
23,796
90,520
5,837
2,112
7,949
98,469
$
$
42,730
5,051
14,513
62,294
8,341
2,373
10,714
73,008
$
$
11,350
1,903
(1,160)
12,093
22,446
11,126
33,572
45,665
Reconciliation of the U.S. statutory income tax rate to our effective tax rate for continuing operations follows:
Percentages
U.S. statutory income tax rate
State income taxes, net of federal tax benefit
Tax effect of stock-based compensation
Tax effect of international operations
Tax credits
Domestic manufacturing deduction
ESOP dividend benefit
All other, net
Effective tax rate on continuing operations
2005
2004
2003
35.0
2.3
0.6
(1.2)
(1.5)
(0.5)
(0.3)
0.3
34.7
35.0
2.6
—
(1.4)
(1.4)
—
(0.3)
0.3
34.8
35.0
1.9
—
(2.6)
(2.1)
—
(0.5)
0.1
31.8
Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as
“temporary differences.” We record the tax effect of these temporary differences as “deferred tax assets” (generally items that
can be used as a tax deduction or credit in future periods) and “deferred tax liabilities” (generally items for which we received a
tax deduction but the tax impact has not yet been recorded in the consolidated statements of income).
During 2005, our effective tax rate was impacted by a benefit of $1.4 million related to R&D tax credits, a settlement of an IRS
audit resulting in a release of tax contingency reserves of $1.3 million, a favorable adjustment related to the filing of our 2004
Federal tax return of $1.0 million. Our effective tax rate was also impacted favorably by tax deductions for profits associated
with qualified domestic production activities. These favorable items are offset by a $3.2 million anticipated unfavorable
settlement for a routine German tax examination related to prior years as well as the tax impact of the adoption of SFAS 123R.
During the fourth quarter of 2004, we repatriated approximately $75.0 million in extraordinary dividends, as defined in the
American Jobs Creation Act of 2004 (the “Jobs Act”), consisting primarily of foreign proceeds resulting from the sale of the
Tools Group. We elected to apply the provisions of Section 965 of the Internal Revenue Code, enacted as part of the Jobs Act, to
the repatriated extraordinary dividends and therefore, were eligible to claim an eighty-five percent dividends received deduction
for income tax purposes on the eligible amounts. The net tax cost of the repatriation of the extraordinary dividends, recorded in
discontinued operations, was approximately $4.0 million.
United States income taxes have not been provided on undistributed earnings of international subsidiaries. It is our intention to
reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to do so. As of December 31, 2005,
approximately $97.0 million of unremitted earnings attributable to international subsidiaries were considered to be indefinitely
invested. We believe that any U.S. tax on repatriated earnings would be substantially offset by U.S. foreign tax credits.
51
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
The tax effects of the major items recorded as deferred tax assets and liabilities are as follows:
In thousands
Accounts receivable allowances
Inventory valuation
Accelerated depreciation/amortization
Accrued product claims and warranties
Employee benefit accruals
Goodwill and other intangibles
Other, net
Total deferred taxes
Net deferred tax liability
2005 Deferred tax
2004 Deferred tax
Assets
5,336
—
—
38,781
92,487
—
—
136,604
$
$
Liabilities
—
3,055
28,047
—
—
150,793
31,524
213,419
$
$
(76,815)
$
$
$
Assets
$
5,606
354
—
33,778
72,810
—
—
112,548
$
$
Liabilities
—
—
37,349
—
—
140,126
28,872
206,347
(93,799)
The determination of annual income tax expense takes into consideration amounts which may be needed to cover exposures for
open tax years. The Internal Revenue Service (IRS) has examined our U.S. federal income tax returns through 2001 with no
material adjustments and is currently auditing 2002 and 2003. In connection with the completion of the 1998 to 2001 Federal
income tax audit, we adjusted certain income tax reserves established related to the periods under examination and recorded a
benefit of $1.3 million to our first quarter 2005 income statement. We do not expect any material impact on earnings to result
from the resolution of matters related to open tax years; however, actual settlements may differ from amounts accrued.
Non-U.S. tax losses of $5.7 million and $5.3 million were available for carryforward at December 31, 2005 and 2004,
respectively. A valuation allowance of $1.5 million and $1.6 million exists for deferred income tax benefits related to the loss
carryforwards available that may not be realized as of December 31, 2005 and 2004, respectively. We believe that sufficient
taxable income will be generated in the respective countries to allow us to fully recover the remainder of the tax losses. A
majority of our non-U.S. tax losses can be carried forward indefinitely. The remaining non-U.S. tax losses will begin to expire in
2007.
11. Benefit Plans
Pension and post-retirement benefits
We sponsor domestic and foreign defined-benefit pension and other post-retirement plans. Pension benefits are based principally
on an employee’s years of service and/or compensation levels near retirement. In addition, we also provide certain post-
retirement health care and life insurance benefits. Generally, the post-retirement health care and life insurance plans require
contributions from retirees. We use a December 31 measurement date each year.
The acquisition of WICOR in 2004 increased unfunded pension liabilities by approximately $23.7 million and increased post-
retirement liabilities by approximately $32.1 million at December 31, 2004. Corresponding liabilities equal to the unfunded
liabilities were recorded on WICOR’s opening balance sheet.
The sale of our Tools Group in 2004 decreased post-retirement liabilities at December 31, 2004 by approximately $4.8 million.
In 2005 we completed the transfer of pension plan assets and related plan liabilities, resulting in a reduction in plan liabilities that
was $3.8 million greater than the amount of plan assets transferred.
In 2004, under the requirements of SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, we recognized a curtailment expense and special termination benefits totaling
approximately $1.8 million due to the divestiture of the Tools Group.
On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Medicare Act) was
signed into law. The Act expands Medicare to include coverage for prescription drugs. On May 19, 2004, the FASB issued FSP
No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and
Modernization Act of 2003”, which requires current recognition of the federal subsidy that employers may receive for providing
drug coverage to retirees. FSP No. 106-2 was effective for the Company July 4, 2004. The amount of subsidies we expect to
receive is not material relative to our accumulated post-retirement benefit obligation.
52
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
Obligations and Funded Status
The following tables present reconciliations of the benefit obligation of the plans, the plan assets of the pension plans, and the
funded status of the plans:
In thousands
Change in benefit obligation
Benefit obligation beginning of year
Service cost
Interest cost
Amendments
Liability transfer
Special termination benefits
Actuarial (gain) loss
Acquisitions
Divestiture
Translation (gain) loss
Benefits paid
Benefit obligation end of year
Change in plan assets
Fair value of plan assets beginning of year
Actual return on plan assets
Asset transfer - acquisitions
Asset transfer - divestiture
Company contributions
Translation (loss) gain
Benefits paid
Fair value of plan assets end of year
Funded status
Plan assets less than
benefit obligation
Unrecognized cost:
Net transition obligation
Net actuarial (gain) loss
Prior service cost (benefit)
Net amount recognized
Pension benefits
2005
2004
Post-retirement
2005
2004
$
$
$
$
$
$
545,118
16,809
29,515
158
(22,432)
—
8,610
—
—
(7,876)
(27,798)
542,104
381,281
13,518
—
(18,600)
4,133
(878)
(27,798)
351,656
$
$
$
$
419,616
15,998
27,514
—
—
1,589
30,799
91,433
(14,479)
3,906
(31,258)
545,118
295,399
53,696
67,709
(11,954)
7,193
496
(31,258)
381,281
(190,448)
$
(163,837)
87
93,398
774
(96,189)
$
122
76,694
915
(86,106)
$
$
$
$
$
$
68,085
850
3,787
—
—
—
(11,669)
—
—
—
(3,487)
57,566
—
—
—
—
3,487
—
(3,487)
—
$
$
$
$
36,903
696
3,012
—
—
—
2,992
32,136
(4,765)
—
(2,889)
68,085
—
—
—
—
2,889
—
(2,889)
—
(57,566)
$
(68,085)
—
(16,123)
(260)
(73,949)
$
—
(612)
(970)
(69,667)
Of the $190.4 million underfunding at December 31, 2005, $104.8 million relates to foreign pension plans and our supplemental
executive retirement plans which are not commonly funded.
Amounts recognized in the consolidated balance sheets of:
In thousands
Prepaid benefit cost
Accrued benefit liability
Intangible asset
Accumulated other comprehensive income — pre-tax
Net amount recognized
Pension benefits
2005
2004
Post-retirement
2005
2004
$
$
7,391
(133,041)
716
28,745
(96,189)
$
$
8,428
(114,545)
610
19,401
(86,106)
$
$
—
(73,949)
—
—
(73,949)
$
$
—
(69,667)
—
—
(69,667)
The accumulated benefit obligation for all defined benefit plans was $463.1 million and $469.2 million at December 31, 2005,
and 2004, respectively.
53
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
Information for pension plans with an accumulated benefit obligation or projected benefit obligation in excess of plan assets are
as follows:
In thousands
Pension plans with an accumulated benefit obligation in excess of plan assets:
Fair value of plan assets
Accumulated benefit obligation
Pension plans with a projected benefit obligation in excess of plan assets:
Fair value of plan assets
Projected benefit obligation
Components of net periodic benefit cost are as follows:
2005
2004
$
$
344,811
457,932
344,811
536,895
$
$
107,605
201,591
374,182
539,661
In thousands
Service cost
Interest cost
Expected return on plan assets
Amortization of transition
obligation
Amortization of prior year
service cost (benefit)
Recognized net actuarial loss
Special termination benefits
Curtailment expense
Net periodic benefit cost
Continuing operations
Discontinued operations
Net periodic benefit cost
Additional Information
Pension benefits
2004
2005
$
16,809
29,515
(29,443)
$
15,998
27,513
(27,970)
2003
15,262
23,890
(24,748)
Post-retirement
2004
2003
2005
$
$
850
3,787
$
696
3,012
558
2,273
20
22
20
—
—
—
289
2,764
—
—
19,954
19,954
—
19,954
$
$
$
450
1,446
1,589
185
19,233
14,897
4,336
19,233
$
$
$
650
672
—
—
15,746
12,428
3,318
15,746
$
$
$
(199)
—
—
—
4,438
4,438
—
4,438
$
$
$
(581)
—
—
—
3,127
2,368
759
3,127
$
$
$
(922)
—
—
—
1,909
942
967
1,909
$
$
$
$
In thousands
Increase in minimum liability included in
other comprehensive income, net of tax
Pension benefits
2005
2004
$
(5,702)
$
(437)
54
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
Assumptions
Weighted-average assumptions used to determine domestic benefit obligations at December 31 are as follows:
Percentages
Discount rate
Rate of compensation increase
Pension benefits
2004
2005
2003
2005
Post-retirement
2004
2003
5.75
5.00
5.75
5.00
6.25
5.00
5.75
5.75
6.25
Weighted-average assumptions used to determine the domestic net periodic benefit cost for years ending December 31 are as
follows:
Percentages
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
Pension benefits
2004
2005
2003
2005
Post-retirement
2004
2003
5.75
8.50
5.00
6.25
8.50
5.00
6.25
8.50
5.00
5.75
6.25
6.25
Discount rate
The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based
on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to
payments from a stream of AA or higher bonds available in the marketplace, adjusted to eliminate the effects of call provisions.
This produced a discount rate of 5.75 percent in 2005 and 2004 and 6.25 percent in 2003. The discount rates on our foreign plans
ranged from 2.00% to 4.90% in 2005 versus a range of 2.00% to 5.25% in 2004. There are no known or anticipated changes in
our discount rate assumptions that will impact our pension expense in 2006.
Expected rate of return
The expected rate of return on plan assets is designed to be a long-term assumption that may be subject to considerable year-to-
year variance from actual returns. In developing the expected long-term rate of return, we considered our historical ten-year
compounded annual return of 9.0 percent, with consideration given to forecasted economic conditions, our asset allocations, input
from external consultants and broader longer-term market indices. In 2005, the pension plan assets yielded a positive return of
4.2 percent, compared to a positive return of 17.6 percent in 2004. Our expected rate of return in 2005 equaled 8.5 percent,
which remained unchanged from 2004. In 2005 our expected return on plan assets was higher than our actual return on plan
assets while in 2004 our expected return on plan assets was lower than our actual return on plans assets, the significant difference
between our expected return on plan assets compared to our actual return on plan assets in 2005 and 2004 is primarily attributable
to the fluctuations of the Pentair common stock price during the respective years. There are no known or anticipated changes in
our return assumption that will impact our pension expense in 2006.
We base our determination of pension expense or income on a market-related valuation of assets which reduces year-to-year
volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which
they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the
market-related value of assets and the actual return based on the market-related value of assets. Since the market-related value of
assets recognizes gains or losses over a five-year-period, the future value of assets will be impacted as previously deferred gains
or losses are recorded.
Pension-related adjustments to equity
In 2003, the financial markets recovered and resulted in a positive return on plan assets of 24.8 percent which eliminated $20.9
million of the 2002 $29.2 million charge to shareholders’ equity. The charge did not impact earnings. In 2004, our discount rate
was lowered from 6.25 percent to 5.75 percent. However, the change in the discount rate assumption was offset by higher than
anticipated returns on assets and thus, did not significantly affect our shareholders’ equity. In 2005, our discount rate remained
consistent with 2004; however, a lower return on plan assets as well as a decrease in the discount rates for our foreign plans
resulted in an after-tax charge to equity of $5.7 million.
Net periodic benefit cost
Total net periodic pension benefit cost was $20.0 million in 2005, $19.2 million in 2004, and $15.7 million in 2003. Total net
periodic pension benefit cost is expected to be approximately $24.5 million in 2006. The increasing trend in net periodic pension
cost from 2003 forward is largely driven by the decrease in the discount rate in 2005 and by actual returns on plan assets. The net
periodic pension benefit cost for 2006 has been estimated assuming a discount rate of 5.75 percent and an expected return on plan
assets of 8.5 percent.
55
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
Unrecognized pension losses
As of our December 31, 2005 measurement date, our pension plans have $93.4 million of cumulative unrecognized losses. To
the extent the unrecognized loss exceeds 10% of the projected benefit obligation, it will be amortized into expense each year on a
straight-line basis over the remaining expected future-working lifetime of active participants (currently approximating 12 years).
The amount included in pension expense for loss amortization in 2005 was $2.8 million.
The assumed health care cost trend rates at December 31 are as follows:
Health care cost trend rate asumed for next year
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
2005
2004
11.00%
11.50%
5.00%
2018
5.00%
2018
The assumed health care cost trend rates can have a significant effect on the amounts reported for health care plans. A one-
percentage-point change in the assumed health care cost trend rates would have the following effects:
In thousands
Effect on total of service and interest cost
Effect on postretirement benefit obligation
1-Percentage-Point
Increase
1-Percentage-Point
Decrease
$
$
291
2,458
(251)
(2,131)
Plan Assets
Objective
The primary objective of our pension plans is to meet commitments to our employees at a reasonable cost to the company. This
is primarily accomplished through growth of capital and safety of the funds invested. The plans will therefore be actively
invested to achieve real growth of capital over inflation through appreciation of securities held and through the accumulation and
reinvestment of dividend and interest income.
Asset allocation
Our actual overall asset allocation for the plans as compared to our investment policy goals is as follows:
Asset Class
Large Capitalization U.S. Stocks
Mid Capitalization, U.S. Stocks
Small Capitalization, U.S. Stocks
Pentair Stock
International (Non-U.S.) Stocks
Private Equity
Fixed Income (Bonds)
Fund of Hedged Funds
Cash
2005 (1)
2004 (1)
Target Minimum Maximum
Investment Policy
19.5%
12.9%
6.9%
9.5%
21.2%
0.1%
9.4%
20.5%
0.0%
18.6%
11.9%
3.2%
10.7%
12.4%
0.2%
10.6%
16.0%
16.4%
20.0%
12.5%
7.5%
10.0%
20.0%
0.0%
10.0%
20.0%
15.0%
7.5%
2.5%
5.0%
15.0%
0.0%
5.0%
15.0%
25.0%
17.5%
12.5%
15.0%
25.0%
5.0%
15.0%
25.0%
(1) Actual asset allocation as of December 31, 2005 and 2004, respectively.
We regularly review our asset allocation and periodically rebalance our investments to our targeted allocation when considered
appropriate. From time to time, we may be outside our targeted ranges by amounts we deem acceptable.
At December 31, 2004, our cash balance was higher than normal due to the liquidation of the WICOR pension assets held in a
separate trust. Those funds were transferred to our pension master trust and subsequent to December 31, 2004, a portion was
reinvested in accordance with our targeted asset allocations. We transferred most of the remaining cash balance to BDK in
conjunction with our transfer of certain pension benefit obligations related to the divested Tools Group. We do require a cash
balance to be available to fund monthly benefit payments and administrative fees.
Equity securities include Pentair common stock in the amount of $32.6 million and $41.1 million at December 31, 2005 and
2004, respectively.
56
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
Cash Flows
Contributions
In 2005, pension contributions totaled $4.1 million, including $0.3 million of contributions to domestic defined benefit pension
plans. In 2004, pension contributions totaled $7.2 million, including $2.7 million of contributions to domestic defined benefit
pension plans. The contributions in 2005 and 2004 equaled or exceeded the minimum funding requirement. Our 2006 pension
contributions are expected to be in the range of $5 million to $10 million.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the plans as
follows:
In millions
2006
2007
2008
2009
2010
2011-2015
$
$
Pension benefits
25.7
24.7
25.9
27.0
28.1
166.9
Post-retirement
4.0
4.0
4.0
4.0
4.0
21.7
Savings plan
We have a 401(k) plan (the plan) with an employee stock ownership (ESOP) bonus component, which covers certain union and
nearly all non-union U.S. employees who meet certain age requirements. Under the plan, eligible U.S. employees may
voluntarily contribute a percentage of their eligible compensation. Matching contributions are made in cash to employees who
meet certain eligibility and service requirements. Our matching contribution is fixed at 50 percent of eligible employee
contributions, and is limited to 5 percent of employee compensation contributed by employees.
In addition to the matching contribution, all employees who meet certain service requirements receive a discretionary ESOP
contribution equal to 1.5 percent of annual eligible compensation.
Our combined expense for the plan and ESOP were approximately $8.8 million, $10.7 million, and $7.3 million, in 2005, 2004,
and 2003, respectively.
12. Shareholders’ Equity
Authorized shares
We may issue up to 250 million shares of common stock. Our Board of Directors may designate up to 15 million of those shares as
preferred stock. On December 10, 2004, the Board of Directors designated a new series of preferred stock of up to 2.5 million
shares, Series A Junior Participating Preferred Stock, par value $0.10 per share. No shares of preferred stock were issued or
outstanding as of December 31, 2005 or December 31, 2004.
Purchase rights
On December 10, 2004, our Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each
outstanding share of common stock. The dividend was payable upon the close of business on January 28, 2005 to the shareholders of
record upon the close of business on January 28, 2005. Each Right entitles the registered holder to purchase one one-hundredth of a
share of Series A Junior Participating Preferred Stock, at a price of $240.00 per one one-hundredth of a share, subject to adjustment.
However, the Rights are not exercisable unless certain change in control events occur, such as a person acquiring or obtaining the
right to acquire beneficial ownership of 15 percent or more of our outstanding common stock. The description and terms of the
Rights are set forth in a Rights Agreement, dated December 10, 2004. The Rights will expire on January 28, 2015, unless the Rights
are earlier redeemed or exchanged in accordance with the terms of the Rights Agreement. On January 28, 2005, the common share
purchase rights issued pursuant to the Rights Agreement dated July 31, 1995 were redeemed in their entirety for an amount equal to
$0.0025 per right.
Share repurchases
In December 2004, the Board of Directors authorized the development of a program and process to repurchase shares of our common
stock up to a maximum dollar limit of $25.0 million annually. There is no expiration associated with the authorization granted. In
2005, we repurchased 755,663 shares for $25.0 million under this plan. We have the authority in 2006 to repurchase shares up to a
maximum dollar limit of $25.0 million. As of February 17, 2006 we had not repurchased any shares under this plan. In 2004 and
2003, respectively, we repurchased 105,500 shares and 80,000 shares of our common stock under similar plans.
57
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
13. Stock Plans
Total stock-based compensation expense from continuing operations in 2005, 2004, and 2003 was $24.2 million, $6.3 million, and
$4.0 million, respectively. The increase in 2005 is attributable to the adoption of SFAS 123R in the fourth quarter of 2005 using the
modified retrospective transition method and restating interim periods in 2005. The adoption of SFAS 123R in 2005 resulted in the
recognition of incremental pre-tax stock-based compensation of $16.4 million, a reduction in net income of $12.0 million, a
reduction in basic and diluted earnings per share of $.12, a reduction in cash flows from operating activities of $8.7 million and
an increase in cash flows from financing activities of $8.7 million. We additionally reclassified our unearned compensation on
non-vested share awards of $7.9 million to additional paid in capital. The cumulative effect adjustment for forfeitures related to
non-vested share awards was immaterial.
The following table shows the 2005 quarterly impact of the adoption of the new accounting standard:
In thousands, except per-share data
Net income, prior to SFAS 123R adoption
Impact of SFAS 123R adoption, net of tax
Net income, adjusted for SFAS 123R adoption
Basic earnings per common share
Impact of SFAS 123R adoption, net of tax
Basic earnings per common share
Diluted earnings per common share
Impact of SFAS 123R adoption, net of tax
Diluted earnings per common share
First
43,305
(3,124)
40,181
0.43
(0.03)
0.40
0.42
(0.03)
0.39
$
$
$
$
$
$
Second
64,522
(3,143)
61,379
0.64
(0.03)
0.61
0.63
(0.03)
0.60
$
$
$
$
$
$
2005
Third
47,375
(2,842)
44,533
0.47
(0.03)
0.44
0.46
(0.03)
0.43
$
$
$
$
$
$
Fourth
41,845
(2,889)
38,956
0.42
(0.03)
0.39
0.41
(0.03)
0.38
$
$
$
$
$
$
Year
197,047
(11,998)
185,049
1.96
(0.12)
1.84
1.92
(0.12)
1.80
$
$
$
$
$
$
Prior to 2005, we applied APB 25 and the disclosure only provisions of SFAS No. 123. The following table illustrates the effect
on income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation during 2004 and 2003. The estimated fair value of each Pentair option is calculated using the Black-
Scholes option-pricing model.
In thousands, except per-share data
Net income
Plus stock-based employee compensation included in net income, net of tax
Less estimated stock-based employee compensation
determined under fair value based method, net of tax
Net Income — pro forma
Earnings per common share
Basic — as reported
Plus stock-based employee compensation included in net income, net of tax
Less estimated stock-based employee compensation
determined under fair value based method, net of tax
Basic — pro forma
Diluted — as reported
Plus stock-based employee compensation included in net income, net of tax
Less estimated stock-based employee compensation
determined under fair value based method, net of tax
Diluted — pro forma
Weighted average common shares outstanding
Basic
Diluted
58
$
$
$
$
$
$
2004
2003
171,225
6,558
(17,958)
159,825
1.72
0.07
(0.18)
1.61
1.68
0.07
(0.18)
1.57
$
$
$
$
$
$
141,352
2,414
(8,015)
135,751
1.44
0.02
(0.07)
1.39
1.42
0.02
(0.08)
1.36
99,316
101,441
97,876
99,620
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
The amounts shown above are not indicative of the effect in future years since the estimated fair value of options is amortized on
an accelerated basis to expense over the vesting period, and the number of options granted varies from year to year.
We estimated the fair values using the Black-Scholes option-pricing model, modified for dividends and using the following
assumptions:
Risk-free interest rate
Expected dividend yield
Expected stock price volatility
Expected lives
2005
2004
2003
3.97%
1.29%
34.50%
3.6 yrs.
2.83%
1.54%
39.70%
5.2 yrs.
2.86%
2.10%
40.00%
5.0 yrs.
Omnibus stock incentive plan
In April 2004, the Omnibus Stock Incentive Plan as Amended and Restated (the Plan) was approved by shareholders. The Plan
authorizes the issuance of additional shares of our common stock and extends through April 2014. The Plan allows for the granting
of:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
nonqualified stock options;
incentive stock options;
non-vested shares;
rights to non-vested shares;
(cid:120)
(cid:120)
(cid:120)
(cid:120)
incentive compensation units (ICUs);
stock appreciation rights;
performance shares; and
performance units.
The Plan is administered by our Compensation Committee (the Committee), which is made up of independent members of our Board
of Directors. Employees eligible to receive awards under the Plan are managerial, administrative, or other key employees who are in
a position to make a material contribution to the continued profitable growth and long-term success of Pentair. The Committee has
the authority to select the recipients of awards, determine the type and size of awards, establish certain terms and conditions of award
grants, and take certain other actions as permitted under the Plan. The Plan provides that no more than 20 percent of the total shares
available for issuance under the Plan may be used to make awards other than stock options and limits the Committee’s authority to
reprice awards or to cancel and reissue awards at lower prices.
Non-qualified and incentive stock options
Under the Plan we may grant stock options to any eligible employee with an exercise price equal to the market value of the
shares on the dates the options were granted. Options generally vest over a three-year period commencing on the grant date and
expire ten years after the grant date. Option grants typically have a reload feature when shares are retired to pay the exercise
price, allowing individuals to receive additional options upon exercise equal to the number of shares retired.
Non-vested shares, rights to non-vested shares and ICUs
Under the Plan, eligible employees are awarded non-vested shares or rights to non-vested shares (awards) of our common
stock. Share awards generally vest from two to five years after issuance, subject to continuous employment and certain other
conditions. Non-vested share awards are valued at market value on the date of grant and are expensed over the vesting
period. Annual expense for the value of non-vested shares and rights to non-vested shares was $7.0 million in 2005, $6.3
million in 2004, and $3.7 million in 2003. ICUs are cash incentives granted to employees. Annual expense for ICUs was
$0.0 million in 2005, $0.3 million in 2004, and $0.9 million in 2003.
Stock appreciation rights, performance shares, and performance units
Under the Plan, the compensation committee is permitted to issue these awards; however, there have been no issuances of
these awards.
Outside directors nonqualified stock option plan
Nonqualified stock options are granted to outside directors under the Outside Directors Nonqualified Stock Option Plan (the
Directors Plan) with an exercise price equal to the market value of the shares on the option grant dates. Options generally vest over a
three-year period commencing on the grant date and expire ten years after the grant date. The Directors Plan extends to January
2008.
59
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
Stock options
The following table summarizes stock option activity under all plans:
Options Outstanding
Balance January 1
Granted
Exercised
Forfeited
Expired
Balance December 31
Options exercisable December 31
Shares available for grant December 31
(1) Weighted average
Shares
5,487,018
1,774,049
(1,296,432)
(4,256)
(87,997)
5,872,382
2,856,331
9,767,068
$
$
$
2005
Exercise
Price (1)
Remaining
Contractual Life (1)
Aggregate
Intrinsic Value
20.97
40.83
19.25
26.31
32.51
27.18
22.60
7.0 years
5.6 years
$
$
159,603,865
64,554,208
The weighted-average grant date fair value of options granted in 2005, 2004, and 2003 was estimated to be $11.44, $8.64, and
$5.76 per share, respectively. The total intrinsic value of options that were exercised during 2005, 2004, and 2003 was $29.5
million, $47.5 million, and $3.8 million, respectively. At December 31, 2005, the total unrecognized compensation cost related
to stock options was $9.8 million. This cost is expected to be recognized over a weighted average period of 9 months.
Cash received from option exercises for the years ended December 31, 2005, 2004, and 2003 was $8.4 million, $10.9 million,
and $5.8 million, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $10.7 million,
$17.2 million, and $1.7 million for the years ended December 31, 2005, 2004, and 2003, respectively.
The following table summarizes non-vested share activity under all plans:
Non-vested Shares Outstanding
Balance January 1
Granted
Vested
Forfeited
Balance December 31
(1) Weighted average
2005
Grant Date
Fair Value (1)
Shares
873,220
300,943
(159,147)
(19,224)
995,792
$
$
19.27
40.87
41.73
39.49
24.98
As of December 31, 2005, there was $12.5 million of unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.3
years. The total fair value of shares vested during the years ended December 31, 2005, 2004 and 2003, was $6.6 million, $12.4
million, and $3.8 million, respectively.
During 2005, we increased the contractual term of options for one individual resulting in additional compensation expense of
$0.4 million under SFAS 123R. In 2004, we recorded $4.4 million of compensation expense under APB 25 related to the
modification of option terms for employees terminated in association with our Tools Group divestiture.
14. Business Segments
We classify our continuing operations into the following business segments:
(cid:120) Water – manufactures and markets essential products and systems used in the movement, treatment, storage and enjoyment
of water. Water segment products include water and wastewater pumps; filtration and purification components and systems;
storage tanks and pressure vessels; and pool and spa equipment and accessories.
60
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
(cid:120)
(cid:120)
Technical Products – formerly referred to as Enclosures, designs, manufactures, and markets standard, modified and
custom enclosures that house and protect sensitive controls components; thermal management products; and accessories.
Applications served include industrial machinery, data communications, networking, telecommunications, test and
measurement, automotive, medical, security, defense, and general electronics. Products include metallic and composite
enclosures, cabinets, cases, subracks, backplanes, and associated thermal management systems.
Other – is primarily composed of unallocated corporate expenses, our captive insurance subsidiary, intermediate finance
companies, divested operations, and intercompany eliminations.
The accounting policies of our operating segments are the same as those described in the summary of significant accounting
policies. We evaluate performance based on the sales and operating income of the segments and use a variety of ratios to
measure performance. These results are not necessarily indicative of the results of operations that would have occurred had each
segment been an independent, stand-alone entity during the periods presented.
Financial information by reportable business segment is included in the following summary:
In thousands
Water
Technical Products
Other
Consolidated
Water
Technical Products
Other (1)
Consolidated
Water
Technical Products
Other
Consolidated
$
$
$
$
$
$
2005
2004
Net sales to external customers
2003
2,131,505
815,074
—
2,946,579
$
$
1,563,394
714,735
—
$
2,278,129
$
1,060,303
582,684
—
1,642,987
Identifiable assets (1)
$
$
2,501,297
640,729
111,729
3,253,755
2,497,980
503,322
119,273
3,120,575
$
Amortization
7,534
$
—
(33)
7,501
$
11,494
177
4,324
15,995
1,321,128
462,837
996,712
2,780,677
1,543
—
(1,166)
377
$
$
$
(1) All cash and cash equivalents are included in Other.
The following table presents certain geographic information:
In thousands
U.S./Canada
Europe
Asia and other
Consolidated
2005
2004
Net sales to external customers
2003
$
$
2,423,934
378,418
144,227
2,946,579
$
$
1,858,224
319,285
100,620
2,278,129
$
$
1,358,277
239,102
45,608
1,642,987
$
$
$
$
$
$
$
$
2005
2004
Operating income (loss)
2003
267,138
109,229
(53,295)
323,072
$
$
197,310
87,844
(37,912)
247,242
Depreciation
$
26,751
19,408
904
47,063
$
35,842
19,318
1,405
56,565
$
$
$
$
Capital expenditures
$
$
44,790
15,826
1,855
62,471
$
24,981
16,240
7,646
48,867
143,962
51,094
(24,846)
170,210
20,517
19,721
571
40,809
17,831
7,014
18,777
43,622
2003
175,361
42,167
15,578
233,106
$
$
$
2005
2004
Long-lived assets
235,021
53,701
23,117
311,839
$
$
249,299
62,025
24,978
336,302
Net sales are based on the location in which the sale originated. Long-lived assets represent property, plant, and equipment, net
of related depreciation.
We offer a broad array of products and systems to multiple markets and customers for which we do not have the financial
systems to track revenues by primary product category. However, our net sales by segment is representative of our sales by
major product category.
We sell our products through various distribution channels including wholesale and retail distributors, original equipment
manufacturers, and home centers. In our Water segment, no single customer accounted for more than 10 percent of segment
sales in 2005, one customer accounted for about 11 percent and 12 percent of segment sales in 2004 and 2003, respectively. In
our Technical Products segment, no single customer accounted for more than 10 percent of segment sales in 2005, 2004, or 2003.
61
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
15. Commitments and Contingencies
Operating lease commitments
Net rental expense under operating leases follows:
In thousands
Gross rental expense
Sublease rental income
Net rental expense
2005
2004
2003
$
$
33,651
(214)
33,437
$
$
27,712
(804)
26,908
$
$
24,407
(698)
23,709
Future minimum lease commitments under non-cancelable operating leases, principally related to facilities, vehicles, and
machinery and equipment are as follows:
In thousands
Minimum lease payments
Minimum sublease rentals
Net future minimum lease commitments
2006
26,317
(487)
25,830
$
$
2007
20,978
(407)
20,571
$
$
2008
17,219
(407)
16,812
$
$
2009
14,151
(339)
13,812
$
$
2010
11,633
—
11,633
$
$
Thereafter
22,555
$
—
22,555
$
Total
112,853
(1,640)
111,213
$
$
Environmental
We have been named as defendants, targets, or potentially responsible parties (PRPs) in a small number of environmental clean-ups, in
which our current or former business units have generally been given de minimis status. To date, none of these claims have resulted in
clean-up costs, fines, penalties, or damages in an amount material to our financial position or results of operations. We have disposed
of a number of businesses over the last ten years and in certain cases, such as the disposition of the Cross Pointe Paper Corporation
uncoated paper business in 1995, the disposition of the Federal Cartridge Company ammunition business in 1997, the disposition of
Lincoln Industrial in 2001, and the disposition of the Tools Group in 2004, we have retained responsibility and potential liability for
certain environmental obligations. We have received claims for indemnification from purchasers both of the paper business and the
ammunition business and have established what we believe to be adequate accruals for potential liabilities arising out of retained
responsibilities. We settled some of the claims in 2005 and 2003 and our recorded accrual was adequate.
In addition, there are pending environmental issues at a limited number of sites, including one site acquired in the acquisition of Essef
Corporation in 1999, which relates to operations no longer carried out at that site. We have established what we believe to be adequate
accruals for remediation costs at this and other sites. We do not believe that projected response costs will result in a material liability.
We may be named as a PRP at other sites in the future, for both divested and acquired businesses. When it is probable and it is
possible to provide reasonable estimates of our liability, with respect to environmental sites, provisions have been made in accordance
with generally accepted accounting principles in the United States. As of December 31, 2005 and 2004, our reserves for such
environmental liabilities were approximately $6.4 million and $9.4 million, respectively, measured on an undiscounted basis. We
cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmental
clean-up costs and liabilities will not exceed the amount of our current reserves.
Litigation
We have been made parties to a number of actions filed or have been given notice of potential claims relating to the conduct of
our business, including those pertaining to commercial disputes, product liability, environmental, safety and health, patent
infringement, and employment matters.
We comply with the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for
Contingencies, and related guidance, and record liabilities for an estimated loss from a loss contingency where the outcome of the
matter is probable and can be reasonably estimated. Factors that are considered when determining whether the conditions for
accrual have been met include the (a) nature of the litigation, claim, or assessment, (b) progress of the case, including progress
after the date of the financial statements but before the issuance date of the financial statements, (c) opinions of legal counsel, and
(d) management’s intended response to the litigation, claim, or assessment. Where the reasonable estimate of the probable loss is
a range, we record the most likely estimate of the loss. When no amount within the range is a better estimate than any other
amount, however, the minimum amount in the range is accrued. Gain contingencies are not recorded until realized.
While we believe that a material adverse impact on our consolidated financial position, results of operations, or cash flows from
any such future charges is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future adverse
ruling or unfavorable development could result in future charges that could have a material adverse impact. We do and will
continue to periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make
appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates
62
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
of the potential impact on our consolidated financial position, results of operations, and cash flows for the proceedings and claims
could change in the future.
Product liability claims
We are subject to various product liability lawsuits and personal injury claims. A substantial number of these lawsuits and claims
are insured and accrued for by Penwald our captive insurance subsidiary. Penwald records a liability for these claims based on
actuarial projections of ultimate losses. For all other claims, accruals covering the claims are recorded, on an undiscounted basis,
when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing
information. The accruals are adjusted periodically as additional information becomes available. We have not experienced
significant unfavorable trends in either the severity or frequency of product liability lawsuits or personal injury claims.
Horizon litigation
Twenty-eight separate lawsuits involving 29 primary plaintiffs, a class action, and claims for indemnity by Celebrity Cruise Lines, Inc.
(Celebrity) were brought against Essef Corporation (Essef) and certain of its subsidiaries prior to our acquisition of Essef in August
1999. Celebrity has alleged that it had sustained economic damages due to loss of use of the M/V Horizon while it was dry-docked.
The claims against Essef and its involved subsidiaries were based upon the allegation that Essef designed, manufactured, and marketed
two sand swimming pool filters that were installed as a part of the spa system on the Horizon, and allegations that the spa and filters
contained Legionnaire’s disease bacteria that infected certain passengers on cruises from December 1993 through July 1994.
The individual and class claims by passengers were tried and resulted in an adverse jury verdict finding liability on the part of the Essef
defendants (70%) and Celebrity and its sister company, Fantasia (together 30%).
After expiration of post-trial appeals, we paid all outstanding punitive damage awards of $7.0 million in the Horizon cases, plus
interest of approximately $1.6 million, in January 2004. We had reserved for the amount of punitive damages awarded at the time of
the Essef acquisition. A reserve for the $1.6 million interest cost was recorded in 2003. All of the personal injury cases have now been
resolved through either settlement or trial.
The only remaining unresolved claims in this case are those brought by Celebrity for damages resulting from the outbreak. Celebrity
filed an amended complaint seeking attorney fees and costs for prior litigation as well as out-of-pocket losses, lost profits, and
loss of business enterprise value. Discovery commenced late in 2004, and was completed in August 2005. Celebrity’s claims for
damages exceed $185 million. Assuming matters of causation, standing, contribution and proof are decided against it, Essef’s
experts believe that damages should amount to no more than approximately $16 to $25 million. Dispositive motions in this
matter were filed in August 2005, which were decided in December 2005. Celebrity’s motion for indemnity from Essef for
payments made by Celebrity for passenger claims of approximately $2.3 million was denied. Essef’s motion for dismissal of
certain damage claims was denied without prejudice to renewal in conjunction with both parties’ motions to exclude certain
expert testimony. We expect these motions to be adjudicated in March 2006. Trial has been scheduled for April 24, 2006. We
believe our reserves for any liability to Celebrity are adequate and intend to vigorously defend against these claims.
Warranties and guarantees
In connection with the disposition of our businesses or product lines, we may agree to indemnify purchasers for various potential
liabilities relating to the sold business, such as pre-closing tax, product liability, warranty, environmental, or other obligations.
The subject matter, amounts, and duration of any such indemnification obligations vary for each type of liability indemnified and
may vary widely from transaction to transaction. Generally, the maximum obligation under such indemnifications is not
explicitly stated and as a result, the overall amount of these obligations cannot be reasonably estimated. Historically, we have not
made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss
would not have a material effect on our financial condition or results of operations.
In accordance with FASB Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Others, we recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee.
We have guaranteed the indebtedness of one customer, whose outstanding debt at December 31, 2005 was $1.1 million. The debt
amount is a declining balance and scheduled to be paid in full by June 2007. The liability relating to the guarantee is not
material.
We provide service and warranty policies on our products. Liability under service and warranty policies is based upon a review
of historical warranty and service claim experience. Adjustments are made to accruals as claim data and historical experience
warrant.
63
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
The changes in the carrying amount of service and product warranties for the year ended December 31, 2005 and 2004 are as
follows:
In thousands
Balance at beginning of the year
Service and product warranty provision
Payments
Acquired
Translation
Balance at end of the year
2005
2004
32,524
40,576
(44,123)
2,231
2,343
33,551
$
$
14,427
35,141
(32,237)
14,899
294
32,524
$
$
Stand-by letters of credit
In the ordinary course of business, predominantly for contracts and bids involving municipal pump products, we are required to
commit to bonds that require payments to our customers for any non-performance. The outstanding face value of the bonds
fluctuates with the value of our projects in process and in our backlog. In addition, we issue financial stand-by letters of credit to
secure our performance to third parties under self-insurance programs and certain legal matters. As of December 31, 2005, the
outstanding value of these instruments totaled $38.8 million. As of December 31, 2004, the outstanding value of these
instruments totaled $64.9 million, which included a $38.9 million stand-by letter of credit pertaining to an indemnified legal
matter that was resolved in our favor during 2005, eliminating the bond requirement.
16. Selected Quarterly Financial Data (Unaudited)
In the fourth quarter of 2005, we adopted SFAS 123R, Stock-Based Payment, using the modified retrospective method as of
January 1, 2005. As a result, quarterly financial information for 2005 has been restated from the previously filed quarterly
financial information for the impact of the adoption of SFAS 123R, see Note 13 for the reconciliation. As we did not
retrospectively adopt SFAS 123R for all periods, the 2004 quarterly financial data remains unmodified.
The following table represents the 2005 quarterly financial information restated for the adoption of SFAS 123R:
In thousands, except per-share data
Net sales
Gross profit
Operating income
Income from continuing operations
Income from discontinued operations, net of tax
Loss on disposal of discontinued operations, net of tax
Net income
Earnings per common share (1)
Basic
Continuing operations
Discontinued operations
Basic earnings per common share
Diluted
Continuing operations
Discontinued operations
Diluted earnings per common share
First
709,635
204,138
72,086
40,181
—
—
40,181
0.40
—
0.40
0.39
—
0.39
$
$
$
$
$
Second
788,523
235,233
107,234
61,379
—
—
61,379
0.61
—
0.61
0.60
—
0.60
$
$
$
$
$
2005
Third
716,308
200,841
76,880
44,533
—
—
44,533
0.44
—
0.44
0.43
—
0.43
$
$
$
$
$
Fourth
732,113
207,809
66,872
38,956
—
—
38,956
0.39
—
0.39
0.38
—
0.38
$
$
$
$
$
$
$
$
$
$
Year
2,946,579
848,021
323,072
185,049
—
—
185,049
1.84
—
1.84
1.80
—
1.80
(1) Amounts may not total to annual earnings because each quarter and year are calculated separately based on basic and diluted weighted-average
common shares outstanding during that period.
64
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
The following table represents the 2005 quarterly financial information as previously reported:
In thousands, except per-share data
Net sales
Gross profit
Operating income
Income from continuing operations
Income from discontinued operations, net of tax
Loss on disposal of discontinued operations, net of tax
Net income
Earnings per common share
Basic
Continuing operations
Discontinued operations
Basic earnings per common share
Diluted
Continuing operations
Discontinued operations
Diluted earnings per common share
First
709,635
204,138
76,373
43,305
—
—
43,305
0.43
—
0.43
0.42
—
0.42
$
$
$
$
$
2005
Second
788,523
235,233
104,978
64,522
—
—
64,522
0.64
—
0.64
0.63
—
0.63
$
$
$
$
$
Third
716,308
200,841
80,776
47,375
—
—
47,375
0.47
—
0.47
0.46
—
0.46
$
$
$
$
$
The following table represents the 2004 quarterly financial information:
In thousands, except per-share data
Net sales
Gross profit
Operating income
Income from continuing operations
Income from discontinued operations, net of tax
Loss on disposal of discontinued operations, net of tax
Net income
Earnings per common share (1)
Basic
Continuing operations
Discontinued operations
Basic earnings per common share
Diluted
Continuing operations
Discontinued operations
Diluted earnings per common share
First
488,453
140,073
50,110
28,242
11,968
—
40,210
0.29
0.12
0.41
0.28
0.12
0.40
$
$
$
$
$
Second
530,433
161,651
70,984
41,993
13,470
—
55,463
0.42
0.14
0.56
0.42
0.13
0.55
$
$
$
$
$
2004
Third
607,767
169,784
64,099
33,092
14,810
—
47,902
0.33
0.15
0.48
0.32
0.15
0.47
$
$
$
$
$
Fourth
651,476
183,202
62,049
33,697
—
(6,047)
27,650
0.34
(0.07)
0.27
0.33
(0.07)
0.26
$
$
$
$
$
$
$
$
$
$
Year
2,278,129
654,710
247,242
137,024
40,248
(6,047)
171,225
1.38
0.34
1.72
1.35
0.33
1.68
(1) Amounts may not total to annual earnings because each quarter and year are calculated separately based on basic and diluted weighted-average
common shares outstanding during that period.
65
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
17. Financial Statements of Subsidiary Guarantors
The $250 million Senior Notes due 2009 are jointly and severally guaranteed by domestic subsidiaries (the “Guarantor
Subsidiaries”), each of which is directly or indirectly wholly-owned by Pentair (the “Parent Company”). The following
supplemental financial information sets forth the condensed consolidated balance sheets as of December 31, 2005 and 2004, the
related condensed consolidated statements of income and statements of cash flows for each of the three years in the period ended
December 31, 2005, for the Parent Company, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries, and total consolidated
Pentair and subsidiaries.
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
For the year ended December 31, 2005
In thousands
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative
Research and development
Operating (loss) income
Gain on sale of investment
Net interest (income) expense
Income before income taxes
Provision for income taxes
Net income
Parent
Company
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
$
$
—
381
(381)
51,370
—
(51,751)
5,435
(63,743)
17,427
6,057
11,370
$
$
2,430,598
1,755,604
674,994
346,026
35,589
293,379
—
115,379
178,000
60,823
117,177
$
$
640,918
461,091
179,827
82,446
10,453
86,928
—
(1,163)
88,091
31,589
56,502
$
$
(124,937)
(118,518)
(6,419)
(935)
—
(5,484)
—
(5,484)
—
—
—
$
$
2,946,579
2,098,558
848,021
478,907
46,042
323,072
5,435
44,989
283,518
98,469
185,049
66
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
December 31, 2005
In thousands
Assets
Current assets
Cash and cash equivalents
Accounts and notes receivable, net
Inventories
Deferred tax assets
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Other assets
Investments in subsidiaries
Goodwill
Intangibles, net
Other
Total other assets
Total assets
Liabilities and Shareholders' 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
Due to / (from) affiliates
Other non-current liabilities
Non-current liabilities of discontinued operations
Total liabilities
Parent
Company
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
$
$
$
$
3,004
543
—
74,116
7,658
85,321
$
4,362
338,439
267,007
34,039
8,798
652,645
$
41,134
118,896
82,305
8,154
12,999
263,488
$
—
(34,031)
—
(67,338)
(5,061)
(106,430)
48,500
423,847
349,312
48,971
24,394
895,024
5,681
228,858
77,300
—
311,839
$
$
1,983,857
—
—
49,100
2,032,957
2,123,959
1,166
836
13,869
—
—
886
—
31,547
48,304
745,162
75,743
24,155
—
(356,365)
31,350
—
568,349
$
$
42,174
1,488,425
240,084
7,157
1,777,840
2,659,343
76,269
167,256
57,006
28,664
—
7,195
42,262
61,318
439,970
1,710,648
28,386
49,794
167,544
64,324
881
—
2,461,547
$
$
84,804
229,782
26,449
5,895
346,930
687,718
19,862
72,531
24,677
14,887
192
9,437
3,112
23,223
167,921
12,344
48,651
—
25,579
246,212
38,224
2,029
540,960
$
$
(2,110,835)
—
—
—
(2,110,835)
(2,217,265)
(93,160)
(33,303)
—
—
—
—
—
(5,062)
(131,525)
(1,719,677)
—
—
(67,338)
45,829
—
—
(1,872,711)
—
1,718,207
266,533
62,152
2,046,892
3,253,755
4,137
207,320
95,552
43,551
192
17,518
45,374
111,026
524,670
748,477
152,780
73,949
125,785
—
70,455
2,029
1,698,145
Shareholders' equity
Total liabilities and shareholders' equity
1,555,610
2,123,959
$
197,796
2,659,343
$
$
146,758
687,718
$
(344,554)
(2,217,265)
$
1,555,610
3,253,755
67
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the year ended December 31, 2005
In thousands
Operating activities
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation
Amortization
Deferred income taxes
Stock compensation
Excess tax benefits from stock-based compensation
Gain on sale of investment
Intercompany dividends
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 used for discontinued operations
Net cash provided by operating activities
Investing activities
Capital expenditures
Proceeds from sales of property and equipment
Acquisitions, net of cash acquired
Investment in subsidiaries
Divestitures
Proceeds from sale of investments
Other
Net cash provided by (used for) investing activities
Financing activities
Proceeds from long-term debt
Repayment of long-term debt
Proceeds from exercise of stock options
Excess tax benefit from stock-based compensation
Repurchases of common stock
Dividends paid
Net cash used for financing activities
Effect of exchange rate changes on cash
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Parent
Company
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
$
11,370
$
117,177
$
56,502
$
—
$
185,049
1,406
4,324
(12,161)
11,350
(4,072)
(5,435)
23,890
2,966
—
1,524
(6,876)
(13,700)
—
14,252
7,035
7,901
(8,794)
34,980
—
34,980
(1,854)
—
(150,534)
139,641
(10,383)
23,835
(100)
605
413,279
(395,978)
8,380
8,676
(25,000)
(53,134)
(43,777)
43,669
10,652
14,745
10,954
(3,929)
—
(1,050)
(13,346)
(16,365)
(131)
8,132
(5,882)
(1,150)
(8,880)
(10,497)
4,690
1,603
150,392
—
150,392
(43,706)
16,532
—
(122,393)
289
—
(2,275)
(151,553)
—
—
—
—
—
—
—
11,490
1,019
3,314
1,882
(675)
—
(22,840)
(23,120)
(2,836)
(538)
17,958
(1,812)
51
4,985
7,065
3,921
6,752
63,118
(632)
62,486
(16,911)
579
—
(17,248)
(61)
—
304
(33,337)
—
—
—
—
—
—
—
8,901
709
2,295
3,004
$
(47)
(1,208)
5,570
4,362
$
$
(11,645)
17,504
23,630
41,134
$
—
—
—
—
—
—
—
12,554
—
(975)
(12,585)
—
—
—
1,006
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
56,565
15,995
5,898
24,186
(8,676)
(5,435)
—
(20,946)
(19,201)
(120)
6,629
(21,394)
(1,099)
10,357
4,609
16,512
(439)
248,490
(632)
247,858
(62,471)
17,111
(150,534)
—
(10,155)
23,835
(2,071)
(184,285)
413,279
(395,978)
8,380
8,676
(25,000)
(53,134)
(43,777)
(2,791)
17,005
31,495
48,500
68
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
For the year ended December 31, 2004
In thousands
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative
Research and development
Operating (loss) income
Net interest (income) expense
Income (loss) before income taxes
Provision (benefit) for income taxes
Income (loss) from continuing operations
Income from discontinued operations, net of tax
Loss on disposal of discontinued operations, net of tax
Net (loss) income
Parent
Company
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
$
$
—
186
(186)
64,951
—
(65,137)
(25,713)
(39,424)
(15,162)
(24,262)
—
—
(24,262)
$
$
1,868,579
1,358,877
509,702
253,173
23,673
232,856
55,410
177,446
63,791
113,655
—
—
113,655
$
$
491,260
344,845
146,415
59,112
7,780
79,523
7,513
72,010
24,379
47,631
40,248
(6,047)
81,832
$
$
(81,710)
(80,489)
(1,221)
(1,221)
—
—
—
—
—
—
—
—
—
$
$
2,278,129
1,623,419
654,710
376,015
31,453
247,242
37,210
210,032
73,008
137,024
40,248
(6,047)
171,225
69
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
December 31, 2004
In thousands
Assets
Current assets
Cash and cash equivalents
Accounts and notes receivable, net
Inventories
Current assets of discontinued operations
Deferred tax assets
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Other assets
Non-current assets of discontinued operations
Investments in subsidiaries
Goodwill
Intangibles, net
Other
Total other assets
Total assets
Liabilities and Shareholders' 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
Due to / (from) affiliates
Other non-current liabilities
Non-current liabilities of discontinued operations
Total liabilities
Parent
Company
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
$
$
$
$
2,295
1,003
—
—
58,469
8,558
70,325
$
5,570
305,060
236,057
—
31,933
8,484
587,104
23,630
111,872
87,619
—
9,830
13,428
246,379
5,111
243,672
87,519
$
$
—
1,881,872
—
—
69,479
1,951,351
2,026,787
1,166
5,350
18,589
—
—
20,246
—
34,092
79,443
720,545
58,289
25,160
(249)
(339,363)
35,168
—
578,993
$
$
—
44,718
1,382,276
229,754
6,110
1,662,858
2,493,634
369
148,266
57,101
27,426
—
(15,871)
39,306
52,586
309,183
1,668,639
25,432
44,507
163,326
182,226
2,403
—
2,395,716
393
59,918
238,128
28,372
4,624
331,435
665,333
14,904
62,391
29,131
15,098
192
23,020
2,312
22,470
169,518
12,491
51,635
—
30,954
229,132
33,233
3,054
530,017
$
$
$
$
$
$
—
(21,476)
—
—
(51,158)
(6,037)
(78,671)
—
—
(1,986,508)
—
—
—
(1,986,508)
(2,065,179)
(4,482)
(20,718)
—
—
—
—
—
(6,065)
(31,265)
(1,677,527)
—
—
(51,158)
(71,995)
—
—
(1,831,945)
31,495
396,459
323,676
—
49,074
24,433
825,137
336,302
393
—
1,620,404
258,126
80,213
1,959,136
3,120,575
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
1,672,781
Shareholders' equity
Total liabilities and shareholders' equity
1,447,794
2,026,787
$
97,918
2,493,634
$
$
135,316
665,333
$
(233,234)
(2,065,179)
$
1,447,794
3,120,575
70
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the year ended December 31, 2004
In thousands
Operating activities
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Net income from discontinued operations
Loss on disposal of discontinued operations
Depreciation
Amortization
Deferred income taxes
Stock-based compensation
Intercompany dividends
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
Acquisitions, net of cash acquired
Investment in subsidiaries
Divestitures
Equity investments
Net cash provided by (used for) investing activities
Financing activities
Net short-term borrowings (repayments)
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 financing activities
Parent
Company
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
$
(24,262)
$
113,655
$
81,832
$
—
$
171,225
—
—
904
4,569
(1,122)
1,743
28,475
1,167
—
(3,527)
3,823
(2,709)
—
(11,633)
(242)
4,980
6,371
8,537
—
8,537
(1,886)
(858,774)
230,841
773,099
—
143,280
(4,162)
850,000
(850,000)
343,316
(440,518)
10,862
(4,200)
(43,128)
(137,830)
—
—
36,763
2,726
15,759
4,249
(9,475)
9,858
(43,865)
2,869
20,412
4,384
1,942
(5,778)
7,299
3,168
1,379
165,345
—
165,345
(32,254)
—
(131,066)
300
28
(162,992)
—
—
—
—
—
—
—
—
—
(40,248)
6,047
9,396
206
2,099
353
(19,000)
7,778
(8,131)
4,728
394
2,921
1,051
23,763
(42)
3,360
(956)
75,551
13,928
89,479
(14,727)
(10,381)
(133,246)
—
32
(158,322)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8,115
—
(1,894)
(7,355)
—
—
—
1,864
—
—
730
—
730
—
—
33,471
—
—
33,471
—
—
—
—
—
—
—
—
—
(40,248)
6,047
47,063
7,501
16,736
6,345
—
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)
(869,155)
—
773,399
60
(144,563)
(4,162)
850,000
(850,000)
343,316
(440,518)
10,862
(4,200)
(43,128)
(137,830)
1,808
(16,494)
47,989
31,495
Effect of exchange rate changes on cash
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
(15,065)
(1,078)
3,373
2,295
$
$
62
2,415
3,155
5,570
$
51,012
(17,831)
41,461
23,630
$
(34,201)
—
—
—
$
71
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
For the year ended December 31, 2003
In thousands
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative
Research and development
Operating (loss) income
Net interest (income) expense
Income (loss) before income taxes
Provision (benefit) for income taxes
Income (loss) from continuing operations
Income from discontinued operations, net of tax
Loss on disposal of discontinued operations, net of tax
Net (loss) income
Parent
Company
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
$
$
—
—
—
54,206
—
(54,206)
(41,018)
(13,188)
(6,983)
(6,205)
—
—
(6,205)
$
$
1,358,874
1,006,638
352,236
173,308
17,271
161,657
48,591
113,066
35,044
78,022
—
—
78,022
$
$
326,570
234,850
91,720
23,300
5,661
62,759
18,822
43,937
17,604
26,333
46,138
(2,936)
69,535
$
$
(42,457)
(44,731)
2,274
2,274
—
—
—
—
—
—
—
—
—
$
$
1,642,987
1,196,757
446,230
253,088
22,932
170,210
26,395
143,815
45,665
98,150
46,138
(2,936)
141,352
72
Pentair, Inc. and subsidiaries
Notes to consolidated financial statements (cid:127) (continued)
Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the year ended December 31, 2003
In thousands
Operating activities
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Net income from discontinued operations
Loss on disposal of discontinued operations
Depreciation
Amortization
Deferred income taxes
Stock compensation
Intercompany dividends
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
Acquisitions, net of cash acquired
Investment in subsidiaries
Divestitures
Equity investments
Other
Net cash provided by (used for) investing activities
Financing activities
Net short-term borrowings (repayments)
Proceeds from long-term debt
Repayment of long-term debt
Proceeds from exercise of stock options
Repurchases of common stock
Dividends paid
Net cash provided by financing activities
Parent
Company
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
$
(6,205)
$
78,022
$
69,535
$
—
$
141,352
—
—
571
141
354
2,315
51,571
688
—
(8,891)
(2,247)
470
—
7,685
11,513
(3,586)
(152)
54,227
—
54,227
(4,159)
(228,647)
121,289
(2,400)
—
48
(113,869)
(873)
780,857
(709,886)
5,795
(1,589)
(40,494)
33,810
—
—
32,327
236
13,110
668
(4,936)
(11,847)
12,653
(605)
(8,030)
4,042
(2,281)
(12,316)
(684)
(936)
4,466
103,889
—
103,889
(18,639)
573
(89,880)
—
—
—
(107,946)
—
—
—
—
—
—
—
(46,138)
2,936
7,911
—
17,855
1,020
(46,635)
3,018
521
1,677
561
301
525
10,068
(11,132)
2,414
2,455
16,892
87,907
104,799
(20,824)
(1,020)
(74,588)
—
(5,294)
—
(101,726)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,061
—
3,038
(3,042)
—
—
—
(3,033)
—
—
—
24
24
—
—
43,179
—
—
—
43,179
—
—
—
—
—
—
—
(46,138)
2,936
40,809
377
31,319
4,003
—
(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)
(229,094)
—
(2,400)
(5,294)
48
(280,362)
(873)
780,857
(709,886)
5,795
(1,589)
(40,494)
33,810
(8,046)
8,341
39,648
47,989
Effect of exchange rate changes on cash
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
23,015
(2,817)
6,190
3,373
$
2,566
(1,491)
4,646
3,155
$
$
9,576
12,649
28,812
41,461
$
(43,203)
—
—
—
$
73
ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
ITEM 9A.
CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and procedures as of the end of the year ended December 31,
2005, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (“the Exchange Act”). Based upon their evaluation, our
Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as
of the year ended December 31, 2005 to ensure that information required to be disclosed by us in the reports we file or submit
under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and
Exchange Commission’s rules and forms, and to ensure that information required to be disclosed by us in the reports we file or
submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and
principal financial officers, as appropriate to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control Over Financial Reporting
The report of management required under this ITEM 9A is contained in ITEM 8 of this Annual Report on Form 10-K under the
caption “Management’s Report on Internal Control Over Financial Reporting.”
Attestation Report of Registered Public Accounting Firm
The attestation report required under this ITEM 9A is contained in ITEM 8 of this Annual Report on Form 10-K under the
caption “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2005
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
74
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this item with respect to directors is contained in our Proxy Statement for our 2006 annual meeting of
shareholders under the captions “Corporate Governance Matters”, “Election of Directors” and “Section 16(a) Beneficial Ownership
Reporting Compliance” and is incorporated herein by reference.
Information required under this item with respect to executive officers is contained in Part I of this Form 10-K under the caption
“Executive Officers of the Registrant.”
Our Board of Directors has adopted Pentair’s Code of Business Conduct and Ethics and designated it as the code of ethics for the
Company’s Chief Executive Officer and senior financial officers in accordance with SEC rules. The Code of Business Conduct
and Ethics also applies to all employees and directors in accordance with New York Stock Exchange Listing Standards. We have
posted a copy of Pentair’s Code of Business Conduct and Ethics on our website at www.pentair.com/code.html. Pentair’s Code
of Business Conduct and Ethics is also available in print to any shareholder who requests it in writing from our Corporate
Secretary. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers
from, Pentair’s Code of Business Conduct and Ethics by posting such information on our website at
www.pentair.com/coder.html.
We are not including the information contained on our website as part of, or incorporating it by reference into, this report.
ITEM 11.
EXECUTIVE COMPENSATION
Information required under this item is contained in our Proxy Statement for our 2006 annual meeting of shareholders under the
captions “Election of Directors” and “Executive Compensation” and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is contained in our Proxy Statement for our 2006 annual meeting of shareholders under the
captions “Security Ownership of Management and Beneficial Ownership” and “Securities Authorized for Issuance under Equity
Compensation Plans” and is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No matters require disclosure here.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required under this item is contained in our Proxy Statement for our 2006 annual meeting of shareholders under the
caption “Independent Auditor Fees” and is incorporated herein by reference.
75
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
List of documents filed as part of this report:
(1)
Financial Statements
Consolidated Statements of Income for the Years Ended December 31, 2005, 2004, and 2003
Consolidated Balance Sheets as of December 31, 2005 and December 31, 2004
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004, and 2003
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2005, 2004,
and 2003
Notes to Consolidated Financial Statements
(2)
Financial Statement Schedules
Schedule II (cid:16) Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and
Exchange Commission have been omitted because they are not applicable or the required information is
shown in the financial statements or notes thereto.
(3)
Exhibits
The exhibits of this Annual Report on Form 10-K included herein are set forth on the attached Exhibit
Index beginning on page 79.
76
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on February 27, 2006.
SIGNATURES
PENTAIR, INC.
By /s/ David D. Harrison
David D. Harrison
Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated, on February 27, 2006.
Signature
Title
/s/ Randall J. Hogan
Randall J. Hogan
/s/ David D. Harrison
David D. Harrison
*
Glynis A. Bryan
*
Richard J. Cathcart
*
Barbara B. Grogan
*
Charles A. Haggerty
*
David A. Jones
*
Augusto Meozzi
*
Ronald L. Merriman
*
William T. Monahan
*
Karen E. Welke
* By /s/ Louis L. Ainsworth
Louis L. Ainsworth
Attorney-in-fact
Chairman and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Director
Director
Director
Director
Director
Director
Director
Director
Director
77
Schedule II – Valuation and Qualifying Accounts
Pentair, Inc. and subsidiaries
In thousands
Allowances for doubtful accounts
Year ended December 31, 2005
Year ended December 31, 2004
Year ended December 31, 2003
Balance
beginning
of period
Additions
charged to
costs and
expenses
Other
changes
add (deduct)
Balance
end of
period
Deductions -
$
$
$
18,775
12,564
10,525
$
$
$
1,388
2,663
1,973
$
$
$
5,931
2,333
1,664
(1)
(1)
(1)
$
$
$
(215)
5,881
1,730
(2)
(2)
(2)
$
$
$
14,017
18,775
12,564
(1) Uncollectible accounts written off, net of recoveries.
(2) Result of acquisitions and foreign currency effects.
78
Exhibit Index
Exhibit
Number
Exhibit
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.2
10.3
10.4
10.5
Second Restated Articles of Incorporation as amended through May 1, 2002 (Incorporated by reference to
Exhibit 3.1 contained in Pentair’s Quarterly Report on Form 10-Q for the quarterly period ended March 30,
2002).
Third Amended and Superceding By-Laws as amended through May 1, 2002 (Incorporated by reference to
Exhibit 3.2 contained in Pentair’s Quarterly Report on Form 10-Q for the quarterly period ended March 30,
2002).
Statement of Resolution of the Board of Directors Establishing the Series and Fixing the Relative Rights and
Preferences of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 3.1
contained in Pentair’s Current Report on Form 8-K dated December 10, 2004).
Rights Agreement dated as of December 10, 2004 between Pentair, Inc. and Wells Fargo Bank, N.A.
(Incorporated by reference to Exhibit 4.1 contained in Pentair’s Registration Statement on Form 8-A, dated
as of December 31, 2004).
Form of Indenture, dated June 1, 1999, between Pentair, Inc. and U.S. Bank National Association, as Trustee
Agent (Incorporated by reference to Exhibit 4.2 contained in Pentair’s Annual Report on Form 10-K for the
year ended December 31, 2000).
Note Purchase Agreement dated as of July 25, 2003 for $50,000,000 4.93% Senior Notes, Series A, due
July 25, 2013, $100,000,000 Floating Rate Senior Notes, Series B, due July 25, 2013, and $50,000,000
5.03% Senior Notes, Series C, due October 15, 2013 (Incorporated by reference to Exhibit 10.22
contained in Pentair’s Current Report on Form 8-K dated July 25, 2003).
Supplemental Indenture between Pentair, Inc. and U.S. Bank National Association, as Trustee, dated as
of August 2, 2004 (Incorporated by reference to Exhibit 4.1 contained in Pentair’s Quarterly Report on
Form 10-Q for the quarterly period ended October 2, 2004).
Second Amended and Restated Credit Agreement dated as of March 4, 2005 among Pentair, Inc.,
various subsidiaries of Pentair, Inc. and various financial institutions therein and Bank of America, N.A.,
as Administrative Agent and Issuing Bank. (Incorporated by reference to Exhibit 99.1 contained in
Pentair’s Current Report on Form 8-K dated March 4, 2005).
First Amendment to Note Purchase agreement dated July 19, 2005 by and among Pentair, Inc. and the
undersigned holders (Incorporated by reference to Exhibit 4 contained in Pentair’s Quarterly Report on Form
10-Q for the quarterly period ended July 2, 2005).
Pentair’s Supplemental Employee Retirement Plan as Amended and Restated effective August 23, 2000
(Incorporated by reference to Exhibit 10.1 contained in Pentair’s Current Report on Form 8-K filed
September 21, 2000).*
Pentair’s 1999 Supplemental Executive Retirement Plan as Amended and Restated effective August 23,
2000 (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Current Report on Form 8-K filed
September 21, 2000).*
Pentair’s Restoration Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to
Exhibit 10.3 contained in Pentair’s Current Report on Form 8-K filed September 21, 2000).*
Amended and Restated Pentair, Inc. Outside Directors Nonqualified Stock Option Plan as amended through
February 27, 2002 (Incorporated by reference to Exhibit 10.7 contained in Pentair’s Annual Report on Form
10-K for the year ended December 31, 2001).*
Pentair, Inc. Non-Qualified Deferred Compensation Plan effective January 1, 1996 (Incorporated by
reference to Exhibit 10.17 contained in Pentair’s Annual Report on Form 10-K for the year ended December
31, 1995).*
79
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
Trust Agreement for Pentair, Inc. Non-Qualified Deferred Compensation Plan between Pentair, Inc. and
State Street Bank and Trust Company (Incorporated by reference to Exhibit 10.18 contained in Pentair’s
Annual Report on Form 10-K for the year ended December 31, 1995).*
Amendment effective August 23, 2000 to Pentair’s Non-Qualified Deferred Compensation Plan effective
January 1, 1996 (Incorporated by reference to Exhibit 10.8 contained in Pentair’s Current Report on Form 8-
K filed September 21, 2000).*
Pentair, Inc. Executive Officer Performance Plan as Amended and Restated, effective January 1, 2003
(Incorporated by reference to Appendix 1 contained in Pentair’s Proxy Statement for its 2003 annual meeting
of shareholders).*
Pentair's Management Incentive Plan as amended and restated January 1, 2002 (Incorporated by reference to
Exhibit 10.16 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 2001).*
Amendment effective January 1, 2003 to Pentair's Management Incentive Plan (Incorporated by reference to
Exhibit 10.15 contained in Pentair’s annual Report on Form 10-K for the year ended December 31, 2003).*
Pentair's Flexible Perquisite Program as amended effective January 1, 1989 (Incorporated by reference to
Exhibit 10.20 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 1989).*
Form of Key Executive Employment and Severance Agreement effective August 23, 2000 for Randall J.
Hogan (Incorporated by reference to Exhibit 10.11 contained in Pentair’s Current Report on Form 8-K filed
September 21, 2000).*
Form of Key Executive Employment and Severance Agreement effective August 23, 2000 for Louis
Ainsworth, Richard J. Cathcart, Michael V. Schrock, Karen A. Durant, David D. Harrison, Frederick S.
Koury, Michael G. Meyer, Jack J. Dempsey, and Charles M. Brown (Incorporated by reference to Exhibit
10.13 contained in Pentair’s Current Report on Form 8-K filed September 21, 2000).*
Employment Agreement dated October 17, 2001, between Pentair, Inc. and Richard J. Cathcart.
(Incorporated by reference to Exhibit 10.31 contained in Pentair’s Quarterly Report on Form 10-Q for the
quarterly period ended September 29, 2001).*
Pentair, Inc. International Stock Purchase and Bonus Plan, as Amend and Restated, effective May 1,
2004 (Incorporated by reference to Appendix I contained in Pentair’s Proxy Statement for its 2004
annual meeting of shareholders). *
Pentair, Inc. Compensation Plan for Non-Employee Directors, as Amended and Restated, effective May
1, 2004 (Incorporated by reference to Appendix F contained in Pentair’s Proxy Statement for its 2004
annual meeting of shareholders). *
Pentair, Inc. Omnibus Stock Incentive Plan, as Amended and Restated, effective May 1, 2004
(Incorporated by reference to Appendix G contained in Pentair’s Proxy Statement for its 2004 annual
meeting of shareholders). *
Pentair, Inc. Employee Stock Purchase and Bonus Plan, as Amended and Restated, effective May 1,
2004 (Incorporated by reference to Appendix H contained in Pentair’s Proxy Statement for its 2004
annual meeting of shareholders). *
Amendment effective December 10, 2004 to the Pentair, Inc. Outside Director’s Nonqualified Stock
Option Plan for Non-Employee Directors (Incorporated by reference to Exhibit 10.1 contained in Pentair’s
Current Report on Form 8-K dated December 10, 2004).*
Summary of Board of Director Compensation, approved December 10, 2004 (Incorporated by reference to
Exhibit 10.2 contained in Pentair’s Current Report on Form 8-K dated December 10, 2004).*
Letter Agreement, dated January 6, 2005, between Pentair, Inc. and Michael Schrock (Incorporated by
reference to Exhibit 10.1 contained in Pentair’s Current Report on Form 8-K dated January 6, 2005).*
Confidentiality and Non-Competition Agreement, dated January 6, 2005, between Pentair, Inc. and Michael
Schrock (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Current Report on Form 8-K dated
January 6, 2005).*
80
21
23
24
31.1
31.2
32.1
32.2
*
List of Pentair subsidiaries.
Consent of Independent Registered Public Accounting Firm – Deloitte & Touche LLP.
Power of Attorney.
Certification of Chief Executive Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934,
as amended.
Certification of Chief Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934,
as amended.
Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
A management contract or compensatory contract.
81
Pentair, Inc. and subsidiaries as of December 31, 2005.
Name of Company
Aplex Industries, Inc.
Apno S.A. de C.V.
Aspen Motion Technologies
Axholme Resources Limited
Century Mfg. Co.
Chansuba Pumps Private Ltd. 1
Compool Inc.
Davies Pumps & Co. Limited
Electronic Enclosures, Inc.
Epps Limited
EuroPentair GmbH
Everpure (Europe) N.V.
Everpure (UK) Limited
Everpure Japan, Inc.
Everpure, LLC
FARADYNE Motors (Suzhou) Co., Ltd 2
FARADYNE Motors LLC 2
Fibredyne, LLC
Fleck Controls, Inc.
Hoffman Enclosures (Mex), LLC
Hoffman Enclosures Inc.
Hoffman Engineering S. de R.L. de C.V.
Hoffman Schroff Pte. Ltd.
Hypro, EU Limited
Hypro, LLC
Inversiones Sta-Rite Chile Limitada
Lincoln Automotive Company
McLean Midwest Corporation
McNeil (Ohio) Corporation
Moraine Properties, LLC
National Pool Tile Group, Inc.
Nocchi Pompes Europe S.a.r.l.
Onga (NZ) Limited
Onga Pump Shop Pty. Ltd.
Optima Enclosures Limited
Pentair Asia Holdings SARL
Pentair Asia PTE Ltd.
Pentair Canada, Inc.
Pentair DMP Corp.
Pentair Electronic Packaging Company
Pentair Electronic Packaging de Mexico, S. de R.L de C.V
Pentair Enclosures de Chile S.r.L.
Pentair Enclosures Group, Inc.
Pentair Enclosures Limited
Pentair Enclosures, Inc.
Pentair Enclosures, S. de R.L. de C.V.
Pentair Filtration, Inc.
Pentair Financial Services Ireland
Pentair France SARL
82
Jurisdiction of Incorporation
United States
Mexico
United States
United Kingdom
United States
India
United States
New Zealand
United States
Mauritius
Germany
Belgium
United Kingdom
Japan
United States
China
United States
United States
United States
United States
United States
Mexico
Singapore
United Kingdom
United States
Chile
United States
United States
United States
United States
United States
France
New Zealand
Australia
United Kingdom
Luxembourg
Singapore
Canada
United States
United States
Mexico
Chile
United States
United Kingdom
United States
Mexico
United States
Ireland
France
Exhibit 21
Segment
Water
Other
Technical Products
Water
Other
Water
Water
Water
Technical Products
Water
Other
Water
Water
Water
Water
Water
Water
Water
Water
Technical Products
Technical Products
Technical Products
Technical Products
Water
Water
Water
Other
Technical Products
Other
Other
Water
Water
Water
Water
Technical Products
Other
Other
Water
Other
Technical Products
Technical Products
Technical Products
Technical Products
Technical Products
Technical Products
Technical Products
Water
Other
Water
Pentair Global Sarl
Pentair Halifax, Co.
Pentair Holdings S.a.r.l.
Pentair Housing LP
Pentair Housing, Inc.
Pentair International Sarl
Pentair Manufacturing France S.A.S.
Pentair Nova Scotia Co.
Pentair Pacific Rim (Water) Limited
Pentair Pacific Rim, Ltd.
Pentair Poland
Pentair Pump Group Inc.
Pentair Pumps S.p.A.
Pentair Qingdao Enclosure Company Ltd.
Pentair Taunus Electrometalurgica Ltda
Pentair Transport, Inc.
Pentair U.K. Ltd.
Pentair UK Group Limited
Pentair Water (Suzhou) Company Ltd.
Pentair Water Australia Pty Ltd
Pentair Water Belgium NV
Pentair Water Europe s.r.l.
Pentair Water Filtration France SAS
Pentair Water Filtration UK Limited
Pentair Water France SAS
Pentair Water Germany GmbH
Pentair Water Group, Inc.
Pentair Water India Private Limited
Pentair Water Italy S.r.l.
Pentair Water New Zealand Limited
Pentair Water Pool and Spa, Inc.
Pentair Water South Africa (Proprietary) Limited
Pentair Water Spain, SL
Pentair Water Taiwan Co., Ltd.
Pentair Water Treatment (OH) Company
Pentair Water Treatment Company
Pentair Water Treatment India Private Limited
Pentair Water, LLC
Pentair Water-Mexico S. de R.L. de C.V.
Penwald Insurance Company
PEP Central, Inc.
PEP West, Inc.
PFAM, Inc.
Porter-Cable de Mexico S.A. de C.V.
PTG Accessories Group
Schroff GmbH
Schroff Inc.
Schroff K.K.
Schroff S.R.L.
Schroff SAS
Schroff Scandinavia AB
Schroff U.K. Ltd.
Seneca Enterprises Co.
SHURflo International Limited
Luxembourg
Canada
Luxembourg
United States
United States
Luxembourg
France
Canada
Hong Kong
Hong Kong
Poland
United States
Italy
P.R.C.
Brazil
United States
United Kingdom
United Kingdom
P.R.C.
Australia
Belgium
Italy
France
United Kingdom
France
Germany
United States
India
Italy
New Zealand
United States
South Africa
Spain
Taiwan
United States
United States
India
United States
Mexico
United States
United States
United States
United States
Mexico
United States
Germany
United States
Japan
Italy
France
Sweden
United Kingdom
United States
United Kingdom
83
Other
Other
Other
Other
Other
Other
Water
Other
Water
Technical Products
Water
Water
Water
Technical Products
Technical Products
Other
Technical Products
Water
Water
Water
Water
Water
Water
Water
Water
Water
Water
Water
Water
Water
Water
Water
Water
Water
Water
Water
Water
Water
Water
Other
Technical Products
Technical Products
Other
Other
Other
Technical Products
Technical Products
Technical Products
Technical Products
Technical Products
Technical Products
Technical Products
Water
Water
SHURflo Limited
SHURflo, LLC
Sta-Rite de Argentina, S.A.
Sta-Rite de Mexico S.A. de C.V. 3
Sta-Rite de Puerto Rico, Inc.
Sta-Rite Industries, LLC
Structural Iberica
Surewood Acquisition Corporation
Tupelo Real Estate, LLC
Webster Electric Company, LLC
WICOR Canada Company
WICOR Global Corp.
WICOR Industries (Australia) Pty. Ltd.
(1) - 47% owned
(2) - 50% owned
(3) - 80% owned
United Kingdom
United States
Argentina
Mexico
Puerto Rico
United States
Spain
United States
United States
United States
Nova Scotia
United States
Australia
Water
Water
Water
Water
Water
Water
Water
Other
Other
Water
Water
Water
Water
84
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23
We consent to the incorporation by reference in Registration Statement Nos. 33-38534, 33-45012,
333-80159, 333-12561, 333-62475, 333-75166, 333-115429, 333-115430, 333-115432, and 333-126693 of Pentair, Inc. of our
reports dated February 27, 2006, with respect to the consolidated financial statements and financial statement schedule of Pentair,
Inc. and subsidiaries(which report expressed an unqualified opinion and included an explanatory paragraph relating to the
Company’s change in 2005 in its method of accounting for stock-based compensation), and management’s report on the
effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K for the year ended
December 31, 2005.
Minneapolis, Minnesota
February 27, 2006
85
Exhibit 24
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS that the undersigned directors of Pentair, Inc., a Minnesota corporation, hereby
constitute and appoint David D. Harrison and Louis L. Ainsworth, or either of them, his/her attorney-in-fact and agent, with full
power of substitution, for the purpose of signing on his/her behalf as a director of Pentair, Inc. the Annual Report on Form 10-
K, to be filed with the Securities and Exchange Commission within the next sixty days, and to file the same, with all exhibits
thereto and other supporting documents, with the Commission, granting unto such attorney-in-fact, full power and authority to
do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly
granted.
Date: February 27, 2006
Signature
/s/ Glynis A. Bryan
Glynis A. Bryan
/s/ Richard J. Cathcart
Richard J. Cathcart
/s/ Barbara B. Grogan
Barbara B. Grogan
/s/ Charles A. Haggerty
Charles A. Haggerty
/s/ David A. Jones
David A. Jones
/s/ Augusto Meozzi
Augusto Meozzi
/s/ Ronald L. Merriman
Ronald L. Merriman
/s/ William T. Monahan
William T. Monahan
/s/ Karen E. Welke
Karen E. Welke
Title
Director
Director
Director
Director
Director
Director
Director
Director
Director
86
Exhibit 31.1
I, Randall J. Hogan, certify that:
1.
I have reviewed this annual report on Form 10-K of Pentair, Inc.;
Certifications
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 27, 2006
/s/ Randall J. Hogan
Randall J. Hogan
Chairman and Chief Executive Officer
87
Exhibit 31.2
I, David D. Harrison, certify that:
1.
I have reviewed this annual report on Form 10-K of Pentair, Inc.;
Certifications
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 27, 2006
/s/ David D. Harrison
David D. Harrison
Executive Vice President and Chief Financial Officer
88
Certification of CEO Pursuant To
18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act Of 2002
Exhibit 32.1
In connection with the Annual Report of Pentair, Inc. (the Company) on Form 10-K for the period ending December 31, 2005 as
filed with the Securities and Exchange Commission on the date hereof (the Report), I, Randall J. Hogan, Chairman and Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that based on my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of
operations of the Company.
Date: February 27, 2006
/s/ Randall J. Hogan
Randall J. Hogan
Chairman and Chief Executive Officer
89
Certification of CFO Pursuant To
18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act Of 2002
Exhibit 32.2
In connection with the Annual Report of Pentair, Inc. (the Company) on Form 10-K for the period ending December 31, 2005 as
filed with the Securities and Exchange Commission on the date hereof (the Report), I, David D. Harrison, Executive Vice
President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that based on my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of
operations of the Company.
Date: February 27, 2006
/s/ David D. Harrison
David D. Harrison
Executive Vice President and Chief Financial Officer
90
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.
· We will manage our business according to the highest business, ethical,
moral and civic standards that apply to a public company.
· 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.
· 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’s standards for ethics, integrity and work practices.
The full text of Pentair’s Code of Business Conduct and Ethics can be found at http://www.pentair.com/code.html
5500 Wayzata Boulevard Suite 800
Golden Valley
Minnesota 55416
763.545.1730 tel
pentair.com