Pentair
Annual Report 2006

Plain-text annual report

A n n u a l R e p o r t 2 0 0 6 financial s u m m a r y Pentair, Inc. and Subsidiaries Years ended December 31 (Dollars in thousands, except per-share data) 2006 2005 2004 2003 2002 operations Net sales $ 3,154,469 $2,946,579 $ 2,278,129 $ 1,642,987 $ 1,488,453 Operating income 306,986 323,072 247,242 170,210 131,295 Adjusted operating income (1) 321,162 339,460 247,242 170,210 131,295 Net income — continuing operations 183,767 185,049 137,024 98,150 74,999 Diluted EPS — continuing operations 1.81 1.80 1.35 0.99 0.75 Net cash provided by operating activities 231,611 247,858 264,091 262,939 270,794 Capital expenditures (2) 51,078 62,471 48,867 43,622 56,696 Proceeds from sale of property and equipment 684 17,111 — — — Free cash flow (3) 181,217 202,498 215,224 219,317 214,098 Number of employees at year end 14,800 14,700 12,900 9,000 8,600 other financial data Total debt 744,061 752,614 736,105 806,493 735,085 Shareholders’ equity 1,669,999 1,555,610 1,447,794 1,261,478 1,105,724 Total debt as a percent of total capital 30.8% 32.6% 33.7% 39.0% 39.9% Return on average shareholders’ equity 11.4% 12.3% 12.6% 11.9% 12.3% Cash dividends declared per common share 0.56 0.52 0.43 0.41 Closing stock price 31.40 34.52 43.56 22.85 Effect of SFAS 123R, net of tax (4) 9,933 11,998 Diluted EPS effect of SFAS 123R (4) 0.10 0.12 — — — — 0.37 17.28 — — Weighted-average shares — diluted 101,371 102,618 101,706 99,620 99,489 (1) Adjusted operating income excludes the impact of the adoption of SFAS 123R on 2005 and 2006 operating income to be comparable to prior years presented. The impact of adoption of SFAS 123R on operating income in 2005 and 2006 was $16.4 million and $14.2 million, respectively. (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 123R which requires the fair value of stock options to be expensed. The standard did not require restatement of prior period amounts to be consistent with the current presentation. The amounts shown represent the impact of adoption in 2005 and 2006. Total pre-tax stock-based compensation in 2006 and 2005 was $25.3 million and $24.2 million, respectively. letter to our s h a r e h o l d e r s After four years of solid earnings growth, Pentair’s 2006 performance resulted in flat earnings. Breakthrough performance in the Technical Products Group in sales, operating income, return on sales and acquisition integration was negated by setbacks in the Water Group. There, strong global growth and improvements in pump did not overcome investments for growth, inefficiencies, We took action to manage and softness in the North American the impact of this challenging residential market — our largest market, including specific steps served market. to manage costs. Importantly, we also strengthened our core technical competencies in flow and filtration, expanded our thermal management capabilities to more effectively serve our Technical Products markets, and streamlined our leadership structure in 2006. These actions were designed to help address short-term economic conditions affecting our businesses while simultaneously improving our long-term prospects. For these reasons, we are confident in our roadmap to drive Pentair’s performance higher in 2007 and beyond. 1 \ pnr letter to our shareholders continued 2006 Results In 2006, Pentair delivered earnings per share of $1.81. Details of the Company’s 2006 performance include: · Revenues increased 7 percent compared to the year earlier, reaching $3.15 billion. Growth in North America was modest, due to the weakness in the residential water equipment market. Growth in Europe, the Middle East and Africa was solid as overall economic conditions were strong and growth investments paid off. Growth in Asia was strong, and reflected our investments in this attractive region. · Operating margins decreased Technical Products 2006 revenues year-over-year. Strong operating surpassed the $1 billion threshold, performance in Technical Products led an increase of 23 percent to the 17th consecutive quarter of year- year-over-year. over-year operating margin improvement for the Group, though these results were offset by the operating performance of the Water Group. · Free cash flow for the year was $181 million, which represented 99 percent conversion of net income, just shy of the Company’s goal of 100 percent. · Six acquisitions were signed in 2006. Approximately 85 percent of the acquired revenue is based outside of North America, reflecting the Company’s growth strategy. · Dividends increased for the 30th year in a row with no increase in net debt during 2006. At the end of 2006, Pentair’s debt-to-total-capital ratio was 30.8 percent, 180 basis points lower than what it was at the end of 2005. 2 \ pnr Leading Positions in Attractive Markets Pentair is a diversified operating company head- quartered in Minnesota. Its Water Group is a global leader in providing innovative products and systems used worldwide in the movement, storage, Water Pentair continues to deliver innovative solutions to address water quality and treatment and enjoyment of water. Pentair’s Technical Products Group is a leader in the global enclosures and thermal management markets, designing and manufacturing scarcity demands. Today, approximately 300 standard, modified and custom enclo- million people live in areas of severe water shortages; by some estimates, that number is expected to increase to 3 billion over the next two decades. Beyond meeting basic human needs for health and sanitation, water contributes to sustainable development: it is required for agricultural development and many industrial purposes, it is an untapped source of sures, and thermal management products and accessories that house and protect sensitive electronics and electrical components. With 2006 revenues of $3.15 billion, Pentair employs approximately 14,800 employees worldwide. power in some regions of the world, and it is increasingly critical to the safety of communities when natural disasters strike. A leader in flow and filtration, Pentair expanded the solutions available to address water needs in 2006. In markets outside of North America, we improved our ability to provide regional solutions to regional needs through acquisitions in China and Germany. Technical Products Pentair continues to serve a broad range of industries — from general manufacturing, medical and security to telecommunications — with a broad product range of products including enclosures, racks, heat exchangers and air 3 \ pnr letter to our shareholders continued conditioners that protect and house electronic and electrical equipment. For example, Pentair cabinets house medical equipment controls, and industrial controls in auto factories, food production facilities, and even border security installations. In 2006, the Group fully integrated its thermal management acquisition. Through the effective deployment of Pentair’s Integrated Management System, these new businesses exceeded productivity and sales goals in their first full year. Maintaining our Strategic Direction Though Pentair faced significant challenges last year, we have reaffirmed that our strategic initiatives — operations excellence, global expansion and differentiated growth — are correct. Pentair’s 2006 performance reflects market weakness and execution shortfalls, which we have already begun to remedy. To do this, we streamlined our leadership organization, appointing Michael V. Schrock as Chief Operating Officer of the Water and Technical Products Groups. We reduced costs to better position Pentair for the difficult markets we are facing. We increased our investment in technology; most notably, we hired a new leader in Water technology to drive global product development and innovation. We also staffed seven global initiatives to drive growth. With me, Pentair’s leadership team has reaffirmed our 4 \ pnr strategic initiatives and committed to John L. Stauch joined Pentair as Executive each one. Together, we are focused on Vice President and Chief Financial Officer (CFO) in February 2007. He brings a breadth of improving performance to deliver the quality experience in finance and investor relations, our customers expect and the value our a proven understanding of operations, and shareholders deserve. strong leadership in complex global business environments to the Company. Winning Right for Forty Years In 2006, Pentair marked the 40th anniversary of the Prior to Pentair, Mr. Stauch held wide ranging finance leadership roles including investor relations, financial planning and analysis, and division Company’s founding. Since 1966, Pentair has CFO positions across a number of consisted of varied businesses in varied industries — paper, lubrication, ammunition, and power tools, to global industries in ten years at Honeywell International and its predecessor, Allied Signal. name a few. Today, Pentair is focused on Water and Technical Products, two arenas in which we control our destiny. Throughout our history, one thing has remained constant: a strong commitment to Pentair’s values. Integrity and high performance — or Win Right — remains at the core of all that we do. We believe this cultural focus is an enormous advantage for Pentair. Of course, it is only through the dedication of every Pentair employee that we earn our reputation for Winning Right, and I thank all Pentair employees for their efforts. Jo h n L . Stau c h Executive Vice President and Chief Financial Officer Clear Roadmap for 2007 We face some uncertain market segments in 2007, particularly in the North American residential and telecommunication markets. Our task, then, is to more effectively drive growth and higher performance to yield strong long-term shareholder value. By rigorously applying Pentair’s Integrated 5 \ pnr letter to our shareholders continued Management System, we expect to make real operating performance progress and to deliver on the promise of our Water business with a step up in operating margins while sustaining the excellent performance of Technical Products; to drive growth in all businesses through an intensified, global approach to vertical markets; and to accelerate the leverage of our increasingly global businesses. We remain optimistic about Pentair’s prospects. Energized by the challenges we face, Pentair employees demonstrate their commitment to our customers and our shareholders daily. Their purposeful enthusiasm inspires me and my confidence in our continued ability to Win Right. I’d like to acknowledge and express appreciation for the continued commitment of Pentair’s employees, customers and shareholders. Thank you. Sincerely, R a n da l l J. H o g a n Chairman and Chief Executive Officer 6 \ pnr technical products group o v e r v i e w Protecting the technologies that connect, enable and inform. 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. Electrical Electronic Thermal Management m a r k e t s · Industrial including automotive, · Electronic including aerospace, · Industrial including automotive machine tool, food and beverage, computer networking, data and machine tool; medical, pharmaceutical, water treatment, communications, defense and datacommunications, petrochemical, defense and security, industrial controls, telecommunications, and test security markets. medical, telecommunications, and measurement markets. · Commercial including test and measurement, and commercial and industrial semiconductor equipment new construction markets. markets. b r a n d s Hoffman® p r o d u c t s Schroff®, Hoffman®, TaunusTM, McLean®, Hoffman®, Pentair Electronic PackagingTM, Aspen Motion TechnologiesTM, Electronic SolutionsTM, and Schroff®. and BirtcherTM. Standard, modified, co-developed Standard, modified and Standard and custom thermal and custom enclosures, co-developed enclosures management solutions including cabinets and accessories, including racks, subracks and air conditioners, heat exchangers, and thermal management indoor and outdoor cabinets as fan trays, motorized impellers, solutions to protect components well as stamped chassis, slide single and dual packaged and instruments. rail and cable management blowers, AC and brushless DC solutions, and integrated motors, electronic controls and solutions with power supplies filter fans. and backplanes. 7 \ pnr water group o v e r v i e w A global leader in providing innovative products and systems used to deliver safe, clean water. While most of the earth is covered in water, only a small fraction of this water supply is practically available for the demands of the world’s population. The accelerating need for safe clean water is driven by scarcity and quality concerns, as water use escalates to accommodate industrial expansion and population growth, and by infrastructure requirements, as both established and emerging regions seek to address them. Pentair is uniquely positioned to deliver quality solutions for our customers’ water needs in flow and filtration. Filtration and Purification m a r k e t s Commercial & Industrial: Including aviation, foodservice, recreational vehicles and marine. Municipal Residential · · · b r a n d s Everpure®, SHURflo®, Fleck®, CodeLine®, StructuralTM, PentekTM, SIATATM, WellMateTM, American Plumber®, Armor®, OMNIFILTER®, Park InternationalTM, FibredyneTM, and Krystal Klear®. p r o d u c t s Products range from softener and filter control valves; filtration housings; replaceable cartridge elements; carbon filtration systems; drinking water filtration systems and components; fiberglass wound pressure tanks and vessels; to brine cabinets and storage tanks; in-ground boxes for irrigation and control valves; stainless steel vessels for industrial filtration markets; and booster pumps for drinking water systems. 8 \ pnr Pump Systems m a r k e t s · · Commercial and Industrial: Including agricultural, car wash, fire protection, food service, HVAC, marine, treatment, water feature and general applications. Municipal: Including water supply, reverse osmosis, desalination, wastewater transport, wastewater process and flood control. · Residential b r a n d s STA-RITE®, Myers®, Aurora®, Hydromatic®, Fairbanks Morse®, Flotec®, Hypro®,Water Ace®, Berkeley®, AermotorTM, Simer®,Verti-LineTM, DiamondTM, Foam Pro®, OngaTM, NocchiTM, ShurDri®, Edwards®, Jung, and Delta Environmental. p r o d u c t s Products range from light-duty diaphragm pumps to high-flow turbine pumps and solid handling pumps designed for water and wastewater applications and agricultural spraying; pressure tanks for residential applications as well as residential and commercial on-site treatment. Pool and Spa m a r k e t s · · · Commercial Municipal Residential For in-ground and above-ground pools, water features and parks, spas, jetted tubs, aquarium, ponds, and aquaculture applications. b r a n d s Pentair Pool Products®, Pentair Water Pool and Spa®, National Pool Tile Group®, Pentair Aquatics®, STA-RITE®, Paragon Aquatics®, Pentair Spa and BathTM, Kreepy Krauly®, Compool®,WhisperFlo®, PoolShark®, Legend®, RainbowTM, Ultra Jet®, FIBERWorks®, IntelliTouch®, Acu-Trol®, EasyTouch®, IntelliFlo®, IntelliProTM, MasterTemp®, and Max-E-Therm®. p r o d u c t s A complete line of pool and spa equipment and accessories, including automation, pumps, filters, lights, cleaners, commercial starting blocks, lifeguard stands and deck equipment, barbeque island and outdoor grill equipment, aquatic pond products and accessories, pool tile and interior finishing surfaces, maintenance equipment, hydrotherapy fittings, and other accessories. 9 \ pnr corporate l e a d e r s h i p board of directors corporate officers G ly n i s A . B rya n (1), 48 Executive Vice President and Chief Financial Officer Swift Transportation Co. R i c h a r d J. Cat h c a rt (4), 62 Vice Chairman Pentair, Inc. Ba r ba r a B . G ro g a n (2, 3, 4), 59 Former Chairman and President Western Industrial Contractors, Inc. C h a r l e s A . H ag g e rt y (2, 3, 4), 65 Chief Executive Officer LeConte Associates, LLC R a n da l l J. H o g a n (4), 51 Chairman and Chief Executive Officer Pentair, Inc. Dav i d A . Jo n e s (2, 3), 57 Chairman and Chief Executive Officer Spectrum Brands, Inc. Au g u s to M e o z z i (1, 4), 67 President of European operations ISOLA Group 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 M i c h a e l V. S c h ro c k President and Chief Operating Officer Jo h n L . Stau c h Executive Vice President and Chief Financial Officer 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 President, Filtration 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 Ro n a l d L . M e r r i m a n (1), 62 Managing Director Merriman Partners Wi l l i a m T. M o n a h a n (2, 3, 4), 59 Former Chairman and Chief Executive Officer Imation Corp. K a r e n E . We l k e (1, 4), 62 Former Group Vice President for Medical Markets 3M Company (1) Audit Committee (2) Compensation Committee (3) Governance Committee (4) International Committee 10 \ pnr investor i n f o r m a t i o n annual meeting The Annual Meeting of Pentair shareholders will take place on Thursday, May 3, 2007 in the Cinema auditorium of the Walker Art Center (1750 Hennepin Avenue, Minneapolis, MN 55403). Pentair management and directors encourage all shareholders to attend the annual meeting. investor information Shareholders, securities analysts and investors seeking more information about the Company can access news releases describing significant Company events and earnings results for each quarter and the fiscal year, and Form 10-K and other Securities and Exchange Commission filings at www.pentair.com. Information may also be obtained by request from the Pentair Investor Relations department, 5500 Wayzata Boulevard, Suite 800, Golden Valley, Minnesota 55416. stock exchange listing New York Stock Exchange (symbol PNR) price range of common stock As of December 31, 2006, there were 3,907 shareholders of record. The high, low, and closing sales price for Pentair’s common stock and the dividends declared for each of the quarterly periods for 2006 and 2005 were as follows: 2006 1Q 2Q 3Q 4Q High 41.90 41.55 34.43 33.49 Low 34.01 32.05 25.69 26.25 Close 40.75 34.19 26.19 31.40 Div. 0.14 0.14 0.14 0.14 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 dividends Dividends are currently $0.15 per share, paid quarterly in February, May, August and November. Pentair has paid 124 consecutive quarterly dividends. dividend reinvestment Pentair offers a Dividend Reinvestment Plan that allows shareholders of record the opportunity to automatically reinvest quarterly cash dividends and invest up to an additional $3,000 per calendar quarter in Pentair common stock, with any costs of purchasing the shares paid by the Company. Plan and enrollment information are available from the Company or Wells Fargo Bank, N.A. registrar, stock transfer and dividend paying agent Wells Fargo Bank, N.A., P.O. Box 64854, St. Paul, Minnesota 55164-0854, 1-877-536-3554, https://www.wellsfargo.com/com/shareowner_services certified public accounts Deloitte & Touche LLP, Minneapolis, Minnesota forward-looking statements This summary annual report may contain forward-looking statements that are based on current expectations, estimates and projections. These statements are not guarantees of future performance and involve risks and uncertainties which are difficult to predict. Important factors that could cause actual results to differ materially include changes in industry conditions, changes in business strategies, governmental and regulatory policies, general economic conditions and changes in operating factors. See Item 1A of the Company’s 2006 Form 10-K, which is included with this report. 11 \ pnr financial h i g h l i g h t s 4 5 1 , 3 7 4 9 , 2 8 7 2 , 2 3 4 6 , 1 8 8 4 , 1 9 3 3 1 2 3 7 4 2 0 7 1 1 3 1 350 300 250 200 150 100 50 0 % 5 . 1 1 % 9 . 0 1 % 2 . 0 1 12% 10% % 4 . 0 % 1 8 . 8 8% 6% 4% 2% 0% ‘02 ’03 ‘04 ’05 ‘06 ‘02 ’03 ‘04 ’05 ‘06 net sales ($ in millions) adjusted operating income* ($ in millions) ‘02 ’03 ‘04 ’05 ‘06 adjusted operating income margin* 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 450 400 350 300 250 200 150 100 50 0 90 80 70 60 50 40 30 20 10 0 ‘02 ’03 ‘04 ’05 ‘06 ‘02 ’03 ‘04 ’05 ‘06 total debt ($ in millions) debt/total capital accounts receivable ($ in millions) days sales outstanding (13 month moving average) 0 8 . 1 1 8 . 1 5 3 . 1 9 9 . 5 0 7 . 0 4 1 2 9 1 2 5 1 2 2 0 2 1 8 1 250 200 150 100 50 0 80 70 60 50 40 30 20 10 0 ‘02 ’03 ‘04 ’05 ‘06 inventories ($ in millions) days on hand (13 month moving average) % 4 7. 3 % 6 7. 2 % 2 . 9 1 400 350 300 250 200 150 100 50 0 40% 30% 20% 10% 0% 3,000 2,500 2,000 1,500 1,000 500 0 900 800 700 600 500 400 300 200 100 0 2.00 1.50 1.00 0.50 0 ‘02 ’03 ‘04 ’05 ‘06 diluted eps ($ per share) ‘02 ’03 ‘04 ’05 ‘06 free cash flow ($ in millions) PNR S&P 500 DJIA 3-year stock price appreciation *As defined in the financial summary section on the inside front cover of this 2006 Pentair Annual Report. 12 \ pnr CERTIFICATIONS The Company has filed as exhibits to its Annual Report on Form 10-K for the fiscal year ended December 31, 2006 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 2006 the Annual CEO Certification required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual. · · · c o d e 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. The Code of Business Conduct is the foundation for numerous specific practices, policies and guidelines that determine how Pentair and its em- ployees conduct their day-to-day business. The Code is intended to set the tone and spirit for how Pentair operates. As a company, by following the spirit of the Code, Pentair creates an operating environment where management sets clear goals, company leadership is en- gaged, 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 

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