Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking Statements

This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact are forward-looking statements. Without limitation, any statements preceded or followed by or that include the words “targets,” “plans,” “believes,” “expects,” “intends,” “will,” “likely,” “may,” “anticipates,” “estimates,” “projects,” “should,” “would,” “positioned,” “strategy,” “future” or words, phrases or terms of similar substance or the negative thereof, are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors include the ability to successfully complete the disposition of our Water Transport business on anticipated terms and timetable; overall global economic and business conditions; competition and pricing pressures in the markets we serve; the strength of housing and related markets; volatility in currency exchange rates and commodity prices; inability to generate savings from excellence in operations initiatives consisting of lean enterprise, supply management and cash flow practices; increased risks associated with operating foreign businesses; the ability to deliver backlog and win future project work; failure of markets to accept new product introductions and enhancements; the ability to successfully identify, complete and integrate acquisitions; the impact of changes in laws and regulations, including those that limit U.S. tax benefits; the outcome of litigation and governmental proceedings; and the ability to achieve our long-term strategic operating goals. Additional information concerning these and other factors is contained in our filings with the U.S. Securities and Exchange Commission, including in Item 1A of this Annual Report on Form 10-K. All forward-looking statements speak only as of the date of this report. Pentair plc assumes no obligation, and disclaims any obligation, to update the information contained in this report.

Overview

Pentair plc is a focused diversified industrial manufacturing company comprising four reporting segments: Valves & Controls, Process Technologies, Flow Technologies and Technical Solutions. We classify our operations into business segments based primarily on types of products offered and markets served. For the year ended December 31, 2014, Valves & Controls, Process Technologies, Flow Technologies and Technical Solutions accounted for 34 percent, 25 percent, 16 percent and 25 percent of total revenues, respectively.

In December 2013, the Company's Board of Directors approved changing the Company's jurisdiction of organization from Switzerland to Ireland. At an extraordinary meeting of shareholders on May 20, 2014, Pentair Ltd. shareholders voted in favor of a reorganization proposal pursuant to which Pentair Ltd. would merge into Pentair plc and all Pentair Ltd. common shares would be cancelled and all holders of such shares would receive ordinary shares of Pentair plc on a one-to-one basis. The reorganization transaction was completed on June 3, 2014, at which time Pentair plc replaced Pentair Ltd. as the ultimate parent company (the "Redomicile"). Shares of Pentair plc began trading on the New York Stock Exchange ("NYSE") on June 3, 2014 under the symbol "PNR", the same symbol under which Pentair Ltd. shares were previously traded.

Although our jurisdiction of organization is Ireland, we manage our affairs so that we are centrally managed and controlled in the United Kingdom (the "U.K.") and therefore have our tax residency in the U.K. We expect that having our publicly-traded parent company incorporated in Ireland and tax resident in the U.K. will provide us the following benefits:

•	Incorporation of our publicly-traded parent company in Ireland enables us to benefit by being subject to a legal and regulatory structure in a jurisdiction with a well-developed legal system and corporate law with established standards of corporate governance.

•	The U.K. has a developed, stable and internationally competitive tax system.

•

The legal requirements we are now subject to as a company incorporated in Ireland, listed on the NYSE and subject to U.S. Securities and Exchange Commission ("SEC") disclosure and shareholder voting requirements strike the right balance between robust external governance oversight and regulation of our executive and director pay practices and the ability of our compensation committee consisting of independent directors to determine executive compensation to provide incentives to our executive management and to offer competitive salaries and benefits.

Our former parent company, Pentair Ltd,. took its form on September 28, 2012 as a result of a reverse acquisition (the "Merger") involving Pentair, Inc. and an indirect, wholly-owned subsidiary of Flow Control (defined below), with Pentair, Inc. surviving as an indirect, wholly-owned subsidiary of Pentair Ltd. "Flow Control" refers to Pentair Ltd. prior the Merger. Prior to the Merger, Tyco International Ltd. ("Tyco") engaged in an internal restructuring whereby it transferred to Flow Control certain assets related to the flow control business of Tyco, and Flow Control assumed from Tyco certain liabilities related to the flow control business of Tyco. On September 28, 2012 prior to the Merger, Tyco effected a spin-off of Flow Control through

the pro-rata distribution of 100% of the outstanding ordinary shares of Flow Control to Tyco’s shareholders (the “Distribution”), resulting in the distribution of approximately 110.9 million of our ordinary shares to Tyco’s shareholders. The Merger was accounted for as a reverse acquisition under the purchase method of accounting with Pentair, Inc. treated as the acquirer.

On January 30, 2014, we acquired, as part of Process Technologies, the remaining 19.9 percent ownership interest in two entities, a U.S. entity and an international entity (collectively, Pentair Residential Filtration or “PRF”), from GE Water & Process Technologies (a unit of General Electric Company) (“GE”) for $134.3 million in cash. Prior to the acquisition, we held a 80.1 percent ownership equity interest in PRF, representing our and GE's respective global water softener and residential water filtration businesses.

On July 28, 2014, our Board of Directors approved a decision to exit our Water Transport business in Australia. The results of the Water Transport business have been presented as discontinued operations and the assets and liabilities of the Water Transport business have been reclassified as held for sale for all periods presented. During 2014, we recognized an impairment charge related to allocated amounts of goodwill, intangible assets, property, plant & equipment and other non-current assets totaling $380.1 million, net of tax, representing our estimated loss on disposal of the Water Transport business. The sale of a portion of the Water Transport business was completed in January 2015. The remaining portions are expected to be disposed of by mid-2015.

Key Trends and Uncertainties Regarding Our Existing Business

The following trends and uncertainties affected our financial performance in 2014 and 2013, and will likely impact our results in the future:

•

We identified specific market opportunities that we find attractive and continue to pursue, both within and outside the United States. We are reinforcing our businesses to more effectively address these opportunities through research and development and additional sales and marketing resources. Unless we successfully penetrate these product and geographic markets, our organic growth would likely be limited.

•	Despite the overall strength of our end-markets, we experience differing levels of volatility depending on the end-market and may continue to do so over the medium and longer term. While we believe the general trends are favorable, factors specific to each of our major end-markets may negatively affect the capital spending plans of our customers and lead to lower sales volumes for us.

•	In 2014, our results were negatively impacted by changes in foreign exchange rates, most significantly related to fluctuations in the Euro, and we expect this trend to continue in 2015.

•

Through 2013 and 2014, we experienced material and other cost inflation. We strive for productivity improvements, and we implement increases in selling prices to help mitigate this inflation. We expect the current economic environment will result in continuing price volatility for many of our raw materials. Commodity prices have begun to moderate, but we are uncertain as to the timing and impact of these market changes.

•

We have a long-term goal to consistently generate free cash flow that equals or exceeds 100 percent of our net income. We define free cash flow as cash flow from operating activities of continuing operations less capital expenditures plus proceeds from sale of property and equipment. Our free cash flow for the full year 2014 was $888.5 million, exceeding our goal of 100 percent net income conversion. We expect to generate free cash flow that exceeds 100 percent of our net income from continuing operations in 2015. We are continuing to target reductions in working capital and particularly inventory as a percentage of sales. See the discussion of “Other financial measures” under “Liquidity and Capital Resources—Other financial measures” in this report for a reconciliation of our free cash flow.

In 2015, our operating objectives include the following:

•	Increasing our presence in both fast growth and developed regions and vertical focus to grow in those markets in which we have competitive advantages;

•	Focusing on developing global talent in light of our increased global presence;

•	Optimizing our technological capabilities to increasingly generate innovative new products; and

•	Driving operating excellence through lean enterprise initiatives, with specific focus on sourcing and supply management, cash flow management and lean operations.

We may seek to meet our objectives of expanding our geographic reach internationally and expanding our presence in our various channels to market by acquiring technologies and products to broaden our businesses’ capabilities to serve additional markets and through acquisitions. We may also consider the divestiture of discrete business units to further focus our businesses on our most attractive markets.

Change in Warranty Reserve

Subsequent to our February 3, 2015 earnings announcement for the quarter and year ended December 31, 2014, we became aware of a potential warranty issue related to certain product sold by Process Technologies. As a result, we recorded a $13.0 million charge to Cost of goods sold and adjusted the fourth quarter and full year 2014 financial results from Net income from continuing operations before noncontrolling interest of $137.8 million and $615.0 million, respectively, and Diluted earnings per share from continuing operations of $0.74 and $3.18, respectively, to Net income from continuing operations before noncontrolling interest of $129.8 million and $607.0 million, respectively, and to Diluted earnings per share from continuing operations of $0.70 and $3.14, respectively. See ITEM 8, Note 17 of the Notes to Consolidated Financial Statements for additional information.

CONSOLIDATED RESULTS OF OPERATIONS

The consolidated results of operations were as follows:

	Years ended December 31										% / point change
In millions	2014			2013			2012				2014 vs. 2013		2013 vs. 2012
Net sales	$	7,039.0		$	6,999.7		$	4,306.8			0.6	%	62.5	%
Cost of goods sold	4,576.0			4,629.6			3,040.9				(1.2	)%	52.2	%
Gross profit	2,463.0			2,370.1			1,265.9				3.9	%	87.2	%
% of net sales	35.0		%	33.9		%	29.4		%		1.1		4.5
Selling, general and administrative	1,493.8			1,493.7			1,117.7				—	%	33.6	%
% of net sales	21.3		%	21.3		%	26.0		%		—		(4.7	)
Research and development	117.3			122.8			92.3				(4.5	)%	33.0	%
% of net sales	1.7		%	1.8		%	2.1		%		(0.1	)	(0.3	)
Impairment of trade names	—			11.0			60.7				(100.0	)%	(81.9	)%
% of net sales	—		%	0.2		%	1.4		%		(0.2	)	(1.2	)
Operating income (loss)	851.9			742.6			(4.8		)		14.7	%	N.M.
% of net sales	12.1		%	10.6		%	(0.1		)%		1.5		10.7
Loss (gain) on sale of businesses, net	0.2			(20.8		)	—				(101.0	)%	N.M.
Loss on early extinguishment of debt	—			—			75.4				—	%	(100.0	)%
Net interest expense	68.6			70.9			68.2				(3.2	)%	4.0	%
Net income (loss) from continuing operations before income taxes and noncontrolling interest	784.3			694.5			(146.1		)		12.9	%	N.M.
Provision (benefit) for income taxes	177.3			177.0			(67.2		)		0.2	%	N.M.
Effective tax rate	22.6		%	25.5		%	46.0		%		(2.9	)	(20.5	)

N.M. Not Meaningful

Net sales

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

	2014 vs. 2013			2013 vs. 2012
Volume	1.0	%		7.3	%
Price	0.9			1.4
Core growth	1.9			8.7
Acquisition (divestiture)	(0.2	)		55.2
Currency	(1.1	)		(1.4	)
Total	0.6	%		62.5	%

The 0.6 percent increase in consolidated net sales in 2014 from 2013 was primarily the result of:

•	core sales growth in Technical Solutions, primarily as the result of increased volume in the United States, China and Canada;

•	core sales growth in Process Technologies due to higher sales of certain pool products serving North American residential housing and increased demand for global food & beverage solutions; and

•	selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•	unfavorable foreign currency effects;

•	decreases in sales of energy products in Valves & Controls and sales declines in residential retail product sales and infrastructure businesses in Flow Technologies; and

•	loss of revenue related to the 2013 divestitures of businesses in Technical Solutions and Flow Technologies.

The 62.5 percent increase in consolidated net sales in 2013 from 2012 was primarily the result of:

•	sales volume of the Flow Control businesses of $3,244.1 million in 2013, compared to $771.1 million in 2012;

•	organic sales growth in Process Technologies and Flow Technologies due to higher sales of certain pool products serving North American residential housing and increased demand for global food & beverage solutions;

•	growth in developed regions led by strength in the United States and Western Europe;

•	growth in emerging regions of the Middle East, Africa and Eastern Europe; and

•	selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•	lower sales in our infrastructure business; and

•	unfavorable foreign currency effects.

Gross profit

The 1.1 percentage point increase in gross profit as a percentage of sales in 2014 from 2013 was primarily the result of:

•	a decrease in cost of goods sold of $86.6 million in 2014 compared to 2013 as a result of inventory fair value step-up and customer backlog recorded as part of the Merger purchase accounting in 2013, which did not recur in 2014;

•	higher contribution margin as a result of savings generated from our Pentair Integrated Management System ("PIMS") initiatives including lean and supply management practices; and

•	selective increases in selling prices across all business segments to mitigate inflationary cost increases.

These increases were partially offset by:

•	inflationary increases related to raw materials and labor costs.

The 4.5 percentage point increase in gross profit as a percentage of sales in 2013 from 2012 was primarily the result of:

•	lower cost of goods sold as a result of inventory fair value step-up and customer backlog recorded as part of the Merger purchase accounting, which decreased from $157.7 million in 2012 to $86.6 million in 2013;

•	savings generated from our PIMS initiatives including lean and supply management practices and synergies from the combined operations subsequent to the Merger; and

•	selective increases in selling prices across all business segments to mitigate inflationary cost increases.

These increases were partially offset by:

•	inflationary increases related to raw materials and labor costs.

Selling, general and administrative ("SG&A")

SG&A expense as a percentage of sales remained consistent in 2014 from 2013 and was favorably impacted by the following:

•	restructuring costs of $88.3 million in 2014, compared to $103.2 million in 2013;

•	savings generated from back-office consolidation, reduction in personnel and other lean initiatives; and

•	higher sales volume and the resultant gain of leverage on fixed operating expenses.

These fluctuations were offset by the following:

•	"mark-to-market" actuarial losses related to pension and other post-retirement benefit plans of $49.9 million in 2014, compared to "mark-to-market" actuarial gains of $63.2 million in 2013; and

•	costs of $10.3 million incurred in 2014, compared to $5.4 million in 2013, as a result of the redomicile of the Company from Switzerland to Ireland.

The 4.7 percentage point decrease in SG&A expense as a percentage of sales in 2013 from 2012 was primarily the result of:

•	“mark-to-market” actuarial gains related to pension and other post-retirement benefit plans of $63.2 million in 2013, compared to "mark-to-market" actuarial losses of $146.2 million in 2012;

•	costs associated with the Merger in 2012 that did not reoccur in 2013, including $23.2 million in transaction advisory fees, $21.8 million of change of control costs and $34.1 million of other transaction costs;

•	sales volume of the Flow Control businesses subsequent to the Merger, which resulted in increased leverage on our fixed operating expenses; and

•	savings generated from back-office consolidation, reduction in personnel and other lean initiatives.

These decreases were partially offset by:

•	restructuring costs of $103.2 million in 2013, compared to $48.7 million in 2012;

•	certain increases for labor and related costs; and

•	intangible asset amortization associated with the Merger.

Gain on sale of businesses, net

During 2013, we sold businesses that were part of Technical Solutions and Flow Technologies for a cash purchase price of $30.1 million and $13.4 million, respectively, net of transaction costs, resulting in a gain of $16.8 million and $4.0 million, respectively.

Loss on early extinguishment of debt

In October 2012, we redeemed the remaining outstanding aggregate principal of our 5.65% fixed rate senior notes due 2013-2017 totaling $400.0 million and our 1.05% floating rate senior notes due 2013 totaling $100.0 million (the “Fixed/Floating Rate Notes”). The redemptions included make-whole premiums of $65.8 million. Concurrent with the redemption of the Fixed/Floating Rate Notes, we terminated a related interest rate swap that was designated as a cash flow hedge, which resulted in the reclassification of $3.4 million of previously unrecognized variable to fixed swap losses from Accumulated Other Comprehensive Income (Loss) ("AOCI") to earnings in October 2012. All costs associated with the redemption were recorded as a Loss on the early extinguishment of debt including $0.6 million of unamortized deferred financing costs.

In December 2012, Pentair Finance S.A. (“PFSA”), completed an exchange offer pursuant to which it exchanged $373.0 million in aggregate principal amount of 5.00% Senior Notes due 2021 of Pentair, Inc. a wholly-owned, indirect subsidiary of the Company for a like amount of new 5.00% Senior Notes due 2021 of PFSA, plus $5.6 million in transaction-related costs which were recorded as a Loss on the early extinguishment of debt.

Net interest expense

The 3.2 percent decrease in net interest expense in 2014 from 2013 was primarily the result of:

•	reduced overall interest rates in effect on our outstanding debt; and

•	additional interest expense of $2.1 million in the second quarter of 2013 for a working capital and net indebtedness adjustment related to the Merger that did not recur in 2014.

These decreases were partially offset by:

•	the impact of higher debt levels during 2014 compared to 2013.

The 4.0 percent increase in net interest expense in 2013 from 2012 was primarily the result of:

•	the impact of higher debt levels following the Merger; and

•	additional interest expense of $2.1 million in the second quarter of 2013 for the working capital and net indebtedness adjustment related to the Merger.

These increases were partially offset by:

•	reduced overall interest rates in effect on our outstanding debt in 2013 compared to 2012; and

•	the impact of higher cash balances following the Merger.

Provision (benefit) for income taxes

The 2.9 percentage point decrease in the effective tax rate in 2014 from 2013 was primarily due to:

•	the mix of global earnings toward lower tax jurisdictions.

The decrease was partially offset by:

•	increase in withholding taxes that are non-recurring.

The 20.5 percentage point decrease in the effective tax rate in 2013 from 2012 was primarily due to:

•	the mix of global earnings, including the impact of the Merger; and

•	the decrease in non-deductible transaction costs during 2013 compared to 2012.

The decreases were partially offset by:

•	the favorable tax impact related to the 2012 exchange offer that did not occur in 2013; and

•	the favorable resolution of U.S. federal and state tax audits in 2012 that did not occur in 2013.

SEGMENT RESULTS OF OPERATIONS

This summary that follows provides a discussion of the results of operations of each of our four reportable segments that were in place during 2014 (Valves & Controls, Process Technologies, Flow Technologies and Technical Solutions). Each of these segments comprises various product offerings that serve multiple end markets. During the first quarter of 2015, we reorganized our business segments to reflect a new operating structure and management of our GBUs, which will result in a change to our reporting segments in 2015.

We evaluate performance based on sales and segment income and use a variety of ratios to measure performance of our reporting segments. Segment income represents operating income (loss) from continuing operations exclusive of certain acquisition related expenses, costs of restructuring activities, impairments and other unusual non-operating items.

Valves & Controls

The net sales and segment income for Valves & Controls were as follows:

	Years ended December 31										% / point change
In millions	2014			2013			2012				2014 vs. 2013		2013 vs. 2012
Net sales	$	2,394.8		$	2,469.2		$	548.6			(3.0	)%	350.1	%
Segment income	350.8			302.8			41.8				15.9	%	N.M.
% of net sales	14.6		%	12.3		%	7.6		%		2.3		4.7

Net sales

The components of the change in Valves & Controls net sales were as follows:

	2014 vs. 2013			2013 vs. 2012
Volume	(2.2	)%		20.7	%
Price	0.5			1.7
Core growth	(1.7	)		22.4
Acquisition	—			331.3
Currency	(1.3	)		(3.6	)
Total	(3.0	)%		350.1	%

The 3.0 percentage point decrease in Valves & Controls net sales in 2014 from 2013 was primarily the result of:

•	decreased sales volume related to lower shipments for our energy products, particularly in the mining industry; and

•	unfavorable foreign currency effects.

These decreases were partially offset by:

•	increased sales volume for our industrial products; and

•	selective increases in selling prices to mitigate inflationary cost increases.

The 350.1 percent increase in Valves & Controls net sales in 2013 from 2012 was primarily the result of:

•	a full year of sales volume in 2013, compared to one quarter in 2012; and

•	continued sales growth in the Middle East and the oil & gas industry.

These increases were partially offset by:

•	unfavorable foreign currency effects.

Segment income

The 2.3 percentage point increase in segment income for Valves & Controls as a percentage of net sales in 2014 from 2013 was primarily the result of:

•	selective increases in selling price to mitigate inflationary cost increases related to raw materials and labor costs;

•	favorable project mix due to higher margin projects in 2014; and

•	savings generated from our PIMS initiatives, including lean and supply management practices.

These increases was partially offset by:

•	costs related to the operating model transformation investment in 2014.

The 4.7 percentage point increase in segment income for Valves & Controls as a percentage of net sales in 2013 from 2012 was primarily the result of:

•	higher volume related to the acquisition of Flow Control, which resulted in increased leverage of our fixed cost base; and

•	savings generated from our PIMS initiatives, including lean and supply management practices.

These increases were partially offset by:

•	post-acquisition costs related to the Merger, including integration and standardization;

•	low margin on large projects and unfavorable project mix; and

•	inflationary increases related to raw materials and labor costs.

Process Technologies

The net sales and segment income for Process Technologies were as follows:

	Years ended December 31										% / point change
In millions	2014			2013			2012				2014 vs. 2013		2013 vs. 2012
Net sales	$	1,833.2		$	1,765.9		$	1,521.1			3.8	%	16.1	%
Segment income	267.2			253.2			181.1				5.5	%	39.8	%
% of net sales	14.6		%	14.2		%	11.9		%		0.4		2.3

Net sales

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

	2014 vs. 2013			2013 vs. 2012
Volume	3.7	%		8.2	%
Price	1.0			1.7
Core growth	4.7			9.9
Acquisition	—			6.3
Currency	(0.9	)		(0.1	)
Total	3.8	%		16.1	%

The 3.8 percent increase in Process Technologies sales in 2014 from 2013 was primarily the result of:

•	core sales growth related to higher sales of certain pool products primarily serving North American residential housing;

•	increased demand for global food & beverage solutions in 2014;

•	growth in developed regions led by strength in the U.S. and Western Europe; and

•	selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•	sales declines in our industrial and infrastructure businesses;

•	unfavorable foreign currency effects; and

•	decreased sales in the fast growth regions of Eastern Europe, Africa and the Middle East.

The 16.1 percent increase in Process Technologies sales in 2013 from 2012 was primarily the result of:

•	organic sales growth related to higher sales of certain pool products serving the North American residential housing market and increased demand for global food & beverage solutions;

•	higher sales volume related to the Merger and other acquisitions in the second half of 2012;

•	growth in developed regions led by strength in U.S. and Western Europe; and

•	selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•	lower sales in India and Eastern Europe.

Segment income

The 0.4 percentage point increase in segment income for Process Technologies as a percentage of net sales in 2014 from 2013 was primarily the result of:

•	selective increases in selling prices to mitigate inflationary cost increases; and

•	core sales growth in our residential & commercial and food & beverage businesses, which resulted in increased leverage on operating expenses.

These increases were partially offset by:

•	inflationary increases related to certain raw materials; and

•	lower sales volumes in our industrial and infrastructure businesses, which resulted in decreased leverage on operating expenses.

The 2.3 percentage point increase in segment income for Process Technologies as a percentage of net sales in 2013 from 2012 was primarily the result of:

•	higher sales volume, which resulted in increased leverage on operating expenses;

•	savings generated from our PIMS initiatives including lean and supply management practices;

•	selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•	inflationary costs related to raw materials and labors costs.

Flow Technologies

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

	Years ended December 31										% / point change
In millions	2014			2013			2012				2014 vs. 2013		2013 vs. 2012
Net sales	$	1,106.6		$	1,131.6		$	1,025.5			(2.2	)%	10.3	%
Segment income	138.5			132.3			104.7				4.7	%	26.4	%
% of net sales	12.5		%	11.7		%	10.2		%		0.8		1.5

Net sales

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

	2014 vs. 2013			2013 vs. 2012
Volume	(1.6	)%		10.0	%
Price	0.9			0.8
Core growth	(0.7	)		10.8
Acquisition (divestiture)	(0.9	)		3.3
Currency	(0.6	)		(3.8	)
Total	(2.2	)%		10.3	%

The 2.2 percent decrease in Flow Technologies sales in 2014 from 2013 was primarily the result of:

•	decreased sales volume related to the loss of a customer in the residential retail business and sales declines in the infrastructure business;

•	loss of revenue related to the divestiture of a business at the end of the fourth quarter of 2013; and

•	unfavorable foreign currency effects.

These decreases were partially offset by:

•	selective increases in selling prices to mitigate inflationary cost increases.

The 10.3 percent increase in Flow Technologies sales in 2013 from 2012 was primarily the result of:

•	selective increases in selling prices to mitigate inflationary cost increases;

•	organic growth in agriculture sales due to strong new product results and international expansion;

•	sales growth in developed markets of the U.S. and Western Europe; and

•	continued sales growth in fast growth regions, including the Middle East and Southeast Asia.

These increases were partially offset by:

•	unfavorable foreign currency effects.

Segment income

The 0.8 percentage point increase in segment income for Flow Technologies as a percentage of net sales in 2014 from 2013 was primarily the result of:

•	selective increases in selling prices to mitigate inflationary cost increases; and

•	savings generated from our PIMS initiatives including lean and supply management practices.

These increases were partially offset by:

•	inflationary increases related to labor and certain raw materials.

The 1.5 percentage point increase in segment income for Flow Technologies as a percentage of net sales in 2013 from 2012 was primarily the result of:

•	savings generated from our PIMS initiatives including lean and supply management practices; and

•	selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•	inflationary increases for certain raw materials and labor; and

•	unfavorable foreign currency effects.

Technical Solutions

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

	Years ended December 31										% / point change
In millions	2014			2013			2012				2014 vs. 2013		2013 vs. 2012
Net sales	$	1,728.1		$	1,663.4		$	1,236.4			3.9	%	34.5	%
Segment income	358.8			322.4			232.1				11.3	%	38.9	%
% of net sales	20.8		%	19.4		%	18.8		%		1.4		0.6

Net sales

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

	2014 vs. 2013			2013 vs. 2012
Volume	4.2	%		(2.9	)%
Price	1.3			1.4
Core growth	5.5			(1.5	)
Acquisition (divestiture)	(0.4	)		36.0
Currency	(1.2	)		—
Total	3.9	%		34.5	%

The 3.9 percent increase in Technical Solutions sales in 2014 from 2013 was primarily the result of:

•	higher sales volume in the U.S., China and Canada;

•	increased sales in our industrial, infrastructure and residential & commercial businesses; and

•	selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•	unfavorable foreign currency effects; and

•	loss of revenue related to the divestiture of a business at the end of the first quarter of 2013.

The 34.5 percent increase in Technical Solutions sales in 2013 from 2012 was primarily the result of:

•	sales volume of the Flow Control business of $656.5 million in 2013, compared to $195.7 million in 2012; and

•	selective increases in selling prices to mitigate inflationary cost increases.

Segment income

The 1.4 percentage point increase in segment income for Technical Solutions as a percentage of net sales in 2014 from 2013 was primarily the result of:

•	higher sales volume in our industrial, infrastructure and residential & commercial businesses, which resulted in increased leverage on operating expenses; and

•	selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

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

The 0.6 percentage point increase in segment income for Technical Solutions as a percentage of sales in 2013 from 2012 was primarily the result of:

•	higher volume related to the acquisition of Flow Control, which resulted in increased leverage of our fixed cost base;

•	selective increases in selling prices to mitigate inflationary cost increases; and

•	savings generated from our PIMS initiatives including lean and supply management practices.

These increases were offset by:

•	lower margin from higher costs related to the Merger; including integration and standardization;

•	intangible asset amortization associated with the Merger; and

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

LIQUIDITY AND CAPITAL RESOURCES

We generally fund cash requirements for working capital, capital expenditures, equity investments, acquisitions, debt repayments, dividend payments and share repurchases from cash generated from operations, availability under existing committed revolving credit facilities and in certain instances, public and private debt and equity offerings. We have grown our businesses in significant part in the past through acquisitions financed by credit provided under our revolving credit facilities and from time to time, by private or public debt issuance. Our primary revolving credit facilities have generally been adequate for these purposes, although we have negotiated additional credit facilities as needed to allow us to complete acquisitions. We intend to issue commercial paper to fund our financing needs on a short-term basis and to use our revolving credit facility as back-up liquidity to support commercial paper.

We are focusing on increasing our cash flow and repaying existing debt, while continuing to fund our research and development, marketing and capital investment initiatives. Our intent is to maintain investment grade ratings and a solid liquidity position.

We experience seasonal cash flows primarily due to seasonal demand in a number of markets within Process Technologies and Flow Technologies. We generally borrow in the first quarter of our fiscal year for operational purposes, which usage reverses in the second quarter as the seasonality of our businesses peaks. End-user demand for pool and certain pumping equipment follows warm weather trends and is at seasonal highs from April to August. 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 heavy flooding and droughts. Additionally, Technical Solutions generally experiences increased demand for thermal protection products and services during the fall and winter months in the Northern Hemisphere.

Operating activities

Cash provided by operating activities of continuing operations was $1,005.0 million in 2014, or $73.7 million higher than in 2013. The increase in cash provided by operating activities from continuing operations was due primarily to a $184.3 million increase in Net income (loss) from continuing operations before noncontrolling interest, net of the following non-cash items: depreciation and amortization, loss (gain) on sale of businesses, trade name impairment and pension and other post-retirement expense (income).

Cash provided by operating activities from continuing operations was $931.3 million in 2013, or $865.4 million higher than in 2012. The increase in cash provided by operating activities from continuing operations was due primarily to a $442.4 million increase in Net income (loss) before noncontrolling interest, net of the following non-cash items: depreciation and amortization, goodwill and trade name impairment and pension and other post-retirement expense. Also attributing to the increase were accelerated contributions of pension and other post-retirement obligations in 2012 that reduced the need for ongoing contributions in 2013.

Investing activities

Net cash used for investing activities was $128.3 million in 2014. Net cash used for investing activities was $211.2 million in 2013. Net cash provided by investing activities was $375.6 million in 2012.

Acquisitions

In December 2014, we paid cash of $7.5 million and $4.8 million to acquire businesses as part of Process Technologies and Technical Solutions, respectively.

In June 2013, $84.4 million of cash was paid to Tyco in settlement of a working capital and net indebtedness adjustment related to the Merger. In addition, in December 2013 we acquired a business as part of Process Technologies for cash consideration of $8.0 million, net of cash acquired.

In September 2012, we acquired $691.7 million of cash in conjunction with the Merger. In October 2012, we acquired, as part of Valves & Controls, the remaining 25 percent equity interest in Pentair Middle East Holding S.a.R.L. (“KEF”) for $100.0 million in cash. Additionally, during 2012, we completed other small acquisitions in Process Technologies with purchase prices totaling $121.2 million in cash, net of cash acquired.

Divestitures

During 2013, we sold businesses that were part of Technical Solutions and Flow Technologies for a cash purchase price of $30.1 million and $13.4 million, respectively, net of transaction costs, resulting in a gain of $16.8 million and $4.0 million, respectively.

Capital expenditures

Capital expenditures in 2014, 2013 and 2012 were $129.6 million, $170.0 million and $94.5 million, respectively. We anticipate capital expenditures for fiscal 2015 to be approximately $150 million, primarily for capacity expansions of manufacturing facilities located in our low-cost countries, developing new products and general maintenance.

Financing activities

Net cash used for financing activities was $995.1 million in 2014. Cash used for financing activities in 2014 included share repurchases, payments of dividends and the purchase of the remaining noncontrolling interest in a business, partially offset by net receipts of commercial paper and revolving long-term debt to fund our operations in the normal course of business.

Net cash used for financing activities was $719.1 million in 2013. Cash used for financing activities in 2013 included share repurchases and payments of dividends, partially offset by net receipts of commercial paper and revolving long-term debt to fund our operations in the normal course of business and cash received from shares issued to employees.

Net cash used for financing activities was $232.3 million in 2012. Cash provided by financing activities in 2012 included net repayments of long-term debt, as further described below, payments of dividends, early debt termination fees and share repurchases, partially offset by net receipts of commercial paper and revolving long-term debt.

In December 2012, PFSA completed an exchange offer (the “Exchange Offer”) pursuant to which it exchanged $373.0 million in aggregate principal amount of 5.00% Senior Notes due 2021 of Pentair, Inc., a wholly-owned, indirect subsidiary of the Company (the “2021 Notes”) for a like amount of new 5.00% Senior Notes due 2021 of PFSA (the “New 2021 Notes”) plus $5.6 million in transaction-related costs. Upon completion of the Exchange Offer, $127.0 million in aggregate principal amount

of 2021 Notes remained outstanding. The remaining 2021 Notes and New 2021 Notes are guaranteed as to payment by Pentair plc.

In November 2012, PFSA completed a private offering of $350.0 million aggregate principal amount of 1.35% Senior Notes due 2015 (the “2015 Notes”) and $250.0 million aggregate principal amount of 2.65% Senior Notes due 2019 (the “2019 Notes” and, collectively, the “2015/2019 Notes”), which are guaranteed as to payment by Pentair plc. In certain circumstances, PFSA may be required to pay additional interest on the 2015/2019 Notes. We used the net proceeds from the sale of the 2015/2019 Notes to repay commercial paper and for general corporate purposes. We classified the outstanding amount on the 2015 Notes maturing in 2015 as long-term as of December 31, 2014 as we have the intent and ability to refinance such obligation on a long-term basis under the Amended Credit Facility (defined below).

In October 2012, we redeemed the remaining outstanding aggregate principal of our 5.65% fixed rate senior notes due 2013-2017 totaling $400.0 million and our 1.05% floating rate senior notes due 2013 totaling $100.0 million (the “Fixed/Floating Rate Notes”). The redemptions included make-whole premiums of $65.8 million. Concurrent with the redemption of the Fixed/Floating Rate Notes, we terminated a related interest rate swap that was designated as a cash flow hedge, which resulted in the reclassification of $3.4 million of previously unrecognized variable to fixed swap losses from AOCI to earnings in October 2012. All costs associated with the redemption were recorded as a Loss on the early extinguishment of debt including $0.6 million of unamortized deferred financing costs.

In September 2012, PFSA, completed a private offering of $550.0 million aggregate principal amount of 3.15% Senior Notes due 2022 (the “2022 Notes”) and $350 million aggregate principal amount of 1.875% Senior Notes due 2017 (the “2017 Notes” and, collectively, the “2017/2022 Notes”), which are guaranteed as to payment by Pentair Ltd. In certain circumstances, PFSA may be required to pay additional interest on the 2017/2022 Notes. The 2017/2022 Notes remained outstanding after the Merger. A portion of the net proceeds from the 2017/2022 Notes offering were used to repay $435.0 million to Tyco in conjunction with the Distribution and the Merger.

In September 2012, Pentair, Inc. entered into a credit agreement providing for an unsecured, committed revolving credit facility, originally set to mature in Septermber 2017 (the "Prior Credit Facility"). Upon the completion of the Merger, Pentair Ltd. became the guarantor under the Prior Credit Facility and PFSA and certain other of our subsidiaries because affiliate borrowers under the Prior Credit Facility. In October 2014, Pentair plc, Pentair Investments Switzerland GmbH ("PISG"), PFSA and Pentair, Inc. entered into an amended and restated credit agreement related to the Prior Credit Facility (the "Amended Credit Facility), with Pentair plc and PISG as guarantors and PFSA and Pentair, Inc. as borrowers. The Amended Credit Facility increased the maximum aggregate availability to $2,100.0 million and extended the maturity date to October 3, 2019. Borrowings under the Amended 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 Amended Credit Facility.

PFSA is authorized to sell short-term commercial paper notes to the extent availability exists under the Amended Credit Facility. PFSA uses the Amended Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. As of December 31, 2014 and 2013, we had $987.6 million and $528.9 million, respectively, of commercial paper outstanding, all of which was classified as long-term as we have the intent and the ability to refinance such obligations on a long-term basis under the Amended Credit Facility.

Total availability under the Amended Credit Facility was $1,102.6 million, which was not limited by any covenants contained in the Amended Credit Facility’s credit agreement. Subsequent to the Merger, we used the remaining proceeds from the 2017/2022 Notes offering and issuances of commercial paper to redeem the Fixed/Floating Rate Notes as discussed above, to repurchase shares in conjunction with our share repurchase as discussed in ITEM 8, Note 14 of the Notes to the Consolidated Financial Statements and to purchase the remaining 25 percent interest in KEF for $100.0 million as discussed in ITEM 8, Note 2 of the Notes to the Consolidated Financial Statements.

Our debt agreements contain certain financial covenants, the most restrictive of which are in the Amended Credit Facility, 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 arising out of Permitted Acquisitions, ("EBITDA") for the four consecutive fiscal quarters then ended (the “Leverage Ratio”) to exceed 3.50 to 1.00 on the last day of each fiscal quarter, 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 Amended 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 December 31, 2014, we were in compliance with all financial covenants in our debt agreements.

In addition to the Amended Credit Facility, we have various other credit facilities with an aggregate availability of $78.3 million, of which none was outstanding at December 31, 2014. Borrowings under these credit facilities bear interest at variable rates. Additionally, as part of 2012 and 2011 acquisitions, we assumed certain capital leases with an outstanding balance of $6.7 million and $21.5 million at December 31, 2014 and 2013, respectively.

As of December 31, 2014, we had $49.4 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 expect to continue to have cash requirements to support working capital needs and capital expenditures, to pay interest and service debt and to pay dividends to shareholders quarterly. We believe we have the ability and sufficient capacity to meet these cash requirements by using available cash and internally generated funds and to borrow under our committed and uncommitted credit facilities.

Dividends

We paid dividends in 2014 of $211.4 million, or $1.10 per ordinary share, compared with $194.2 million, or $0.96 per ordinary share, in 2013 and $112.4 million, or $0.88 per ordinary share in 2012. At our 2014 annual meeting of shareholders held on May 20, 2014, our shareholders approved a proposal to pay quarterly cash dividends through the second quarter of 2015. The authorization provided that dividends of $1.20 per share be made in quarterly installments of $0.30 for each of the third and fourth quarters of 2014 and first and second quarters of 2015 and we expect to continue paying dividends on a quarterly basis. In December 2014, the Board of Directors approved an increase of $0.02 per share for the remaining dividends to be paid in the first and second quarters of 2015, bringing the total quarterly dividend for those quarters to $0.32 per share. The Board of Directors also approved a plan to increase the dividend for the remainder of 2015, which will mark the 39th consecutive year we have increased dividends.

Under Irish law, the payment of future cash dividends after those approved at our 2014 annual meeting of shareholders and redemptions and repurchases of shares following the Redomicile may be paid only out of Pentair plc's “distributable reserves” on its statutory balance sheet. Pentair plc is not permitted to pay dividends out of share capital, which includes share premiums. Distributable reserves may be created through the earnings of the Irish parent company and through a reduction in share capital approved by the Irish High Court. Distributable reserves are not linked to a U.S. generally accepted accounting principles ("GAAP") reported amount (e.g., retained earnings). On July 22, 2014, the Irish High Court approved Pentair plc's conversion of approximately $14.4 billion of share premium to distributable reserves. On July 29, 2014, following the approval of the Irish High Court, we made the required filing of Pentair plc's initial accounts with the Irish Companies Registration Office, which completed the process to allow us to pay future cash dividends and redeem and repurchase shares out of Pentair plc's "distributable reserves." As of December 31, 2014, our distributable reserve balance was $12.1 billion.

Authorized shares

Our authorized share capital consists of 426.0 million ordinary shares with a par value of $0.01 per share.

Share repurchases

Prior to the closing of the Merger, our board of directors, and Tyco as our sole shareholder, authorized the repurchase of our ordinary shares with a maximum aggregate value of $400.0 million following the closing of the Merger. This authorization does not have an expiration date. In October 2012, our board of directors authorized the repurchase of our ordinary shares with a maximum aggregate value of $800.0 million. This authorization expires on December 31, 2015 and is in addition to the $400.0 million share repurchase authorization. There is no remaining availability under these 2012 authorizations.

In December 2013, the Board of Directors authorized the repurchase of shares of our ordinary shares up to a maximum dollar limit of $1.0 billion. This authorization expires on December 31, 2016 and is in addition to the combined $1.2 billion prior share repurchase authorizations.

In December 2014, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $1.0 billion. This authorization is in addition to the 2012 and 2013 share repurchase authorizations. The authorization expires on December 31, 2019 and there were no repurchases made in 2014 under this authorization.

During the year ended December 31, 2014, we repurchased 16.4 million of our ordinary shares for $1.2 billion pursuant to these authorizations and had no remaining availability for repurchases under the 2013 authorization.

Contractual obligations

The following summarizes our significant contractual obligations that impact our liquidity:

	Years ended December 31
In millions	2015			2016			2017			2018			2019			Thereafter			Total
Debt obligations	$	—		$	—		$	350.0		$	—		$	1,597.4		$	1,050.0		$	2,997.4
Capital lease obligations	6.7			—			—			—			—			—			6.7
Interest obligations on fixed-rate debt	60.2			55.5			55.5			49.0			49.0			89.5			358.7
Operating lease obligations, net of sublease rentals	51.9			39.7			30.8			19.3			15.3			19.1			176.1
Purchase obligations	53.3			5.8			—			—			—			—			59.1
Pension and other post-retirement plan contributions	22.6			21.3			30.0			16.6			16.5			205.6			312.6
Total contractual obligations, net	$	194.7		$	122.3		$	466.3		$	84.9		$	1,678.2		$	1,364.2		$	3,910.6

The $350.0 million of principal outstanding on the 2015 Notes matures in December 2015. As discussed above, we classified this debt as long-term as of December 31, 2014 as we have the intent and ability to refinance such obligation on a long-term basis under the Amended Credit Facility. As such, this obligation is included in the 2019 obligations in the table above, the year in which the Amended Credit Facility expires.

The majority of the purchase obligations represent commitments for raw materials to be utilized in the normal course of business. For purposes of the above table, arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction.

In addition to the summary of significant contractual obligations, we will incur annual interest expense on outstanding variable rate debt. As of December 31, 2014, variable interest rate debt was $997.4 million at a weighted average interest rate of 0.69%.

The total gross liability for uncertain tax positions at December 31, 2014 was estimated to be $62.1 million. We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Interest expense, respectively, which is consistent with our past practices. As of December 31, 2014, we had recorded $1.2 million for the possible payment of penalties and $9.8 million related to the possible payment of interest.

Other financial measures

In addition to measuring our cash flow generation or usage based upon operating, investing and financing classifications included in the Consolidated Statements of Cash Flows, we also measure our free cash flow. We have a long-term goal to consistently generate free cash flow that equals or exceeds 100 percent conversion of net income. Free cash flow is a non-GAAP financial measure that we use to assess our cash flow performance. We believe free cash flow is an important measure of operating performance because it provides us and our investors a measurement of cash generated from operations that is available to pay dividends, make acquisitions, repay debt and repurchase shares. In addition, free cash flow is used as a criterion to measure and pay compensation-based incentives. Our measure of free cash flow may not be comparable to similarly titled measures reported by other companies. The following table is a reconciliation of free cash flow:

	Years ended December 31
In millions	2014			2013			2012
Net cash provided by operating activities of continuing operations	$	1,005.0		$	931.3		$	65.9
Capital expenditures	(129.6		)	(170.0		)	(94.5		)
Proceeds from sale of property and equipment	13.1			6.0			5.5
Free cash flow	$	888.5		$	767.3		$	(23.1	)

Off-balance sheet arrangements

At December 31, 2014, we had no off-balance sheet financing arrangements.

COMMITMENTS AND CONTINGENCIES

We have been made parties to a number of actions filed or have been given notice of potential claims relating to the conduct of our business, including those pertaining to commercial disputes, product liability, asbestos, environmental, safety and health, patent infringement and employment matters.

While we believe that a material impact on our consolidated financial position, results of operations or cash flows from any such future claims or potential claims is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future adverse ruling or unfavorable development could result in future charges that could have a material impact. We do and will continue to periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our consolidated financial position, results of operations and cash flows for the proceedings and claims described in ITEM 8, Note 17 of the Notes to Consolidated Financial Statements could change in the future.

Asbestos Matters

Our subsidiaries and numerous other companies are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were attached to or used with asbestos-containing components manufactured by third-parties. Each case typically names between dozens to hundreds of corporate defendants. While we have observed an increase in the number of these lawsuits over the past several years, including lawsuits by plaintiffs with mesothelioma-related claims, a large percentage of these suits have not presented viable legal claims and, as a result, have been dismissed by the courts. Our historical strategy has been to mount a vigorous defense aimed at having unsubstantiated suits dismissed, and, where appropriate, settling suits before trial. Although a large percentage of litigated suits have been dismissed, we cannot predict the extent to which we will be successful in resolving lawsuits in the future.

As of December 31, 2014, there were approximately 3,400 claims outstanding against our subsidiaries. This amount is not adjusted for claims that are not actively being prosecuted, identified incorrect defendants, or duplicated other actions, which would ultimately reflect our current estimate of the number of viable claims made against us, our affiliates, or entities for which we assumed responsibility in connection with acquisitions or divestitures. In addition, the amount does not include certain claims pending against third parties for which we have been provided an indemnification.

Our estimated liability for asbestos-related claims was $249.1 million and $254.7 million as of December 31, 2014 and 2013, respectively, and was recorded in Other non-current liabilities in the Consolidated Balance Sheets for pending and future claims and related defense costs. Our estimated receivable for insurance recoveries was $115.8 million and $119.6 million at December 31, 2014 and 2013, respectively, and was recorded in Other non-current assets in the Consolidated Balance Sheets.

Environmental Matters

We are involved in or have retained responsibility and potential liability for environmental obligations and legal proceedings related to our current business and, including pursuant to certain indemnification obligations, related to certain formerly owned businesses. We are responsible, or alleged to be responsible, for ongoing environmental investigation and/or remediation of sites in several countries. These sites are in various stages of investigation and/or remediation and at some of these sites our liability is considered de minimis. We received notification from the U.S. Environmental Protection Agency and from similar state and non-U.S. environmental agencies, that several sites formerly or currently owned and/or operated by us, and other properties or water supplies that may be or may have been impacted from those operations, contain disposed or recycled materials or waste and require environmental investigation and/or remediation. Those sites include instances where we have been identified as a potentially responsible party under U.S. federal, state and/or non-U.S. environmental laws and regulations. For several formerly owned businesses, we have also received claims for indemnification from purchasers of these businesses.

Our accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. It can be difficult to estimate reliably the final costs of investigation and remediation due to various factors. In our opinion, the amounts accrued are appropriate based on facts and circumstances as currently known. Based upon our experience, current information regarding known contingencies and applicable laws, we have recorded reserves for these environmental matters of $31.4 million and $34.8 million as of December 31, 2014 and 2013, respectively. We do not anticipate these environmental conditions will have a material adverse effect on our financial position, results of operations or cash flows. However, unknown conditions, new details about existing conditions or changes in environmental requirements may give rise to environmental liabilities that will exceed the amount of our current reserves and could have a material adverse effect in the future.

Product liability claims

We are subject to various product liability lawsuits and personal injury claims. A substantial number of these lawsuits and claims are insured and accrued for by Penwald, our captive insurance subsidiary. See discussion in ITEM 1 and ITEM 8, Note 1

of the Notes to Consolidated Financial Statements — Insurance subsidiary. Penwald records a liability for these claims based on actuarial projections of ultimate losses. For all other claims, accruals covering the claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are adjusted periodically as additional information becomes available. In 2004, we disposed of the Tools Group and we retained responsibility for certain product claims. We have not experienced significant unfavorable trends in either the severity or frequency of product liability lawsuits or personal injury claims.

Compliance Matters

Prior to the Merger, the Flow Control business was subject to investigations by the U.S. Department of Justice (“DOJ”) and the SEC related to allegations that improper payments were made by the Flow Control business and other Tyco subsidiaries and third-party intermediaries in recent years in violation of the Foreign Corrupt Practices Act. Tyco reported to the DOJ and the SEC the remedial measures that it had taken in response to the allegations and Tyco’s own internal investigations. As a result of discussions with the DOJ and SEC aimed at resolving these matters, on September 24, 2012, Tyco entered into a settlement with the SEC and a non-prosecution agreement with the DOJ, pursuant to which the Flow Control business is for a three year period subject to yearly reporting to the DOJ concerning its continuing compliance efforts.

Stand-by Letters of Credit, Bank Guarantees and Bonds

In certain situations, Tyco guaranteed Flow Control’s performance 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, 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 December 31, 2014 and 2013, the outstanding value of bonds, letters of credit and bank guarantees totaled $370.1 million and $484.0 million, respectively, of which $32.4 million and $25.3 million, respectively, relate to the Water Transport business.

NEW ACCOUNTING STANDARDS

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

CRITICAL ACCOUNTING POLICIES

We have adopted various accounting policies to prepare the consolidated financial statements in accordance with GAAP. Our significant accounting policies are more fully described in ITEM 8, Note 1 of the Notes to Consolidated Financial Statements. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry and information available from other outside sources, as appropriate. We consider an accounting estimate to be critical if:

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

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

Our critical accounting estimates include the following:

Impairment of goodwill and indefinite-lived intangibles

Goodwill

Goodwill represents the excess of the cost of acquired businesses over the net of the fair value of identifiable tangible net assets and identifiable intangible assets purchased and liabilities assumed.

Goodwill is tested at least annually for impairment and is tested for impairment more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is performed using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. If the estimated fair value is less than the carrying amount of the reporting unit there is an indication that goodwill impairment exists and a second step must be completed in order to determine the amount of the goodwill impairment, if any that should be recorded. In the second step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation.

The fair value of each reporting unit is determined using a discounted cash flow analysis and market approach. Projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital and the appropriate discount rate. Use of the market approach consists of comparisons to comparable publicly-traded companies that are similar in size and industry. Actual results may differ from those used in our valuations.

In developing our discounted cash flow analysis, assumptions about future revenues and expenses, capital expenditures and changes in working capital are based on our annual operating plan and long-term business plan for each of our reporting units. These plans take into consideration numerous factors including historical experience, anticipated future economic conditions, changes in raw material prices and growth expectations for the industries and end markets we participate in. These assumptions are determined over a six year long-term planning period. The six year growth rates for revenues and operating profits vary for each reporting unit being evaluated. Revenues and operating profit beyond 2020 are projected to grow at a perpetual growth rate of 3.0%.

Discount rate assumptions for each reporting unit take into consideration our assessment of risks inherent in the future cash flows of the respective reporting unit and our weighted-average cost of capital. We utilized discount rates ranging from 11.0% to 12.0% in determining the discounted cash flows in our fair value analysis.

In estimating fair value using the market approach, we identify a group of comparable publicly-traded companies for each reporting unit that are similar in terms of size and product offering. These groups of comparable companies are used to develop multiples based on total market-based invested capital as a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”). We determine our estimated values by applying these comparable EBITDA multiples to the operating results of our reporting units. The ultimate fair value of each reporting unit is determined considering the results of both valuation methods.

During 2014, we recognized an impairment charge related to allocated amounts of goodwill, intangible assets, property, plant & equipment and other non-current assets totaling $380.1 million, net of a $12.3 million tax benefit, representing our estimated loss on disposal of the Water Transport business in Australia. The impairment charge is included in Loss from sale / impairment of discontinued operations, net of tax in our Consolidated Statements of Operations and Comprehensive Income (Loss).

We completed step one of our annual goodwill impairment evaluation as of the first day of the fourth quarter of 2014, 2013 and 2012 with each reporting unit’s fair value substantially in excess of its carrying value. Accordingly, step two of the impairment analysis was not required for 2014, 2013 or 2012.

Identifiable intangible assets

Our primary identifiable intangible assets include: customer relationships, trade names and trademarks, proprietary technology, backlog and patents. Identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant. We complete our annual impairment test during the fourth quarter each year for those identifiable assets not subject to amortization. There was no impairment charge recorded in 2014 for identifiable intangible assets. Impairment charges of $11.0 million and $60.7 million were recorded in 2013 and 2012, respectively, related to trade names. These charges were recorded in Impairment of trade names in our Consolidated Statements of Operations and Comprehensive Income (Loss).

The impairment test consists of a comparison of the fair value of the trade name with its carrying value. Fair value 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. The impairment charges recorded in 2013 and 2012 were the result of a rebranding strategies implemented in the fourth quarters of 2013 and 2012, respectively.

Impairment of long-lived assets

We review the recoverability of long-lived assets to be held and used, such as property, plant and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced for the cost to dispose of the assets. The measurement of impairment requires us to estimate future cash flows and the fair value of long-lived assets. During 2014 and 2013, we recorded impairment charges of $20.9 million and $16.6 million, respectively, in conjunction with restructuring activities. There were no material impairment charges recorded related to long-lived assets in 2012.

Percentage of completion revenue recognition

Revenue from certain long-term contracts is recognized over the contractual period under the percentage of completion method of accounting. Under this method, sales and gross profit are recognized as work is performed either 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 expended 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. 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 and contract values. These reviews have not resulted in adjustments that were significant to our results of operations. Estimated losses are recorded when identified. Claims against customers are recognized as revenue upon settlement.

Pension and other post-retirement plans

We sponsor U.S. and Non-U.S. defined-benefit pension and other post-retirement plans. The amounts recognized in our consolidated financial statements related to our defined-benefit pension and other post-retirement plans are determined from actuarial valuations. Inherent in these valuations are assumptions, including: expected return on plan assets, discount rates, rate of increase in future compensation levels and health care cost trend rates. These assumptions are updated annually and are disclosed in ITEM 8, Note 13 to the Notes to Consolidated Financial Statements. Differences in actual experience or changes in assumptions may affect our pension and other post-retirement obligations and future expense.

We recognize changes in the fair value of plan assets and net actuarial gains or losses for pension and other post-retirement benefits annually in the fourth quarter each year ("mark-to-market adjustment") and, if applicable, in any quarter in which an interim remeasurement is triggered. Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension and other post-retirement plans or when assumptions change as they may each year. The primary factors contributing to actuarial gains and losses each year are (1) changes in the discount rate used to value pension and other post-retirement benefit obligations as of the measurement date and (2) differences between the expected and the actual return on plan assets. This accounting method also results in the potential for volatile and difficult to forecast mark-to-market adjustments. Mark-to-market adjustments resulted in a pre-tax charge of $49.9 million in 2014, pre-tax income of $63.2 million in 2013 and a pre-tax charge of $146.2 million in 2012. The remaining components of pension expense, primarily service and interest costs and the expected return on plan assets, are recorded on a quarterly basis as ongoing pension expense.

Discount rate

The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to payments from a stream of bonds available in the marketplace rated AA or higher, adjusted to eliminate the effects of call provisions. This produced a weighted-average discount rate for our U.S. plans of 3.63% in 2014, 4.51% in 2013 and 3.67% in 2012. The discount rates on our Non-U.S. plans ranged from 0.50% to 4.25% in 2014, 0.50% to 5.00% in 2013 and 0.50% to 4.50% in 2012. There are no known or anticipated changes in our discount rate assumption that will impact our pension expense in 2015.

Expected rate of return

Our expected rate of return on plan assets for our U.S. plans was 4.56% for 2014, 3.75% in 2013 and 7.50% in 2012. The expected rate of return on our Non-U.S. plans ranged from 1.00% to 6.40% in 2014, 1.00% to 6.50% in 2013 and 1.00% to

4.60% in 2012. The expected rate of return is designed to be a long-term assumption that may be subject to considerable year-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical returns, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader longer-term market indices.

During 2012, we adopted an investment strategy for our U.S. pension plans with a primary objective of preserving the funded status of the U.S. plans. This was achieved through investments in fixed interest instruments with interest rate sensitivity characteristics closely reflecting the interest rate sensitivity of our benefit obligations. The shifting of allocations away from equities to liability hedging fixed income investments, by reinvesting in fixed income instruments as equity investments were redeemed, was completed during 2013. As of December 31, 2014, the U.S. pension plans have an approximately 97 percent allocation to fixed income investments. As a result of the adoption of this investment strategy, we anticipate the expected rate of return on our U.S. funded pension plans will continue to be consistent with the discount rate.

See ITEM 8, Note 13 of the Notes to Consolidated Financial Statements for further information regarding pension and other post-retirement plans.

Loss contingencies

Accruals are recorded for various contingencies including legal proceedings, self-insurance and other claims that arise in the normal course of business. The accruals are based on judgment, the probability of losses and, where applicable, the consideration of opinions of internal and/or external legal counsel and actuarially determined estimates. Additionally, we record receivables from third party insurers when recovery has been determined to be probable.

We recognize asbestos-related liabilities on an undiscounted basis when a loss is probable and can be reasonably estimated. Certain of these liabilities are subject to insurance coverage. Our subsidiaries and numerous other companies are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were attached to or used with asbestos-containing components manufactured by third-parties. The process of estimating asbestos-related liabilities and the corresponding insurance recoveries receivable is complex and dependent primarily on our historical claim experience, estimates of potential future claims, our legal strategy for resolving these claims, the availability of insurance coverage, and the solvency and creditworthiness of insurers.

See ITEM 8, Note 17 of the Notes to Consolidated Financial Statements for further information regarding loss contingencies.

Income taxes

In determining taxable income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.

We currently have recorded valuation allowances that we will maintain until when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Our income tax expense recorded in the future may be reduced to the extent of decreases in our valuation allowances. The realization of our remaining deferred tax assets is primarily dependent on future taxable income in the appropriate jurisdiction. Any reduction in future taxable income including but not limited to any future restructuring activities may require that we record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance could result in additional income tax expense in such period and could have a significant impact on our future earnings.

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management records the effect of a tax rate or law change on the Company’s deferred tax assets and liabilities in the period of enactment. Future tax rate or law changes could have a material effect on the Company’s financial condition, results of operations or cash flows.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We perform reviews of our income tax positions on a quarterly basis and accrue for uncertain tax positions. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the tax jurisdictions in which we operate based on our estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. As events change or resolution occurs, these

liabilities are adjusted, such as in the case of audit settlements with taxing authorities. The ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.