Pentair Annual Report 2006

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FY2006 Annual Report · Pentair

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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

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

High

41.90

41.55

34.43

33.49

Low

34.01

32.05

25.69

26.25

40.75

34.19

26.19

31.40

Div.

0.14

2005

High

44.32

46.03

45.17

38.41

Low

38.39

37.45

36.11

30.80

39.14

42.62

36.50

34.52

Div.

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

%
5
.
1
1

%
9
.
0
1

%
2
.
0
1

12%

10%

%
4
.
0
% 1
8
.
8

‘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%

450

400

350

300

250

200

150

100

‘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

‘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

40%

30%

20%

10%

3,000

2,500

2,000

1,500

1,000

500

900

800

700

600

500

400

300

200

100

2.00

1.50

1.00

0.50

‘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