What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-21 compared with 2022-02-22 · 144 added, 141 removed, 333 unchanged (46% of the section changed)

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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 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 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;

These factors include 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;

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

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

the impact of raw material, logistics and labor costs and other inflation;

volatility in currency exchange rates;

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

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

risks associated with operating foreign businesses;

the impact of raw material, logistics and labor costs and other inflation;

the impact of seasonality of sales and weather conditions;

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Pentair assumes no obligation, and disclaims any obligation, to update the information contained in this report.

Pentair plc and its consolidated subsidiaries (“we,” “us,” “our,” “Pentair” or the “Company”) is a pure play water industrial manufacturing company comprised of two reporting segments:

Pentair plc and its consolidated subsidiaries (“we,” “us,” “our,” “Pentair” or the “Company”) is a pure play water industrial manufacturing company and in 2022 we were comprised of two reporting segments:

Consumer Solutions and Industrial & Flow Technologies.

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For the year ended December 31, 2022, the Consumer Solutions and Industrial & Flow Technologies segments represented approximately 64% and 36% of total revenues, respectively.

Effective January 1, 2023, we reorganized our segments, going from two segments to three, with the three reorganized segments reflecting how we expect to manage our business in 2023.

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

Our new Water Solutions segment includes Manitowoc Ice.

The Industrial & Flow Technologies segment remains the same.

The discussions below reporting on prior periods reflect the previous segmentation, but the descriptions of our businesses below continue to apply in their re-segmented form.

Additional information regarding this re-segmentation is found under the section titled “New Segmentation” in ITEM 1 of this Form 10-K.

Although our jurisdiction of organization is Ireland, we manage our affairs so that we are centrally managed and controlled in the United Kingdom (the “U.K.”) and therefore have our tax residency in the U.K.

On October 18, 2021, as part of both of our Consumer Solutions and Industrial & Flow Technologies reporting segments, we completed the acquisition of Pleatco Holdings, LLC and related entities (“Pleatco”) for $254.6 million in cash, net of cash acquired.

Pleatco manufactures water filtration and clean air technologies for pool, spa and industrial air customers.

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

(“KBI”) for $83.1 million in cash, net of cash acquired.

KBI provides beverage equipment and services to commercial customers.

COVID-19 Pandemic

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic.

The COVID-19 pandemic continues to persist throughout the 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, vaccine and mask requirements, 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 substantially to maintain business continuity at substantially all of our manufacturing facilities throughout the COVID-19 pandemic.

While our facilities substantially remained operational during 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 have improved and economic activity has increased, we have experienced supply chain challenges, including availability of materials, 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 in 2022.

In light of the ongoing COVID-19 pandemic, we maintain our commitment to protect the health and safety of our employees by continuing our enhanced safety protocols for those on-site at our manufacturing facilities, for those who provide manufacturing-support activities, and for those working in office environments.

In addition, we have maintained flexibility for employees who do not need to be physically present at our facilities and sites to perform their job responsibilities remotely and essential business travel has generally remained 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 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 Part I—ITEM 1A, “Risk Factors,” included herein.

Transformation Program

During 2021, we launched and committed resources to a program designed to accelerate growth and drive margin expansion through transformation across our businesses to elevate our capabilities, reduce complexity and streamline our processes (the “Transformation Program”).

The Transformation Program is structured in multiple phases and is expected to empower us to work more efficiently and optimize our business to better serve our customers while meeting our financial objectives.

We are targeting at least 300 basis points of margin expansion by 2025 through:

• reducing business, product, and organizational complexity;

• elevating our proficiency in pricing, sourcing and operations effectiveness;

• delivering decision making speed through organizational clarity and improved processes;

• developing a future state digital enterprise;

• modernizing general and administrative capabilities.

During 2021, we incurred transformation costs that primarily represented professional services and project management related charges.

In 2022, 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.

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.

Key Trends and Uncertainties Regarding Our Existing Business

The following trends and uncertainties affected our financial performance in 2022, and are reasonably likely to 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 and effectiveness of vaccines to address the COVID-19 virus.

The broader implications of the COVID-19 pandemic that are reasonably likely to impact 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 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” for key trends and uncertainties with regard to the COVID-19 pandemic.

• We executed certain business restructuring initiatives unrelated to the COVID-19 pandemic aimed at reducing our fixed cost structure and realigning our business.

• We executed certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business.

We expect these actions to continue into 2023 and to drive margin growth.

• 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 in 2022 and beyond.

• We experienced supply chain challenges, including increased lead times for raw materials due to availability constraints and high demand.

• 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.

During 2022, we made strategic progress on our Transformation Program initiatives with a primary focus on two of our four key themes of pricing excellence and strategic sourcing and built capabilities across all themes, including the other two of operations excellence and organizational effectiveness.

We expect to continue to execute on our key Transformation Program initiatives to drive margin expansion and expect to continue to incur transformation costs in 2023 and beyond.

• We experienced supply chain challenges, including increased lead times for raw materials due to availability constraints and high demand for these materials.

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 in 2023, and which may continue thereafter and could negatively impact our results of operations.

• We experienced inflationary increases of raw materials such as metals, resins and electronics (including drives and motors), as well as increases in logistics and labor costs.

• We experienced 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.

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 in 2023, and which may continue thereafter and could negatively impact our results of operations.

• We experienced increased inventory levels in order to support market demand and reflect ongoing supply chain challenges.

In the second half 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.

• 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 in 2023 as we expect backlog to return to more historical levels and lead times to improve.

• 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.

In 2022, our operating objectives remain to focus on delivering our core while continuing to build out our future.

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

There are many uncertainties regarding the COVID-19 pandemic, including the 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 and effectiveness of vaccines to address the COVID-19 virus.

The broader implications of the COVID-19 pandemic that are reasonably likely to impact 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 effectiveness of vaccinations, the pandemic’s effect on the demand for our products and services, our supply chain, and our manufacturing and distribution capacity, as well as the impact of governmental regulations imposed in response to the pandemic.

In 2023, our operating objectives focus on delivering our core and building our future.

We expect to execute these objectives by:

• Delivering revenue growth in our core businesses;

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

• Continued focus on capital allocation through:

◦ Commitment to maintain our investment grade rating;

◦ Return 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;

• Delivering profitable revenue growth and productivity for customers and shareholders;

• Continuing to focus on capital allocation through:

◦ Committing to maintain our investment grade rating;

◦ Focusing on reducing our long-term debt;

◦ Returning cash to shareholders through dividends and share repurchases;

◦ Accelerating our performance with strategically-aligned mergers and acquisitions;

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

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

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

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(Gain) loss on sale of businesses (0.2) (1.4) 0.1 N.M.

Net interest expense 12.5 23.9 30.1 (47.7) % (20.6) %

Net interest expense 61.8 12.5 23.9 N.M.

Other (income) expense (16.9) (1.0) 5.3 N.M.

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Core growth 6.2 20.9

Acquisition 2.6 0.5

Acquisition/Divestiture 5.5 2.6

Currency (2.2) 1.3

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The 9.5 percent increase in consolidated net sales in 2022 from 2021 was primarily the result of:

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

• volume increase in our Industrial & Flow Technologies segment primarily driven by strong demand in the residential and irrigation flow businesses as well as increased demand and recovery in our food and beverage and commercial flow businesses;

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

• favorable foreign currency effects in 2021 compared to the prior year.

The gross profit as a percentage of net sales was unchanged when comparing 2021 and 2020, primarily as a result of:

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

• 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, fourth quarter of 2021 and second quarter of 2021, respectively;

• sales volume increase in our industrial solutions business within our Industrial & Flow Technologies segment;

• sales volume increase in our commercial water solutions business within our Consumer Solutions segment.

This increase was partially offset by:

• sales volume decrease in our Consumer Solutions segment mainly driven by our pool and residential water treatment businesses;

• sales volume decrease in our residential and irrigation flow businesses within our Industrial & Flow Technologies segment;

• unfavorable foreign currency effects in 2022 compared to the prior year.

The 1.9 percentage point decrease in gross profit as a percentage of net sales in 2022 from 2021 was primarily the result of:

• 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;

• decreased productivity in our Consumer Solutions pool and residential water treatment businesses due to decreased sales volumes;

• decreased productivity in our Industrial & Flow Technologies segment as a result of supply chain and plant inefficiencies;

• inventory impairments and write-offs and certain accruals of $19.6 million recorded as part of exiting businesses in our Consumer Solutions segment;

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

• charges of $4.7 million recorded in 2022 for the write-off of inventory and costs related to contracts and orders that we will no longer fulfill in light of our exit of business activity and sales in Russia.

This decrease was partially offset by:

• increases in selling prices to mitigate impacts of inflation.

• complexity reduction and exiting older, less profitable product lines in our residential and commercial flow businesses in our Industrial & Flow Technologies segment;

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

This was offset by:

• inflationary cost increases due to tight supply of raw materials such as metals, resins and electronics (including drives and motors);

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

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

The 1.4 percentage point decrease in SG&A expense as a percentage of net sales in 2021 from 2020 was driven by:

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

• legal settlements and accrual reductions of $7.6 million in 2021;

• restructuring and other costs of $7.4 million in 2021, compared to $14.1 million in 2020;

• lower amortization on definite-lived intangible assets.

This decrease was partially offset by:

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

• costs of $11.7 million related to the transformation program launched in 2021.

The 0.6 percentage point increase in SG&A expense as a percentage of net sales in 2022 from 2021 was driven by:

• identifiable intangible asset amortization expense of $28.6 million related to the addition of Manitowoc Ice’s definite-lived intangible assets in 2022;

• deal-related costs and expenses of $22.2 million in 2022, compared to $7.9 million in 2021;

• restructuring costs of $36.7 million in 2022, compared to $7.4 million in 2021;

• transformation costs of $27.2 million in 2022, compared to $11.7 million in 2021.

This increase was partially offset by:

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

Net interest expense

The 47.7 percent decrease in net interest expense in 2021 from 2020 was the result of:

• strong cash flows in 2021 used to reduce overall debt levels during the year compared to 2020;

• lower interest rates on outstanding variable rate debt.

The increase in net interest expense in 2022 from 2021 was the result of:

• increased debt due to the acquisition of Manitowoc Ice;

• increased variable interest rates in 2022 compared to the prior year;

• the amortization of debt issuance costs of $9.0 million in 2022 related to financing commitments for a bridge loan facility established in connection with the definitive agreement to purchase Manitowoc Ice.

Provision for income taxes

The 6.1 percentage point decrease in the effective tax rate in 2021 from 2020 was primarily due to:

• 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 placed limitations on the deductibility of certain interest expense for U.S.

tax purposes that occurred during 2020 that did not occur in 2021;

• the favorable impact resulting from changes in unrecognized tax benefits for tax positions taken in prior periods.

This decrease was partially offset by:

• the unfavorable mix of global earnings.

The 0.9 percentage point increase in the effective tax rate in 2022 from 2021 was primarily due to:

• the impact of favorable discrete items in 2021 that did not occur in 2022.

This increase was partially offset by:

• the favorable mix of global earnings.

2021 Comparison with 2020

A discussion of changes in our consolidated results of operations, segment results of operations and liquidity and capital resources from the year ended December 31, 2020 to December 31, 2019 can be found in Part II, ITEM 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year

ended December 31, 2020, which was filed with the SEC on February 16, 2021.

A discussion of changes in our consolidated results of operations, segment results of operations and liquidity and capital resources from the year ended December 31, 2021 to December 31, 2020 can be found in Part II, ITEM 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 22, 2022.

However, such discussion is not incorporated by reference into, and does not constitute a part of, this Annual Report on Form 10-K.

SEGMENT RESULTS OF OPERATIONS

The summary that follows provides a discussion of the results of operations of our two reportable segments (Consumer Solutions and Industrial & Flow Technologies).

The summary that follows provides a discussion of the results of operations of each of our 2022 reportable segments (Consumer Solutions and Industrial & Flow Technologies).

Each of these segments is comprised of various product offerings that serve multiple end users.

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The 11.9 percent increase in net sales for Consumer Solutions in 2022 from 2021 was primarily the result of:

• increased sales volume in our pool business due to consumers increasing their pool use while continuing to invest in their homes and backyards;

• increased sales volume in our water treatment business as residential demand remained strong and commercial demand improved due to recovery in the restaurant and hospitality industries in 2021;

• increases in selling prices to mitigate impacts of inflation;

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

• favorable foreign currency effects in 2021 compared to the prior year.

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

• increased sales volume in our commercial water solutions business in 2022 compared to the prior year.

The increase was partially offset by:

• decreased sales volume in our pool and residential water treatment businesses in 2022 compared to the prior year;

• unfavorable foreign currency effects compared to 2021.

Segment income

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

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

Growth/Price/Acquisition 10.8 pts 5.0 pts

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The 0.4 percentage point decrease in segment income for Consumer Solutions as a percentage of net sales in 2022 from 2021 was primarily the result of:

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

• delayed realization of full amount of announced price increases due to order backlogs;

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

• 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:

• increased sales volume in all of our businesses resulting in cost leverage and higher productivity;

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

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

Industrial & Flow Technologies

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Core growth 9.7 9.1

Acquisition 0.4 —

Acquisition/Divestiture — 0.4

Currency (4.1) 2.1

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The 5.6 percent increase in net sales for Industrial & Flow Technologies in 2022 from 2021 was primarily the result of:

• increased sales volume in our residential and irrigation flow businesses in 2021 due to strong demand across all product lines in these businesses;

• increased sales volume in our food and beverage business in 2021 due to demand in sustainable gas solutions and beer membrane filtration systems along with recovery in short cycle orders;

• increased sales volume in our commercial flow business due to demand in our water supply and water disposal product lines;

• increases in selling prices to mitigate inflationary cost increases;

• favorable foreign currency effects compared to the prior year.

• increased sales volume in our industrial solutions business in 2022 due to continued recovery in our project sales.

This increase was partially offset by:

• decreased sales volume in our residential and irrigation flow businesses in 2022 compared to the prior year;

• unfavorable foreign currency effects in 2022 compared to 2021.

Segment income

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

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

Growth/Price/Acquisition 9.6 pts 3.6 pts

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The 1.1 percentage point increase in segment income for Industrial & Flow Technologies as a percentage of net sales in 2022 from 2021 was primarily the result of:

• 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;

• increases in selling prices to mitigate inflationary cost increases.

• complexity reduction and exiting older, less profitable product lines in our residential and commercial flow businesses;

• increased productivity due to cost actions driving manufacturing efficiencies.

This increase was partially offset by:

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

• 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.

BACKLOG OF ORDERS BY SEGMENT

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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 2023 net sales.

The increase in our backlog from the prior year 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.

The decrease in our backlog in our Consumer Solutions segment from the prior year was primarily driven by pool backlog trending down to more historical levels due to increased manufacturing capacity, improved lead times 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 of 2021 as the seasonality of our businesses peaked and generated significant

cash to fund our operations.

In the second half of 2021, we funded our operations using our continued strong cash flow and our revolving credit facility.

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.

In the second half of 2022, we funded our operations using our strong cash flow and revolving credit facility.

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

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 temperature, heavy flooding and droughts.

In 2021, we completed the acquisitions of KBI and Pleatco for total consideration of approximately $83.1 million and $254.6 million, respectively, in cash, net of cash acquired.

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

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

On July 28, 2022, as part of our Consumer Solutions reporting segment, we completed the acquisition of Manitowoc Ice for approximately $1.6 billion in cash.

We funded the purchase price for this acquisition with net proceeds from our term loan facility, the issuance of the 2032 Senior Notes and borrowings under our revolving credit facility, as well as cash on hand.

Summary of Cash Flows

Cash flows from continuing operations were as follows:

Years ended December 31

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Cash provided by (used for):

Operating activities $ 613.6 $ 574.2 $ 345.2

Operating activities of continuing operations $ 364.3 $ 613.6 $ 574.2

Investing activities (1,582.8) (390.7) (117.9)

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Operating activities

In 2022, net cash provided by operating activities of continuing operations primarily reflects net income from continuing operations of $615.4 million, net of non-cash depreciation, amortization and asset impairment.

Additionally, we had a cash outflow of $218.7 million as a result of changes in net working capital, primarily due to increased inventory balances compared to December 31, 2021.

Inventory was higher due to inflationary impacts, continued supply chain inefficiencies and a rebalancing of inventory levels in the residential channel.

In 2021, net cash provided by operating activities of continuing operations primarily reflects net income from continuing operations of $633.5 million, net of non-cash depreciation and amortization.

Additionally, we had a cash outflow of $20.8 million as a result of changes in net working capital, primarily due to increased sales demand and inflationary impacts leading to higher accounts receivable, inventory, accounts payable and other current liabilities balances.

In 2020, net cash provided by operating activities of continuing operations primarily reflects net income from continuing operations of $432.2 million, net of non-cash depreciation and amortization.

Additionally, we had a cash inflow of $109.5 million as a result of changes in net working capital, primarily the result of accounts receivables collections and reduced accounts receivables due to the pool business early buy program shipments with extended payment terms moving from the fourth quarter of 2020 into 2021 due to continued strong demand.

Investing activities

Net cash used for investing activities of continuing operations in 2021 primarily reflects capital expenditures of $60.2 million and cash paid for acquisitions of $338.5 million in our Consumer Solutions and Industrial & Flow Technologies reporting segments, net of cash acquired.

Net cash used for investing activities of continuing operations in 2020 primarily reflects capital expenditures of $62.2 million and cash paid for acquisitions of $58.0 million in our Consumer Solutions reporting segment, net of cash acquired.

Net cash used for investing activities in 2022 primarily reflects the net cash paid of $1,579.5 million for the Manitowoc Ice acquisition and capital expenditures of $85.2 million, partially offset by cash received upon the settlement of net investment hedges of $78.9 million.

Net cash used for investing activities in 2021 primarily reflects capital expenditures of $60.2 million and cash paid for acquisitions of $338.5 million in our Consumer Solutions and Industrial & Flow Technologies reporting segments, net of cash acquired.

Financing activities

In 2022, net cash provided by financing activities primarily relates to net borrowings of revolving long-term debt of $124.5 million, 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 and net cash receipts upon the settlement of cross currency swaps of $12.3 million, partially offset by dividend payments of $138.6 million, repayment of $88.3 million senior fixed notes, share repurchases of $50.0 million and payments of debt issuance costs of $15.8 million.

In 2021, net cash used for financing activities primarily relates to repayment of $103.8 million of senior notes, $150.0 million of share repurchases, dividend payments of $133.0 million and payments upon maturity of cross currency swaps of $14.7 million, partially offset by net borrowings of revolving long-term debt of $159.4 million.

In 2020, net cash used for financing activities primarily relates to repayment of commercial paper and revolving long-term debt of $117.5 million, repayment of $74.0 million of senior notes, $150.2 million of share repurchases and dividend payments of $127.1 million.

Free Cash Flow

In addition to measuring our cash flow generation or usage based upon operating, investing and financing classifications included in the Consolidated Statements of Cash Flows, we also measure our free cash flow.

We have a long-term goal to consistently generate free cash flow that equals or exceeds 100 percent conversion of net income.

Free cash flow is a non-GAAP financial measure that we use to assess our cash flow performance.

We have a long-term goal to consistently generate free cash flow that is equal to 100 percent conversion of net income.

Free cash flow is a non-U.S.

GAAP financial measure that we use to assess our cash flow performance.

We believe free cash flow is an important measure of liquidity because it provides us and our investors a measurement of cash generated from operations that is available to pay dividends, repurchase shares and repay debt.

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Free cash flow from continuing operations $ 283.2 $ 557.3 $ 512.1

Net cash (used for) provided by operating activities of discontinued

operations (0.4) (0.6) 7.8

Net cash used for operating activities of discontinued operations (1.0) (0.4) (0.6)

Free cash flow $ 282.2 $ 556.9 $ 511.5

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are parties to a credit agreement (the “Senior Credit Facility”), with Pentair as guarantor and PFSA and Pentair, Inc.

as borrowers, which was amended and restated in December 2021, providing for a $900.0 million senior unsecured revolving credit facility and a $200.0 million senior unsecured term loan facility.

as borrowers, which was amended and restated in December 2021 and further amended in December 2022, providing for a $900.0 million senior unsecured revolving credit facility and a $200.0 million senior unsecured term loan facility.

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, the euro 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 alternate base rate, adjusted term secured overnight financing rate, adjusted euro interbank offered rate, adjusted daily simple secured overnight financing rate or 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.

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In addition, PFSA has the option to request to increase the revolving credit facility and/or to 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.

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

The Senior Credit Facility contains covenants requiring us not to permit (i) the ratio of our consolidated debt (net of our consolidated unrestricted cash and cash equivalents in excess of $5.0 million but not to exceed $250.0 million) to our consolidated net income (excluding, among other things, non-cash gains and losses) before interest, taxes, depreciation, amortization and non-cash share-based compensation expense (“EBITDA”) on the last day of any period of four consecutive fiscal quarters (each, a “testing period”) to exceed 3.75 to 1.00 (or, at PFSA’s election and subject to certain conditions, 4.25 to 1.00 for four testing periods in connection with certain material acquisitions) (the “Leverage Ratio”) and (ii) the ratio of our EBITDA to our consolidated interest expense, for the same period to be less than 3.00 to 1.00 as of the end of each fiscal quarter.

For purposes of the Leverage Ratio, the Senior Credit Facility provides for the calculation of EBITDA giving pro forma effect to certain acquisitions, divestitures and liquidations during the period to which such calculation relates.

In addition to the Senior Credit Facility, we have various other credit facilities with an aggregate availability of $21.4 million, of which there were no outstanding borrowings at December 31, 2021.

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 $600.0 million senior unsecured term loan facility (the “Term Loan 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.

The Term Loan Facility has a maturity date of July 28, 2027, with required quarterly installment payments of $6.3 million beginning on the last day of the third quarter of 2023 and increasing to $12.5 million beginning with the last day of the third quarter of 2024.

The Term Loan Facility bears interest at a rate equal to an alternate base rate, adjusted term secured overnight financing rate, or adjusted daily simple secured overnight financing 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.

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.

The Senior Credit Facility and the Term Loan Facility contain covenants requiring us not to permit (i) the ratio of our consolidated debt (net of our consolidated unrestricted cash and cash equivalents in excess of $5.0 million but not to exceed $250.0 million) to our consolidated net income (excluding, among other things, non-cash gains and losses) before interest, taxes, depreciation, amortization and non-cash share-based compensation expense (“EBITDA”) on the last day of any period of four consecutive fiscal quarters (each, a “testing period”) to exceed 3.75 to 1.00 (or, at PFSA’s election and subject to certain conditions, 4.25 to 1.00 for four testing periods in connection with certain material acquisitions) (the “Leverage Ratio”) and (ii) the ratio of our EBITDA to our consolidated interest expense, for the same period to be less than 3.00 to 1.00 as of the end of each fiscal quarter.

For purposes of the Leverage Ratio, the Senior Credit Facility 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 $21.0 million, of which there were no outstanding borrowings at December 31, 2022.

Borrowings under these credit facilities bear interest at variable rates.

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

We classified this debt as long-term as of December 31, 2021 as we have the intent and ability to refinance such obligation on a long-term basis under the Senior Credit Facility.

We have $12.5 million of Term Loan Facility payments due in the next twelve months.

We classified this debt as long-term as of December 31, 2022 as we have the intent and ability to refinance such obligation on a long-term basis under the revolving credit facility under the Senior Credit Facility.

As of December 31, 2022, we had $89.6 million of cash held in certain countries in which the ability to repatriate is limited due to local regulations or significant potential tax consequences.

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The 2020 Authorization supplemented the 2018 Authorization.

During the year ended December 31, 2020, we repurchased 3.7 million of our ordinary shares for $150.2 million under the 2018 Authorization.

During the year ended December 31, 2021, we repurchased 2.1 million of our ordinary shares for $150.0 million, of which 0.8 million shares, or $50.0 million, and 1.3 million shares, or $100.0 million, were repurchased pursuant to the 2018 Authorization and 2020 Authorization, respectively.

During the year ended December 31, 2022, we repurchased 1.0 million of our ordinary shares for $50.0 million under the 2020 Authorization.

As of December 31, 2022, we had $600.0 million available for share repurchases under the 2020 Authorization.

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Distributable reserves may be created through the earnings of the Irish parent company and through a reduction in share capital approved by the Irish High Court.

Distributable reserves are not linked to a GAAP reported amount (e.g., retained earnings).

Distributable reserves are not linked to a U.S.

GAAP reported amount (e.g., retained earnings).

Our distributable reserve balance was $7.1 billion and $8.4 billion as of December 31, 2022 and 2021, respectively.

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COMMITMENTS AND CONTINGENCIES

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

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

While we believe that a material impact on our consolidated financial position, results of operations or cash flows from any such future claims or potential claims is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future adverse ruling or unfavorable development could result in future charges that could have a material impact.

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CRITICAL ACCOUNTING POLICIES

We have adopted various accounting policies to prepare the consolidated financial statements in accordance with GAAP.

We have adopted various accounting policies to prepare the consolidated financial statements in accordance with U.S.

Our significant accounting policies are more fully described in ITEM 8, Note 1 of the Notes to Consolidated Financial Statements.

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However, we may elect to perform the quantitative goodwill impairment test even if no indications of a potential impairment exist.

During 2021, a qualitative assessment was performed.

During 2022 and 2021, a qualitative assessment was performed.

As a result, it was determined that it was more likely than not that the fair value of the reporting units exceeded their respective carrying values.

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Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

An impairment charge of $2.7 million was recorded in 2022 related to the write-off of a proprietary technology intangible asset as a result of restructuring initiatives implemented in the fourth quarter of 2022.

The impairment charge was recorded in Selling, general and administrative in our Consolidated Statements of Operations and Comprehensive Income.

Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant.

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The non-recurring fair value measurement is a “Level 3” measurement under the fair value hierarchy.

No impairment charge was recorded during 2021 for identifiable intangible assets.

No impairment charges were recognized in 2022 or 2021 as a result of our annual impairment assessment.

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, royalty rates, customer attrition rates, useful lives 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.

Pension and other post-retirement plans

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This accounting method also results in the potential for volatile and difficult to forecast mark-to-market adjustments.

Mark-to-market adjustments resulted in a pre-tax gain of $2.4 million in 2021, a pre-tax loss of $6.7 million in 2020 and a pre-tax gain of $3.4 million in 2019.

Mark-to-market adjustments resulted in pre-tax gains of $17.5 million and $2.4 million in 2022 and 2021, respectively, and a pre-tax loss of $6.7 million in 2020.

The remaining components of pension expense, including service and interest costs and the expected return on plan assets, are recorded on a quarterly basis as ongoing pension expense.

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In developing the expected long-term rate of return, we considered our historical returns, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader long-term market indices.

Sensitivity to changes in key assumptions

A 100 basis point increase or decrease in the discount rates used to measure our pension and other post-retirement benefit plans would result in a $7.1 million increase or $6.1 million decrease in our total projected benefit obligation.

A 100 basis point increase or decrease in the assumed rate of return on pension assets or discount rates for our pension and other post-retirement benefit plans would result in an immaterial change in our ongoing pension expense.

These estimates exclude any potential mark-to-market adjustments.

Loss contingencies

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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-K

Item 7. Management’s Discussion and Analysis