What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-10-25 compared with 2022-07-26 · 167 added, 149 removed, 275 unchanged (53% of the section changed)

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Without limitation, any statements preceded or followed by or that include the words “targets,” “plans,” “believes,” “expects,” “intends,” “will,” “likely,” “may,” “anticipates,” “estimates,” “projects,” “should,” “would,” “could,” “positioned,” “strategy,” “future” or words, phrases or terms of similar substance or the negative thereof, are forward-looking statements.

All statements made about the Manitowoc Ice acquisition, including the anticipated time for completing the acquisition, and the anticipated benefits of the acquisition are forward-looking statements.

These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements.

These factors include our ability to close the Manitowoc Ice acquisition on the expected terms and time schedule, including satisfying closing conditions;

our ability to integrate the Manitowoc Ice acquisition successfully;

These factors include our ability to integrate the Manitowoc Ice acquisition successfully;

our ability to retain customers and employees of Manitowoc Ice;

the overall impact of the COVID-19 pandemic on our and the Manitowoc Ice business;

the duration and severity of the COVID-19 pandemic, the impact of virus variants and the 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 workforce, customers and suppliers, and customer demand;

overall global economic and business conditions impacting our business, including the strength of housing and related markets and conditions relating to the conflict between Russia and Ukraine and related sanctions;

the overall global economic and business conditions impacting our business, including the strength of housing and related markets and conditions relating to the conflict between Russia and Ukraine and related sanctions;

the overall impact of the COVID-19 pandemic including the impact of virus variants and the effectiveness of vaccinations on the global economy, our workforce, businesses, operations, customers, suppliers and customer demand;

supply, demand, logistics, competition and pricing pressures related to and in the markets we serve;

volatility in currency exchange rates;

volatility in currency exchange and interest rates;

failure of markets to accept new product introductions and enhancements;

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Consumer Solutions and Industrial & Flow Technologies.

For the first six months of 2022, the Consumer Solutions and Industrial & Flow Technologies segments represented approximately 64% and 36% of total revenues, respectively.

For the first nine months of 2022, the Consumer Solutions and Industrial & Flow Technologies segments represented approximately 64% and 36% 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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Residential and commercial pool equipment and accessories include pumps, filters, heaters, lights, automatic controls, automatic cleaners, maintenance equipment and pool accessories.

Water treatment products and systems include pressure tanks, control valves, activated carbon products, conventional filtration products, and point-of-entry and point-of-use systems.

Water treatment products and systems include pressure tanks, control valves, activated carbon products, commercial ice machines, conventional filtration products, and point-of-entry and point-of-use systems.

Applications for our pool business’s products include residential and commercial pool maintenance, repair, renovation, service and construction.

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

• Industrial & Flow Technologies — This segment manufactures and sells a variety of fluid treatment and pump products and systems, including pressure vessels, gas recovery solutions, membrane bioreactors, wastewater reuse systems and advanced membrane filtration, separation systems, water disposal pumps, water supply pumps, fluid transfer pumps, turbine pumps, solid handling pumps, and agricultural spray nozzles, while serving the global

residential, commercial and industrial markets.

These products and systems are used in a range of applications, including fluid delivery, ion exchange, desalination, food and beverage, separation technologies for the oil and gas industry, residential and municipal wells, water treatment, wastewater solids handling, pressure boosting, circulation and transfer, fire suppression, flood control, agricultural irrigation and crop spray.

and transfer, fire suppression, flood control, agricultural irrigation and crop spray.

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

On March 2, 2022, as part of our Consumer Solutions reporting segment, we entered into a definitive agreement with Welbilt, Inc.

(“Welbilt”), to acquire the issued and outstanding equity securities of certain subsidiaries of Welbilt and certain other assets, rights, and properties, and assume certain liabilities, comprising Welbilt’s Manitowoc Ice business (“Manitowoc Ice”), for an aggregate purchase price of $1.6 billion, subject to customary adjustments contemplated by the definitive agreement.

We expect to fund the purchase price for the acquisition with borrowings under our term loan facility and net proceeds from the issuance of our 2032 senior notes, together with cash on hand and/or borrowings under our revolving credit facility.

We expect to close our Manitowoc Ice acquisition on or around July 28, 2022, subject to customary closing conditions set forth in the definitive agreement.

On July 28, 2022, as part of our Consumer Solutions reporting segment, we acquired the issued and outstanding equity securities of certain subsidiaries of Welbilt, Inc.

(“Welbilt”) and certain other assets, rights, and properties, and assumed certain liabilities, comprising Welbilt’s Manitowoc Ice business (“Manitowoc Ice”), for approximately $1.6 billion in cash.

Effective January 1, 2023, Pentair will move to three reporting segments to reflect how we expect to manage our business beginning in 2023.

As a result of this segment change, the Consumer Solutions segment will be divided into a Pool segment and a Water Solutions segment.

Our new Water Solutions segment will include Manitowoc Ice, assuming the successful completion of the acquisition on or around July 28, 2022.

Our new Water Solutions segment will include Manitowoc Ice.

The Industrial & Flow Technologies segment will remain the same.

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The ongoing effects of the COVID-19 pandemic continue to impact global economic conditions.

During the first six months of 2022, we have continued to experience various degrees of supply chain challenges, including increased lead times for raw materials due to availability constraints and high demand.

In connection with the supply chain disruptions described above, we have experienced inflationary increases of certain raw materials, such as metals, resins and electronics (including drives and motors), as well as logistics, transportation and labor costs.

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 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.

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“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.

Supply Chain / Inflation

During the first nine months of 2022, we have continued to experience various degrees of 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 throughout the remainder of 2022.

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 throughout the remainder of 2022.

Key Trends and Uncertainties Regarding Our Existing Business

The following trends and uncertainties affected our financial performance in the first six months of 2022 and/or may impact our results in the future:

The following trends and uncertainties affected our financial performance in the first nine months of 2022 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 an increasing number of virus variants, the extent of worldwide social, political and economic disruption it may continue to cause and the distribution and effectiveness of vaccines to address the COVID-19 virus.

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

• During 2021 and the first six months of 2022, we executed certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business.

• During 2021 and the first nine months of 2022, we executed certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business.

We expect these actions to continue throughout the remainder of 2022 and to drive margin growth.

• In 2021, we created a transformation office and launched and committed resources to the Transformation Program designed to accelerate growth and drive margin expansion by driving operational excellence, reducing complexity and streamlining our processes.

We expect to implement Transformation Program initiatives and incur transformation costs throughout the remainder of 2022 and beyond.

• During the first six months of 2022, we continued to experience supply chain challenges, including increased lead times for raw materials due to availability constraints and high demand.

We expect to continue to implement Transformation Program initiatives and incur transformation costs throughout the remainder of 2022 and beyond.

• During the first nine months of 2022, we continued to experience supply chain challenges, including increased lead times for raw materials due to availability constraints and high demand.

• During the first six months of 2022, we continued to experience inflationary increases in costs of raw materials such as metals, resins and electronics (including drives and motors), as well as increases in logistics, transportation and labor costs.

• During the first nine months of 2022, we continued to experience inflationary increases in costs of raw materials such as metals, resins and electronics (including drives and motors), as well as increases in logistics, transportation and labor costs.

• At the end of the second quarter of 2022, our backlog, primarily in our Consumer Solutions segment, decreased compared to the backlog at the end of 2021 as shipments outpaced new orders during the period as customers balanced the need to place new orders with market demand and channel inventory levels.

• During the first nine months of 2022, we continued to experience increased inventory levels in order to support market demand and reflect ongoing supply chain challenges.

In the third quarter of 2022, we began to see inventory correcting within our residential distributor channels, which we expect to result in moderated volumes for the next few quarters as channel inventories normalize to more historical levels and could negatively impact our results of operations.

• During the first nine months of 2022, our backlog, primarily in our Consumer Solutions segment, decreased compared to the backlog at the end of 2021.

Shipments outpaced new orders during the period as customers balanced the need to place new orders with market demand and channel inventory levels.

This downward trend may continue throughout the remainder of 2022 as we expect backlog to return to more historical levels.

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• Delivering income and cash by managing price/cost inflation, prioritizing growth investments and addressing the cost structures as necessary;

• Continued focus on capital allocation through:

◦ Commitment to maintain our investment grade rating;

◦ Return of cash to shareholders through dividends and share repurchases;

◦ Supplement our business with strategically-aligned mergers and acquisitions;

• Focused growth initiatives that accelerate our investments in digital, technology and services expansion;

• Implementation of Transformation Program initiatives that will drive operational excellence, reduce complexity and improve our organizational structure;

• Integration of Manitowoc Ice’s operations with our existing operations;

• Continuing to focus on capital allocation through:

◦ Committing to maintain our investment grade rating;

◦ Returning cash to shareholders through dividends and share repurchases;

◦ Supplementing our business with strategically-aligned mergers and acquisitions;

• Focusing growth initiatives that accelerate our investments in digital, technology and services expansion;

• Implementing Transformation Program initiatives that will drive operational excellence, reduce complexity and improve our organizational structure;

• Integrating Manitowoc Ice’s operations with our existing operations;

• Building a high performance growth culture and delivering on our commitments while living our Win Right values.

CONSOLIDATED RESULTS OF OPERATIONS

The consolidated results of operations for the three months ended June 30, 2022 and 2021 were as follows:

The consolidated results of operations for the three months ended September 30, 2022 and 2021 were as follows:

Three months ended

In millions June 30,

2022 June 30,

In millions September 30,

2022 September 30,

Change % / Point

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% of net sales 13.9 % 17.3 % (3.4) pts

Gain on sale of businesses (0.2) (1.4) 1.2 N.M.

Other expense 0.3 0.3 — N.M.

Net interest expense 9.2 3.8 5.4 142.1 %

Net interest expense 19.3 2.6 16.7 N.M.

Income from continuing operations before income taxes 127.7 165.8 (38.1) (23.0) %

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Not Meaningful

The consolidated results of operations for the six months ended June 30, 2022 and June 30, 2021 were as follows:

Six months ended

In millions June 30,

2022 June 30,

The consolidated results of operations for the nine months ended September 30, 2022 and September 30, 2021 were as follows:

Nine months ended

In millions September 30,

2022 September 30,

Change % / Point

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% of net sales 15.5 % 17.5 % (2.0) pts

Gain on sale of businesses (0.2) (1.4) 1.2 N.M.

Other expense 0.5 1.0 (0.5) N.M.

Net interest expense 14.9 8.9 6.0 67.4 %

Net interest expense 34.2 11.5 22.7 N.M.

Income from continuing operations before income taxes 449.2 475.1 (25.9) (5.5) %

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

Three months ended June 30, 2022 Six months ended June 30, 2022

Three months ended September 30, 2022 Nine months ended September 30, 2022

over the prior year period over the prior year period

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Total 8.9 % 12.3 %

The 13.1 and 14.2 percent increases in net sales in the second quarter and first half, respectively, of 2022 from 2021 were primarily driven by:

The 8.9 and 12.3 percent increases in net sales in the third quarter and first nine months, respectively, of 2022 from 2021 were primarily driven by:

• increased sales from the acquisitions of Manitowoc Ice, Pleatco Holdings, LLC (“Pleatco”), and Ken’s Beverage, Inc.

(“KBI”) completed in the third quarter of 2022, the fourth quarter of 2021 and the second quarter of 2021, respectively;

• increases in selling prices to mitigate a rise in inflationary cost;

• volume increase in our Consumer Solutions segment mainly driven by our pool business in the first half of 2022;

• volume increase in our industrial solutions business within our Industrial & Flow Technologies segment in the second quarter and first half of 2022;

• increased sales in the second quarter and first half of 2022 from the acquisitions of Pleatco Holdings, LLC (“Pleatco”) and Ken’s Beverage, Inc (“KBI”) in 2021.

• volume increase in our industrial solutions flow businesses within our Industrial & Flow Technologies segment in the third quarter and first nine months of 2022.

These increases were partially offset by:

• volume decrease in our residential and irrigation flow and commercial and infrastructure flow businesses within our Industrial & Flow Technologies segment in the second quarter and first half of 2022;

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

The 2.4 and 2.8 percentage point decreases in gross profit as a percentage of net sales in the second quarter and first half, respectively, of 2022 from 2021 were primarily driven by:

• volume decrease in our Consumer Solutions segment mainly driven by our pool and residential water treatment businesses in the third quarter and first nine months of 2022;

• volume decrease in our residential and irrigation flow businesses within our Industrial & Flow Technologies segment in the third quarter and first nine months of 2022;

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

The 1.5 and 2.4 percentage point decreases in gross profit as a percentage of net sales in the third quarter and first nine months, respectively, of 2022 from 2021 were 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, additional headcount and factory labor wage increases;

• a charge of $1.7 million recorded in the first quarter of 2022 for the write-off of inventory and costs related to contracts and orders that we will no longer fulfill in light of our exiting of business activity and sales in Russia.

• amortization of inventory fair market value step-up of $5.8 million as a result of the Manitowoc Ice acquisition;

• charges of $2.3 million recorded in the first nine months of 2022 for the write-off of inventory and costs related to contracts and orders that we will no longer fulfill in light of our exiting of business activity and sales in Russia.

These decreases were partially offset by:

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

The 3.1 and 1.3 percentage point decreases in SG&A as a percentage of net sales in the second quarter and first half, respectively, of 2022 from 2021 were primarily driven by:

• higher employee incentive and stock compensation expense in 2021 compared to 2022 as the result of stronger financial performance in 2021 than initially forecasted;

The 1.8 percentage point increase in SG&A as a percentage of net sales in the third quarter of 2022 from 2021 was primarily driven by:

• identifiable intangible asset amortization expense of $12.9 million related to the addition of Manitowoc Ice’s definite-lived intangible assets in the third quarter of 2022;

• deal-related costs and expenses of $13.4 million in the third quarter of 2022, compared to $2.1 million in the third quarter of 2021 primarily as a result of the Manitowoc Ice acquisition;

• restructuring costs of $10.9 million in the third quarter of 2022, compared to none in the third quarter of 2021;

• transformation costs of $10.1 million in the third quarter of 2022, compared to $4.0 million in the third quarter of 2021.

This increase was partially offset by:

• higher employee incentive expense in the third quarter of 2021 compared to the third quarter of 2022 as a result of stronger financial performance in 2021 than initially forecasted.

The 0.3 percentage point decrease in SG&A as a percentage of net sales in the first nine months of 2022 from 2021 was primarily driven by:

• higher employee incentive and stock compensation expense in the first nine months of 2021 compared to the first nine months of 2022 as a result of stronger financial performance in 2021 than initially forecasted;

• insurance proceeds received in the second quarter of 2022 as recovery of previously incurred expenses;

• a gain on sale of fixed assets completed in the second quarter of 2022.

These decreases were partially offset by:

• transformation costs of $5.2 million in the second quarter of 2022, compared to $1.9 million in the second quarter of 2021, and $10.7 million in the first half of 2022, compared to $1.9 million in the first half of 2021;

• deal-related costs and expenses of $1.6 million in the second quarter of 2022, compared to $1.0 million in the same period of the prior year, and $8.0 million in the first half of 2022, compared to $1.7 million in the first half of 2021;

• a charge of $4.2 million recorded in the first quarter of 2022 for the write-off of uncollectible accounts receivable and other costs incurred in light of our exiting of business activity and sales in Russia.

This decrease was partially offset by:

• transformation costs of $20.8 million in the first nine months of 2022, compared to $5.9 million in the first nine months of 2021;

• increased deal-related costs and expenses of $21.4 million in the first nine months of 2022, compared to $3.8 million in the first nine months of 2021 primarily as a result of the Manitowoc Ice acquisition.

Net interest expense

The 142.1 and 67.4 percent increases in net interest expense in the second quarter and first half, respectively, of 2022 from 2021 were primarily driven by:

• the amortization of debt issuance costs of $5.1 million during the second quarter of 2022 and $7.7 million during the first half of 2022 related to financing commitments for a bridge loan facility established in connection with the definitive agreement to purchase Manitowoc Ice;

• increased variable rate lending compared to the same periods of the prior year.

These increases were partially offset by:

• the weakening of the Euro compared to the same period of the prior year resulting in less interest expense on the outstanding cross currency swaps in the second quarter and first half of 2022.

The increase in net interest expense in the third quarter and first nine months of 2022 from 2021 was primarily driven by:

• increased debt due to the acquisition of Manitowoc Ice;

• the amortization of debt issuance costs of $1.3 million during the third quarter of 2022 and $9.0 million during the first nine months of 2022 related to financing commitments for a bridge loan facility established in connection with the definitive agreement to purchase Manitowoc Ice;

• increased variable interest rates compared to the same periods of the prior year.

The increase was partially offset by:

• the weakening of the Euro compared to the same periods of the prior year resulting in less interest expense on the outstanding cross currency swaps in the third quarter and first nine months of 2022.

Provision for income taxes

The 0.2% percentage point decrease in the effective tax rate in the second quarter of 2022 from 2021 was primarily driven b y:

• the favorable mix of global earnings.

The 0.9 percentage point increase in the effective tax rate in the first half of 2022 from 2021 was primarily driven b y:

• the favorable impact of discrete items that occurred during the first half of 2021 that did not occur in 2022.

This increase was partially offset by:

The 3.7 and 0.3 percentage point decreases in the effective tax rate in the third quarter and first nine months, respectively, of 2022 from 2021 were primarily driven b y:

• the favorable mix of global earnings.

This decrease was partially offset by:

• the impact of favorable discrete items that occurred during the third quarter and first nine months of 2021 that did not occur in 2022.

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,

2022 June 30,

2021 % / Point Change June 30,

2022 June 30,

Three months ended Nine months ended

In millions September 30,

2022 September 30,

2021 % / Point Change September 30,

2022 September 30,

2021 % / 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, 2022 Six months ended June 30, 2022

Three months ended September 30, 2022 Nine months ended September 30, 2022

over the prior year period over the prior year period

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Total 8.4 % 16.4 %

The 18.9 and 20.9 percent increases in net sales for Consumer Solutions in the second quarter and first half, respectively, of 2022 from 2021 were primarily driven by:

The 8.4 and 16.4 percent increases in net sales for Consumer Solutions in the third quarter and first nine months, respectively, of 2022 from 2021 were primarily driven by:

• increases in selling prices to mitigate impacts of inflation;

• increased sales due to the Pleatco and KBI acquisitions that occurred in 2021;

• increased sales volume in the first half of 2022 in our pool business as a result of an increase in available capacity.

• increased sales due to the Manitowoc Ice acquisition that occurred in the third quarter of 2022 and the Pleatco and KBI acquisitions that occurred in the fourth quarter of 2021 and the second quarter of 2021, respectively;

• increased sales volume in our commercial water solutions business in the third quarter and first nine months of 2022 compared to the prior year periods.

These increases were partially offset by:

• decreased sales volume in our residential businesses in the second quarter and first half of 2022 compared to the prior year;

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

• decreased sales volume in our pool and residential water treatment businesses in the third quarter and first nine months of 2022 compared to the prior year periods;

• unfavorable 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, 2022 Six months ended June 30, 2022

Three months ended September 30, 2022 Nine months ended September 30, 2022

over the prior year period over the prior year period

Growth/Price/Acquisition 11.6 pts 10.9 pts

Currency 0.1 —

Inflation (10.5) (11.4)

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Total 0.3 pts (1.1) pts

The 0.2 and 1.8 percentage point decreases in segment income for Consumer Solutions as a percentage of net sales in the second quarter and first half, respectively, of 2022 from 2021 were primarily driven by:

The 0.3 percentage point increase in segment income for Consumer Solutions as a percentage of net sales in the third quarter of 2022 from 2021 was primarily driven by:

• the income of the Manitowoc Ice business that was acquired in the third quarter of 2022;

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

• sales mix of higher margin products in the pool business in the third quarter of 2022 compared to 2021;

• increased productivity in our commercial water solutions business.

This increase was partially offset by:

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

• decreased productivity in our residential water treatment business due to decreased sales volume in the second quarter and first half of 2022 compared to the prior year.

These decreases were partially offset by:

• decreased productivity in our pool and residential water treatment businesses due to decreased sales volume.

The 1.1 percentage point decrease in segment income for Consumer Solutions as a percentage of net sales in the first nine months of 2022 from 2021 was primarily driven by:

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

• decreased productivity in our pool and residential water treatment businesses due to decreased sales volume.

This decrease was partially offset by:

• the income of the Manitowoc Ice business that was acquired in the third quarter of 2022;

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

• increased productivity in our commercial water solutions business.

Industrial & Flow Technologies

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

Three months ended Six months ended

In millions June 30,

2022 June 30,

2021 % / Point Change June 30,

2022 June 30,

Three months ended Nine months ended

In millions September 30,

2022 September 30,

2021 % / Point Change September 30,

2022 September 30,

2021 % / 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, 2022 Six months ended June 30, 2022

Three months ended September 30, 2022 Nine months ended September 30, 2022

over the prior year period over the prior year period

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Total 9.7 % 5.8 %

The 3.7 and 3.9 percent increases in net sales for Industrial & Flow Technologies in the second quarter and first half, respectively, of 2022 from 2021 were primarily driven by:

The 9.7 and 5.8 percent increases in net sales for Industrial & Flow Technologies in the third quarter and first nine months, respectively, of 2022 from 2021 were primarily driven by:

• increases in selling prices to mitigate inflationary cost increases;

• increased sales volume in our industrial solutions business due to continued recovery in our project sales;

• increased sales due to the acquisition of Pleatco in 2021.

• increased sales volume in our industrial solutions business in the third quarter and first nine months of 2022 due to continued recovery in our project sales;

• increased sales volume in our commercial and infrastructure flow businesses in the third quarter of 2022;

• increased sales due to the acquisition of Pleatco in the fourth quarter of 2021.

These increases were partially offset by:

• decreased sales volume in our residential and irrigation flow and commercial and infrastructure flow businesses in the second quarter and first half of 2022;

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

• decreased sales volume in our residential and irrigation flow businesses in the third quarter and first nine months of 2022;

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

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, 2022 Six months ended June 30, 2022

Three months ended September 30, 2022 Nine months ended September 30, 2022

over the prior year period over the prior year period

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Total 2.1 pts 0.7 pts

Segment income for Industrial & Flow Technologies as a percentage of net sales was flat in both the second quarter and first half of 2022 from 2021, primarily driven by:

The 2.1 and 0.7 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 2022 from 2021, were primarily driven by:

• increases in selling prices to mitigate inflationary cost increases;

• insurance proceeds and gain on sale of fixed assets in the second quarter of 2022.

These increases were partially offset by:

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

• decreased productivity due to supply chain and plant inefficiencies, partially offset by insurance proceeds and gain on sale of fixed assets.

• decreased productivity due to supply chain and plant inefficiencies.

BACKLOG OF ORDERS BY SEGMENT

In millions June 30,

In millions September 30,

2022 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 2022 net sales.

The decrease in backlog in our Consumer Solutions segment from December 31, 2021 to June 30, 2022 was primarily due to shipments outpacing new orders during the period as customers balanced the need to place new orders with market demand and channel inventory levels.

The decrease in backlog in our Consumer Solutions segment from December 31, 2021 to September 30, 2022 was primarily driven by pool backlog continuing to trend to more historical levels due to increased manufacturing capacity and customers balancing the need to place new orders with market demand and channel inventory levels.

LIQUIDITY AND CAPITAL RESOURCES

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Consistent with historical trends, we experienced seasonal cash usage in the first quarter of 2022 and drew on our revolving credit facility to fund our operations.

This cash usage reversed in the second quarter as the seasonality of our businesses peaked and generated significant cash to fund our operations.

This cash usage reversed in the second quarter of 2022 as the seasonality of our businesses peaked and generated significant cash to fund our operations.

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

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Summary of Cash Flows

Six months ended

In millions June 30,

2022 June 30,

Nine months ended

In millions September 30,

2022 September 30,

Net cash provided by (used for):

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Operating activities

The $176.3 million in net cash provided by operating activities of continuing operations in the first six months of 2022 primarily reflects $310.9 million of net income from continuing operations, net of non-cash depreciation and definite-lived intangible amortization.

Additionally, we had a cash outflow of $129.7 million as a result of changes in net working capital, primarily due to increased inventory balances and lower employee compensation and benefits accruals compared to December 31, 2021.

The inventory balance is higher due to inflationary impacts and continued supply chain inefficiencies.

The lower employee compensation and benefits accruals are attributable to the payment of employee incentive compensation in the first quarter.

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 definite-lived intangible amortization.

Additionally, we had a cash inflow of $47.2 million as a result of changes in net working capital, primarily due to increased 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 $271.5 million in net cash provided by operating activities of continuing operations in the first nine months of 2022 primarily reflects $458.2 million of net income from continuing operations, net of non-cash depreciation and definite-lived intangible amortization.

Additionally, we had a cash outflow of $165.2 million as a result of changes in net working capital, primarily due to increased inventory balances compared to December 31, 2021.

Inventory is higher due to inflationary impacts and continued supply chain inefficiencies.

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 definite-lived intangible amortization.

Additionally, we 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 payable, accounts receivable and inventory balances.

Investing activities

Net cash used for investing activities in the first six months of 2022 primarily reflects capital expenditures of $40.1 million, partially offset by cash received upon the settlement of net investment hedges of $8.8 million.

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

Net cash used for investing activities in the first nine months of 2022 primarily reflects the net cash paid of $1,591.5 million for the Manitowoc Ice acquisition and capital expenditures of $63.2 million, partially offset by cash received upon the settlement of net investment hedges of $8.8 million.

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

acquisition prior to working capital true-ups and capital expenditures of $38.6 million.

Financing activities

Net cash used for financing activities in the first six months of 2022 primarily relates to dividend payments of $69.5 million, share repurchases of $50.0 million and payments of debt issuance costs of $8.9 million, partially offset by net borrowings of revolving long-term debt of $19.8 million,

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

Net cash provided by financing activities in the first nine months of 2022 primarily relates to net borrowings of revolving long-term debt of $256.1 million and net proceeds received from the Term Loan Facility and issuance of the 2032 Senior Notes of $1,391.3 million used to finance the Manitowoc Ice acquisition, partially offset by dividend payments of $104.1 million, repayment of $88.3 million senior fixed notes, share repurchases of $50.0 million and payments of debt issuance costs of $15.7 million.

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

2022 June 30,

Nine months ended

In millions September 30,

2022 September 30,

Net cash provided by operating activities of continuing operations $ 271.5 $ 540.4

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The revolving credit facility has a maturity date of December 16, 2026 and the term loan facility has a maturity date of December 16, 2024.

Borrowings under the Senior Credit Facility bear interest at a rate equal to an adjusted base rate, the London interbank offered rate or the central bank rate, plus, in each case, an applicable margin.

Borrowings under the Senior Credit Facility bear interest at a rate equal to an adjusted base rate, the London interbank offered rate, the euro interbank offered rate or the central bank 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.

As of June 30, 2022, total availability under the Senior Credit Facility was $685.0 million.

As of September 30, 2022, total availability under the Senior Credit Facility was $448.4 million.

In addition, PFSA has the option to request to increase the revolving credit facility and/or enter into one or more additional tranches of term loans in an aggregate amount of up to $300.0 million, subject to customary conditions, including the commitment of the participating lenders.

In connection with entering into the definitive agreement to acquire Manitowoc Ice, Pentair and PFSA entered into a commitment letter, dated March 2, 2022 (the “Commitment Letter”), pursuant to which, among other things, the lenders have committed to provide debt financing for the acquisition of Manitowoc Ice, consisting of a senior unsecured bridge facility of $1.6 billion (the “Bridge Facility”), on the terms and subject to the conditions set forth in the Commitment Letter.

The Bridge Facility will be subject to mandatory reduction and prepayment for 100% of the net cash proceeds from the issuance of any debt and other of our securities, other specified events and the Term Loan Facility (as defined below), subject to certain exceptions.

In March 2022, in contemplation of the acquisition of Manitowoc Ice, Pentair and PFSA entered into a Loan Agreement among PFSA, as borrower, Pentair, as guarantor, and the lenders and agents party thereto, providing for a five-year $600.0 million senior unsecured term loan facility (the “Term Loan Facility”).

On June 30, 2022, the Term Loan Facility was amended to increase the facility by $400.0 million to an aggregate principal amount of $1.0 billion.

PFSA and Pentair intend to borrow the full $1.0 billion aggregate principal amount available under the Term Loan Facility to finance a portion of the purchase price in the Manitowoc Ice acquisition and to pay related fees and expenses.

The aggregate principal amount of the commitments under the Term Loan Facility have replaced a corresponding amount of the commitments in respect of the Bridge Facility in accordance with the terms of the Commitment Letter.

As a result, the remaining commitment under the Bridge Facility was $600.0 million as of June 30, 2022.

No borrowings or loans were outstanding under the Bridge Facility or the Term Loan Facility as of June 30, 2022.

On July 8, 2022, in contemplation of the acquisition of Manitowoc Ice, Pentair, as guarantor, and PFSA, as issuer, completed a public offering of $400.0 million aggregate principal amount of 5.900% Senior Notes due 2032 (“2032 Senior Notes”).

PFSA and Pentair intend to use the net proceeds from the issuance of the 2032 Senior Notes to finance a portion of the purchase price in the Manitowoc Ice acquisition and to pay related fees and expenses.

The net proceeds from the issuance of the 2032 Senior Notes have replaced a corresponding amount of the commitments in respect of the Bridge Facility in accordance with the terms of the Commitment Letter.

On July 8, 2022, Pentair and PFSA voluntarily eliminated the remaining $200.0 million of commitments under the Bridge Facility.

As a result, there are no remaining commitments under the Bridge Facility.

In June 2022, the Term Loan Facility was amended to increase the facility by $400.0 million to an aggregate principal amount of $1.0 billion.

In July 2022, in contemplation of the acquisition of Manitowoc Ice, Pentair, as guarantor, and PFSA, as issuer, completed a public offering of $400.0 million aggregate principal amount of 5.900% Senior Notes due 2032 (“2032 Senior Notes”).

We used the net proceeds from the Term Loan Facility and the issuance of the 2032 Senior Notes to finance a portion of the Manitowoc Ice acquisition purchase price and to pay related fees and expenses.

Our debt agreements contain various financial covenants, but the most restrictive covenants are contained in the Senior Credit Facility and the Term Loan Facility.

1 unchanged sentence

For purposes of the Leverage Ratio, the Senior Credit Facility and the Term Loan Facility provide 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 and the Term Loan Facility, we have various other credit facilities with an aggregate availability of $21.5 million, of which there were no outstanding borrowings at June 30, 2022.

In addition to the Senior Credit Facility and the Term Loan Facility, we have various other credit facilities with an aggregate availability of $20.9 million, of which there were no outstanding borrowings at September 30, 2022.

Borrowings under these credit facilities bear interest at variable rates.

We have $88.3 million fixed rate senior notes maturing in the next twelve months.

We classified this debt as long-term as of June 30, 2022 as we have the intent and ability to refinance such obligation on a long-term basis under the Senior Credit Facility.

As of June 30, 2022, we had $65.0 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 no fixed rate senior notes maturing in the next twelve months.

As of September 30, 2022, we had $92.3 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

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The authorization expires on December 31, 2025.

During the three and six months ended June 30, 2022, we repurchased 0.9 million of our ordinary shares for $50.0 million.

As of June 30, 2022, we had $600.0 million available for share repurchases under this authorization.

During the nine months ended September 30, 2022, we repurchased 0.9 million of our ordinary shares for $50.0 million.

As of September 30, 2022, we had $600.0 million available for share repurchases under this authorization.

Dividends payable

On May 16, 2022, the Board of Directors declared a quarterly cash dividend of $0.21, payable on August 5, 2022 to shareholders of record at the close of business on July 22, 2022.

As a result, the balance of dividends payable included in Other current liabilities on our Condensed Consolidated Balance Sheets was $34.5 million at June 30, 2022, compared to $33.0 million at December 31, 2021.

We paid dividends in the first six months of 2022 of $69.5 million, or $0.42 per ordinary share compared with $66.7 million, or $0.40 per ordinary share, in the prior year period.

On September 19, 2022, the Board of Directors declared a quarterly cash dividend of $0.21, payable on November 4, 2022 to shareholders of record at the close of business on October 21, 2022.

As a result, the balance of dividends payable included in Other current liabilities on our Condensed Consolidated Balance Sheets was $34.5 million at September 30, 2022, compared to $33.0 million at December 31, 2021.

We paid dividends in the first nine months of 2022 of $104.1 million, or $0.63 per ordinary share, compared with $99.9 million, or $0.60 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.

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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, 2022 and December 31, 2021 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, 2022 and December 31, 2021 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,

2022 December 31,

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2,668.6 1,193.6

(1) No assets due from non-guarantor subsidiaries were included as of June 30, 2022 and December 31, 2021, respectively.

(2) Includes assets due from non-guarantor subsidiaries of $1,183.4 million and $1,202.5 million as of June 30, 2022 and December 31, 2021, respectively.

(3) Includes liabilities due to non-guarantor subsidiaries of $904.2 million and $792.1 million as of June 30, 2022 and December 31, 2021, respectively.

(4) Includes liabilities due to non-guarantor subsidiaries of $257.7 million and $276.8 million as of June 30, 2022 and December 31, 2021, respectively.

(1) No assets due from non-guarantor subsidiaries were included as of September 30, 2022 and December 31, 2021, respectively.

(2) Includes assets due from non-guarantor subsidiaries of $2,644.2 million and $1,202.5 million as of September 30, 2022 and December 31, 2021, respectively.

(3) Includes liabilities due to non-guarantor subsidiaries of $918.3 million and $792.1 million as of September 30, 2022 and December 31, 2021, respectively.

(4) Includes liabilities due to non-guarantor subsidiaries of $239.3 million and $276.8 million as of September 30, 2022 and December 31, 2021, respectively.

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

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In our Annual Report on Form 10-K for the year ended December 31, 2021, we identified the critical accounting policies that affect our more significant estimates and assumptions used in preparing our consolidated financial statements.

There have been no material changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

There have been no material changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, except for the additional critical accounting policy related to business combinations as set forth below.

Business Combinations

Assets and liabilities acquired in a business combination are recorded at their estimated fair values at the acquisition date.

Goodwill is recorded when the purchase price exceeds the estimated fair value of the net identifiable tangible and intangible assets acquired.

Estimates of intangible asset fair value represent management’s best estimate of assumptions and about future events and uncertainties, including significant judgments related to future cash flows, discount rates, margin and revenue growth assumptions including royalty rates and customer attrition rates, and others.

Inputs used are generally obtained from historical data supplemented by current and anticipated market conditions and growth rates.

If the actual results differ from the estimates and judgments used in these fair values, the amounts recorded in the consolidated financial statements could result in a possible impairment of the intangible assets and goodwill or require acceleration of the amortization expense of finite-lived intangible assets.

Allocations of the purchase price for acquisitions are based on estimates of the fair value of the net assets acquired and are subject to adjustment upon finalization of the purchase price allocation.

During this measurement period, we will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date.

All changes that do not qualify as measurement period adjustments are included in current period earnings.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk during the quarter ended June 30, 2022.

There have been no material changes in our market risk during the quarter ended September 30, 2022.

For additional information refer to Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021.

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