Pentair 2006

...$3.15 billion compared to sales of $2.95 billion for 2005, an increase of 7 percent. Free cash flow for the year of $181 million was slightly better than anticipated, with free cash flow conversion as a percentage of net income in line with the Company's goal of 100 percent.

For the fourth quarter, EPS from continuing operations was $0.39, an increase of 3 percent, on sales of $743.0 million as compared to $732.1 million in the same period in 2005. Fourth quarter sales reflect growth in the North American commercial and industrial markets; growth in the European and Asian markets; and, as anticipated, declines in pool sales linked to slowing pool starts and an inventory drawdown by distribution customers.

According to Pentair Chairman and Chief Executive Officer, Randall J. Hogan, "Overall, our fourth quarter results were in line with our expectations. Earnings per share were higher than anticipated, driven by tax benefits and operating improvements in Filtration and Technical Products. Sales grew despite softness in some markets, reflecting the value of the diversity in Pentair's end markets.

"Last year was challenging and our 2006 performance produced mixed results. We faced economic headwinds yet strengthened our organization, invested in growth, and enhanced our product lines to respond to the accelerating technological needs of our customers. Looking ahead, we are focused on improving Water margins and maintaining Technical Products solid margins through continued implementation of Pentair's Integrated Management System in all of our businesses, and by re-establishing solid growth," Hogan said.

Water Group Fourth Quarter 2006 Comments

The Water Group's fourth quarter sales of $500.8 million were down 3 percent over the same period last year. Excluding the impact of favorable foreign exchange, sales declined approximately 4 percent. Excluding the pool and spa businesses, Water sales grew nearly 4 percent in the quarter.

Growth in emerging markets in Asia-Pacific, successful market penetration in Europe and the Middle East, and strength in the North American commercial and industrial markets were offset by a significant decline in the pool and spa businesses and softness in retail and residential pumps.

Emerging markets in Asia-Pacific drove significant sales growth reflecting the Company's successful sales into desalination projects with the Codeline product. Continued commercial market penetration in China also contributed to the region's impressive growth.

Market growth in Europe and penetration into the Middle East drove strong sales with filtration and pump contributing growth in the mid-teens.

Sales in North American Filtration markets grew in the low single digits. Commercial filtration and Everpure residential filtration grew though slowing residential and marine markets did offset some of this growth.

Sales in North American Pump markets were essentially flat for the quarter with strong sales in commercial and industrial pump markets offset by slowing residential and retail sales. Municipal market orders and backlog reached record levels in the quarter though sales were down due to timing of shipments.

As expected, sales in North American pool and spa markets experienced a decline of almost 20 percent in the quarter. Decreases reflect the inventory drawdown by pool distribution customers as they positioned themselves for a softer overall market. Fourth quarter 2006 early buy orders were better than projected; however, the additional early buy orders are scheduled to be shipped in the first quarter of 2007 and could take the place of higher margin standard orders.

Water's fourth quarter operating income totaled $36.5 million, down 34 percent as compared to $55.5 million in the same period in 2005.

Water's fourth quarter operating margin was 7.3 percent, down 340 basis points as compared to the same period last year.

The most significant factor in the year-over-year operating margin comparison was lower volume, resulting in a 160 basis point operating margin decline. Other factors affecting operating margin included a mix shift to lower margin products, which resulted in an 80 basis point decline, and an excess inventory reserve established for pump motors the Company no longer expects to need, which resulted in an additional 80 basis point decline.

The impact of these negative factors was moderated by price increases implemented to offset inflationary cost increases; significant savings from supply management initiatives; and lower growth-related investment spending.

Future Outlook and Comment

The Company sees continued opportunities among its diverse end markets in 2007 and coming years, and affirms projected EPS guidance for the full year 2007 of between $2.00 and $2.15. The Company is also initiating EPS guidance for the first quarter 2007 of between $0.37 and $0.41, including a $0.02 to $0.03 negative impact in the quarter for the Jung Pumpen acquisition (announced December 11, 2006). The Jung Pumpen acquisition is expected to be EPS neutral for the full year 2007.