What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-20 compared with 2023-02-21 · 191 added, 132 removed, 345 unchanged (48% of the section changed)

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All statements, other than statements of historical fact, are forward-looking statements.

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.

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,” or “future” or words, phrases, or terms of similar substance or the negative thereof 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 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;

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

volatility in currency exchange rates;

volatility in currency exchange rates and interest rates;

failure of markets to accept new product introductions and enhancements;

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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 and in 2022 we were comprised of two reporting segments:

Consumer Solutions and Industrial & Flow Technologies.

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

Flow (formerly named the Industrial & Flow Technologies segment), Water Solutions and Pool.

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

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.

For the year ended December 31, 2023, the Flow, Water Solutions and Pool segments represented approximately 38%, 29% and 33% of total revenues, respectively.

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 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.

In July 2022, as part of our Water 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.

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The following trends and uncertainties affected our financial performance in 2023, and are reasonably likely to impact our results in the future:

• 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.

• 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 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.

During 2023, we made strategic progress on our Transformation Program initiatives with a focus on our four key themes of pricing excellence, strategic sourcing, operations excellence and organizational effectiveness.

We expect to continue to execute on our key Transformation Program initiatives to drive margin expansion and to continue to incur transformation costs in 2024 and beyond.

• In 2023, we executed certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business.

We expect these actions to continue into 2024 and to drive margin growth.

• The current volatile market for commodities has the potential to drive price increases in our supply chain.

While we have taken pricing actions and implemented transformation initiatives that we expect to improve productivity and offset cost increases, we anticipate supply chain pressures and inflationary cost increases to continue into 2024.

• The Organization for Economic Co-operation and Development Pillar Two Model Rules (“Pillar Two”), for a global 15.0% minimum tax, are in the process of being adopted by a number of jurisdictions in which we operate.

In particular, the U.K.

has completed passage of legislation to comply with the Pillar Two framework, which became effective at the start of 2024.

We expect Pillar Two to have a negative 1.0% to 1.5% impact to our effective tax rate in 2024.

That impact could change in the future as we continue to evaluate the enacted legislative changes and as new guidance becomes available.

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

We are reinforcing that our businesses more effectively address these opportunities through research and development and additional sales and marketing resources.

We expect to continue investing in our businesses to drive these opportunities through research and development and additional sales and marketing resources.

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

• 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.

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.

In 2024, our operating objectives focus on delivering our core and building our future.

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

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

• Focusing growth initiatives that accelerate our investments in digital, innovation, technology and ESG;

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

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% of net sales 18.0 % 14.4 % 16.9 % 3.6 pts (2.5) pts

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

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

Net interest expense 118.3 61.8 12.5 N.M.

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

Other expense (income)

2.0 (16.9) (1.0) N.M.

Income from continuing operations before income taxes

618.9 550.6 626.8 12.4 % (12.2) %

Provision for income taxes 67.4 70.8 75.0 (4.8) % (5.6) %

(Benefit) provision for income taxes

(4.0) 67.4 70.8 N.M.

Effective tax rate (0.6) % 12.2 % 11.3 % (12.8) pts 0.9 pts

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Total (0.4) % 9.5 %

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

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

• 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.

The 0.4 percent decrease in consolidated net sales in 2023 from 2022 was primarily the result of:

• decreased sales volume in our residential business within our Flow segment compared to the prior year;

• decreased sales volume in our residential business within our Water Solutions segment driven by lower demand compared to the prior year and certain business exits announced in the second half of 2022;

• decreased sales volume in our Pool segment primarily due to higher channel inventory and lower demand compared to the prior year.

This decrease was partially offset by:

• increases in selling prices to mitigate impacts of inflation.

• increased selling prices to mitigate a rise in inflationary costs as well as lower rebates and incentives in our Pool segment;

• increased sales within our Water Solutions segment from the acquisition of Manitowoc Ice, which was completed in the third quarter of 2022;

• increased sales volume in our commercial business within our Water Solutions segment driven by demand and easing of supply chain pressures, which allowed increased productivity and delivery to market;

• increased sales volume in our commercial and industrial solutions businesses within our Flow segment compared to the prior year.

The 3.9 percentage point increase in gross profit as a percentage of net sales in 2023 from 2022 was primarily the result of:

• increased selling prices to mitigate impacts of inflation as well as lower rebates and incentives in our Pool segment;

• increased productivity within our Water Solutions segment as a result of certain transformation and restructuring initiatives;

• increased productivity in our Flow segment mainly driven by manufacturing leverage and transformation initiatives;

• inventory impairments and write-offs and certain accruals of $19.6 million, recorded in 2022 as part of exiting businesses in our Water Solutions segment;

• amortization of inventory fair market value step-up of $5.8 million in 2022, as a result of the Manitowoc Ice acquisition.

This increase was partially offset by:

• inflationary cost increases related to labor costs and certain raw materials;

• inventory impairments and write-offs of $7.0 million in 2023.

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

The 0.2 percentage point increase in SG&A expense as a percentage of net sales in 2023 from 2022 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;

• higher employee compensation costs compared to the prior year;

• transformation costs of $44.3 million in 2023, compared to $27.2 million in 2022.

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.

• no deal-related costs and expenses in 2023, compared to $22.2 million in 2022;

• restructuring costs of $9.1 million in 2023, compared to $36.7 million in 2022.

Net interest expense

The increase in net interest expense in 2023 from 2022 was the result of:

• increased debt due to the acquisition of Manitowoc Ice;

• increased variable interest rates in 2023 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 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.

• increased debt due to the acquisition of Manitowoc Ice in the third quarter of 2022.

This increase was partially offset by:

• 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 acquisition of Manitowoc Ice that did not recur in 2023.

(Benefit) provision for income taxes

The 12.8 percentage point decrease in the effective tax rate in 2023 from 2022 was primarily due to:

• the favorable impact of worthless stock deductions related to exiting certain businesses in our Water Solutions segment;

• the favorable impact of discrete items primarily related to increases in tax basis in assets located in foreign jurisdictions;

• the favorable mix of global earnings.

2022 Comparison with 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.

A discussion of changes in our consolidated results of operations, segment results of operations for the Flow (formerly named Industrial & Flow Technologies) segment and liquidity and capital resources from the year ended December 31, 2022 to December 31, 2021 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, 2022, which was filed with the SEC on February 21, 2023.

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 each of our 2022 reportable segments (Consumer Solutions and Industrial & Flow Technologies).

The summary that follows provides a discussion of the results of operations of our three reportable segments (Flow, Water Solutions and Pool).

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

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Segment income represents equity income of unconsolidated subsidiaries and operating income exclusive of intangible amortization, certain acquisition related expenses, costs of restructuring and transformation activities, impairments and other unusual non-operating items.

Consumer Solutions

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

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

Years ended December 31 % / point change

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% of net sales 17.8 % 16.1 % 15.0 % 1.7 pts 1.1 pts

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

The components of the change in Flow net sales were as follows:

2023 vs 2022 2022 vs 2021

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Core growth 5.1 9.7

Acquisition 8.8 4.3

Currency 0.3 (4.1)

Total 5.4 % 5.6 %

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

• increases in selling prices to mitigate impacts of inflation;

• 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 5.4 percent increase in net sales for Flow in 2023 from 2022 was primarily the result of:

• increased selling prices to mitigate inflationary cost increases;

• increased sales volume in our commercial and industrial solutions businesses in 2023 compared to the prior year;

• favorable foreign currency effects in 2023 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.

• decreased sales volume in our residential business in 2023 compared to 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:

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

Growth/Price/Acquisition 5.6 pts 9.6 pts

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Total 1.7 pts 1.1 pts

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:

The 1.7 percentage point increase in segment income for Flow as a percentage of net sales in 2023 from 2022 was primarily the result of:

• increased selling prices to mitigate impacts of inflation;

• increased productivity mainly driven by manufacturing leverage and transformation initiatives.

This increase was partially offset by:

• inflationary cost increases related to labor costs and certain raw materials.

Water Solutions

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

Years ended December 31 % / point change

In millions 2023 2022 2021 2023 vs 2022 2022 vs 2021

Net sales $ 1,177.2 $ 986.8 $ 769.9 19.3 % 28.2 %

Segment income 247.6 149.0 101.7 66.2 % 46.5 %

% of net sales 21.0 % 15.1 % 13.2 % 5.9 pts 1.9 pts

The components of the change in Water Solutions net sales were as follows:

2023 vs 2022 2022 vs 2021

Volume (2.0) % (6.2) %

Price 3.1 15.1

Core growth 1.1 8.9

Acquisition/Divestiture 18.5 21.9

Currency (0.3) (2.6)

Total 19.3 % 28.2 %

The 19.3 percent increase in net sales for Water Solutions in 2023 from 2022 was primarily the result of:

• increased sales as a result of the acquisition of Manitowoc Ice, which was completed in the third quarter of 2022;

• higher sales volume in our commercial business driven by higher demand and easing of supply chain pressures, which allowed increased production and delivery to market;

• increased selling prices to mitigate inflationary cost increases.

This increase was partially offset by:

• decreased sales volume in our residential business driven by lower demand in 2023 compared to the prior year and certain business exits announced in the second half of 2022;

• unfavorable foreign currency effects.

The 28.2 percent increase in net sales for Water Solutions in 2022 from 2021 was primarily the result of:

• increased sales due to the acquisitions of Manitowoc Ice and Ken’s Beverage, Inc.

completed in the third quarter of 2022 and the second quarter of 2021, respectively;

• increased selling prices to mitigate impacts of inflation;

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

This increase was partially offset by:

• decreased sales volume in our residential business in 2022 compared to the prior year;

• unfavorable foreign currency effects.

Segment income

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

Growth/Price/Acquisition 7.8 pts 14.6 pts

Currency (0.5) (0.3)

Inflation (4.7) (10.6)

Productivity 3.3 (1.8)

Total 5.9 pts 1.9 pts

The 5.9 percentage point increase in segment income for Water Solutions as a percentage of net sales in 2023 from 2022 was primarily the result of:

• increased sales as a result of the Manitowoc Ice acquisition;

• increased selling prices to mitigate impacts of inflation;

• increased productivity in the residential business as a result of certain transformation and restructuring initiatives.

This increase was partially offset by:

• inflationary cost increases related to labor costs and certain raw materials;

• unfavorable foreign currency effects.

The 1.9 percentage point increase in segment income for Water Solutions as a percentage of net sales in 2022 from 2021 was primarily the result of:

• increased sales as a result of the Manitowoc Ice acquisition in the third quarter of 2022;

• increased selling prices to mitigate impacts of inflation.

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 pool and residential water treatment businesses due to decreased sales volume.

This decrease was partially offset by:

• 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

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

• decreased productivity in our residential business due to decreased sales volume;

• unfavorable foreign currency effects.

The net sales and segment income for Pool were as follows:

Years ended December 31 % / point change

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% of net sales 31.0 % 28.3 % 28.8 % 2.7 pts (0.5) pts

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

The components of the change in Pool net sales were as follows:

2023 vs 2022 2022 vs 2021

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Total (17.7) % 3.9 %

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

• increases in selling prices to mitigate inflationary cost increases;

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

The 17.7 percent decrease in net sales for Pool in 2023 from 2022 was primarily the result of:

• sales volume decreases primarily due to higher channel inventory and lower demand compared to the prior year.

This decrease was partially offset by:

• increased selling prices to mitigate a rise in inflationary costs as well as lower rebates and incentives.

The 3.9 percent increase in net sales for Pool in 2022 from 2021 was primarily the result of:

• increased selling prices to mitigate impacts of inflation;

• increased sales due to the acquisition of Pleatco Holdings, LLC completed in the fourth quarter of 2021.

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.

• decreased sales volume in 2022 compared to the prior year;

• unfavorable foreign currency effects.

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:

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

Growth/Price/Acquisition 5.3 pts 10.1 pts

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Total 2.7 pts (0.5) pts

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:

• increases in selling prices to mitigate inflationary cost increases.

The 2.7 percentage point increase in segment income for Pool as a percentage of net sales in 2023 from 2022 was primarily the result of:

• increased selling prices to mitigate impacts of inflation as well as lower rebates and incentives;

• increased productivity associated with benefits realized from our transformation initiatives;

• cost management initiatives associated with decreased sales volume.

This increase was 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.

• inflationary cost increases related to labor costs and certain raw materials.

The 0.5 percentage point decrease in segment income for Pool as a percentage of net sales in 2022 from 2021 was primarily the result of:

• 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 due to decreased sales volume.

This decrease was partially offset by:

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

• increased sales as a result of the Pleatco Holdings, LLC acquisition in the fourth quarter of 2021.

BACKLOG OF ORDERS BY SEGMENT

In millions 2023 2022 $ change % change

Consumer Solutions $ 483.1 $ 1,073.7 $ (590.6) (55.0) %

Industrial & Flow Technologies 512.1 446.3 65.8 14.7 %

$ 390.1 $ 512.1 $ (122.0) (23.8) %

Water Solutions

108.5 193.5 (85.0) (43.9) %

239.7 289.6 (49.9) (17.2) %

Total $ 738.3 $ 995.2 $ (256.9) (25.8) %

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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 2024 net sales.

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.

The decrease in our overall backlog from the prior year was primarily driven by our backlog trending down to more historical levels as a result of increased manufacturing capacity and improved lead times.

LIQUIDITY AND CAPITAL RESOURCES

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In the second half of 2023, 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.

End-user demand for pool equipment in the Pool segment, water solution products in the Water Solutions segment, and residential water supply and agricultural products within the Flow segment follows warm weather trends, with seasonal highs from April to September.

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).

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.

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

Summary of Cash Flows

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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.

In 2023, net cash provided by operating activities of continuing operations primarily reflects net income from continuing operations, net of non-cash depreciation, definite-lived intangible amortization, asset impairment and deferred income taxes, of $653.1 million.

Additionally, we had a cash outflow of $61.3 million as a result of changes in net working capital, primarily due to an increase in accounts receivable and decreases in accounts payable and other current liability balances, partially offset by lower inventory compared to December 31, 2022.

Decreases in inventory and accounts payable were primarily related to supply chain efficiencies and improved lead times.

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

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.

Investing activities

Net cash used for investing activities in 2023 primarily reflects capital expenditures of $76.0 million and cash paid upon the settlement of net investment hedges of $18.5 million, partially offset by proceeds from the sale of property and equipment of $5.6 million.

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 2023, net cash used for financing activities primarily relates to net repayments of revolving long-term debt of $320.0 million and dividend payments of $145.2 million.

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.

Free Cash Flow

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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 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.

as borrowers, 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.

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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.

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.

In 2022, Pentair and PFSA entered into a senior unsecured term loan facility (the “Term Loan Facility”), with PFSA, as borrower, Pentair, as guarantor, and the lenders and agents party thereto, providing for 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 which began on the last day of the third quarter of 2023 and increases 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”).

In addition to the Term Loan Facility, Pentair, as guarantor, and PFSA, as issuer, completed a public offering in 2022 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.

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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.

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 $20.9 million, of which there were no outstanding borrowings at December 31, 2023.

Borrowings under these credit facilities bear interest at variable rates.

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.

We have $37.5 million of Term Loan Facility payments and $200.0 million of payments under the senior unsecured term loan facility, associated with the Senior Credit Facility, due in the next twelve months.

We classified this debt as long-term as of December 31, 2023 as we have the intent and ability to refinance such obligations on a long-term basis under the revolving credit facility under the Senior Credit Facility.

As of December 31, 2023, we had $87.5 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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Share repurchases

In May 2018, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $750.0 million (the “2018 Authorization”).

The 2018 Authorization expired on May 31, 2021.

In December 2020, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $750.0 million (the “2020 Authorization”).

The 2020 Authorization expires on December 31, 2025.

The 2020 Authorization supplemented the 2018 Authorization.

During the 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.

On December 12, 2022, the Board of Directors approved a 5 percent increase in the Company’s regular quarterly dividend rate (from $0.21 per share to $0.22 per share) that was paid on February 3, 2023 to shareholders of record at the close of business on January 20, 2023.

In December 2020, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $750.0 million.

This authorization expires on December 31, 2025.

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

During the year ended December 31, 2023, no ordinary shares were repurchased.

As of December 31, 2023, we had $600.0 million available for share repurchases under this authorization.

On December 11, 2023, the Board of Directors approved a regular quarterly cash dividend of $0.23 per share that was paid on February 2, 2024 to shareholders of record at the close of business on January 19, 2024.

This dividend reflects a 5 percent increase in the Company’s regular cash dividend rate.

The balance of dividends payable included in Other current liabilities on our Consolidated Balance Sheets was $38.0 million at December 31, 2023.

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Operating lease obligations, net of sublease rentals (Note 15) 31.4 97.8 129.2

Purchase and marketing obligations 19.8 14.8 34.6

Pension and other post-retirement plan contributions (Note 11) 9.5 79.9 89.4

Other purchase obligations

42.4 24.2 66.6

Total contractual obligations, net $ 363.3 $ 2,250.9 $ 2,614.2

The majority of the purchase obligations represent commitments for raw materials to be utilized in the normal course of business.

Other purchase obligations primarily include service and marketing contracts as well as commitments for raw materials to be utilized in the normal course of business.

For purposes of the above table, arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction.

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As of December 31, 2023, variable interest rate debt was $1,187.5 million at a weighted average interest rate of 6.84%.

Inclusive of our interest rate swaps and collars, our weighted average interest rate on our variable rate debt was 6.29% as of December 31, 2023.

Refer to ITEM 8, Note 9 of the Notes to Consolidated Financial Statements for additional information regarding our interest rate swaps and collars.

The total gross liability for uncertain tax positions at December 31, 2023 was estimated to be $38.6 million.

We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Net interest expense , respectively, which is consistent with our past practices.

We record penalties and interest related to unrecognized tax benefits in (Benefit) p rovision for income taxes and Net interest expense , respectively, which is consistent with our past practices.

As of December 31, 2023, we had recorded $0.3 million for the possible payment of penalties and $6.4 million related to the possible payment of interest.

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As of December 31, 2023 and 2022, the outstanding value of bonds, letters of credit and bank guarantees totaled $124.3 million and $99.7 million, respectively.

NEW ACCOUNTING STANDARDS

See ITEM 8, Note 1 of the Notes to Consolidated Financial Statements, included in this Form 10-K, for information pertaining to accounting standards to be adopted in the future.

CRITICAL ACCOUNTING POLICIES

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• it requires us to make assumptions about matters that were uncertain at the time we were making the estimate;

• changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations.

• changes in the estimate or different estimates that we could have selected which would have had a material impact on our financial condition or results of operations.

Our critical accounting estimates include the following:

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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 2022 and 2021, a qualitative assessment was performed.

During 2023, a quantitative assessment was performed.

The fair value of each reporting unit was determined using a discounted cash flow analysis and market approach.

Projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital and the appropriate discount rate.

Use of the market approach consists of comparisons to comparable publicly-traded companies that are similar in size and industry.

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

For the 2023 annual impairment test, the estimated fair value significantly exceeded the carrying value in each of our reporting units, therefore, no impairment charge was required.

During 2022, 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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We consider positive and mitigating events and circumstances that may affect its determination of whether it is more likely than not that the fair value exceeds the carrying amount.

The non-recurring fair value measurement is a “Level 3” measurement under the fair value hierarchy described in ITEM 8, Note 9 of the Notes to Consolidated Financial Statements.

Identifiable intangible assets

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

No impairment charges associated with identifiable intangibles with finite lives were recognized in 2023.

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

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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.

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.

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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 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.

Mark-to-market adjustments resulted in a pre-tax loss of $6.1 million in 2023 and pre-tax gains of $17.5 million and $2.4 million in 2022 and 2021, respectively.

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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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.

A 100 basis point increase or decrease in the discount rates used to measure our U.S.

defined-benefit pension and other post-retirement plans would result in an approximately $7 million increase or $6 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 U.S.

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.

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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