PNR Pentair Inc

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These estimates require us to make assumptions based on historical results, observance of trends in our share price, changes in option exercise behavior, future expectations and other relevant factors. If other assumptions had been used, share-based compensation expense, as calculated and recorded under the accounting guidance, could have been affected. We based the expected life assumption on historical experience as well as the terms and vesting periods of the options granted. For purposes of determining expected share price volatility, we considered a rolling average of historical volatility measured over a period approximately equal to the expected option term. The risk-free interest rate for periods that coincide with the expected life of the options is based on the United States (“U.S.”) Treasury Department yield curve in effect at the time of grant.

5.Restructuring and Transformation Program

During the second quarter of 2021, we launched and committed resources to a program designed to accelerate growth and drive margin expansion through transformation of our business model to drive operational excellence, reduce complexity and streamline our processes (the “Transformation Program”). The Transformation Program is structured in multiple phases and is expected to empower us to work more efficiently and optimize our business to better serve our customers while meeting our financial objectives.

During the nine months ended September 30, 2021 and the year ended December 31, 2020, we initiated and continued execution of actions aimed at reducing our fixed cost structure and realigning our business associated with restructuring and the Transformation Program, including the reduction in headcount of approximately 50 and 175 employees, respectively.

Restructuring and transformation-related costs within Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income included the following: 

(1) Transformation costs primarily consist of professional services and project management and related costs.

(2) Other costs primarily consist of asset impairment and various contract termination costs.

Restructuring and transformation costs by reportable segment were as follows:

Pentair plc and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Activity related to accrued severance and related costs recorded in Other current liabilities in the Condensed Consolidated Balance Sheets is summarized as follows for the nine months ended September 30, 2021: 

In millions			September 30, 2021
Beginning balance			$	15.2
Costs incurred			5.1
Cash payments and other			(8.0)
Ending balance			$	12.3

6.Earnings Per Share

Basic and diluted earnings per share were calculated as follows:

7.Accounts Receivable

All trade receivables are reported on our Condensed Consolidated Balance Sheets at the outstanding principal amount adjusted for any allowance for credit losses and write-offs, net of recoveries. We record an allowance for credit losses, reducing our receivables balance to an amount we estimate is collectible from our customers. Estimates used in determining the allowance for credit losses are based on current trends, aging of accounts receivable, periodic credit evaluations of our customers’ financial condition, and historical collection experience as well as reasonable and supportable forecasts of future economic conditions. Write-offs are recorded at the time all collection efforts have been exhausted. We generally do not require collateral. We review our allowance for credit losses on a quarterly basis.

In millions			September 30, 2021			December 31, 2020
Beginning balance			$	8.4		$	10.3
Bad debt expense (benefit) (1)			1.1			(0.5)
Acquisitions			0.6			0.1
Write-offs, net of recoveries			(0.6)			(1.6)
Other (2)			0.3			0.1
Ending balance			$	9.8		$	8.4
(1) The bad debt benefit for the year-ended December 31, 2020 includes the positive impact related to the adoption of ASU No. 2016-13     “Financial Instruments-Credit Losses.”
(2) Other amounts are primarily the effects of changes in currency translation and the impact of allowance for credits.

Pentair plc and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

8.Supplemental Balance Sheet Information

In millions			September 30, 2021			December 31, 2020
Inventories
Raw materials and supplies			$	265.4		$	218.7
Work-in-process			71.2			67.2
Finished goods			168.0			134.1
Total inventories			$	504.6		$	420.0
Other current assets
Cost in excess of billings			$	55.2		$	50.1
Prepaid expenses			50.8			48.5
Prepaid income taxes			1.7			3.8
Other current assets			3.0			3.1
Total other current assets			$	110.7		$	105.5
Property, plant and equipment, net
Land and land improvements			$	35.1		$	35.9
Buildings and leasehold improvements			192.1			195.4
Machinery and equipment			601.0			589.7
Capitalized software			82.8			79.9
Construction in progress			56.2			47.8
Total property, plant and equipment			967.2			948.7
Accumulated depreciation and amortization			670.4			647.5
Total property, plant and equipment, net			$	296.8		$	301.2
Other non-current assets
Right-of-use lease assets			$	78.6		$	83.6
Deferred income taxes			27.3			27.4
Deferred compensation plan assets			24.2			22.6
Other non-current assets			70.3			69.2
Total other non-current assets			$	200.4		$	202.8
Other current liabilities
Dividends payable			$	33.1		$	33.2
Accrued warranty			43.0			37.0
Accrued rebates and incentives			209.6			122.0
Billings in excess of cost			30.7			22.5
Current lease liability			24.7			22.1
Income taxes payable			21.8			14.6
Accrued restructuring			12.3			15.2
Other current liabilities			152.0			143.8
Total other current liabilities			$	527.2		$	410.4
Other non-current liabilities
Long-term lease liability			$	56.1		$	65.1
Income taxes payable			45.0			44.8
Self-insurance liabilities			45.1			42.0
Deferred compensation plan liabilities			24.2			22.6
Foreign currency contract liabilities			26.3			69.6
Other non-current liabilities			28.1			25.3
Total other non-current liabilities			$	224.8		$	269.4

Pentair plc and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

9.Goodwill and Other Identifiable Intangible Assets

The changes in the carrying amount of goodwill by reportable segment were as follows:

In millions			December 31, 2020			Purchase Accounting Adjustments			Acquisitions			Foreign currency  translation/other			September 30, 2021
Consumer Solutions			$	1,580.5		$	(1.2)		$	29.0		$	(6.0)		$	1,602.3
Industrial & Flow Technologies			811.7			—			—			(27.5)			784.2
Total goodwill			$	2,392.2		$	(1.2)		$	29.0		$	(33.5)		$	2,386.5

Identifiable intangible assets consisted of the following:

Identifiable intangible asset amortization expense was $6.0 million and $6.9 million for the three months ended September 30, 2021 and 2020, respectively, and $19.4 million and $21.5 million for the nine months ended September 30, 2021 and 2020, respectively.

Estimated future amortization expense for identifiable intangible assets during the remainder of 2021 and the next five years is as follows:

			Q4
			2021			2022			2023			2024			2025			2026
Estimated amortization expense			$	5.8		$	17.6		$	15.4		$	14.9		$	14.9		$	13.5

Pentair plc and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

10.Debt

Debt and the average interest rates on debt outstanding were as follows: 

In millions			Average interest rate as of September 30, 2021			Maturity Year			September 30, 2021			December 31, 2020
Revolving credit facilities			1.080%			2023			$	—		$	36.1
Term loans			1.006%			2023			200.0			200.0
Senior notes - fixed rate (1)			5.000%			2021			—			103.8
Senior notes - fixed rate (1)			3.150%			2022			88.3			88.3
Senior notes - fixed rate (1)			4.650%			2025			19.3			19.3
Senior notes - fixed rate (1)			4.500%			2029			400.0			400.0
Unamortized debt issuance costs and discounts			N/A			N/A			(6.7)			(7.9)
Total debt									$	700.9		$	839.6
(1) Senior notes are guaranteed as to payment by Pentair plc.

Pentair, Pentair Finance S.à r.l (“PFSA“) and Pentair, Inc. are parties to a credit agreement (the “Senior Credit Facility”), with Pentair as guarantor and PFSA and Pentair, Inc. as borrowers, providing for a $900.0 million senior unsecured revolving credit facility. The Senior Credit Facility has a maturity date of April 25, 2023. Borrowings under the Senior Credit Facility bear interest at a rate equal to an adjusted base rate or the London Interbank Offered Rate, plus, in each case, an applicable margin. The applicable margin is based on, at PFSA’s election, Pentair’s leverage level or PFSA’s public credit rating.

The Senior Credit Facility provides for the extension of term loans in an aggregate amount of $200.0 million (the “Term Loans”). We have utilized the term loan extension since December 2019. The Term Loans are in addition to the revolving credit facility commitment. In addition, PFSA has the option to further increase the Senior Credit Facility in an aggregate amount of up to $300.0 million, through a combination of increases to the total commitment amount of the revolving credit facility and/or one or more tranches of term loans in addition to the Term Loans, subject to customary conditions, including the commitment of the participating lenders.

PFSA is authorized to sell short-term commercial paper notes to the extent availability exists under the Senior Credit Facility. PFSA uses the Senior Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. PFSA had no commercial paper outstanding as of September 30, 2021 and December 31, 2020.

In 2020, the commercial paper market began to experience high levels of volatility due to uncertainty related to the COVID-19 pandemic. The volatility impacted both market access to and pricing of commercial paper. As a cost mitigation action, we withdrew our credit ratings to access the commercial paper market and continued to use the revolving credit facility, along with cash generated from operations, to fund our general operations. As of September 30, 2021, total availability under the Senior Credit Facility was $900.0 million.

Our debt agreements contain various financial covenants, but the most restrictive covenants are contained in the Senior Credit Facility. The Senior Credit Facility contains covenants requiring us not to permit (i) the ratio of our consolidated debt (net of our consolidated unrestricted cash in excess of $5.0 million but not to exceed $250.0 million) to our consolidated net income (excluding, among other things, non-cash gains and losses) before interest, taxes, depreciation, amortization and non-cash share-based compensation expense (“EBITDA”) on the last day of any period of four consecutive fiscal quarters to exceed 3.75 to 1.00 (the “Leverage Ratio”) and (ii) the ratio of our EBITDA to our consolidated interest expense, for the same period to be less than 3.00 to 1.00 as of the end of each fiscal quarter. For purposes of the Leverage Ratio, the Senior Credit Facility provides for the calculation of EBITDA giving pro forma effect to certain acquisitions, divestitures and liquidations during the period to which such calculation relates.

In addition to the Senior Credit Facility, we have various other credit facilities with an aggregate availability of $21.4 million, of which there were no outstanding borrowings at September 30, 2021. Borrowings under these credit facilities bear interest at variable rates.

Pentair plc and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

We have $88.3 million of fixed rate senior notes maturing in the next twelve months. We classified this debt as long-term as of September 30, 2021 as we have the intent and ability to refinance such obligation on a long-term basis under the Senior Credit Facility.

Debt outstanding, excluding unamortized issuance costs and discounts, at September 30, 2021 matures on a calendar year basis as follows:

			Q4
In millions			2021			2022			2023			2024			2025			2026						Thereafter			Total
Contractual debt obligation maturities			$	—		$	88.3		$	200.0		$	—		$	19.3		$	—					$	400.0		$	707.6

11.Derivatives and Financial Instruments

Derivative financial instruments

We are exposed to market risk related to changes in foreign currency exchange rates. To manage the volatility related to this exposure, we periodically enter into a variety of derivative financial instruments. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates. The derivative contracts contain credit risk to the extent that our bank counterparties may be unable to meet the terms of the agreements. The amount of such credit risk is generally limited to the unrealized gains, if any, in such contracts. Such risk is minimized by limiting those counterparties to major financial institutions of high credit quality.

Foreign currency contracts

We conduct business in various locations throughout the world and are subject to market risk due to changes in the value of foreign currencies in relation to our reporting currency, the U.S. dollar. We manage our economic and transaction exposure to certain market-based risks through the use of foreign currency derivative financial instruments. Our objective in holding these derivatives is to reduce the volatility of net earnings and cash flows associated with changes in foreign currency exchange rates. The majority of our foreign currency contracts have an original maturity date of less than one year.

At September 30, 2021 and December 31, 2020, we had outstanding foreign currency derivative contracts with gross notional U.S. dollar equivalent amounts of $10.6 million and $12.4 million, respectively. The impact of these contracts on the Condensed Consolidated Statements of Operations and Comprehensive Income was not material for any period presented.

Cross Currency Swaps

At September 30, 2021 and December 31, 2020, we had outstanding cross currency swap agreements with a combined notional amount of $817.8 million and $855.1 million, respectively. The agreements are accounted for as either cash flow hedges, to hedge foreign currency fluctuations on certain intercompany debt, or as net investment hedges to manage our exposure to fluctuations in the Euro-U.S. Dollar exchange rate. We had deferred foreign currency losses of $8.3 million and $32.8 million at September 30, 2021 and December 31, 2020, respectively, in Accumulated other comprehensive loss associated with our cross currency swap activity. The periodic interest settlements related to our cross currency swap agreements are classified as operating activities. The cash flows that relate to principal balances are classified as financing activities for the cash flow hedges on intercompany debt and investing activities for the net investment hedges.

In January 2021, one of our cross currency swap agreements which was accounted for as a cash flow hedge matured, resulting in a net cash payment of $14.7 million. The net cash payment is included within financing activities on the Condensed Consolidated Statements of Cash Flows.

Fair value measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:

In making fair value measurements, observable market data must be used when available. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

Fair value of financial instruments

The following methods were used to estimate the fair values of each class of financial instruments: 

•short-term financial instruments (cash and cash equivalents, accounts and notes receivable, accounts and notes payable and variable-rate debt) — recorded amount approximates fair value because of the short maturity period;

•long-term fixed-rate debt, including current maturities — fair value is based on market quotes available for issuance of debt with similar terms, which are inputs that are classified as Level 2 in the valuation hierarchy defined by the accounting guidance;

•foreign currency contract agreements — fair values are determined through the use of models that consider various assumptions, including time value, yield curves, as well as other relevant economic measures, which are inputs that are classified as Level 2 in the valuation hierarchy defined by the accounting guidance; and

•deferred compensation plan assets (mutual funds, common/collective trusts and cash equivalents for payment of certain non-qualified benefits for retired, terminated and active employees) — fair value of mutual funds and cash equivalents are based on quoted market prices in active markets that are classified as Level 1 in the valuation hierarchy defined by the accounting guidance; fair value of common/collective trusts are valued at net asset value (“NAV”), which is based on the fair value of the underlying securities owned by the fund and divided by the number of shares outstanding.

The recorded amounts and estimated fair values of total debt, excluding unamortized issuance costs and discounts, were as follows:

Financial assets and liabilities measured at fair value on a recurring and nonrecurring basis were as follows:

12.Income Taxes

We manage our affairs so that we are centrally managed and controlled in the United Kingdom (“U.K.”) and therefore have our tax residency in the U.K. The provision for income taxes consists of provisions for the U.K. and international income taxes. We operate in an international environment with operations in various locations outside the U.K. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates.

The effective income tax rate for the nine months ended September 30, 2021 was 14.2%, compared to 19.9% for the nine months ended September 30, 2020. We continue to actively pursue initiatives to reduce our effective tax rate. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.

The liability for uncertain tax positions was $46.7 million and $46.3 million at September 30, 2021 and December 31, 2020, respectively. We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Net interest expense, respectively, on the Condensed Consolidated Statements of Operations and Comprehensive Income, which is consistent with our past practices.

13.Benefit Plans

Components of net periodic benefit expense for our pension plans for the three and nine months ended September 30, 2021 and 2020 were as follows:

Components of net periodic benefit expense for our other post-retirement plans for the three and nine months ended September 30, 2021 and 2020 were not material.

14.Shareholders’ Equity

Share repurchases

In May 2018, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $750.0 million (the “2018 Authorization”). The 2018 authorization expired on May 31, 2021. In December 2020, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $750.0 million (the “2020 Authorization”). The 2020 Authorization expires on December 31, 2025. The 2020 Authorization supplemented the 2018 Authorization.

During the nine months ended September 30, 2021, we repurchased 1.4 million of our ordinary shares for $100.0 million, of which 0.8 million shares, or $50.0 million, and 0.6 million shares, or $50.0 million, were repurchased pursuant to the 2018 Authorization and the 2020 Authorization, respectively. As of September 30, 2021, we had $700.0 million available for share repurchases under the 2020 Authorization.

Dividends payable

On September 21, 2021, the Board of Directors declared a quarterly cash dividend of $0.20, payable on November 5, 2021 to shareholders of record at the close of business on October 22, 2021. As a result, the balance of dividends payable included in Other current liabilities on our Condensed Consolidated Balance Sheets was $33.1 million at September 30, 2021, compared to $33.2 million at December 31, 2020.

15.Segment Information

We evaluate performance based on net sales and segment income (loss) and use a variety of ratios to measure performance of our reporting segments. 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. Segment income (loss) represents equity income of unconsolidated subsidiaries and operating income exclusive of intangible amortization, certain acquisition related expenses, costs of restructuring and transformation activities, impairments and other unusual non-operating items.

Pentair plc and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Financial information by reportable segment is as follows:

			Three months ended									Nine months ended
In millions			September 30, 2021			September 30, 2020						September 30, 2021			September 30, 2020
Net sales
Consumer Solutions			$	613.6		$	470.8					$	1,711.9		$	1,260.8
Industrial & Flow Technologies			355.1			327.4						1,063.1			960.1
Other			0.5			0.3						1.2			0.9
Consolidated			$	969.2		$	798.5					$	2,776.2		$	2,221.8
Segment income (loss)
Consumer Solutions			$	144.2		$	113.8					$	418.6		$	295.3
Industrial & Flow Technologies			52.4			42.7						159.5			131.5
Other			(16.9)			(16.0)						(59.1)			(50.1)
Consolidated			$	179.7		$	140.5					$	519.0		$	376.7

The following table presents a reconciliation of consolidated segment income to consolidated income from continuing operations before income taxes:

16.Commitments and Contingencies

Legal proceedings

We have been, and in the future may be, made parties to a number of actions filed or have been, and in the future may be, given notice of potential claims relating to the conduct of our business, including those relating to commercial, regulatory or contractual disputes with suppliers, authorities, customers or parties to acquisitions and divestitures, intellectual property matters, environmental, asbestos, safety and health matters, product liability, the use or installation of our products, consumer matters, and employment and labor matters.

While we believe that a material impact on our consolidated financial position, results of operations or cash flows from any such future claims or potential claims 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 the notes to our consolidated financial statements could change in the future.

Environmental matters

We have been named as defendant, target or a potentially responsible party in a number of environmental clean-ups relating to our current or former business units. Accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. It can be difficult to estimate reliably the final costs of investigation and remediation due to various factors. In our opinion, the amounts accrued are appropriate based on facts and circumstances as currently known. As of September 30, 2021 and December 31, 2020, our recorded reserves for environmental matters were not material.

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.

Warranties and guarantees

In connection with our disposition of 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 obligations under such indemnifications are 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 adverse effect on our financial position, results of operations or cash flows.

We recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. In connection with the disposition of the Valves & Controls business, we agreed to indemnify Emerson Electric Co. for certain pre-closing tax liabilities. We have recorded a liability representing the fair value of our expected future obligation for this matter.

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.

Pentair plc and Subsidiaries

Notes to condensed consolidated financial statements (unaudited)