Pentair’s Fourth Quarter Results

Excluding the impact of stock options expensing (SOE), EPS of $0.41 gained 24 percent in the quarter. Pentair's FY2005 EPS from continuing operations gained 33 percent on a sales gain of 29 percent. Excluding the impact of SOE, EPS gained 42 percent in the year.

Pentair announced on December 19, 2005, that it would early adopt SFAS 123R for Share-Based Payment, an accounting change requiring companies to recognize an expense in the Income Statement for stock options. Pentair has adopted using the modified retrospective approach, restating the first three quarters of 2005 to reflect an impact of $9.1 million after tax expense or ($0.09) of EPS. In the fourth quarter 2005, the impact was $2.9 million after tax expense or ($0.03) of EPS, for a full year EPS impact of ($0.12). Pentair's reported fourth quarter 2005 and FY2005 results reflect the adoption of SFAS 123R. The reconciliation of the reported GAAP financial information to the non-GAAP financials excluding the adoption of SFAS 123R is provided on pages seven through 11 of this fourth quarter earnings announcement.

According to Pentair Chairman and Chief Executive Officer, Randall J. Hogan, "In our first full year after the transformation of Pentair into a Water-led business, we met our strategic and financial goals of replacing the earnings of our former Tools Group, and added an additional 14 percent to EPS on top of that, excluding stock option expensing. In 2005, we achieved organic growth of approximately six percent, while achieving the highest profitability and return on invested capital in the last five years. We also met our Free Cash Flow goal with $201 million and exceeded our 100% conversion of net income goal for the fifth consecutive year.

"In addition to the operating and financial progress in the year, we accelerated our investments to drive growth and instill operating excellence throughout the Company," Hogan said. "These activities included increasing R&D; adding international management, sales, engineering, sourcing and manufacturing talent; starting the implementation of a unified business system infrastructure in Europe; launching our Faradyne Motors joint venture with ITT Industries; and continuing to strengthen our global sourcing and operating competencies. In addition, through our disciplined M&A process, we examined a number of opportunities and completed two acquisitions that are consistent with our growth strategies. These actions lend confidence to our outlook for 2006 and, therefore, we are reaffirming our previous guidance for the full year 2006 of between $2.08 and $2.18, which includes the expensing of stock options. Further, we are expecting first quarter EPS of between $0.40 and $0.42."

Water Group Fourth Quarter Comments

• Sales of $517.8 million were up 10 percent over the same period last year, or approximately 11 percent excluding unfavorable foreign exchange. Sales in all markets grew by at least mid-single digits in local currencies, with the strongest growth occurring in pump and pool markets.
• Pump sales grew in the high single digits, spurred by new products, and strong municipal and industrial pump demand, as well as by pricing actions. Water systems sales also gained in the mid-single digits.
• Share gains, favorable weather conditions, and successful early buy programs bolstered pool and spa equipment sales in the quarter.

• Filtration grew in the mid-single digits, experiencing continued strength in foodservice markets and strong sales related to desalination projects.
• Pentair sales in Euros in European filtration markets were up in the high teens, supported by strength in Food and Beverage markets, while sales in European pool markets realized sales gains in the high single digits benefiting from early buy programs. Asian sales were up significantly as a result of the ramp-up of production at the Pentair Suzhou manufacturing facility in China.
• New Water products were significant in driving sales. New pumps included a bulk chemical transfer pump; a drainer pump; a gas engine transfer pump; and new split case, solids handling, and centrifugal pumps. Pool products included new heat pumps, automation controls, lights, filters, chlorinators, pumps, and pool finishes. New filtration products included a new modular filtration system and a number of new OEM products.
• Excluding the impact of SOE, operating income of $56.8 million increased 16 percent over the same period last year driven by higher volumes, supply savings, and pricing, which were somewhat offset by materials inflation and our accelerated investments focused on growth, operating excellence, and international expansion. Excluding the impact of SOE, operating margins of 11.0 percent for the quarter expanded by 50 basis points over fourth quarter 2004 margins of 10.5 percent. Including the impact of SOE, operating income totaled $55.5 million, up 13 percent.
• The integration of the water businesses continued on-track with $36 million of savings realized net of integration costs during 2005 against a total year goal of $30 million. These savings were somewhat offset by temporary operating inefficiencies related to product moves and plant consolidations undertaken to achieve future cost benefits, as well as investments made to support growth.
• Investments for growth during the quarter included low-cost country engineering and sourcing, start-up of Eastern European manufacturing capability, increased infrastructure in China and Europe to support local market opportunities, filtration R&D innovation programs, and the Faradyne Motor joint venture, announced December 15, 2005.

Enclosures Group Fourth Quarter Comments

• Sales of $214.3 million reflect an 18 percent gain over the same period last year. Excluding the impact of acquisitions and unfavorable foreign exchange, sales grew approximately 13 percent, significantly above the growth rate of the addressed markets. Enclosure sales grew in all markets in the fourth quarter, including Europe.
• The strong sales performance was driven by share gains and pricing in the North American electrical market; new products and programs at Pentair Electronic Packaging and in Europe; and new customers in Asia.
• The Group's vertical market initiative drove growth in petrochemical, food & beverage, water & wastewater, and pharmaceutical markets.
• Electronics sales grew in the fourth quarter, with the new Advanced Telecommunications Computing Architecture (ATCA) platform supporting OEM customers worldwide. The Enclosures Group has secured a leading market position in ATCA, and sales of this product family are expected to accelerate throughout 2006.
• Excluding the impact of SOE, operating income of $30.7 million was 30 percent higher than the same period last year, setting a new record for quarterly operating income in the Enclosures Group. This performance resulted from higher volumes, supply savings, productivity improvements, and pricing, which more than offset material inflation. Including the impact of SOE, operating income totaled $30.0 million, up 26 percent.
• Excluding the impact of SOE, Enclosures margins were 14.3 percent for the quarter, expanding by 130 basis points over the fourth quarter 2004. The fourth quarter 2005 represents the Group's 16th consecutive quarter of sequential margin improvement. Including the impact of SOE, margins were 14.0 percent, up 100 basis points.
• The Thermal Management businesses acquired on December 1, 2005 are included in Pentair's financials for one month. Integration activities are off to a fast start with supplier negotiations, lean enterprise training, and kaizen events conducted in the first week after closing.