Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the Quarterly Period Ended March 31, 2018
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-11625
Pentair plc
 
(Exact name of Registrant as specified in its charter)
Ireland
  
98-1141328
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification number)
 
 
43 London Wall, London, EC2M 5TF, United Kingdom
(Address of principal executive offices)
Registrant's telephone number, including area code: 44-20-7347-8925
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§223.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer þ
  
Accelerated filer o
  
Non-accelerated filer o
  
Smaller reporting 
company o
 
Emerging growth
company o
 
  
 
  
(Do not check if a smaller reporting company)
  
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
On March 31, 2018, 178,386,369 shares of Registrant's common stock were outstanding.


Table of Contents

Pentair plc and Subsidiaries
 
 
Page
 
 
PART I FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II OTHER INFORMATION
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 6.
 
 
 
 



2
Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS
Pentair plc and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
 
Three months ended
In millions, except per-share data
March 31,
2018
March 31,
2017
Net sales
$
1,269.7

$
1,183.5

Cost of goods sold
807.7

761.2

Gross profit
462.0

422.3

Selling, general and administrative
279.6

251.7

Research and development
30.1

30.0

Operating income
152.3

140.6

Other (income) expense:
 
 
Loss on sale of business
5.3

—

Net interest expense
13.8

35.0

Other expense
1.4

2.0

Income from continuing operations before income taxes
131.8

103.6

Provision for income taxes
27.6

22.9

Net income from continuing operations
104.2

80.7

(Loss) income from discontinued operations, net of tax
(1.3
)
7.1

Net income
$
102.9

$
87.8

Comprehensive income, net of tax
 
 
Net income
$
102.9

$
87.8

Changes in cumulative translation adjustment
2.4

75.7

Changes in market value of derivative financial instruments, net of tax
(3.8
)
1.6

Comprehensive income
$
101.5

$
165.1

Earnings (loss) per ordinary share
 
 
Basic
 
 
Continuing operations
$
0.58

$
0.44

Discontinued operations
(0.01
)
0.04

Basic earnings per ordinary share
$
0.57

$
0.48

Diluted
 
 
Continuing operations
$
0.58

$
0.44

Discontinued operations
(0.01
)
0.04

Diluted earnings per ordinary share
$
0.57

$
0.48

Weighted average ordinary shares outstanding
 
 
Basic
179.2

182.0

Diluted
181.5

184.0

Cash dividends paid per ordinary share
$
0.35

$
0.345

See accompanying notes to condensed consolidated financial statements.

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Pentair plc and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
 
March 31,
2018
December 31,
2017
In millions, except per-share data
Assets
Current assets
 
 
Cash and cash equivalents
$
907.5

$
113.3

Accounts and notes receivable, net of allowances of $17.9 and $22.6, respectively
985.2

831.6

Inventories
593.5

581.0

Other current assets
232.8

222.9

Total current assets
2,719.0

1,748.8

Property, plant and equipment, net
546.5

545.5

Other assets
 
 
Goodwill
4,380.1

4,351.1

Intangibles, net
1,536.5

1,558.4

Other non-current assets
186.0

429.9

Total other assets
6,102.6

6,339.4

Total assets
$
9,368.1

$
8,633.7

Liabilities and Equity
Current liabilities
 
 
Current maturities of long-term debt and short-term borrowings
$
0.2

$
—

Accounts payable
404.0

495.7

Employee compensation and benefits
142.7

186.6

Other current liabilities
480.6

517.1

Total current liabilities
1,027.5

1,199.4

Other liabilities
 
 
Long-term debt
2,673.1

1,440.7

Pension and other post-retirement compensation and benefits
291.9

285.6

Deferred tax liabilities
369.1

394.8

Other non-current liabilities
286.8

275.4

Total liabilities
4,648.4

3,595.9

Equity
 
 
Ordinary shares $0.01 par value, 426.0 authorized, 178.4 and 180.3 issued at March 31, 2018 and December 31, 2017, respectively
1.8

1.8

Additional paid-in capital
2,654.7

2,797.7

Retained earnings
2,308.0

2,481.7

Accumulated other comprehensive loss
(244.8
)
(243.4
)
Total equity
4,719.7

5,037.8

Total liabilities and equity
$
9,368.1

$
8,633.7

See accompanying notes to condensed consolidated financial statements.

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Pentair plc and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Three months ended
In millions
March 31,
2018
March 31,
2017
Operating activities
 
 
Net income
$
102.9

$
87.8

Loss (income) from discontinued operations, net of tax
1.3

(7.1
)
Adjustments to reconcile net income from continuing operations to net cash provided by (used for) operating activities of continuing operations
 
 
Equity income of unconsolidated subsidiaries
(0.6
)
(0.2
)
Depreciation
21.5

21.4

Amortization
24.7

24.0

Deferred income taxes
(10.6
)
(4.7
)
Loss on sale of business
5.3

—

Share-based compensation
6.0

16.4

Changes in assets and liabilities, net of effects of business acquisitions
 
 
Accounts and notes receivable
(146.9
)
(130.6
)
Inventories
(6.3
)
(8.6
)
Other current assets
(2.4
)
(18.0
)
Accounts payable
(94.2
)
(55.9
)
Employee compensation and benefits
(46.6
)
(23.9
)
Other current liabilities
(20.8
)
15.8

Other non-current assets and liabilities
(0.2
)
(5.1
)
Net cash provided by (used for) operating activities of continuing operations
(166.9
)
(88.7
)
Net cash provided by (used for) operating activities of discontinued operations
(0.7
)
(17.3
)
Net cash provided by (used for) operating activities
(167.6
)
(106.0
)
Investing activities
 
 
Capital expenditures
(16.8
)
(23.6
)
Proceeds from sale of property and equipment
2.3

—

Payments due to the sale of businesses, net
(13.8
)
—

Acquisitions, net of cash acquired
(2.9
)
(56.7
)
Net cash provided by (used for) investing activities of continuing operations
(31.2
)
(80.3
)
Net cash provided by (used for) investing activities of discontinued operations
—

(3.7
)
Net cash provided by (used for) investing activities
(31.2
)
(84.0
)
Financing activities
 
 
Net receipts (repayments) of short-term borrowings
0.2

(0.1
)
Net receipts of commercial paper and revolving long-term debt
417.5

229.1

Proceeds from long-term debt
800.0

—

Debt issuance costs
(7.5
)
—

Shares issued to employees, net of shares withheld
0.9

2.8

Repurchases of ordinary shares
(150.0
)
—

Dividends paid
(63.3
)
(62.8
)
Net cash provided by (used for) financing activities
997.8

169.0

Effect of exchange rate changes on cash and cash equivalents
(4.8
)
20.6

Change in cash and cash equivalents
794.2

(0.4
)
Cash and cash equivalents, beginning of period
113.3

238.5

Cash and cash equivalents, end of period
$
907.5

$
238.1

See accompanying notes to condensed consolidated financial statements.

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Pentair plc and Subsidiaries
Condensed Consolidated Statements of Changes in Equity (Unaudited)

In millions
Ordinary shares
 
Additional paid-in capital
Retained earnings
Accumulated
other
comprehensive loss
 Total
Number
Amount
 
Balance - December 31, 2017
180.3

$
1.8

 
$
2,797.7

$
2,481.7

$
(243.4
)
$
5,037.8

Net income
—

—

 
—

102.9

—

102.9

Cumulative effect of accounting changes
—

—

 
—

(214.0
)
—

(214.0
)
Other comprehensive loss, net of tax
—

—

 
—

—

(1.4
)
(1.4
)
Dividends declared
—

—

 
—

(62.6
)
—

(62.6
)
Share repurchase
(2.2
)
—

 
(150.0
)
—

—

(150.0
)
Exercise of options, net of shares tendered for payment
0.1

—

 
5.8

—

—

5.8

Issuance of restricted shares, net of cancellations
0.3

—

 
—

—

—

—

Shares surrendered by employees to pay taxes
(0.1
)
—

 
(4.8
)
—

—

(4.8
)
Share-based compensation
—

—

 
6.0

—

—

6.0

Balance - March 31, 2018
178.4

$
1.8

 
$
2,654.7

$
2,308.0

$
(244.8
)
$
4,719.7

 
In millions
Ordinary shares
 
Additional paid-in capital
Retained earnings
Accumulated
other
comprehensive loss
 Total
Number
Amount
Balance - December 31, 2016
181.8

$
1.8

 
$
2,920.8

$
2,068.1

$
(736.3
)
$
4,254.4

Net income
—

—

 
—

87.8

—

87.8

Other comprehensive income, net of tax
—

—

 
—

—

77.3

77.3

Dividends declared
—

—

 
—

(64.0
)
—

(64.0
)
Exercise of options, net of shares tendered for payment
0.2

—

 
9.5

—

—

9.5

Issuance of restricted shares, net of cancellations
0.3

0.1

 
—

—

—

0.1

Shares surrendered by employees to pay taxes
(0.1
)
—

 
(6.7
)
—

—

(6.7
)
Share-based compensation
—

—

 
16.4

—

—

16.4

Balance - March 31, 2017
182.2

$
1.9

 
$
2,940.0

$
2,091.9

$
(659.0
)
$
4,374.8

See accompanying notes to condensed consolidated financial statements.


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Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)


1.    Basis of Presentation and Responsibility for Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements of Pentair plc and its subsidiaries ("we," "us," "our," "Pentair," or the "Company") have been prepared following the requirements of the U.S. Securities and Exchange Commission ("SEC") for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America ("GAAP") can be condensed or omitted.
We are responsible for the unaudited condensed consolidated financial statements included in this document. The financial statements include all normal recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. As these are condensed financial statements, one should also read our consolidated financial statements and notes thereto, which are included in our Annual Report on Form 10-K for the year ended December 31, 2017.
Revenues, expenses, cash flows, assets and liabilities can and do vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be indicative of those for a full year.
Our fiscal year ends on December 31. We report our interim quarterly periods on a calendar quarter basis.
Electrical separation
On April 3, 2018, our Board of Directors formally approved the plan to separate our Water business and Electrical business into two independent, publicly-traded companies (the "Separation") and certain details related to the Separation, including the record date, distribution date and distribution ratio. The Separation will occur by means of a distribution of the Company’s Electrical business, to be effected by the transfer of the Electrical business from the Company to nVent Electric plc (“nVent”) and the issuance of ordinary shares of nVent directly to holders of Company ordinary shares on a pro rata basis (the “Distribution”). The Distribution is expected to occur at 4:59 p.m., Eastern Time, on April 30, 2018.
Each Company shareholder will receive one ordinary share of nVent for every one ordinary share of Pentair held as of the close of business on April 17, 2018, the record date for the Distribution. nVent ordinary shares are expected to begin trading on the New York Stock Exchange on May 1, 2018, under the symbol "NVT." "When-issued" trading for nVent ordinary shares began on April 16, 2018 and will continue through April 30, 2018. Beginning on April 16, 2018 and continuing through April 30, 2018, there are two markets in Pentair ordinary shares: Pentair shares that trade in the "regular way" market trade with an entitlement to nVent ordinary shares to be distributed pursuant to the Distribution and Pentair shares that trade in the "ex-distribution" market trade without an entitlement to nVent ordinary shares.
Upon completion of the Separation, Electrical's jurisdiction of organization will be Ireland, but it will manage its affairs so that it will be centrally managed and controlled in the United Kingdom (the "U.K.") and therefore will have its tax residency in the U.K. The disclosures and financial statements within these condensed consolidated financial statements include the results of operations, financial condition and cash flows of the Electrical business as continuing operations.
Adoption of new accounting standards
On January 1, 2018, we adopted Accounting Standards Update ("ASU") No. 2017-07, "Retirement Benefits-Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." As a result of the adoption, the interest cost, expected return on plan assets and net actuarial gain/loss components of net periodic pension and post-retirement benefit cost have been reclassified from Selling, general and administrative expense to Other expense. Only the service cost component remains in Operating income and will be eligible for capitalization in assets on a prospective basis.
The effect of the retrospective presentation change related to the net periodic cost of our defined benefit pension and other post-retirement plans on our Condensed Consolidated Statements of Operations and Comprehensive Income was as follows:
 
Three months ended
March 31, 2017
In millions
Previously Reported
As Revised
Effect of Change
Selling, general and administrative expenses
$
253.9

$
251.7

$
(2.2
)
Operating income
138.4

140.6

2.2

Other expense
—

2.2

2.2


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Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

On January 1, 2018, we adopted ASU No. 2016-16, "Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory." The ASU requires the tax effects of all intra-entity sales of assets other than inventory to be recognized in the period in which the transaction occurs. The adoption resulted in a $215.8 million cumulative-effect adjustment recorded in retained earnings as of the beginning of 2018 that reflects a $254.3 million reduction of a prepaid long term tax asset, partially offset by the establishment of $38.5 million of deferred tax assets.

On January 1, 2018, we adopted ASU No. 2014-09, "Revenue from Contracts with Customers" and the related amendments ("ASC 606" or "the new revenue standard") using the modified retrospective method. As a result of adoption, the cumulative impact to our retained earnings at January 1, 2018 was $1.8 million. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of the adoption of the new standard to be immaterial to our net income on an ongoing basis.

A majority of our net sales continue to be recognized when products are shipped from our manufacturing facilities or delivery has occurred, depending on terms of the sale. Under the new standard, timing for recognition of certain revenue may be accelerated such that a portion of revenue will be recognized prior to shipment or delivery dependent upon contract-specific terms.

The impact of adopting the new standard primarily relates to the accounting for certain custom products manufactured by our Electrical segment. Previously revenue was recognized for these custom products upon shipment. However, as these products have no alternative use to the Company and we have an enforceable right to payment for our performance completed to date, revenue related to these custom products is now recognized over time. Additionally, the new revenue standard resulted in reclassifications on the Condensed Consolidated Balance Sheets related to accounting for sales returns.

As required by ASC 606, the impact of adoption of the new revenue standard on our Condensed Consolidated Statements of Operations and Comprehensive Income and Condensed Consolidated Balance Sheets was as follows:
Condensed Consolidated Statements of Operations and Comprehensive Income
 
Three months ended March 31, 2018
In millions
As Reported
Balances without adoption of ASC 606
Effect of Change
Net sales
$
1,269.7

$
1,261.1

$
8.6

Cost of goods sold
807.7

801.3

6.4

Provision for income taxes
27.6

27.2

0.4

Net income from continuing operations
104.2

102.4

1.8

Condensed Consolidated Balance Sheets
 
 
 
March 31, 2018
In millions
As Reported
Balances without adoption of ASC 606
Effect of Change
Assets
 
 
 
Accounts and notes receivable, net
$
985.2

$
977.3

$
7.9

Inventories
593.5

602.6

(9.1
)
Other current assets
232.8

222.8

10.0

Liabilities
 
 
 
Other current liabilities
480.6

473.8

6.8

Deferred tax liabilities
369.1

368.6

0.5

Equity
 
 
 
Retained Earnings
2,308.0

2,306.4

1.6


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Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

The cumulative effect of the changes made to our January 1, 2018 Condensed Consolidated Balance Sheet from the modified retrospective adoption of ASU 2016-16 and ASU 2014-09 was as follows:
Condensed Consolidated Balance Sheets
 
 
 
In millions
Balance at December 31, 2017
Adjustments due to ASU 2016-16
Adjustments due to ASU 2014-09
Balance at January 1, 2018
Assets
 
 
 
 
Accounts and notes receivable, net
$
831.6

$
—

$
6.5

$
838.1

Inventories
581.0

—

(3.4
)
577.6

Other current assets
222.9

—

3.4

226.3

Other non-current assets
429.9

(246.5
)
—

183.4

Liabilities
 
 
 
 
Other current liabilities
517.1

—

6.5

523.6

Deferred tax liabilities
394.8

(30.7
)
0.5

364.6

Equity
 
 
 
 
Retained Earnings
2,481.7

(215.8
)
1.8

2,267.7


New accounting standards issued but not yet adopted
In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, "Leases" ("the new lease standard" or "ASC 842"), which requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The new lease standard requirements are effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and early adoption is permitted. The Company has begun evaluating the new lease standard, including the review and implementation of the necessary changes to our existing processes and systems that will be required to implement this new standard. While we are unable to quantify the impact at this time, we expect the primary impact to our consolidated financial position upon adoption will be the recognition, on a discounted basis, of our minimum commitments under noncancelable operating leases on our consolidated balance sheets resulting in the recording of right of use assets and lease obligations. We currently do not expect ASC 842 to have a material effect on either our consolidated statement of operations or consolidated statement of cash flow. We plan to adopt ASC 842 in the first quarter of 2019.
2.     Revenue
Revenue recognition
Revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for transferring those goods or providing services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

When determining whether the customer has obtained control of the goods or services, we consider any future performance obligations. Generally, there is no post-shipment obligation on product sold other than warranty obligations in the normal and ordinary course of business. In the event significant post-shipment obligations were to exist, revenue recognition would be deferred until Pentair has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.

Performance obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, standalone selling price is generally readily observable.
Our performance obligations are satisfied at a point in time or over time as work progresses. Revenue from goods and services transferred to customers at a point in time accounted for 84.3% and 90.3% of our revenue for the three-month periods ended

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Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

March 31, 2018 and 2017, respectively. Revenue on these contracts is recognized when obligations under the terms of the contract with our customer are satisfied; generally this occurs with the transfer of control upon shipment.
Revenue from products and services transferred to customers over time accounted for 15.7% and 9.7% of our revenue for the three-month periods ended March 31, 2018 and 2017, respectively. For the majority of our revenue recognized over time, we use an input measure to determine progress towards completion. Under this method, sales and gross profit are recognized as work is performed generally based on the relationship between the actual costs incurred and the total estimated costs at completion ("the cost-to-cost method") or based on efforts for measuring progress towards completion in situations in which this approach is more representative of the progress on the contract than the cost-to-cost method. Contract costs include labor, material, overhead and, when appropriate, general and administrative expenses. Changes to the original estimates may be required during the life of the contract and such estimates are reviewed on a regular basis. Sales and gross profit are adjusted using the cumulative catch-up method for revisions in estimated total contract costs. These reviews have not resulted in adjustments that were significant to our results of operations. For performance obligations related to long term contracts, when estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined.
We use an output method to measure progress towards completion for certain of our Electrical businesses, as this method appropriately depicts performance towards satisfaction of the performance obligation. Under the output method, revenue is recognized based on number of units produced.
On March 31, 2018, we had $168.7 million of remaining performance obligations on contracts with original expected duration of one year or more. We expect to recognize the majority of our remaining performance obligations on these contracts within the next 12 to 18 months.
Sales returns
The right of return may exist explicitly or implicitly with our customers. Our return policy allows for customer returns only upon our authorization. Goods returned must be product we continue to market and must be in salable condition. When the right of return exists, we adjust the transaction price for the estimated effect of returns. We estimate the expected returns based on historical sales levels, the timing and magnitude of historical sales return levels as a percent of sales, type of product, type of customer and a projection of this experience into the future.

Pricing and sales incentives
Our sales contracts may give customers the option to purchase additional goods or services priced at a discount. Options to acquire additional goods or services at a discount can come in many forms, such as customer programs and incentive offerings including pricing arrangements, promotions and other volume-based incentives.

We reduce the transaction price for certain customer programs and incentive offerings including pricing arrangements, promotions and other volume-based incentives that represent variable consideration. Sales incentives given to our customers are recorded using either the expected value method or most likely amount approach for estimating the amount of consideration to which Pentair shall be entitled. The expected value is the sum of probability-weighted amounts in a range of possible consideration amounts. An expected value is an appropriate estimate of the amount of variable consideration when there are a large number of contracts with similar characteristics. The most likely amounts is the single most likely amount in a range of possible consideration amounts (that is, the single most likely outcome of the contract). The most likely amount is an appropriate estimate of the amount of variable consideration if the contract has limited possible outcomes (for example, an entity either achieves a performance bonus or does not).

Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling price. However, one of our businesses allows customers to apply for a refund of a percentage of the original purchase price if they can demonstrate sales to a qualifying end customer. We use the expected value method to estimate the anticipated refund to be paid based on historical experience and reduce sales for the probable cost of the discount. The cost of these refunds is recorded as a reduction of the transaction price.
Volume-based incentives involve rebates that are negotiated at or prior to the time of sale with the customer and are redeemable only if the customer achieves a specified cumulative level of sales or sales increase. Under these incentive programs, at the time of sale, we reforecast the most likely amount of the rebate to be paid based on forecasted sales levels. These forecasts are updated at least quarterly for each customer and the transaction price is reduced for the anticipated cost of the rebate. If the forecasted sales for a customer changes, the accrual for rebates is adjusted to reflect the new amount of rebates expected to be earned by the customer.

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Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Shipping and handling costs
Amounts billed to customers for shipping and handling activities after the customer obtains control are treated as a promised service performance obligation and recorded in Net sales in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income. Shipping and handling costs incurred by Pentair for the delivery of goods to customers are considered a cost to fulfill the contract and are included in Cost of goods sold in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income.

Contract assets and liabilities
Contract assets consist of unbilled amounts resulting from sales under long-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer, such as when the customer retains a small portion of the contract price until completion of the contract. We typically receive interim payments on sales under long-term contracts as work progresses, although for some contracts, we may be entitled to receive an advance payment. Contract liabilities consist of advanced payments, billings in excess of costs incurred and deferred revenue.

Contract assets are recorded within Other current assets and contract liabilities are recorded within Other current liabilities in the Condensed Consolidated Balance Sheets.

Contract assets and liabilities consisted of the following:
In millions
March 31, 2018
December 31, 2017
$ Change
% Change
Contract assets
$
118.0

$
121.4

$
(3.4
)
(2.8
)%
Contract liabilities
41.4

43.4

(2.0
)
(4.6
)%
Net contract assets
$
76.6

$
78.0

$
(1.4
)
(1.8
)%
The $1.4 million decrease in net contract assets from December 31, 2017 to March 31, 2018 was primarily the result of timing of milestone payments. Approximately half of our contract liabilities at December 31, 2017 were recognized in revenue in the first quarter of 2018. There were no impairment losses recognized on our contract assets for the three months ended March 31, 2018.

Practical expedients and exemptions
We generally expense incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. These costs primarily relate to sales commissions and are recorded in Selling, general and administrative expense in the Condensed Consolidated Statements of Operations and Comprehensive Income.

We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Further, we do not adjust the promised amount of consideration for the effects of a significant financing component if we expect, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

Revenue by category
We disaggregate our revenue from contracts with customers by geographic location, vertical and strategic business group ("SBG") for each of our segments, as we believe these best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.


11
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Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Geographic net sales information by segment, based on geographic destination of the sale, was as follows:
 
Three months ended March 31, 2018
In millions
Water
Electrical
U.S.
$
452.2

$
317.0

Western Europe
110.3

121.7

Developing (1)
113.0

56.9

Other Developed (2)
56.8

43.3

Segment net sales
$
732.3

$
538.9

(1) Developing includes China, Eastern Europe, Latin America, the Middle East and Southeast Asia.
(2) Other Developed includes Australia, Canada and Japan.

 
Three months ended March 31, 2017
In millions
Water
Electrical
U.S.
$
431.2

300.1

Western Europe
95.3

103.3

Developing (1)
104.9

62.1

Other Developed (2)
51.5

36.7

Segment net sales
$
682.9

$
502.2

(1) Developing includes China, Eastern Europe, Latin America, the Middle East and Southeast Asia.
(2) Other Developed includes Australia, Canada and Japan.

Vertical market net sales information for Water was as follows:
 
Three months ended
In millions
March 31, 2018
March 31, 2017
Residential
$
412.1

$
388.3

Commercial
151.8

144.7

Industrial
168.4

149.9

Water net sales
$
732.3

$
682.9


Vertical market net sales information for Electrical was as follows:
 
Three months ended
In millions
March 31, 2018
March 31, 2017
Industrial
$
243.5

$
220.5

Commercial & Residential
146.0

134.5

Energy
79.9

88.0

Infrastructure
69.5

59.2

Electrical net sales
$
538.9

$
502.2



12
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Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Net sales information by SBG was as follows:
 
Three months ended
In millions
March 31, 2018
March 31, 2017
Aquatic Systems
$
240.4

$
222.5

Filtration Solutions
251.6

230.8

Flow Technologies
240.3

229.6

Total Water
732.3

682.9

Enclosures
254.1

226.5

Thermal Management
147.9

145.4

Electrical & Fastening Solutions
136.9

130.3

Total Electrical
538.9

502.2

Other
(1.5
)
(1.6
)
Consolidated net sales
$
1,269.7

$
1,183.5


3.Discontinued Operations
On April 28, 2017, we completed the sale of the Valves & Controls business to Emerson Electric Co. for $3.15 billion in cash. The sale resulted in a gain of $181.1 million, net of tax. The results of the Valves & Controls business have been presented as discontinued operations. The Valves & Controls business was previously disclosed as a stand-alone reporting segment. Transaction costs of $11.2 million related to the sale of Valves & Controls were incurred during the three months ended March 31, 2017 and were recorded within (Loss) income from discontinued operations, net of tax presented below.

Operating results of discontinued operations are summarized below:
 
Three months ended
In millions
March 31,
2018
March 31,
2017
Net sales
$
—

$
356.5

Cost of goods sold
—

267.9

Gross profit
—

88.6

Selling, general and administrative
—

79.5

Research and development
—

4.2

Operating income
$
—

$
4.9

 
 
 
(Loss) income from discontinued operations before income taxes
$
(0.7
)
$
5.7

Income tax provision (benefit)
0.6

(1.4
)
(Loss) income from discontinued operations, net of tax
$
(1.3
)
$
7.1


13
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Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

4.
Share Plans
Total share-based compensation expense for the three months ended March 31, 2018 and 2017 was as follows:
 
Three months ended
In millions
March 31,
2018
March 31,
2017
Restricted stock units
$
2.4

$
5.8

Stock options
1.2

4.5

Performance share units
2.4

6.1

Total share-based compensation expense
$
6.0

$
16.4


5.
Restructuring
During the three months ended March 31, 2018 and the year ended December 31, 2017, we initiated and continued execution of certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business, specifically as part of the contemplation of the Separation. Initiatives during the three months ended March 31, 2018 included the reduction in hourly and salaried headcount of 200 employees, which included 175 in Water and 25 in Electrical. Initiatives during the year ended December 31, 2017 included the reduction in hourly and salaried headcount of approximately 500 employees, which included 250 in Water and 250 in Electrical.
Restructuring related costs included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income included costs for severance and other restructuring costs as follows: 
 
Three months ended
In millions
March 31,
2018
March 31,
2017
Severance and related costs
$
10.6

$
20.6

Other
0.2

0.3

Total restructuring costs
$
10.8

$
20.9

Other restructuring costs primarily consist of asset impairment and various contract termination costs.
Restructuring costs by reportable segment were as follows:
 
Three months ended
In millions
March 31,
2018
March 31,
2017
Water
$
5.6

$
7.1

Electrical
2.8

9.3

Other
2.4

4.5

Consolidated
$
10.8

$
20.9

Activity related to accrued severance and related costs recorded in Other current liabilities in the Condensed Consolidated Balance Sheets is summarized as follows for the three months ended March 31, 2018: 
In millions
March 31,
2018
Beginning balance
$
39.8

Costs incurred
10.6

Cash payments and other
(16.3
)
Ending balance
$
34.1


14
Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

6.
Earnings Per Share
Basic and diluted earnings per share were calculated as follows:
 
Three months ended
In millions, except per-share data
March 31,
2018
March 31,
2017
Net income
$
102.9

$
87.8

Net income from continuing operations
$
104.2

$
80.7

Weighted average ordinary shares outstanding
 
 
Basic
179.2

182.0

Dilutive impact of stock options, restricted stock units and performance share units
2.3

2.0

Diluted
181.5

184.0

Earnings (loss) per ordinary share
 
 
Basic
 
 
Continuing operations
$
0.58

$
0.44

Discontinued operations
(0.01
)
0.04

Basic earnings per ordinary share
$
0.57

$
0.48

Diluted
 
 
Continuing operations
$
0.58

$
0.44

Discontinued operations
(0.01
)
0.04

Diluted earnings per ordinary share
$
0.57

$
0.48

Anti-dilutive stock options excluded from the calculation of diluted earnings per share
0.4

1.8


15
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Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

7.    Supplemental Balance Sheet Information
In millions
March 31,
2018
December 31,
2017
Inventories
 
 
Raw materials and supplies
$
255.7

$
255.1

Work-in-process
86.3

83.0

Finished goods
251.5

242.9

Total inventories
$
593.5

$
581.0

Other current assets
 
 
Cost in excess of billings
$
118.0

$
121.4

Prepaid expenses
78.9

80.7

Prepaid income taxes
26.0

15.3

Other current assets
9.9

5.5

Total other current assets
$
232.8

$
222.9

Property, plant and equipment, net
 
 
Land and land improvements
$
73.6

$
72.6

Buildings and leasehold improvements
361.4

354.5

Machinery and equipment
1,026.6

1,011.6

Construction in progress
38.0

35.1

Total property, plant and equipment
1,499.6

1,473.8

Accumulated depreciation and amortization
953.1

928.3

Total property, plant and equipment, net
$
546.5

$
545.5

Other non-current assets
 
 
Prepaid income taxes
$
—

$
254.3

Deferred income taxes
54.3

43.0

Deferred compensation plan assets
43.6

49.4

Other non-current assets
88.1

83.2

Total other non-current assets
$
186.0

$
429.9

Other current liabilities
 
 
Dividends payable
$
62.4

$
63.1

Accrued warranty
45.2

41.0

Accrued rebates
71.9

92.7

Billings in excess of cost
30.2

29.9

Income taxes payable
23.9

31.1

Accrued restructuring
34.1

39.8

Other current liabilities
212.9

219.5

Total other current liabilities
$
480.6

$
517.1

Other non-current liabilities
 
 
Income taxes payable
$
92.3

$
92.7

Self-insurance liabilities
51.1

48.3

Deferred compensation plan liabilities
43.6

49.4

Foreign currency contract liabilities
62.2

47.2

Other non-current liabilities
37.6

37.8

Total other non-current liabilities
$
286.8

$
275.4


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Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

8.
Goodwill and Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill by segment were as follows:
In millions
December 31,
2017
Foreign currency 
translation/other 
March 31,
2018
Water
$
2,112.9

$
25.9

$
2,138.8

Electrical
2,238.2

3.1

2,241.3

Total goodwill
$
4,351.1

$
29.0

$
4,380.1

Identifiable intangible assets consisted of the following:
 
March 31,
2018
 
December 31,
2017
In millions
Cost
Accumulated
amortization
Net
 
Cost
Accumulated
amortization
Net
Definite-life intangibles
 
 
 
 
 
 
 
Customer relationships
$
1,514.9

$
(460.5
)
$
1,054.4

 
$
1,513.9

$
(437.5
)
$
1,076.4

Trade names
1.5

(1.5
)
—

 
1.5

(1.4
)
0.1

Proprietary technology and patents
133.7

(98.4
)
35.3

 
131.9

(94.2
)
37.7

Total definite-life intangibles
1,650.1

(560.4
)
1,089.7

 
1,647.3

(533.1
)
1,114.2

Indefinite-life intangibles
 
 
 
 
 
 
 
Trade names
446.8

—

446.8

 
444.2

—

444.2

Total intangibles
$
2,096.9

$
(560.4
)
$
1,536.5

 
$
2,091.5

$
(533.1
)
$
1,558.4

Identifiable intangible asset amortization expense was $24.7 million and $24.0 million for the three months ended March 31, 2018 and 2017, respectively.
Estimated future amortization expense for identifiable intangible assets during the remainder of 2018 and the next five years is as follows:
 
Q2-Q4
 
 
 
 
 
In millions
2018
2019
2020
2021
2022
2023
Estimated amortization expense
$
72.0

$
89.4

$
84.1

$
77.5

$
69.8

$
67.2



17
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Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

9.
Debt
Debt and the average interest rates on debt outstanding were as follows: 
In millions
Average interest rate as of March 31, 2018
Maturity
Year
March 31,
2018
December 31,
2017
Commercial paper
2.340%
2019
$
257.8

$
34.0

Revolving credit facilities
3.430%
2019
222.1

28.4

Senior notes - fixed rate (1)
2.900%
2018
255.3

255.3

Senior notes - fixed rate (1)
2.650%
2019
250.0

250.0

Senior notes - fixed rate - Euro (1)
2.450%
2019
615.4

594.4

Senior notes - fixed rate (1)
3.625%
2020
74.0

74.0

Senior notes - fixed rate (1)
5.000%
2021
103.8

103.8

Senior notes - fixed rate (1)
3.150%
2022
88.3

88.3

Senior notes - fixed rate (1)
4.650%
2025
19.3

19.3

Senior notes - fixed rate - nVent (2)
3.950%
2023
300.0

—

Senior notes - fixed rate - nVent (2)
4.550%
2028
500.0

—

Other
8.545%
2018
0.2

—

Unamortized debt issuance costs and discounts
N/A
N/A
(12.9
)
(6.8
)
Total debt


2,673.3

1,440.7

Less: Current maturities and short-term borrowings


(0.2
)
—

Long-term debt


$
2,673.1

$
1,440.7

 
 
 
 
 
(1) Senior notes are guaranteed as to payment by Pentair plc and PISG
(2) Senior notes are guaranteed as to payment by nVent plc, Pentair plc and PISG

Separation related debt
In March 2018, in anticipation of the Separation, nVent Finance S.à r.l. (“nVent Finance”), a subsidiary of Pentair that will become a subsidiary of nVent at the time of the completion of the Separation, issued $300.0 million aggregate principal amount of 3.950% senior notes due 2023 (the "2023 Notes") and $500.0 million aggregate principal amount of 4.550% senior notes due 2028 (the "2028 Notes" and, collectively with the 2023 Notes, the "nVent Notes").
The nVent Notes are fully and unconditionally guaranteed by nVent. In addition, the nVent Notes initially are fully and unconditionally guaranteed by Pentair and Pentair Investments Switzerland GmbH ("PISG"). Upon completion of the Separation, the guarantees of Pentair and PISG will be automatically and unconditionally terminated and released.
Additionally in March 2018, in anticipation of the Separation, nVent Finance entered into a credit agreement with a syndicate of banks providing for a five-year $200.0 million senior unsecured term loan facility (the "nVent Term Loan Facility") and a five-year $600.0 million senior unsecured revolving credit facility (the "nVent Revolving Credit Facility"). After the completion of the Separation, nVent Finance will have the option to request to increase the nVent Revolving Credit Facility in an aggregate amount of up to $300.0 million, subject to customary conditions, including the commitment of the participating lenders. As of March 31, 2018, there were no outstanding borrowings under the nVent Term Loan Facility or the nVent Revolving Credit Facility. We expect that nVent Finance will have $200.0 million of borrowings outstanding under the nVent Term Loan Facility and no borrowings under the nVent Revolving Credit Facility at the time of the Separation.
In connection with the Separation, nVent Finance will transfer to Pentair all cash in excess of $50.0 million of nVent and its subsidiaries, including cash from the net proceeds from the borrowings under the nVent Term Loan Facility and the issuance of the nVent Notes, as consideration for the contribution of the assets of the Electrical business to nVent Finance by Pentair. Pentair expects to use the proceeds of such cash transfer to repay certain outstanding debt of Pentair.

18
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Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Other debt matters
Pentair, PISG, Pentair Finance S.à r.l. ("PFSA") and Pentair, Inc. are parties to an amended and restated credit agreement (the "Credit Facility"), with Pentair and PISG as guarantors and PFSA and Pentair, Inc. as borrowers. The Credit Facility has a maximum aggregate availability of $2,500.0 million and a maturity date of October 3, 2019. Borrowings under the Credit Facility generally bear interest at a variable rate equal to the London Interbank Offered Rate ("LIBOR") plus a specified margin based upon PFSA's credit ratings. PFSA must pay a facility fee ranging from 9.0 to 25.0 basis points per annum (based upon PFSA's credit ratings) on the amount of each lender's commitment and letter of credit fee for each letter of credit issued and outstanding under the Credit Facility.
PFSA is authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. PFSA uses the Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. PFSA had $257.8 million of commercial paper outstanding as of March 31, 2018 and $34.0 million as of December 31, 2017, all of which was classified as long-term debt as we have the intent and the ability to refinance such obligations on a long-term basis under the Credit Facility.
Our debt agreements contain certain financial covenants, the most restrictive of which are in the Credit Facility (as updated for the Amendments), including that we may not permit (i) the ratio of our consolidated debt plus synthetic lease obligations to our consolidated net income (excluding, among other things, non-cash gains and losses) before interest, taxes, depreciation, amortization, non-cash share-based compensation expense, and up to a lifetime maximum $25.0 million of costs, fees and expenses incurred in connection with certain acquisitions, investments, dispositions and the issuance, repayment or refinancing of debt, ("EBITDA") for the four consecutive fiscal quarters then ended (the "Leverage Ratio") to exceed 3.50 to 1.00 as of the last day of any period of four consecutive fiscal quarters and (ii) the ratio of our EBITDA for the four consecutive fiscal quarters then ended to our consolidated interest expense, including consolidated yield or discount accrued as to outstanding securitization obligations (if any), 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 Credit Facility provides for the calculation of EBITDA giving pro forma effect to certain acquisitions, divestitures and liquidations during the period to which such calculation relates. As of March 31, 2018, we were in compliance with all financial covenants in our debt agreements.
Total availability under the Credit Facility was $2,220.1 million as of March 31, 2018, which was limited to $183.4 million by the maximum Leverage Ratio in the Credit Facility's credit agreement.
In addition to the Credit Facility, we have various other credit facilities with an aggregate availability of $31.2 million, of which there were $0.2 million outstanding borrowings at March 31, 2018. Borrowings under these credit facilities bear interest at variable rates.
We have $255.3 million of fixed rate senior notes maturing in September 2018. We classified this debt as long-term as of March 31, 2018 as we have the intent and ability to refinance such obligation on a long-term basis under the Credit Facility prior to maturity.
Debt outstanding, excluding unamortized issuance costs and discounts, at March 31, 2018 matures on a calendar year basis as follows:
 
Q2-Q4
 
 
 
 
 
 
 
In millions
2018
2019
2020
2021
2022
2023
Thereafter
Total
Contractual debt obligation maturities
$
0.2

$
1,600.6

$
74.0

$
103.8

$
88.3

$
300.0

$
519.3

$
2,686.2

10.
Derivatives and Financial Instruments
Derivative financial instruments
We are exposed to market risk related to changes in foreign currency exchange rates. To manage the volatility related to this exposure, we periodically enter into a variety of derivative financial instruments. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency rates. The derivative contracts contain credit risk to the extent that our bank counterparties may be unable to meet the terms of the agreements. The amount of such credit risk is generally limited to the unrealized gains, if any, in such contracts. Such risk is minimized by limiting those counterparties to major financial institutions of high credit quality.

19
Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Foreign currency contracts
We conduct business in various locations throughout the world and are subject to market risk due to changes in the value of foreign currencies in relation to our reporting currency, the U.S. dollar. We manage our economic and transaction exposure to certain market-based risks through the use of foreign currency derivative financial instruments. Our objective in holding these derivatives is to reduce the volatility of net earnings and cash flows associated with changes in foreign currency exchange rates. The majority of our foreign currency contracts have an original maturity date of less than one year.

At March 31, 2018 and December 31, 2017, we had outstanding foreign currency derivative contracts with gross notional U.S. dollar equivalent amounts of $406.0 million and $481.4 million, respectively. The impact of these contracts on the Condensed Consolidated Statements of Operations and Comprehensive Income was not material for any period presented.
Gains or losses on foreign currency contracts designated as hedges are reclassified out of Accumulated Other Comprehensive Loss ("AOCI") and into Selling, general and administrative expense in the Condensed Consolidated Statements of Operations and Comprehensive Income upon settlement. Such reclassifications during the three months ended March 31, 2018 and 2017 were not material.
Net investment hedge
We have net investments in foreign subsidiaries that are subject to changes in the foreign currency exchange rate. In September 2015, we designated the €500 million 2.45% Senior Notes due 2019 (the "2019 Euro Notes") as a net investment hedge for a portion of our net investment in our Euro denominated subsidiaries. The gains/losses on the 2019 Euro Notes have been included as a component of the cumulative translation adjustment account within AOCI. As of March 31, 2018 and December 31, 2017, we had a deferred foreign currency losses of $50.6 million and $29.6 million, respectively, in AOCI associated with the net investment hedge activity.
Fair value measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:
 
Level 1:
  
Valuation is based on observable inputs such as quoted market prices (unadjusted) for identical assets or liabilities in active markets.
 
 
Level 2:
  
Valuation is based on inputs such as quoted market prices for similar assets or liabilities in active markets or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
 
 
Level 3:
  
Valuation is based upon other unobservable inputs that are significant to the fair value measurement.
In making fair value measurements, observable market data must be used when available. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Fair value of financial instruments
The following methods were used to estimate the fair values of each class of financial instruments: 
•
short-term financial instruments (cash and cash equivalents, accounts and notes receivable, accounts and notes payable and variable-rate debt) — recorded amount approximates fair value because of the short maturity period;
•
long-term fixed-rate debt, including current maturities — fair value is based on market quotes available for issuance of debt with similar terms, which are inputs that are classified as Level 2 in the valuation hierarchy defined by the accounting guidance;
•
foreign currency contract agreements — fair values are determined through the use of models that consider various assumptions, including time value, yield curves, as well as other relevant economic measures, which are inputs that are classified as Level 2 in the valuation hierarchy defined by the accounting guidance; and
•
deferred compensation plan assets (mutual funds, common/collective trusts and cash equivalents for payment of certain non-qualified benefits for retired, terminated and active employees) — fair value of mutual funds and cash equivalents are based on quoted market prices in active markets that are classified as Level 1 in the valuation hierarchy defined by

20
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Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

the accounting guidance; fair value of common/collective trusts are based on observable inputs that are classified as Level 2 in the valuation hierarchy defined by the accounting guidance.
The recorded amounts and estimated fair values of total debt, excluding unamortized issuance costs and discounts, were as follows:
 
March 31,
2018
 
December 31,
2017
In millions
Recorded
Amount
Fair
Value
 
Recorded
Amount
Fair
Value
Variable rate debt
$
480.1

$
480.1

 
$
62.4

$
62.4

Fixed rate debt
2,206.1

2,250.8

 
1,385.1

1,424.0

Total debt
$
2,686.2

$
2,730.9

 
$
1,447.5

$
1,486.4

Financial assets and liabilities measured at fair value on a recurring and nonrecurring basis were as follows:
 
March 31, 2018
In millions
Level 1
Level 2
Level 3
Total
Recurring fair value measurements
 
 
 
 
Foreign currency contract assets
$
—

$
0.6

$
—

$
0.6

Foreign currency contract liabilities
—

(62.2
)
—

(62.2
)
Deferred compensation plan assets
36.8

6.8

—

43.6

Total recurring fair value measurements
$
36.8

$
(54.8
)
$
—

$
(18.0
)
 
December 31, 2017
In millions
Level 1
Level 2
Level 3
Total
Recurring fair value measurements
 
 
 
 
Foreign currency contract assets
$
—

$
0.6

$
—

$
0.6

Foreign currency contract liabilities
—

(47.2
)
—

(47.2
)
Deferred compensation plan assets
42.8

6.6

—

49.4

Total recurring fair value measurements
$
42.8

$
(40.0
)
$
—

$
2.8

Nonrecurring fair value measurements (1)
 
 
 
 
(1) 
During the fourth quarter of 2017, we completed our annual intangible assets impairment review. As a result, we recorded a pre-tax non-cash impairment charge of $25.2 million for a trade name intangible in 2017. The impairment charge reduced the carrying value of the impacted trade name intangible to $27.0 million. The fair value of trade names is measured using the relief-from-royalty method. This method assumes the trade name has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital.
11.
Income Taxes
We manage our affairs so that we are centrally managed and controlled in the U.K. and therefore have our tax residency in the U.K. The provision for income taxes consists of provisions for U.K. and international income taxes. We operate in an international environment with operations in various locations outside the U.K. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates.
The effective income tax rate for the three months ended March 31, 2018 was 20.9%, compared to 22.1% for 2017. We continue to actively pursue initiatives to reduce our effective tax rate. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution. The liability for uncertain tax positions was $35.3 million and $36.6 million at March 31, 2018 and December 31, 2017, respectively. We record penalties and

21
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Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

interest related to unrecognized tax benefits in Provision for income taxes and Net interest expense, respectively, on the Condensed Consolidated Statements of Operations and Comprehensive Income, which is consistent with our past practices.

U.S. tax reform
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

Given the significance of the Act, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. SAB 118 allows registrants to record provisional amounts during a one year “measurement period.” The measurement period is deemed to have ended when the registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed.
The Company calculated its best estimate of the impact of the Act in its December 31, 2017 income tax provision in accordance with its understanding of the Act and guidance available as of the date of the filing of the Annual Report on Form 10-K and as a result recorded a provisional income tax benefit of $84.8 million in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was a decrease to income tax expense of $147.7 million. The remeasurement of deferred taxes requires further analysis regarding the state tax impacts of the remeasurement, the impact of the Act on the taxation of executive compensation arrangements, changes to tax capitalization provisions and other aspects of the Act that may impact our tax balances.
The amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was an increase to income tax expense of $62.9 million. The determination of the transition tax requires additional analysis regarding the amount and composition of the Company’s historical foreign earnings and foreign tax credit position.
We have not made any additional measurement-period adjustments related to these items during the quarter. However, we are continuing to gather additional information to complete our accounting for these items and expect to complete the analysis required to complete our accounting within the prescribed measurement period.

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Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

12.
Benefit Plans
Components of net periodic benefit cost for our pension plans for the three months ended March 31, 2018 and 2017 were as follows:
 
U.S. pension plans
 
Three months ended
In millions
March 31,
2018
March 31,
2017
Service cost
$
0.8

$
2.6

Interest cost
3.0

4.1

Expected return on plan assets
(2.2
)
(2.9
)
Net periodic benefit cost
$
1.6

$
3.8

 
Non-U.S. pension plans
 
Three months ended
In millions
March 31,
2018
March 31,
2017
Service cost
$
1.8

$
1.8

Interest cost
1.1

0.9

Expected return on plan assets
(0.4
)
(0.3
)
Net periodic benefit cost
$
2.5

$
2.4

As described in Note 1, during the first quarter of 2018, the Company adopted ASU 2017-07. As a result, service costs are classified as employee compensation costs within Cost of goods sold and Selling, general and administrative expense within the Condensed Consolidated Statements of Operations and Comprehensive Income. All other components of net periodic benefit cost are classified within Other expense for the periods presented.
Components of net periodic benefit cost for our other post-retirement plans for the three months ended March 31, 2018 and 2017 were not material.
13.
Shareholders' Equity
Share repurchases
In December 2014, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $1.0 billion. The authorization expires on December 31, 2019. During the three months ended March 31, 2018, we repurchased 2.2 million of our shares for $150.0 million pursuant to this authorization. As of March 31, 2018, we had $450.0 million available for share repurchases under this authorization.
Dividends payable
On December 5, 2017, the Board of Directors declared a quarterly cash dividend of $0.35 that was paid on February 9, 2018 to shareholders on record at the close of business on January 26, 2018 and approved a plan to increase the 2018 annual cash dividend to $1.40, which is intended to be paid in four quarterly installments. Additionally, on February 27, 2018 the Board of Directors declared a quarterly cash dividend of $0.35 payable on April 27, 2018 to shareholders of record at the close of business on April 13, 2018. As a result, the balance of dividends payable included in Other current liabilities on our Condensed Consolidated Balance Sheets was $62.4 million and $63.1 million at March 31, 2018 and December 31, 2017, respectively.
14.
Segment Information
We evaluate performance based on net sales and segment income (loss) and use a variety of ratios to measure performance of our reporting segments. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. Segment income (loss) represents equity income of unconsolidated subsidiaries and operating income exclusive of intangible amortization, certain acquisition related expenses, costs of restructuring activities, impairments and other unusual non-operating items.

23
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Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Financial information by reportable segment is as follows:
 
Three months ended
In millions
March 31,
2018
March 31,
2017
Net sales
 
 
Water
$
732.3

$
682.9

Electrical
538.9

502.2

Other
(1.5
)
(1.6
)
Consolidated
$
1,269.7

$
1,183.5

Segment income (loss)
 
 
Water
$
132.7

$
116.1

Electrical
106.3

104.3

Other
(28.5
)
(34.7
)
Consolidated
$
210.5

$
185.7

The following table presents a reconciliation of consolidated segment income to consolidated income from continuing operations before income taxes:
 
Three months ended
In millions
March 31,
2018
March 31,
2017
Segment income
$
210.5

$
185.7

Restructuring and other
(8.3
)
(20.9
)
Intangible amortization
(24.7
)
(24.0
)
Loss on sale of business
(5.3
)
—

Separation costs
(24.6
)
—

Net interest expense
(13.8
)
(35.0
)
Other expense
(2.0
)
(2.2
)
Income from continuing operations before income taxes
$
131.8

$
103.6

15.
Commitments and Contingencies
Warranties and guarantees
In connection with the disposition of our businesses or product lines, we may agree to indemnify purchasers for various potential liabilities relating to the sold business, such as pre-closing tax, product liability, warranty, environmental, or other obligations. The subject matter, amounts and duration of any such indemnification obligations vary for each type of liability indemnified and may vary widely from transaction to transaction.

Generally, the maximum obligation under such indemnifications is not explicitly stated and as a result, the overall amount of these obligations cannot be reasonably estimated. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial position, results of operations or cash flows.
We recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. In connection with the disposition of the Valves & Controls business, we agreed to indemnify Emerson Electric Co. for certain pre-closing tax liabilities. During the second quarter of 2017, we recorded a liability representing the fair value of our expected future obligation for this matter.
We provide service and warranty policies on our products. Liability under service and warranty policies is based upon a review of historical warranty and service claim experience. Adjustments are made to accruals as claim data and historical experience warrant.

24
Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

The changes in the carrying amount of service and product warranties of continuing operations for the three months ended March 31, 2018 were as follows:  
In millions
March 31,
2018
Beginning balance
$
41.0

Service and product warranty provision
16.5

Payments
(12.4
)
Foreign currency translation
0.1

Ending balance
$
45.2

Stand-by letters of credit, bank guarantees and bonds
In certain situations, Tyco International Ltd., Pentair Ltd.'s former parent company ("Tyco"), guaranteed performance by the flow control business of Pentair Ltd. ("Flow Control") to third parties or provided financial guarantees for financial commitments of Flow Control. In situations where Flow Control and Tyco were unable to obtain a release from these guarantees in connection with the spin-off of Flow Control from Tyco, we will indemnify Tyco for any losses it suffers as a result of such guarantees.
In disposing of assets or businesses, we often provide representations, warranties and indemnities to cover various risks including unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not have the ability to reasonably estimate the potential liability due to the inchoate and unknown nature of these potential liabilities. However, we have no reason to believe that these uncertainties would have a material adverse effect on our financial position, results of operations or cash flows.
In the ordinary course of business, we are required to commit to bonds, letters of credit and bank guarantees that require payments to our customers for any non-performance. The outstanding face value of these instruments fluctuates with the value of our projects in process and in our backlog. In addition, we issue financial stand-by letters of credit primarily to secure our performance to third parties under self-insurance programs.
As of March 31, 2018 and December 31, 2017, the outstanding value of bonds, letters of credit and bank guarantees totaled $189.7 million and $201.5 million, respectively.
16.
Supplemental Guarantor Information
Pentair plc (the "Parent Company Guarantor") and PISG (the "Subsidiary Guarantor"), fully and unconditionally, guarantee the Notes of PFSA (the "Subsidiary Issuer"). The Subsidiary Guarantor is a Switzerland limited liability company and 100 percent-owned subsidiary of the Parent Company Guarantor. The Subsidiary Issuer is a Luxembourg private limited liability company and 100 percent-owned subsidiary of the Subsidiary Guarantor. The guarantees provided by the Parent Company Guarantor and Subsidiary Guarantor are joint and several.
The following supplemental financial information sets forth the Company's Condensed Consolidating Statement of Operations and Comprehensive Income (Loss), Condensed Consolidating Balance Sheets and Condensed Consolidating Statement of Cash Flows by relevant group within the Company: Pentair plc and PISG as the guarantors, PFSA as issuer of the debt and all other non-guarantor subsidiaries. Condensed consolidating financial information for Pentair plc, PISG and PFSA on a stand-alone basis is presented using the equity method of accounting for subsidiaries.

25
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Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Three months ended March 31, 2018
In millions
Parent
Company
Guarantor
Subsidiary
Guarantor
Subsidiary
Issuer
Non-guarantor
Subsidiaries
Eliminations
Consolidated
Total
Net sales
$
—

$
—

$
—

$
1,269.7

$
—

$
1,269.7

Cost of goods sold
—

—

—

807.7

—

807.7

Gross profit
—

—

—

462.0

—

462.0

Selling, general and administrative
7.1

—

0.1

272.4

—

279.6

Research and development
—

—

—

30.1

—

30.1

Operating income (loss)
(7.1
)
—

(0.1
)
159.5

—

152.3

Loss (earnings) from continuing operations of investment in subsidiaries
(111.3
)
(110.7
)
(123.7
)
—

345.7

—

Other (income) expense:
 
 
 
 
 
 
Loss on sale of business
—

—

—

5.3

—

5.3

Net interest (income) expense
—

(0.3
)
12.6

1.5

—

13.8

Other expense
—

—

—

1.4

—

1.4

Income (loss) from continuing operations before income taxes
104.2

111.0

111.0

151.3

(345.7
)
131.8

Provision for income taxes
—

—

—

27.6

—

27.6

Net income (loss) from continuing operations
104.2

111.0

111.0

123.7

(345.7
)
104.2

Loss from discontinued operations, net of tax
—

—

—

(1.3
)
—

(1.3
)
Earnings (loss) from discontinued operations of investment in subsidiaries
(1.3
)
(1.3
)
(1.3
)
—

3.9

—

Net income (loss)
$
102.9

$
109.7

$
109.7

$
122.4

$
(341.8
)
$
102.9

Comprehensive income (loss), net of tax
 
 
 
 
 
 
Net income (loss)
$
102.9

$
109.7

$
109.7

$
122.4

$
(341.8
)
$
102.9

Changes in cumulative translation adjustment
2.4

2.4

2.4

2.4

(7.2
)
2.4

Changes in market value of derivative financial instruments, net of tax
(3.8
)
(3.8
)
(3.8
)
(3.8
)
11.4

(3.8
)
Comprehensive income (loss)
$
101.5

$
108.3

$
108.3

$
121.0

$
(337.6
)
$
101.5




26
Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Condensed Consolidating Balance Sheet
March 31, 2018
In millions
Parent
Company
Guarantor
Subsidiary
Guarantor
Subsidiary
Issuer
Non-guarantor
Subsidiaries
Eliminations
Consolidated
Total
Assets
Current assets
 
 
 
 
 
 
Cash and cash equivalents
$
0.2

$
—

$
—

$
907.3

$
—

$
907.5

Accounts and notes receivable, net
—

—

—

985.2

—

985.2

Inventories
—

—

—

593.5

—

593.5

Other current assets
0.9

0.2

5.1

236.1

(9.5
)
232.8

Total current assets
1.1

0.2

5.1

2,722.1

(9.5
)
2,719.0

Property, plant and equipment, net
—

—

—

546.5

—

546.5

Other assets
 
 
 
 
 
 
Investments in subsidiaries
5,104.8

5,009.0

7,068.3

—

(17,182.1
)
—

Goodwill
—

—

—

4,380.1

—

4,380.1

Intangibles, net
—

—

—

1,536.5

—

1,536.5

Other non-current assets
2.2

96.0

870.6

1,283.4

(2,066.2
)
186.0

Total other assets
5,107.0

5,105.0

7,938.9

7,200.0

(19,248.3
)
6,102.6

Total assets
$
5,108.1

$
5,105.2

$
7,944.0

$
10,468.6

$
(19,257.8
)
$
9,368.1

Liabilities and Equity
Current liabilities
 
 
 
 
 
 
Current maturities of long-term debt and short-term borrowings
$
—

$
—

$
—

$
0.2

$
—

$
0.2

Accounts payable
1.5

—

—

402.5

—

404.0

Employee compensation and benefits
0.4

—

—

142.3

—

142.7

Other current liabilities
69.8

0.4

12.5

407.4

(9.5
)
480.6

Total current liabilities
71.7

0.4

12.5

952.4

(9.5
)
1,027.5

Other liabilities
 
 
 
 
 
 
Long-term debt
286.5

—

2,922.7

1,530.1

(2,066.2
)
2,673.1

Pension and other post-retirement compensation and benefits
—

—

—

291.9

—

291.9

Deferred tax liabilities
—

—

—

369.1

—

369.1

Other non-current liabilities
30.2

—

—

256.6

—

286.8

Total liabilities
388.4

0.4

2,935.2

3,400.1

(2,075.7
)
4,648.4

Equity
4,719.7

5,104.8

5,008.8

7,068.5

(17,182.1
)
4,719.7

Total liabilities and equity
$
5,108.1

$
5,105.2

$
7,944.0

$
10,468.6

$
(19,257.8
)
$
9,368.1



27
Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Condensed Consolidating Statement of Cash Flows
Three months ended March 31, 2018
In millions
Parent
Company
Guarantor
Subsidiary
Guarantor
Subsidiary
Issuer
Non-guarantor
Subsidiaries
Eliminations
Consolidated
Total
Operating activities
 
 
 
 
 
 
Net cash provided by (used for) operating activities
$
83.4

$
111.3

$
109.1

$
(129.7
)
$
(341.7
)
$
(167.6
)
Investing activities
 
 
 
 
 
 
Capital expenditures
—

—

—

(16.8
)
—

(16.8
)
Proceeds from sale of property and equipment
—

—

—

2.3

—

2.3

Payments due to sale of businesses, net
—

—

—

(13.8
)
—

(13.8
)
Acquisitions, net of cash acquired
—

—

—

(2.9
)
—

(2.9
)
Net intercompany loan activity
—

(1.9
)
(262.6
)
103.1

161.4

—

Net cash provided by (used for) investing activities
—

(1.9
)
(262.6
)
71.9

161.4

(31.2
)
Financing activities
 
 
 
 
 
 
Net receipts of short-term borrowings
—

—

—

0.2

—

0.2

Net repayments of commercial paper and revolving long-term debt
—

—

223.8

193.7

—

417.5

Proceeds from long-term debt
—

—

—

800.0

—

800.0

Debt issuance costs
—

—

—

(7.5
)
—

(7.5
)
Net change in advances to subsidiaries
129.2

(109.4
)
(91.4
)
(108.7
)
180.3

—

Shares issued to employees, net of shares withheld
0.9

—

—

—

—

0.9

Repurchases of ordinary shares
(150.0
)
—

—

—

—

(150.0
)
Dividends paid
(63.3
)
—

—

—

—

(63.3
)
Net cash provided by (used for) financing activities
(83.2
)
(109.4
)
132.4

877.7

180.3

997.8

Effect of exchange rate changes on cash and cash equivalents
—

—

21.1

(25.9
)
—

(4.8
)
Change in cash and cash equivalents
0.2

—

—

794.0

—

794.2

Cash and cash equivalents, beginning of period
—

—

—

113.3

—

113.3

Cash and cash equivalents, end of period
$
0.2

$
—

$
—

$
907.3

$
—

$
907.5


28
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Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Three months ended March 31, 2017
In millions
Parent
Company
Guarantor
Subsidiary
Guarantor
Subsidiary
Issuer
Non-guarantor
Subsidiaries
Eliminations
Consolidated
Total
Net sales
$
—

$
—

$
—

$
1,183.5

$
—

$
1,183.5

Cost of goods sold
—

—

—

761.2

—

761.2

Gross profit
—

—

—

422.3

—

422.3

Selling, general and administrative
(11.0
)
0.1

0.4

262.2

—

251.7

Research and development
—

—

—

30.0

—

30.0

Operating income (loss)
11.0

(0.1
)
(0.4
)
130.1

—

140.6

Loss (earnings) from continuing operations of investment in subsidiaries
(69.7
)
(69.7
)
(98.5
)
—

237.9

—

Other (income) expense:
 
 
 
 
 
 
Net interest expense (income)
—

(0.1
)
28.4

6.7

—

35.0

Other expense
—

—

—

2.0


2.0

Income (loss) from continuing operations before income taxes
80.7

69.7

69.7

121.4

(237.9
)
103.6

Provision for income taxes
—

—

—

22.9

—

22.9

Net income (loss) from continuing operations
80.7

69.7

69.7