What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-04-23 compared with 2023-10-24 · 153 added, 234 removed, 213 unchanged (65% of the section changed)

18 unchanged sentences

the outcome of litigation and governmental proceedings;

and the ability to achieve our long-term strategic operating and ESG goals.

and the ability to achieve our long-term strategic operating and environmental, social and governance (“ESG”) goals and targets.

Additional information concerning these and other factors is contained in our filings with the U.S.

8 unchanged sentences

and recover and reuse water.

Whether it’s improving, moving or helping people enjoy water, we help manage the world’s most precious resource.

We are comprised of three reporting segments:

Industrial & Flow Technologies, Water Solutions and Pool.

For the first nine months of 2023, the Industrial & Flow Technologies, Water Solutions and Pool segments represented approximately 39%, 29% and 32% of total revenues, respectively.

Whether it’s moving, improving or helping people enjoy water, we help manage life’s most essential resource.

We are composed of three reporting segments:

Flow, Water Solutions and Pool.

For the first three months of 2024, the Flow, Water Solutions and Pool segments represented approximately 38%, 27% and 35% of total revenues, respectively.

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

• Industrial & Flow Technologies — The focus of this segment is to deliver water where it is needed, when it is needed and more efficiently and transforming waste into value.

• Flow — The focus of this segment is to deliver water where it is needed, when it is needed, more efficiently and to transform waste into value.

This segment designs, manufactures and sells a variety of fluid treatment and pump products and systems, including pressure vessels, gas recovery solutions, membrane bioreactors, wastewater reuse systems and advanced membrane filtration, separation systems, water disposal pumps, water supply pumps, fluid transfer pumps, turbine pumps, solid handling pumps and agricultural spray nozzles, while serving the global residential, commercial and industrial markets.

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

• Water Solutions — The focus of this segment is to provide great tasting, higher-quality water and ice while helping end-users use water more productively.

• Water Solutions — The focus of this segment is to provide great-tasting, higher-quality water and ice while helping people use water more productively.

This segment designs, manufactures and sells commercial and residential water treatment products and systems including pressure tanks, control valves, activated carbon products, commercial ice machines, conventional filtration products, and point-of-entry and point-of-use water treatment systems.

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In addition, our water solutions business also provides installation and preventative services for water management solutions for commercial operators.

• Pool — The focus of this segment is to provide innovative, energy-efficient pool solutions to help end-users more sustainably enjoy water.

• Pool — The focus of this segment is to provide innovative, energy-efficient pool solutions to help people more sustainably enjoy water.

This segment designs, manufactures and sells a complete line of energy-efficient residential and commercial pool equipment and accessories including pumps, filters, heaters, lights, automatic controls, automatic cleaners, maintenance equipment and pool accessories.

Applications for our pool products include residential and commercial pool maintenance, pool repair, renovation, service and construction and aquaculture solutions.

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.

Applications for our pool products include residential and commercial pool maintenance, pool repair, renovation, service, construction and aquaculture solutions.

Key Trends and Uncertainties Regarding Our Existing Business

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

The following trends and uncertainties affected our financial performance in the first three months of 2024 and are reasonably likely to impact our results in the future:

• 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 and the first nine months of 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.

During 2023 and the first three months of 2024, 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 throughout the remainder of 2024 and beyond.

• During 2022 and the first nine months of 2023, we executed certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business.

• During 2023 and the first three months of 2024, we executed certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business.

We expect these actions to continue throughout the remainder of 2024 and to drive margin growth.

• During the first nine months of 2023, we continued to experience supply chain challenges and inflationary cost increases of certain raw materials due to availability constraints and high demand.

While we have taken pricing actions and implemented transformation initiatives that we expect to improve productivity and offset these cost increases, we expect supply chain pressures and inflationary cost increases to continue for the remainder of 2023, which may continue thereafter and could negatively impact our results of operations.

• During the second half of 2022 and the first nine months of 2023, we have seen inventory correcting within our residential distributor channels.

We anticipate channel inventories to approach more normalized levels by the end of 2023.

• During 2023 and the first three months of 2024, we experienced inflationary cost increases for certain raw materials.

The current volatile market for commodities has the potential to continue 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 for the remainder of 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 United Kingdom has completed passage of legislation to comply with the Pillar Two framework which becomes effective beginning in 2024.

Pillar Two could negatively impact our effective tax rate beginning in 2024.

We are continuing to evaluate the impact of proposed and enacted legislative changes as new guidance becomes available.

Pillar Two has negatively impacted 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.

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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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CONSOLIDATED RESULTS OF OPERATIONS

The consolidated results of operations for the three months ended September 30, 2023 and 2022 were as follows:

The consolidated results of operations for the three months ended March 31, 2024 and March 31, 2023 were as follows:

Three months ended

In millions September 30,

2023 September 30,

Change % / Point

Net sales $ 1,008.8 $ 1,055.1 $ (46.3) (4.4) %

Cost of goods sold 637.0 707.0 (70.0) (9.9) %

Gross profit 371.8 348.1 23.7 6.8 %

% of net sales

36.9 % 33.0 % 3.9 pts

Selling, general and administrative

166.2 177.3 (11.1) (6.3) %

% of net sales

16.5 % 16.8 % (0.3) pts

Research and development

25.5 23.7 1.8 7.6 %

% of net sales 2.5 % 2.2 % 0.3 pts

Operating income 180.1 147.1 33.0 22.4 %

% of net sales 17.9 % 13.9 % 4.0 pts

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

Other (income) expense

(0.3) 0.3 (0.6) N.M.

Net interest expense 27.5 19.3 8.2 42.5 %

Income from continuing operations before income taxes 152.9 127.7 25.2 19.7 %

Provision for income taxes

20.8 12.3 8.5 69.1 %

Effective tax rate 13.6 % 9.6 % 4.0 pts

Not Meaningful

The consolidated results of operations for the nine months ended September 30, 2023 and September 30, 2022 were as follows:

Nine months ended

In millions September 30,

2023 September 30,

In millions March 31,

2024 March 31,

Change % / Point

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% of net sales 17.8 % 17.8 % — pts

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

Other (income) expense

Other expense

0.1 0.7 (0.6) N.M.

Net interest expense 91.7 34.2 57.5 N.M.

Net interest expense 27.3 32.4 (5.1) (15.7) %

Income from continuing operations before income taxes 153.4 150.5 2.9 1.9 %

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

Three months ended September 30, 2023 Nine months ended September 30, 2023

over the prior year period over the prior year period

Three months ended March 31, 2024

over the prior year period

Volume (3.9) %

Price 5.3 7.3

Core growth (7.3) (5.7)

Acquisition/Divestitures 2.3 5.9

Currency 0.6 (0.2)

Total (1.1) %

The 4.4 percent decrease in net sales in the third quarter of 2023 from 2022 was primarily driven by:

• decreased sales volume in our residential flow business within our Industrial & Flow Technologies 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;

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

The 1.1 percent decrease in net sales in the first quarter of 2024 from 2023 was primarily driven by:

• decreased sales volume in our residential flow business within our Flow segment and our residential business within our Water Solutions segment compared to the same period of the prior year;

• decreased sales volume in our commercial business within our Water Solutions segment driven by the completion of a large project in 2023 that did not recur in the first three months of 2024;

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

This decrease was partially offset by:

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

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

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

Net sales were flat in the first nine months of 2023 from 2022, primarily driven by:

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

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

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

• increases in selling prices to mitigate a rise in inflationary costs and lower rebates and incentives in our Pool segment.

The 3.9 and 3.7 percentage point increases in gross profit as a percentage of net sales in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven by:

• increases in selling prices to mitigate impacts of inflationary costs and 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 Industrial & Flow Technologies segment mainly driven by manufacturing leverage and transformation initiatives.

These increases were partially offset by:

• increased selling prices to mitigate inflationary cost increases;

• increased sales volume in our commercial flow business within our Flow segment compared to the same period of the prior year.

The 1.3 percentage point increase in gross profit as a percentage of net sales in the first quarter of 2024 from 2023 was primarily driven by:

• increases in selling prices to mitigate impacts of inflationary costs;

• increased productivity in our Flow and Water Solutions segments mainly driven by manufacturing leverage and transformation initiatives;

• asset impairment and write-offs of $0.8 million recorded in the first quarter of 2024, compared to $3.9 million in the first quarter of 2023.

This increase was partially offset by:

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

• inventory impairments and write-offs of $1.4 million in the third quarter of 2023 and $5.3 million in the first nine months of 2023.

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

The 0.3 percentage point decrease in SG&A as a percentage of net sales in the third quarter of 2023 from 2022 was primarily driven by:

• identifiable intangible asset amortization expense of $13.8 million in the third quarter of 2023, compared to $18.5 million in the third quarter of 2022;

• restructuring and other costs of $1.6 million in the third quarter of 2023, compared to $12.5 million in the third quarter of 2022;

• no deal-related costs and expenses in the third quarter of 2023, compared to $13.4 million in the third quarter of 2022.

The decrease was partially offset by:

• transformation costs of $13.5 million in the third quarter of 2023, compared to $10.1 million in the third quarter of 2022;

• higher employee compensation costs compared to the same period of the prior year.

The 0.6 percentage point increase in SG&A as a percentage of net sales in the first nine months of 2023 from 2022 was primarily driven by:

• increased identifiable intangible asset amortization expense of $12.7 million in the first nine months of 2023 related to the addition of Manitowoc Ice’s definite-lived intangible assets in the third quarter of 2022;

• transformation costs of $28.0 million in the first nine months of 2023, compared to $20.8 million in the first nine months of 2022;

• higher employee compensation costs compared to the same period of the prior year.

The increase was partially offset by:

• no deal-related costs and expenses in the first nine months of 2023, compared to $21.4 million in the first nine months of 2022;

• restructuring and other costs of $5.1 million in the first nine months of 2023, compared to $15.7 million in the first nine months of 2022.

The 1.4 percentage point increase in SG&A as a percentage of net sales in the first quarter of 2024 from 2023 was primarily driven by:

• transformation costs of $17.0 million in the first quarter of 2024, compared to $8.5 million in the first quarter of 2023;

• restructuring and other costs of $4.6 million in the first quarter of 2024, compared to $2.9 million in the first quarter of 2023.

Net interest expense

The increases in net interest expense in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven by:

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

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

These increases were partially offset by:

• the amortization of debt issuance costs of $1.3 million during the third quarter of 2022 and $9.0 million during the first nine months of 2022 related to financing commitments for a bridge loan facility established in connection with the acquisition of Manitowoc Ice that did not recur in the first nine months of 2023.

The 15.7 percent decrease in net interest expense in the first quarter of 2024 from 2023 was primarily driven by:

• lower variable debt compared to the same period of the prior year.

This decrease was partially offset by:

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

Provision for income taxes

The 4.0 and 0.6 percentage point increases in the effective tax rate in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven b y:

The 1.6 percentage point decrease in the effective tax rate in the first quarter of 2024 from 2023 was primarily driven b y:

• the favorable impact of discrete items that occurred during the first quarter of 2024 that did not occur in the same period of the prior year.

This decrease was partially offset by:

• the unfavorable mix of global earnings.

These increases were partially offset by:

• the impact of favorable discrete items that occurred during the third quarter and first nine months of 2023 that did not occur in 2022.

SEGMENT RESULTS OF OPERATIONS

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

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

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 comprises various product offerings that serve multiple end users.

We evaluate performance based on net sales and segment income and use a variety of ratios to measure performance of our reporting segments.

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, legal accrual adjustments and settlements and other unusual non-operating items.

Industrial & Flow Technologies

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

Three months ended Nine months ended

In millions September 30,

2023 September 30,

2022 % / Point Change September 30,

2023 September 30,

Segment income represents equity income of unconsolidated subsidiaries and operating income exclusive of intangible amortization, costs of restructuring and transformation activities, impairments, legal accrual adjustments and settlements and other unusual non-operating items.

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

Three months ended

In millions March 31,

2024 March 31,

2023 % / Point Change

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Segment income 77.3 65.0 18.9 %

% of net sales 19.4 % 16.9 % 2.5 pts 18.1 % 15.7 % 2.4 pts

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

Three months ended September 30, 2023 Nine months ended September 30, 2023

over the prior year period over the prior year period

% of net sales 20.1 % 16.6 % 3.5 pts

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

Three months ended March 31, 2024

over the prior year period

Volume (4.3) %

Price 4.9 8.3

Core growth (2.1)

Currency 1.6 (0.1)

Total (1.9) %

The 2.7 and 7.0 percent increases in net sales for Industrial & Flow Technologies in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven by:

• increases in selling prices to mitigate inflationary cost increases;

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

• favorable foreign currency effects compared to the third quarter of the prior year.

These increases were partially offset by:

• decreased sales volume in our residential flow business compared to the prior year.

The 1.9 percent decrease in net sales for Flow in the first quarter of 2024 from 2023 was primarily driven by:

• decreased sales volume in our residential flow business compared to the same period of the prior year.

This decrease was partially offset by:

• increased sales volume in our commercial flow business compared to the same period of the prior year;

• increased selling prices to mitigate inflationary cost increases.

Segment income

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

Three months ended September 30, 2023 Nine months ended September 30, 2023

over the prior year period over the prior year period

Growth/Price 4.2 pts 6.5 pts

Currency (0.2) (0.1)

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

Three months ended March 31, 2024

over the prior year period

Growth/Price 3.2 pts

Inflation (2.3)

Productivity 2.6

Total 2.5 pts 2.4 pts

The 2.5 and 2.4 percentage point increases in segment income for Industrial & Flow Technologies as a percentage of net sales in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven by:

• increases in selling prices to mitigate impacts of inflation;

Total 3.5 pts

The 3.5 percentage point increase in segment income for Flow as a percentage of net sales in the first quarter of 2024 from 2023 was primarily driven by:

• increased selling prices to mitigate impacts of inflation and favorable mix;

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

These increases were partially offset by:

This increase was partially offset by:

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

• unfavorable foreign currency effects compared to the prior year.

Water Solutions

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

Three months ended Nine months ended

In millions September 30,

2023 September 30,

2022 % / Point Change September 30,

2023 September 30,

Three months ended

In millions March 31,

2024 March 31,

2023 % / Point Change

1 unchanged sentence

Segment income 55.6 52.4 6.1 %

% of net sales 23.0 % 17.9 % 5.1 pts 21.6 % 14.8 % 6.8 pts

% of net sales 20.4 % 19.3 % 1.1 pts

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

Three months ended September 30, 2023 Nine months ended September 30, 2023

over the prior year period over the prior year period

Three months ended March 31, 2024

over the prior year period

Volume (0.8) %

Price 2.9 3.5

Core growth 0.8

Acquisition/Divestitures 8.7 26.2

Currency (0.4)

Total 8.8 % 29.0 %

The 8.8 and 29.0 percent increases in net sales for Water Solutions in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven by:

• 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;

• increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

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

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

The 0.4 percent increase in net sales for Water Solutions in the first quarter of 2024 from 2023 was primarily driven by:

• increased selling prices in our commercial business to mitigate inflationary cost increases.

This increase was partially offset by:

• decreased sales volume in our commercial business driven by the completion of a large project in 2023 that did not recur in the first three months of 2024;

• decreased sales volume in our residential business as a result of lower demand;

• unfavorable foreign currency effects compared to the same period of the prior year.

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:

Three months ended September 30, 2023 Nine months ended September 30, 2023

over the prior year period over the prior year period

Growth/Price/Acquisition/Divestitures 7.2 pts 9.6 pts

Three months ended March 31, 2024

over the prior year period

Currency (0.5)

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Productivity 1.6

Total 5.1 pts 6.8 pts

The 5.1 and 6.8 percentage point increases in segment income for Water Solutions as a percentage of net sales in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven by:

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

• increases in selling prices to mitigate impacts of inflation;

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

These increases were partially offset by:

Total 1.1 pts

The 1.1 percentage point increase in segment income for Water Solutions as a percentage of net sales in the first quarter of 2024 from 2023 was primarily driven by:

• increased selling prices in our commercial business to mitigate impacts of inflation and favorable mix;

• 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;

• unfavorable foreign currency effects compared to the prior year.

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

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

Three months ended Nine months ended

In millions September 30,

2023 September 30,

2022 % / Point Change September 30,

2023 September 30,

Three months ended

In millions March 31,

2024 March 31,

2023 % / Point Change

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Segment income 110.8 116.2 (4.6) %

% of net sales 29.3 % 28.0 % 1.3 pts 31.0 % 28.1 % 2.9 pts

% of net sales 30.8 % 31.9 % (1.1) pts

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

Three months ended September 30, 2023 Nine months ended September 30, 2023

over the prior year period over the prior year period

Three months ended March 31, 2024

over the prior year period

Volume (5.7) %

Price 7.3 8.6

Core growth (20.8) (21.8)

Currency — (0.1)

Total (1.3) %

The 20.8 and 21.9 percent decreases in net sales for Pool in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven by:

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

These decreases were partially offset by:

• increases in selling prices to mitigate inflationary cost increases and lower rebates and incentives.

The 1.3 percent decrease in net sales for Pool in the first quarter of 2024 from 2023 was primarily driven by:

• decreased sales volume primarily due to lower demand compared to the prior year.

This decrease was partially offset by:

• increased selling prices to mitigate inflationary cost increases.

Segment income

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

Three months ended September 30, 2023 Nine months ended September 30, 2023

over the prior year period over the prior year period

Growth/Price 3.1 pts 6.1 pts

Three months ended March 31, 2024

over the prior year period

Growth/Price 2.7 pts

Inflation (1.7)

Productivity (2.1)

Total 1.3 pts 2.9 pts

The 1.3 and 2.9 percentage point increases in segment income for Pool as a percentage of net sales in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven by:

• increases in selling prices to mitigate impacts of inflation and lower rebates and incentives;

• positive impact to margin associated with benefits realized from our transformation initiatives;

• cost management initiatives associated with decreased sales volume.

These increases were partially offset by:

Total (1.1) pts

The 1.1 percentage point decrease in segment income for Pool as a percentage of net sales in the first quarter of 2024 from 2023 was primarily driven by:

• decreased productivity due to decreased sales volume and investments to drive future growth;

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

This decrease was partially offset by:

• increased selling prices to mitigate impacts of inflation.

BACKLOG OF ORDERS BY SEGMENT

In millions September 30,

In millions March 31,

2024 December 31,

2023 $ Change % Change

Industrial & Flow Technologies $ 404.6 $ 512.1 $ (107.5) (21.0) %

Flow $ 365.8 $ 390.1 $ (24.3) (6.2) %

Water Solutions 113.2 108.5 4.7 4.3 %

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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 overall backlog from December 31, 2022 was primarily driven by our backlog trending down to more historical levels as a result of increased manufacturing capacity and improved lead times.

The decrease in our overall backlog from December 31, 2023 was primarily driven by backlog in our Flow and Pool segments 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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Consistent with historical trends, we experienced seasonal cash usage in the first quarter of 2024 and drew on our revolving credit facility to fund our operations.

This cash usage reversed in the second quarter of 2023 as the seasonality of our businesses peaked and generated significant cash to fund our operations.

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

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

This cash usage typically reverses in the second quarter as the seasonality of our businesses peak.

We expect historical seasonal patterns to continue and the second quarter of 2024 to generate significant cash to fund our operations.

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 is 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.

2 unchanged sentences

Summary of cash flows

Nine months ended

In millions September 30,

2023 September 30,

Three months ended

In millions March 31,

2024 March 31,

Net cash provided by (used for):

3 unchanged sentences

Operating activities

The $502.3 million in net cash provided by operating activities of continuing operations in the first nine months of 2023 primarily reflects $506.8 million of net income from continuing operations, net of non-cash depreciation, definite-lived intangible amortization and asset impairment.

The $271.5 million in net cash provided by operating activities of continuing operations in the first nine months of 2022 primarily reflects $458.2 million of net income from continuing operations, net of non-cash depreciation and definite-lived intangible amortization.

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

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

Net cash used for operating activities of continuing operations in the first three months of 2024 primarily reflects a cash outflow of $287.9 million as a result of changes in net working capital, primarily due to an increase in accounts receivable largely related to certain advance sale programs in anticipation of our distributors’ peak sales season in the second and third quarters.

The outflow related to net working capital was partially offset by net income from continuing operations, net of non-cash depreciation, definite-lived intangible amortization and asset impairment, of $162.7 million.

Net cash used for operating activities of continuing operations in the first three months of 2023 primarily reflects a cash outflow of $262.6 million as a result of changes in net working capital, primarily due to an increase in accounts receivable largely related to certain advance sale programs in anticipation of our distributors’ peak sales season in the second and third quarters.

Investing activities

Net cash used for investing activities in the first nine months of 2023 primarily reflects capital expenditures of $54.8 million, partially offset by proceeds from the sale of property and equipment of $5.4 million.

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

Net cash used for investing activities in the first three months of 2024 reflects capital expenditures of $19.3 million.

Net cash used for investing activities in the first three months of 2023 primarily reflects capital expenditures of $16.6 million.

Financing activities

Net cash used for financing activities in the first nine months of 2023 primarily relates to net repayments of revolving long-term debt of $320.0 million and dividend payments of $108.9 million.

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

Net cash provided by financing activities in the first three months of 2024 primarily relates to net borrowings of revolving long-term debt of $101.4 million, partially offset by dividend payments of $38.0 million.

Net cash provided by financing activities in the first three months of 2023 primarily relates to net borrowings of revolving long-term debt of $173.6 million, partially offset by dividend payments of $36.2 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.

In addition to measuring our cash flow generation or usage based upon operating, investing and financing classifications included in the Condensed 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 is equal to 100 percent conversion of net income.

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The following table is a reconciliation of free cash flow:

Nine months ended

In millions September 30,

2023 September 30,

Net cash provided by operating activities of continuing operations $ 502.3 $ 271.5

Three months ended

In millions March 31,

2024 March 31,

Net cash used for operating activities of continuing operations

$ (107.4) $ (106.6)

Capital expenditures of continuing operations (19.3) (16.6)

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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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The applicable margin is based on, at PFSA’s election, Pentair’s leverage level or PFSA’s public credit rating.

As of September 30, 2023, total availability under the Senior Credit Facility was $900.0 million.

As of March 31, 2024, total availability under the Senior Credit Facility was $798.6 million.

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 that began on the last day of the third quarter of 2023 and increase to $12.5 million beginning with the last day of the third quarter of 2024.

In addition, Pentair and PFSA are parties to a senior unsecured term loan facility (the “Term Loan Facility”), with PFSA, as borrower, Pentair, as guarantor, 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 increase 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.

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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 $20.8 million, of which there were no outstanding borrowings at September 30, 2023.

Borrowings under these credit facilities bear interest at variable rates.

We have $31.3 million of Term Loan Facility payments due in the next twelve months.

We classified this debt as long-term as of September 30, 2023 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 September 30, 2023, we had $93.1 million of cash held in certain countries in which the ability to repatriate is limited due to local regulations or significant potential tax consequences.

We have $43.8 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 March 31, 2024 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 March 31, 2024, we had $89.1 million of cash held in certain countries in which the ability to repatriate is limited due to local regulations or significant potential tax consequences.

Share repurchases

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 authorization expires on December 31, 2025.

During the three and nine months ended September 30, 2023, no ordinary shares were repurchased.

As of September 30, 2023, we had $600.0 million available for share repurchases under this authorization.

This authorization expires on December 31, 2025.

During the three months ended March 31, 2024, no ordinary shares were repurchased.

As of March 31, 2024, we had $600.0 million available for share repurchases under this authorization.

Dividends payable

On September 18, 2023, the Board of Directors declared a quarterly cash dividend of $0.22 per share, payable on November 3, 2023 to shareholders of record at the close of business on October 20, 2023.

As a result, the balance of dividends payable included in Other current liabilities on our Condensed Consolidated Balance Sheets was $36.4 million at September 30, 2023, compared to $36.2 million at December 31, 2022.

We paid dividends in the first nine months of 2023 of $108.9 million, or $0.66 per ordinary share compared with $104.1 million, or $0.63 per ordinary share, in the prior year period.

On February 19, 2024, the Board of Directors declared a quarterly cash dividend of $0.23 per share, payable on May 3, 2024 to shareholders of record at the close of business on April 19, 2024.

As a result, the balance of dividends payable included in Other current liabilities on our Condensed Consolidated Balance Sheets was $38.2 million at March 31, 2024, compared to $38.0 million at December 31, 2023.

We paid dividends in the first three months of 2024 of $38.0 million, or $0.23 per ordinary share compared with $36.2 million, or $0.22 per ordinary share, in the prior year period.

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

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

The following table presents summarized financial information as of September 30, 2023 and December 31, 2022 for the Parent Company Guarantor and Subsidiary Issuer on a combined basis after elimination of (i) intercompany transactions and balances among the guarantors and issuer and (ii) equity in earnings from and investments in any subsidiary that is a non-guarantor or issuer.

In millions September 30,

The following table presents summarized financial information as of March 31, 2024 and December 31, 2023 for the Parent Company Guarantor and Subsidiary Issuer on a combined basis after elimination of (i) intercompany transactions and balances among the guarantors and issuer and (ii) equity in earnings from and investments in any subsidiary that is a non-guarantor or issuer.

In millions March 31,

2024 December 31,

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2,285.9 2,331.4

(1) No assets due from non-guarantor subsidiaries were included as of September 30, 2023 and December 31, 2022, respectively.

(2) Includes assets due from non-guarantor subsidiaries of $2,660.7 million and $2,664.7 million as of September 30, 2023 and December 31, 2022, respectively.

(3) Includes liabilities due to non-guarantor subsidiaries of $1,455.9 million and $989.8 million as of September 30, 2023 and December 31, 2022, respectively.

(4) Includes liabilities due to non-guarantor subsidiaries of $255.8 million and $259.8 million as of September 30, 2023 and December 31, 2022, respectively.

(1) No assets due from non-guarantor subsidiaries were included as of March 31, 2024 and December 31, 2023, respectively.

(2) Includes assets due from non-guarantor subsidiaries of $2,554.6 million and $2,673.3 million as of March 31, 2024 and December 31, 2023, respectively.

(3) Includes liabilities due to non-guarantor subsidiaries of $1,115.7 million and $1,583.6 million as of March 31, 2024 and December 31, 2023, respectively.

(4) Includes liabilities due to non-guarantor subsidiaries of $157.1 million and $268.4 million as of March 31, 2024 and December 31, 2023, respectively.

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

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk during the quarter ended September 30, 2023.

There have been no material changes in our market risk during the quarter ended March 31, 2024.

For additional information refer to Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2023.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis