What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-26 compared with 2021-07-27 · 145 added, 124 removed, 308 unchanged (47% of the section changed)

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These factors include the overall impact of the COVID-19 pandemic on our business;

the duration and severity of the COVID-19 pandemic, the impact of virus variants and the rate of vaccinations;

the duration and severity of the COVID-19 pandemic, the impact of virus variants and the rate and effectiveness of vaccinations;

actions that may be taken by us, other businesses and governments to address or otherwise mitigate the impact of the COVID-19 pandemic, including those that may impact our ability to operate our facilities, meet production demands, and deliver products to our customers;

the impacts of the COVID-19 pandemic on the global economy, our customers and suppliers, and customer demand;

the impacts of the COVID-19 pandemic on the global economy, our workforce, customers and suppliers, and customer demand;

overall global economic and business conditions impacting our business, including the strength of housing and related markets;

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failure of markets to accept new product introductions and enhancements;

the ability to successfully identify, finance, complete and integrate acquisitions;

the ability to successfully identify, finance, complete and integrate acquisitions, including the Pleatco acquisition;

the ability to achieve the benefits of our restructuring plans, cost reduction initiatives and transformation program;

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Consumer Solutions and Industrial & Flow Technologies.

For the first six months of 2021, the Consumer Solutions and Industrial & Flow Technologies segments represented approximately 61% and 39% of total revenues, respectively.

For the first nine months of 2021, the Consumer Solutions and Industrial & Flow Technologies segments represented approximately 62% and 38% of total revenues, respectively.

We classify our operations into business segments based primarily on types of products offered and markets served:

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The primary focus of this segment is business-to-business.

On September 15, 2021, as part of both of our Consumer Solutions and Industrial & Flow Technologies reporting segments, we entered into a definitive agreement to acquire Pleatco Holdings, LLC and related entities (“Pleatco”), a manufacturer of water filtration and clean air technologies for pool, spa and industrial air customers, for total consideration of approximately $255.0 million in cash, subject to customary adjustments.

We completed the Pleatco acquisition on October 18, 2021.

On May 19, 2021, as part of our Consumer Solutions reporting segment, we completed the acquisition of Ken’s Beverage, Inc.

(“KBI”) for $82.8 million in cash, net of cash acquired.

KBI provides beverage equipment and services to commercial customers.

COVID-19 Pandemic Update

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The COVID-19 pandemic continues to persist throughout the United States (“U.S.”) and the world, with the continued potential for significant impact.

The COVID-19 pandemic has resulted in governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, “shelter-in-place” and “stay-at-home” orders, travel restrictions, business curtailments, limits on gatherings, and other measures.

In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the economic impacts of the COVID-19 pandemic.

Our businesses generally have been and continue to be considered essential under applicable government-mandated orders which has allowed us to maintain business continuity at substantially all of our manufacturing facilities throughout the COVID-19 pandemic.

While our facilities have remained operational during the first half of 2021, we continue to experience various degrees of manufacturing cost pressures and inefficiencies as a result of supply chain issues and, in certain businesses, increased demand.

While our facilities have remained operational during the first nine months of 2021, we continue to experience various degrees of manufacturing cost pressures and inefficiencies as a result of supply chain issues and, in certain businesses, increased demand.

Although we regularly monitor the financial health and operations of companies in our supply chain, and use alternative suppliers when necessary and available, financial hardship or government restrictions on our suppliers or sub-suppliers caused by the COVID-19 pandemic could cause a disruption in our ability to obtain raw materials or components required to manufacture our products and adversely affect our operations.

Further, as the COVID-19 pandemic conditions improve and economic activity increases, we have experienced supply chain challenges, including increased lead times, as well as inflation of raw materials, logistics and labor costs due to availability constraints and high demand.

We expect the inflationary trends to continue throughout the remainder of 2021.

Our Consumer Solutions segment delivered significant growth in the first six months of 2021 led by continued strength in our pool and residential water treatment businesses.

Further, as the COVID-19 pandemic conditions have improved and economic activity has increased, we have experienced supply chain challenges, including increased lead times, as well as inflation of raw materials, logistics and labor costs due to availability constraints and high demand.

We expect the inflationary trends to continue throughout the remainder of 2021 and may continue thereafter.

Our Consumer Solutions segment delivered significant growth in the first nine months of 2021 led by continued strength in our pool and residential water treatment businesses.

The high level of demand in these businesses continued as consumers invested in their homes and backyards.

Demand in our commercial water treatment business improved in the second quarter of 2021 as the restaurant and hospitality industries began to reopen.

Our Industrial & Flow Technologies segment had strong growth in the first six months of 2021 mainly driven by increased volume within our residential and irrigation flow businesses due to high demand in the residential vertical.

Our commercial flow business experienced increased sales in the first half of 2021 due to strong demand in our water supply and water disposal product lines.

Demand in our infrastructure business has stabilized but we remain disciplined in our project selection.

In our industrial filtration business, demand is mostly driven by customer capital spending, which saw recovery in the second quarter of 2021 in most industries served.

We maintain our commitment to protect the health and safety of our employees, customers, and suppliers by continuing our enhanced safety protocols for those on-site at our manufacturing facilities and for those who provide manufacturing-support activities.

Demand in our commercial water treatment business improved in 2021 as the restaurant and hospitality industries reopened.

Our Industrial & Flow Technologies segment had strong growth in the first nine months of 2021 mainly driven by increased volume within our residential and irrigation flow businesses due to high demand in the residential vertical.

Our commercial flow business experienced increased sales in the first nine months of 2021 due to strong demand in our water supply and water disposal product lines.

Demand in our infrastructure business stabilized in the first half of 2021 and sales increased in the third quarter.

In our industrial filtration business, demand is mostly driven by customer capital spending, which saw recovery begin in the second quarter and growth in the third quarter of 2021 in food and beverage while the industrial long-cycle project business had decreased sales volumes in comparison with the prior year.

In addition, employees who do not need to be physically present at our facilities and sites to perform their job responsibilities generally continue to work from home and essential business travel remains the main travel activity.

The extent of the COVID-19 pandemic’s effect on our operational and financial performance in the future will depend on future developments, including the duration, geographic location and intensity of the pandemic, the impact of virus variants, the rate of vaccinations, our continued ability to manufacture and distribute our products, as well as any future actions that may be taken by governmental authorities or by us relating to the pandemic.

The extent of the COVID-19 pandemic’s effect on our operational and financial performance in the future will depend on future developments, including the duration, geographic location and intensity of the pandemic, the impact of virus variants, the rate and effectiveness of vaccinations, our continued ability to manufacture and distribute our products, as well as any future actions that may be taken by governmental authorities or by us relating to the pandemic.

For more information regarding factors and events that may impact our business, results of operations and financial condition as a result of the COVID-19 pandemic, see “Risk Factors - Risks Related to the COVID-19 Pandemic” included in Item 1A.

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• developing a future state digital enterprise by eliminating non-value add activities, streamlining processes and using automation to increase productivity;

• modernizing general and administrative expenses, and

• modernizing general and administrative expenses;

• delivering decision making speed through improved processes and analytics.

Throughout the remainder of 2021 and beyond we expect to incur transformation costs including and related to labor restructuring, non-labor restructuring, IT investments and design and execution charges.

During the first nine months of 2021, we incurred transformation costs that primarily represented professional services and project management related charges.

Throughout the remainder of 2021 and beyond we expect to continue to incur transformation costs that include professional services, project management and related design and execution charges, as well as costs related to both labor and non-labor restructuring and IT investments.

Key Trends and Uncertainties Regarding Our Existing Business

The following trends and uncertainties affected our financial performance in the first six months of 2021 and/or may impact our results in the future:

• There are many uncertainties regarding the COVID-19 pandemic, including the anticipated duration and severity of the pandemic, the spread of increasing number of virus variants, the extent of worldwide social, political and economic disruption it may continue to cause and the development and distribution of vaccines to address the COVID-19 virus.

The broader implications of the COVID-19 pandemic on our business, financial condition, results of operations and cash flows cannot be determined at this time, and ultimately will be affected by a number of evolving factors including the length of time that the pandemic continues and the impact of vaccines on it, the impact of virus variants, the rate of vaccinations, the pandemic’s effect on the demand for our products and services, our supply chain, and our manufacturing capacity, as well as the impact of governmental regulations imposed in response to the pandemic.

The following trends and uncertainties affected our financial performance in the first nine months of 2021 and/or may impact our results in the future:

• There are many uncertainties regarding the COVID-19 pandemic, including the anticipated duration and severity of the pandemic, the spread of increasing number of virus variants, the extent of worldwide social, political and economic disruption it may continue to cause and the distribution of vaccines to address the COVID-19 virus.

The broader implications of the COVID-19 pandemic on our business, financial condition, results of operations and cash flows cannot be determined at this time, and ultimately will be affected by a number of evolving factors including the length of time that the pandemic continues and the impact of vaccines on it, the impact of virus variants, the rate and effectiveness of vaccinations, the pandemic’s effect on the demand for our products and services, our supply chain, and our manufacturing capacity, as well as the impact of governmental regulations imposed in response to the pandemic.

See further discussion above under “ COVID-19 Pandemic Update” for key trends and uncertainties with regard to the COVID-19 pandemic.

• During 2020 and the first half of 2021, we executed certain business restructuring initiatives unrelated to the COVID-19 pandemic aimed at reducing our fixed cost structure and realigning our business.

• During 2020 and the first nine months of 2021, we executed certain business restructuring initiatives unrelated to the COVID-19 pandemic aimed at reducing our fixed cost structure and realigning our business.

We expect these actions to continue throughout the remainder of 2021 and to drive margin growth.

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We expect to implement Transformation Program initiatives and incur transformation costs throughout the remainder of 2021 and beyond.

• During the first nine months of 2021, we experienced supply chain challenges, including increased lead times for raw materials due to availability constraints and high demand.

While we have elevated our engagement with our suppliers and used secondary suppliers and new methods of procurement where available to mitigate the supply chain pressures, we expect supply chain challenges to continue for the remainder of 2021, and which may continue thereafter and could negatively impact our results of operations.

• During the first nine months of 2021, we experienced inflationary increases of raw materials such as metals, resins and electronics, as well as increases in logistics and labor costs.

While we have taken pricing actions and we strive for productivity improvements that could help offset these inflationary cost increases, we expect inflationary cost increases to continue for the remainder of 2021, and which may continue thereafter and could negatively impact our results of operations.

• We have identified specific product and geographic market opportunities that we find attractive and continue to pursue, both within and outside the U.S.

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Unless we successfully penetrate these markets, our core sales growth will likely be limited or may decline.

• During the first half of 2021, we experienced supply chain challenges, including increased lead times, and inflationary increases of raw materials such as metals, resins and electronics, logistics and labor costs due to availability constraints and high demand.

While we have taken pricing actions and we strive for productivity improvements that could help offset these cost increases, we expect supply chain pressures and inflationary cost increases to continue for the remainder of 2021, which may continue thereafter and could negatively impact our results of operations.

In 2021, our operating objectives remain to focus on delivering our core while continuing to build out our future.

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CONSOLIDATED RESULTS OF OPERATIONS

The consolidated results of operations for the three months ended June 30, 2021 and 2020 were as follows:

The consolidated results of operations for the three months ended September 30, 2021 and 2020 were as follows:

Three months ended

In millions June 30,

2021 June 30,

In millions September 30,

2021 September 30,

Change % / Point

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% of net sales 17.3 % 16.0 % 1.3 pts

Loss on sale of businesses — 0.1 (0.1) N.M.

(Gain) loss on sale of businesses (1.4) — (1.4) N.M.

Other expense (income) 0.3 (2.5) 2.8 N.M.

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Not Meaningful

CONSOLIDATED RESULTS OF OPERATIONS

The consolidated results of operations for the six months ended June 30, 2021 and June 30, 2020 were as follows:

Six months ended

In millions June 30,

2021 June 30,

The consolidated results of operations for the nine months ended September 30, 2021 and September 30, 2020 were as follows:

Nine months ended

In millions September 30,

2021 September 30,

Change % / Point

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% of net sales 17.5 % 15.3 % 2.2 pts

Loss on sale of businesses — 0.1 (0.1) N.M.

Other expense 0.7 0.9 (0.2) (22.2) %

(Gain) loss on sale of businesses (1.4) 0.1 (1.5) N.M.

Other expense (income) 1.0 (1.6) 2.6 N.M.

Net interest expense 11.5 20.0 (8.5) (42.5) %

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The components of the consolidated net sales change from the prior period were as follows:

Three months ended June 30, 2021 Six months ended June 30, 2021

Three months ended September 30, 2021 Nine months ended September 30, 2021

over the prior year period over the prior year period

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Total 21.4 % 25.0 %

The 31.9 and 27.0 percent increases in net sales in the second quarter and first half, respectively, of 2021 from 2020 were primarily driven by:

The 21.4 and 25.0 percent increases in net sales in the third quarter and first nine months, respectively, of 2021 from 2020 were primarily driven by:

• volume increase in our Consumer Solutions segment mainly driven by continued robust demand in our pool and residential water treatment businesses;

• volume increase in our residential and irrigation flow businesses in our Industrial & Flow Technologies segment due to strong demand across all product lines in those businesses;

• selective increases in selling prices to mitigate inflationary cost increases;

• favorable foreign currency effects compared to the second quarter and first six month of the prior year.

The 1.8 and 1.4 percentage point increases in gross profit as a percentage of net sales in the second quarter and first half, respectively, of 2021 from 2020 were primarily driven by:

• volume increase in our Industrial & Flow Technologies segment primarily driven by strong demand across all product lines in the residential and irrigation flow businesses as well as increased demand in sustainable gas solutions and recovery in short cycle orders in our food and beverage business;

• selective increases in selling prices to mitigate a rise in inflationary costs;

• favorable foreign currency effects compared to the third quarter and first nine months of the prior year.

The 0.2 percentage point decrease in gross profit as a percentage of net sales in the third quarter of 2021 from 2020 was primarily driven by:

• inflationary cost increases due to tight supply of raw materials such as metals, resins and electronics;

• higher logistics and labor costs due to increased demand as well as factory labor wage increases.

This decrease was partially offset by:

• volume expansion in both our Consumer Solutions and Industrial & Flow Technologies segments;

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• increased productivity in both the Consumer Solutions and Industrial & Flow Technologies segments.

This increase was partially offset by:

The 0.9 percentage point increase in gross profit as a percentage of net sales in the first nine months of 2021 from 2020 was primarily driven by:

• volume expansion in both our Consumer Solutions and Industrial & Flow Technologies segments;

• selective increases in selling prices to mitigate impacts of inflation;

• increased productivity in both the Consumer Solutions and Industrial & Flow Technologies segments.

The increase was partially offset by:

• inflationary cost increases due to tight supply of raw materials such as metals, resins, and electronics;

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Selling, general and administrative expenses (“SG&A”)

The 0.4 percentage point increase in SG&A as a percentage of net sales in the second quarter of 2021 from 2020 was primarily driven by:

• higher employee incentive compensation due to increased sales in our Consumer Solutions and Industrial & Flow Technologies segments;

• restructuring, transformation and other costs of $5.8 million in the second quarter of 2021, compared to $1.1 million in the second quarter of 2020;

• lower travel and entertainment, trade show and advertising expenses in the second quarter of 2020 due to the government restrictions in place for the COVID-19 pandemic.

This increase was partially offset by:

• lower amortization on definite-lived intangible assets.

The 1.2 percentage point decrease in SG&A as a percentage of net sales in the first half of 2021 from 2020 was primarily driven by:

• reduction in travel and entertainment, trade show and advertising expenses compared to the prior year due to the COVID-19 pandemic restrictions not beginning until March of 2020;

The 1.3 and 1.1 percentage point decreases in SG&A as a percentage of net sales in the third quarter and first nine months, respectively, of 2021 from 2020 were primarily driven by:

• reduction in travel and entertainment, trade show and advertising expenses for the first nine months of 2021 compared to the prior year due to the COVID-19 pandemic restrictions not beginning until March of 2020;

• legal accrual reductions of $2.4 million in the first quarter of 2021;

• lower amortization on definite-lived intangible assets;

• leverage on certain fixed costs due to the significant increase in sales year over year.

This decrease was partially offset by:

These decreases were partially offset by:

• higher employee incentive compensation due to increased sales in our Consumer Solutions and Industrial & Flow Technologies segments;

• restructuring, transformation and other costs of $7.3 million in the first six months of 2021, compared to $3.5 million in the first six months of 2020.

• restructuring and transformation costs of $4.0 million and $11.2 million in the third quarter and first nine months, respectively, of 2021, compared to $1.8 million and $5.6 million in the third quarter and first nine months, respectively, of 2020.

Net interest expense

The 50.6 and 39.0 percent decreases in net interest expense in the second quarter and first half, respectively, of 2021 from 2020 were primarily driven by:

The 51.9 and 42.5 percent decreases in net interest expense in the third quarter and first nine months, respectively, of 2021 from 2020 were primarily driven by:

• strong cash flows in 2021 used to repay senior fixed notes that matured as well as reduce variable debt leading to overall lower debt levels compared to the same periods of the prior year;

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Provision for income taxes

The 12.9 and 10.6 percentage point decreases in the effective tax rate in the second quarter and first half, respectively, of 2021 from 2020 were primarily driven b y:

• the unfavorable impact of discrete items, including items related to the Coronavirus Aid, Relief, and Economic Security Act and items related to final regulations as part of the Tax Cuts and Jobs Act of 2017 that limit the deductibility of interest expense for U.S.

tax purposes that occurred during the second quarter and first half of 2020 that did not occur in 2021.

These decreases were partially offset by:

The 1.8 percentage point increase in the effective tax rate in the third quarter of 2021 from 2020 was primarily driven b y:

• the impact of discrete items specific to the third quarter of 2021 compared to 2020;

• the unfavorable mix of global earnings.

The 5.7 percentage point decrease in the effective tax rate in the first nine months of 2021 from 2020 was primarily driven b y:

• the unfavorable impact of discrete items, including items related to the Coronavirus Aid, Relief, and Economic Security Act, and items related to final regulations as part of the Tax Cuts and Jobs Act of 2017 that place limitations on the deductibility of certain interest expense for U.S.

tax purposes that occurred during the first nine months of 2020 that did not occur in 2021.

The decrease was partially offset by:

• the unfavorable mix of global earnings.

SEGMENT RESULTS OF OPERATIONS

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The net sales and segment income for Consumer Solutions were as follows:

Three months ended Six months ended

In millions June 30,

2021 June 30,

2020 % / Point Change June 30,

2021 June 30,

Three months ended Nine months ended

In millions September 30,

2021 September 30,

2020 % / Point Change September 30,

2021 September 30,

2020 % / Point Change

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The components of the change in Consumer Solutions net sales from the prior period were as follows:

Three months ended June 30, 2021 Six months ended June 30, 2021

Three months ended September 30, 2021 Nine months ended September 30, 2021

over the prior year period over the prior year period

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Total 30.3 % 35.8 %

The 43.8 and 39.0 percent increases in net sales for Consumer Solutions in the second quarter and first half, respectively, of 2021 from 2020 were primarily driven by:

The 30.3 and 35.8 percent increases in net sales for Consumer Solutions in the third quarter and first nine months, respectively, of 2021 from 2020 were primarily driven by:

• increased sales volume in our pool business due to consumers increasing their pool use while continuing to invest in their homes and backyards as a result of the COVID-19 pandemic;

• increased sales volume in our water treatment business as residential demand remained strong in the second quarter and first half of 2021;

• increased sales volume in our commercial water treatment business in the second quarter of 2021 due to increased demand as the restaurant and hospitality industries reopen;

• increased sales due to acquisitions that occurred in the first half of 2021 and second half of 2020;

• increased sales volume in our water treatment business as residential demand remained strong in the third quarter and first nine months of 2021;

• increased sales volume in our commercial water treatment business in the third quarter and first nine months of 2021 due to improved demand in the restaurant and hospitality industries;

• increased sales due to acquisitions that occurred in the first nine months of 2021 and last quarter of 2020;

• selective increases in selling prices to mitigate impacts of inflation;

• favorable foreign currency effects compared to the second quarter and first half of the prior year.

• favorable foreign currency effects compared to the third quarter and first nine months of the prior year.

Segment income

The components of the change in Consumer Solutions segment income as a percentage of net sales from the prior period were as follows:

Three months ended June 30, 2021 Six months ended June 30, 2021

Three months ended September 30, 2021 Nine months ended September 30, 2021

over the prior year period over the prior year period

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Total (0.7) pts 1.1 pts

The 0.8 and 2.0 percentage point increases in segment income for Consumer Solutions as a percentage of net sales in the second quarter and first half, respectively, of 2021 from 2020 were primarily driven by:

• increase in sales volume in our pool business resulting in cost leverage and favorable income drop through;

• reduction in travel and entertainment, trade show and advertising expenses compared to the first half of the prior year due to the COVID-19 pandemic;

The 0.7 percentage point decrease in segment income for Consumer Solutions as a percentage of net sales in the third quarter of 2021 from 2020 was primarily driven by:

• inflationary cost increases due to high demand and tight supply of raw materials such as metals, resins and electronics along with increased logistics and labor costs;

• higher sales rebates and employee incentive compensation expense in line with increased sales in our pool and water treatment businesses.

The decrease was partially offset by:

• selective increases in selling prices to mitigate the impacts of inflation;

• increased sales volume across all of our businesses resulting in cost leverage and favorable income drop through;

• increased productivity.

These increases were partially offset by:

The 1.1 percentage point increase in segment income for Consumer Solutions as a percentage of net sales in the first nine months of 2021 from 2020 was primarily driven by:

• increased sales volume in all of our businesses resulting in cost leverage and favorable income drop through;

• selective increases in selling prices to mitigate the impacts of inflation;

• increased productivity.

The increase was partially offset by:

• inflationary cost increases due to high demand and tight supply of raw materials such as metals, resins, and electronics along with increased logistics and labor costs;

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The net sales and segment income for Industrial & Flow Technologies were as follows:

Three months ended Six months ended

In millions June 30,

2021 June 30,

2020 % / Point Change June 30,

2021 June 30,

Three months ended Nine months ended

In millions September 30,

2021 September 30,

2020 % / Point Change September 30,

2021 September 30,

2020 % / Point Change

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The components of the change in Industrial & Flow Technologies net sales from the prior period were as follows:

Three months ended June 30, 2021 Six months ended June 30, 2021

Three months ended September 30, 2021 Nine months ended September 30, 2021

over the prior year period over the prior year period

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Total 8.5 % 10.7 %

The 16.7 and 11.9 percent increases in net sales for Industrial & Flow Technologies in the second quarter and first half, respectively, of 2021 from 2020 were primarily driven by:

• increased sales volume in our residential and irrigation flow businesses in the second quarter and first half of 2021 due to strong demand across all product lines in these businesses;

• increased sales volume in our food and beverage business in the second quarter of 2021 due to demand in sustainable gas solutions and recovery in short cycle orders;

• increased sales volume in our commercial flow business in the second quarter of 2021 driven by our water disposal and water supply product lines;

The 8.5 and 10.7 percent increases in net sales for Industrial & Flow Technologies in the third quarter and first nine months, respectively, of 2021 from 2020 were primarily driven by:

• increased sales volume in our residential and irrigation flow businesses in the third quarter and first nine months of 2021 due to strong demand across all product lines in these businesses;

• increased sales volume in our food and beverage business in the third quarter and first nine months of 2021 due to demand in sustainable gas solutions and recovery in short cycle orders;

• selective increases in selling prices to mitigate inflationary cost increases;

• favorable foreign currency effects in the second quarter and first half compared to the same periods of the prior year.

• favorable foreign currency effects in the third quarter and first nine months compared to the same periods of the prior year.

These increases were partially offset by:

• decreased sales volume in our infrastructure flow business due to less project sales primarily in North America.

• decreased sales volume in our industrial filtration business.

Segment income

The components of the change in Industrial & Flow Technologies segment income as a percentage of net sales from the prior period were as follows:

Three months ended June 30, 2021 Six months ended June 30, 2021

Three months ended September 30, 2021 Nine months ended September 30, 2021

over the prior year period over the prior year period

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Total 1.8 pts 1.3 pts

The 1.6 and 1.1 percentage point increases in segment income for Industrial & Flow Technologies as a percentage of net sales in the second quarter and first half, respectively, of 2021 from 2020 were primarily driven by:

• increased sales volumes in our residential and irrigation flow, food and beverage and commercial flow businesses which resulted in increased leverage on fixed operating expenses and improved drop-through;

The 1.8 and 1.3 percentage point increases in segment income for Industrial & Flow Technologies as a percentage of net sales in the third quarter and first nine months, respectively, of 2021 from 2020 were primarily driven by:

• increased sales volumes in our residential and irrigation flow and food and beverage businesses which resulted in increased leverage on fixed operating expenses and improved income drop through;

• selective increases in selling prices to mitigate inflationary cost increases;

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These increases were partially offset by:

• inflationary cost increases due to high demand and tight supply of metals and resins along with increased logistics and labor costs.

• inflationary cost increases due to high demand and tight supply of metals and resins along with increased logistics due to supply chain constraints and labor costs due to workforce shortages;

• increased operating expenses as a result of our continued focus on strategic growth.

BACKLOG OF ORDERS BY SEGMENT

In millions June 30,

In millions September 30,

2021 December 31,

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Our backlog of orders is dependent upon when customers place orders and is not necessarily an indicator of our expected results for our 2021 net sales.

The increase in our backlog from December 31, 2020 to June 30, 2021 was driven by a significant increase in orders due to higher than anticipated demand in certain of our residential and commercial businesses coupled with continuing supply chain disruptions and labor availability challenges.

The increase in our backlog from December 31, 2020 to September 30, 2021 was driven by a significant increase in orders due to higher than anticipated demand in our pool business and certain of our residential and commercial businesses, coupled with continuing supply chain disruptions and labor availability challenges.

LIQUIDITY AND CAPITAL RESOURCES

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End-user demand for pool and certain pumping equipment has followed warm weather trends and historically has been at seasonal highs from April to August.

The magnitude of the sales spike has been partially mitigated by employing some advance sale “early buy” programs (generally including extended payment terms and/or additional discounts).

The magnitude of the sales spike has historically been partially mitigated by employing some advance sale “early buy” programs (generally including extended payment terms and/or additional discounts).

Demand for residential and agricultural water systems is also impacted by weather patterns, particularly by heavy flooding and droughts.

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We are committed to maintaining investment grade credit ratings and a solid liquidity position.

We completed the Pleatco acquisition on October 18, 2021 for total consideration of approximately $255.0 million in cash, subject to customary adjustments.

We funded the purchase price with cash on hand and borrowings under our revolving credit facility.

Summary of Cash Flows

Six months ended

In millions June 30,

2021 June 30,

Nine months ended

In millions September 30,

2021 September 30,

Net cash provided by (used for):

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Operating activities

The $361.0 million in net cash provided by operating activities of continuing operations in the first six months of 2021 primarily reflects $302.6 million of net income from continuing operations, net of non-cash depreciation and amortization.

Additionally, the Company had a cash inflow of $47.2 million as a result of changes in net working capital, primarily the result of collections of accounts receivables on higher sales, increased accounts payables resulting from inventory purchases to meet demand and increased sales leading to higher accrued rebates and incentives.

The $266.5 million in net cash provided by operating activities of continuing operations in the first six months of 2020 primarily reflects $183.9 million of net income from continuing operations, net of non-cash depreciation and amortization.

The $540.4 million in net cash provided by operating activities of continuing operations in the first nine months of 2021 primarily reflects $465.1 million of net income from continuing operations, net of non-cash depreciation and amortization.

Additionally, the Company had a cash inflow of $64.3 million as a result of changes in net working capital, primarily the result of increased sales and demand leading to higher accrued rebates and incentives, accounts payables, accounts receivable and inventory balances.

The $500.8 million in net cash provided by operating activities of continuing operations in the first nine months of 2020 primarily reflects $313.2 million of net income from continuing operations, net of non-cash depreciation and amortization.

Additionally, the Company had a cash inflow of $165.6 million as a result of changes in net working capital, primarily the result of collections on accounts receivables from our early buy programs in the pool business that became due in the second quarter.

Investing activities

Net cash used for investing activities in the first six months of 2021 reflects net cash paid of $82.8 million for the Ken’s Beverage, Inc.

acquisition, capital expenditures of $24.3 million and proceeds from the sale of property and equipment of $3.5 million.

Net cash used for investing activities in the first six months of 2020 primarily reflects capital expenditures of $30.5 million and cash paid for acquisitions in our Consumer Solutions reporting segment of $28.5 million, net of cash acquired.

Net cash used for investing activities in the first nine months of 2021 primarily reflects net cash paid of $82.8 million for the Ken’s Beverage, Inc.

acquisition, net of cash acquired, and capital expenditures of $38.6 million.

Net cash used for investing activities in the first nine months of 2020 primarily reflects capital expenditures of $44.4 million and cash paid for acquisitions in our Consumer Solutions reporting segment of $28.5 million, net of cash acquired.

Financing activities

Net cash used for financing activities in the first six months of 2021 primarily relates to the repayment of $103.8 million senior fixed notes, net borrowings of revolving long-term debt of $20.0 million, $50.0 million of share repurchases, dividend payments of $66.7 million and payments upon the maturity of cross currency swaps of $14.7 million.

Net cash used for financing activities in the first six months of 2020 primarily relates to $115.2 million of share repurchases and dividend payments of $63.7 million.

Net cash used for financing activities in the first nine months of 2021 primarily relates to the repayment of the 5.000% Senior Notes due in 2021 of $103.8 million, net repayments of revolving long-term debt of $36.1 million, $100.0 million of share repurchases, dividend payments of $99.9 million and payments upon the maturity of cross currency swaps of $14.7 million.

Net cash used for financing activities in the first nine months of 2020 primarily relates to net repayments of commercial paper and revolving long-term debt of $151.3 million, the repayment of the 3.625% Senior Notes due in 2020 of $74.0 million, $115.2 million of share repurchases and dividend payments of $95.4 million.

Free Cash Flow

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The following table is a reconciliation of free cash flow:

Six months ended

In millions June 30,

2021 June 30,

Nine months ended

In millions September 30,

2021 September 30,

Net cash provided by operating activities of continuing operations $ 540.4 $ 500.8

17 unchanged sentences

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 June 30, 2021 and December 31, 2020.

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.

1 unchanged sentence

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 June 30, 2021, total availability under the Senior Credit Facility was $883.9 million.

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.

1 unchanged sentence

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.

As of June 30, 2021, we were in compliance with all financial covenants in our debt agreements, and there was no material uncertainty about our ongoing ability to meet these covenants.

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 June 30, 2021.

As of September 30, 2021, we were in compliance with all financial covenants in our debt agreements, and there was no material uncertainty about our ongoing ability to meet these covenants.

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.

We have no fixed rate senior notes maturing in the next twelve months.

As of June 30, 2021, we have $60.1 million of cash held in certain countries in which the ability to repatriate is limited due to local regulations or significant potential tax consequences.

We have $88.3 million 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.

As of September 30, 2021, we had $60.2 million of cash held in certain countries in which the ability to repatriate is limited due to local regulations or significant potential tax consequences.

Share repurchases

4 unchanged sentences

The 2020 Authorization supplemented the 2018 Authorization.

During the six months ended June 30, 2021, we repurchased 0.8 million of our ordinary shares for $50.0 million under the 2018 Authorization.

As of June 30, 2021, we had $750.0 million available for share repurchases under the 2020 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 2020 Authorization, respectively.

As of September 30, 2021, we had $700.0 million available for share repurchases under the 2020 Authorization.

Dividends payable

On May 4, 2021, the Board of Directors declared a quarterly cash dividend of $0.20, payable on August 6, 2021 to shareholders of record at the close of business on July 23, 2021.

As a result, the balance of dividends payable included in Other current liabilities on our Condensed Consolidated Balance Sheets was $33.2 million at both June 30, 2021 and December 31, 2020, respectively.

We paid dividends in the first six months of 2021 of $66.7 million, or $0.40 per ordinary share compared with $63.7 million, or $0.38 per ordinary share, in the prior year period.

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.

We paid dividends in the first nine months of 2021 of $99.9 million, or $0.60 per ordinary share compared with $95.4 million, or $0.57 per ordinary share, in the prior year period.

Under Irish law, the payment of future cash dividends and repurchases of shares may be paid only out of Pentair plc’s “distributable reserves” on its statutory balance sheet.

14 unchanged sentences

If such subsidiaries are unable to transfer funds to the Parent Company Guarantor or the Subsidiary Issuer and sufficient cash or liquidity is not otherwise available, the Parent Company Guarantor or the Subsidiary Issuer may not be able to make principal and interest payments on their outstanding debt, including the senior notes or the guarantees.

The following table presents summarized financial information as of June 30, 2021 and December 31, 2020 for the Parent Company Guarantor and Subsidiary Issuer on a combined basis after elimination of (i) intercompany transactions and balances among the guarantors and issuer and (ii) equity in earnings from and investments in any subsidiary that is a non-Guarantor or issuer.

In millions June 30,

The following table presents summarized financial information as of September 30, 2021 and December 31, 2020 for the Parent Company Guarantor and Subsidiary Issuer on a combined basis after elimination of (i) intercompany transactions and balances among the guarantors and issuer and (ii) equity in earnings from and investments in any subsidiary that is a non-Guarantor or issuer.

In millions September 30,

2021 December 31,

5 unchanged sentences

1,007.1 1,283.0

(1) Includes assets due from non-guarantor subsidiaries of $2.4 million and $2.8 million as of June 30, 2021 and December 31, 2020, respectively.

(2) Includes assets due from non-guarantor subsidiaries of $1,195.0 million and $1,028.5 million as of June 30, 2021 and December 31, 2020, respectively.

(3) Includes liabilities due to non-guarantor subsidiaries of $577.2 million and $556.6 million as of June 30, 2021 and December 31, 2020, respectively.

(4) Includes liabilities due to non-guarantor subsidiaries of $529.1 million and $495.2 million as of June 30, 2021 and December 31, 2020, respectively.

(1) Includes assets due from non-guarantor subsidiaries of $7.1 million and $2.8 million as of September 30, 2021 and December 31, 2020, respectively.

(2) Includes assets due from non-guarantor subsidiaries of $949.5 million and $1,028.5 million as of September 30, 2021 and December 31, 2020, respectively.

(3) Includes liabilities due to non-guarantor subsidiaries of $662.7 million and $556.6 million as of September 30, 2021 and December 31, 2020, respectively.

(4) Includes liabilities due to non-guarantor subsidiaries of $283.6 million and $495.2 million as of September 30, 2021 and December 31, 2020, respectively.

The Parent Company Guarantor and Subsidiary Issuer do not have material results of operations on a combined basis.

5 unchanged sentences

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk during the quarter ended June 30, 2021.

There have been no material changes in our market risk during the quarter ended September 30, 2021.

For additional information refer to Item 7A of our 2020 Annual Report on Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis