filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Pentair plc and its subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2014, the Company’s internal control over financial reporting was effective based on those criteria.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2014. That attestation report is set forth immediately following this management report.
| Randall J. Hogan | John L. Stauch | |
| Chairman and Chief Executive Officer | Executive Vice President and Chief Financial Officer |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Pentair plc
Manchester, United Kingdom
We have audited the internal control over financial reporting of Pentair plc and subsidiaries (the “Company”) as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule listed in the Index at Item 15 as of and for the year ended December 31, 2014 of the Company and our report dated February 24, 2015 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 24, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Pentair plc
Manchester, United Kingdom
We have audited the accompanying consolidated balance sheets of Pentair plc and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations and comprehensive income (loss), changes in equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Pentair plc and subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2015 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 24, 2015
Pentair plc and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
| Years ended December 31 | |||||||||
| In millions, except per-share data | 2014 | 2013 | 2012 | ||||||
| Net sales | $ | 7,039.0 | $ | 6,999.7 | $ | 4,306.8 | |||
| Cost of goods sold | 4,576.0 | 4,629.6 | 3,040.9 | ||||||
| Gross profit | 2,463.0 | 2,370.1 | 1,265.9 | ||||||
| Selling, general and administrative | 1,493.8 | 1,493.7 | 1,117.7 | ||||||
| Research and development | 117.3 | 122.8 | 92.3 | ||||||
| Impairment of trade names | — | 11.0 | 60.7 | ||||||
| Operating income (loss) | 851.9 | 742.6 | (4.8 | ) | |||||
| Other (income) expense | |||||||||
| Loss (gain) on sale of businesses, net | 0.2 | (20.8 | ) | — | |||||
| Loss on early extinguishment of debt | — | — | 75.4 | ||||||
| Equity income of unconsolidated subsidiaries | (1.2 | ) | (2.0 | ) | (2.3 | ) | |||
| Interest income | (3.7 | ) | (4.4 | ) | (2.0 | ) | |||
| Interest expense | 72.3 | 75.3 | 70.2 | ||||||
| Income (loss) from continuing operations before income taxes and noncontrolling interest | 784.3 | 694.5 | (146.1 | ) | |||||
| Provision (benefit) for income taxes | 177.3 | 177.0 | (67.2 | ) | |||||
| Net income (loss) from continuing operations before noncontrolling interest | 607.0 | 517.5 | (78.9 | ) | |||||
| Income (loss) from discontinued operations, net of tax | (6.4 | ) | 25.9 | (25.7 | ) | ||||
| Loss from sale / impairment of discontinued operations, net of tax | (385.7 | ) | (0.8 | ) | — | ||||
| Net income (loss) before noncontrolling interest | 214.9 | 542.6 | (104.6 | ) | |||||
| Noncontrolling interest | — | 5.8 | 2.6 | ||||||
| Net income (loss) attributable to Pentair plc | $ | 214.9 | $ | 536.8 | $ | (107.2 | ) | ||
| Net income (loss) from continuing operations attributable to Pentair plc | $ | 607.0 | $ | 511.7 | $ | (81.5 | ) | ||
| Comprehensive income (loss), net of tax | |||||||||
| Net income (loss) before noncontrolling interest | $ | 214.9 | $ | 542.6 | $ | (104.6 | ) | ||
| Changes in cumulative translation adjustment | (336.3 | ) | (29.1 | ) | 31.4 | ||||
| Amortization of pension and other post-retirement prior service cost, net of $0, $0.2 and $0.2 tax, respectively | — | (0.4 | ) | (0.3 | ) | ||||
| Changes in market value of derivative financial instruments, net of $1.1, $0.7 and $3.7 tax, respectively | (0.4 | ) | (0.3 | ) | (3.6 | ) | |||
| Total comprehensive income (loss) | (121.8 | ) | 512.8 | (77.1 | ) | ||||
| Less: Comprehensive income attributable to noncontrolling interest | — | 8.0 | 4.0 | ||||||
| Comprehensive income (loss) attributable to Pentair plc | $ | (121.8 | ) | $ | 504.8 | $ | (81.1 | ) | |
| Earnings (loss) per ordinary share attributable to Pentair plc | |||||||||
| Basic | |||||||||
| Continuing operations | $ | 3.19 | $ | 2.54 | $ | (0.64 | ) | ||
| Discontinued operations | (2.06 | ) | 0.13 | (0.20 | ) | ||||
| Basic earnings (loss) per ordinary share attributable to Pentair plc | $ | 1.13 | $ | 2.67 | $ | (0.84 | ) | ||
| Diluted | |||||||||
| Continuing operations | $ | 3.14 | $ | 2.50 | $ | (0.64 | ) | ||
| Discontinued operations | (2.03 | ) | 0.12 | (0.20 | ) | ||||
| Diluted earnings (loss) per ordinary share attributable to Pentair plc | $ | 1.11 | $ | 2.62 | $ | (0.84 | ) | ||
| Weighted average ordinary shares outstanding | |||||||||
| Basic | 190.6 | 201.1 | 127.4 | ||||||
| Diluted | 193.7 | 204.6 | 127.4 |
See accompanying notes to consolidated financial statements.
Pentair plc and Subsidiaries
Consolidated Balance Sheets
| December 31 | ||||||
| In millions, except per-share data | 2014 | 2013 | ||||
| Assets | ||||||
| Current assets | ||||||
| Cash and cash equivalents | $ | 110.4 | $ | 256.0 | ||
| Accounts and notes receivable, net of allowances of $96.5 and $112.4, respectively | 1,205.9 | 1,285.0 | ||||
| Inventories | 1,130.4 | 1,195.1 | ||||
| Other current assets | 366.8 | 361.6 | ||||
| Current assets held for sale | 80.6 | 134.4 | ||||
| Total current assets | 2,894.1 | 3,232.1 | ||||
| Property, plant and equipment, net | 950.0 | 1,044.3 | ||||
| Other assets | ||||||
| Goodwill | 4,741.9 | 4,860.7 | ||||
| Intangibles, net | 1,608.1 | 1,749.9 | ||||
| Other non-current assets | 436.2 | 390.0 | ||||
| Non-current assets held for sale | 24.9 | 466.3 | ||||
| Total other assets | 6,811.1 | 7,466.9 | ||||
| Total assets | $ | 10,655.2 | $ | 11,743.3 | ||
| Liabilities and Equity | ||||||
| Current liabilities | ||||||
| Current maturities of long-term debt and short-term borrowings | $ | 6.7 | $ | 2.5 | ||
| Accounts payable | 583.1 | 576.9 | ||||
| Employee compensation and benefits | 305.5 | 312.4 | ||||
| Other current liabilities | 709.1 | 645.9 | ||||
| Current liabilities held for sale | 35.1 | 72.5 | ||||
| Total current liabilities | 1,639.5 | 1,610.2 | ||||
| Other liabilities | ||||||
| Long-term debt | 2,997.4 | 2,547.9 | ||||
| Pension and other post-retirement compensation and benefits | 322.0 | 320.2 | ||||
| Deferred tax liabilities | 528.3 | 557.0 | ||||
| Other non-current liabilities | 497.7 | 456.4 | ||||
| Non-current liabilities held for sale | 6.5 | 33.9 | ||||
| Total liabilities | 5,991.4 | 5,525.6 | ||||
| Equity | ||||||
| Ordinary shares $0.01 and CHF 0.50 par value, 426.0 and 213.0 authorized, 202.4 and 213.0 issued at December 31, 2014 and December 31, 2013, respectively | 2.0 | 113.5 | ||||
| Ordinary shares held in treasury, 19.9 and 15.6 shares at December 31, 2014 and December 31, 2013, respectively | (1,251.9 | ) | (875.1 | ) | ||
| Additional paid-in capital | 4,250.0 | 5,071.4 | ||||
| Retained earnings | 2,044.0 | 1,829.1 | ||||
| Accumulated other comprehensive loss | (380.3 | ) | (43.6 | ) | ||
| Shareholders’ equity attributable to Pentair plc | 4,663.8 | 6,095.3 | ||||
| Noncontrolling interest | — | 122.4 | ||||
| Total equity | 4,663.8 | 6,217.7 | ||||
| Total liabilities and equity | $ | 10,655.2 | $ | 11,743.3 |
See accompanying notes to consolidated financial statements.
Pentair plc and Subsidiaries
Consolidated Statements of Cash Flows
| Years ended December 31 | |||||||||
| In millions | 2014 | 2013 | 2012 | ||||||
| Operating activities | |||||||||
| Net income (loss) before noncontrolling interest | $ | 214.9 | $ | 542.6 | $ | (104.6 | ) | ||
| (Income) loss from discontinued operations, net of tax | 6.4 | (25.9 | ) | 25.7 | |||||
| Loss from sale / impairment of discontinued operations, net of tax | 385.7 | 0.8 | — | ||||||
| Adjustments to reconcile net income (loss) from continuing operations before noncontrolling interest to net cash provided by (used for) operating activities of continuing operations | |||||||||
| Equity income of unconsolidated subsidiaries | (1.2 | ) | (2.0 | ) | (2.3 | ) | |||
| Depreciation | 138.7 | 141.3 | 85.2 | ||||||
| Amortization | 114.0 | 134.1 | 74.9 | ||||||
| Loss (gain) on sale of businesses, net | 0.2 | (20.8 | ) | — | |||||
| Deferred income taxes | 2.0 | 54.0 | (138.9 | ) | |||||
| Share-based compensation | 33.6 | 31.1 | 35.8 | ||||||
| Impairment of trade names | — | 11.0 | 60.7 | ||||||
| Loss on early extinguishment of debt | — | — | 75.4 | ||||||
| Excess tax benefits from share-based compensation | (12.6 | ) | (16.8 | ) | (5.0 | ) | |||
| Pension and other post-retirement expense (income) | 76.2 | (31.3 | ) | 167.5 | |||||
| Pension and other post-retirement contributions | (27.7 | ) | (34.0 | ) | (238.0 | ) | |||
| Loss (gain) on sale of assets | (1.5 | ) | 3.9 | (2.4 | ) | ||||
| Changes in assets and liabilities, net of effects of business acquisitions | |||||||||
| Accounts and notes receivable | 9.0 | (106.3 | ) | 31.2 | |||||
| Inventories | (3.7 | ) | 58.1 | 108.3 | |||||
| Other current assets | (22.0 | ) | (5.7 | ) | (0.2 | ) | |||
| Accounts payable | 34.5 | 41.1 | (53.8 | ) | |||||
| Employee compensation and benefits | 13.2 | 66.3 | (91.9 | ) | |||||
| Other current liabilities | 58.5 | 41.2 | 69.2 | ||||||
| Other non-current assets and liabilities | (13.2 | ) | 48.6 | (30.9 | ) | ||||
| Net cash provided by (used for) operating activities of continuing operations | 1,005.0 | 931.3 | 65.9 | ||||||
| Net cash provided by (used for) operating activities of discontinued operations | 3.4 | (3.4 | ) | (22.2 | ) | ||||
| Net cash provided by (used for) operating activities | 1,008.4 | 927.9 | 43.7 | ||||||
| Investing activities | |||||||||
| Capital expenditures | (129.6 | ) | (170.0 | ) | (94.5 | ) | |||
| Proceeds from sale of property and equipment | 13.1 | 6.0 | 5.5 | ||||||
| Proceeds from sale of businesses, net | 0.3 | 43.5 | — | ||||||
| Acquisitions, net of cash acquired | (12.3 | ) | (92.4 | ) | 470.5 | ||||
| Other | 0.2 | 1.7 | (5.9 | ) | |||||
| Net cash provided by (used for) investing activities | (128.3 | ) | (211.2 | ) | 375.6 | ||||
| Financing activities | |||||||||
| Net receipts (repayments) of short-term borrowings | 0.5 | — | (3.7 | ) | |||||
| Net receipts of commercial paper and revolving long-term debt | 468.6 | 104.2 | 253.8 | ||||||
| Proceeds from long-term debt | 2.2 | 0.7 | 594.3 | ||||||
| Repayment of long-term debt | (16.8 | ) | (7.4 | ) | (617.2 | ) | |||
| Debt issuance costs | (3.1 | ) | (1.4 | ) | (9.7 | ) | |||
| Debt extinguishment costs | — | — | (74.8 | ) | |||||
| Excess tax benefits from share-based compensation | 12.6 | 16.8 | 5.0 | ||||||
| Shares issued to employees, net of shares withheld | 37.0 | 80.0 | 68.2 | ||||||
| Repurchases of ordinary shares | (1,150.0 | ) | (715.8 | ) | (334.2 | ) | |||
| Dividends paid | (211.4 | ) | (194.2 | ) | (112.4 | ) | |||
| Purchase of / distribution to noncontrolling interest | (134.7 | ) | (2.0 | ) | (1.6 | ) | |||
| Net cash provided by (used for) financing activities | (995.1 | ) | (719.1 | ) | (232.3 | ) | |||
| Effect of exchange rate changes on cash and cash equivalents | (30.6 | ) | 21.0 | 0.3 | |||||
| Change in cash and cash equivalents | (145.6 | ) | 18.6 | 187.3 | |||||
| Cash and cash equivalents, beginning of year | 256.0 | 237.4 | 50.1 | ||||||
| Cash and cash equivalents, end of year | $ | 110.4 | $ | 256.0 | $ | 237.4 |
See accompanying notes to consolidated financial statements.
Pentair plc and Subsidiaries
Consolidated Statements of Changes in Equity
| In millions | Ordinary shares | Treasury shares | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | Total Pentair plc | Non-controlling interest | Total | |||||||||||||||||||||
| Number | Amount | Number | Amount | ||||||||||||||||||||||||||
| Balance - December 31, 2011 | 98.6 | $ | 47.5 | — | $ | — | $ | 457.8 | $ | 1,465.8 | $ | (37.7 | ) | $ | 1,933.4 | $ | 114.0 | $ | 2,047.4 | ||||||||||
| Net income (loss) | — | — | — | — | — | (107.2 | ) | — | (107.2 | ) | 2.6 | (104.6 | ) | ||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | — | 26.1 | 26.1 | 1.4 | 27.5 | |||||||||||||||||||
| Tax benefit of share-based compensation | — | — | — | — | 5.6 | — | — | 5.6 | — | 5.6 | |||||||||||||||||||
| Dividends declared | — | — | — | — | (141.1 | ) | (66.3 | ) | — | (207.4 | ) | — | (207.4 | ) | |||||||||||||||
| Distribution to noncontrolling interest | — | — | — | — | — | — | — | — | (1.6 | ) | (1.6 | ) | |||||||||||||||||
| Issuance of shares related to the Merger | 113.6 | 65.5 | (2.7 | ) | (119.6 | ) | 4,985.8 | — | — | 4,931.7 | — | 4,931.7 | |||||||||||||||||
| Share repurchase | — | — | (7.3 | ) | (334.2 | ) | — | — | — | (334.2 | ) | — | (334.2 | ) | |||||||||||||||
| Exercise of options, net of shares tendered for payment | 0.7 | 0.4 | 2.3 | 97.6 | (7.8 | ) | — | — | 90.2 | — | 90.2 | ||||||||||||||||||
| Issuance of restricted shares, net of cancellations | 0.2 | 0.1 | 1.2 | 59.8 | (40.9 | ) | — | — | 19.0 | — | 19.0 | ||||||||||||||||||
| Shares surrendered by employees to pay taxes | (0.1 | ) | — | (0.4 | ) | (19.1 | ) | (2.8 | ) | — | — | (21.9 | ) | — | (21.9 | ) | |||||||||||||
| Share-based compensation | — | — | — | — | 35.8 | — | — | 35.8 | — | 35.8 | |||||||||||||||||||
| Balance - December 31, 2012 | 213.0 | $ | 113.5 | (6.9 | ) | $ | (315.5 | ) | $ | 5,292.4 | $ | 1,292.3 | $ | (11.6 | ) | $ | 6,371.1 | $ | 116.4 | $ | 6,487.5 | ||||||||
| Net income | — | — | — | — | — | 536.8 | — | 536.8 | 5.8 | 542.6 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | — | (32.0 | ) | (32.0 | ) | 2.2 | (29.8 | ) | ||||||||||||||||
| Tax benefit of share-based compensation | — | — | — | — | 22.6 | — | — | 22.6 | — | 22.6 | |||||||||||||||||||
| Dividends declared | — | — | — | — | (198.5 | ) | — | — | (198.5 | ) | — | (198.5 | ) | ||||||||||||||||
| Distribution to noncontrolling interest | — | — | — | — | — | — | — | — | (2.0 | ) | (2.0 | ) | |||||||||||||||||
| Share repurchase | — | — | (12.3 | ) | (715.8 | ) | — | — | — | (715.8 | ) | — | (715.8 | ) | |||||||||||||||
| Exercise of options, net of shares tendered for payment | — | — | 3.0 | 131.8 | (35.6 | ) | — | — | 96.2 | — | 96.2 | ||||||||||||||||||
| Issuance of restricted shares, net of cancellations | — | — | 0.9 | 37.0 | (37.0 | ) | — | — | — | — | — | ||||||||||||||||||
| Shares surrendered by employees to pay taxes | — | — | (0.3 | ) | (12.6 | ) | (3.6 | ) | — | — | (16.2 | ) | — | (16.2 | ) | ||||||||||||||
| Share-based compensation | — | — | — | — | 31.1 | — | — | 31.1 | — | 31.1 | |||||||||||||||||||
| Balance - December 31, 2013 | 213.0 | $ | 113.5 | (15.6 | ) | $ | (875.1 | ) | $ | 5,071.4 | $ | 1,829.1 | $ | (43.6 | ) | $ | 6,095.3 | $ | 122.4 | $ | 6,217.7 | ||||||||
| Net income | — | — | — | — | — | 214.9 | — | 214.9 | — | 214.9 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | — | (336.7 | ) | (336.7 | ) | — | (336.7 | ) | ||||||||||||||||
| Tax benefit of share-based compensation | — | — | — | — | 11.4 | — | — | 11.4 | — | 11.4 | |||||||||||||||||||
| Conversion of Pentair Ltd. common shares to Pentair plc ordinary shares | — | (111.4 | ) | — | — | 111.4 | — | — | — | — | — | ||||||||||||||||||
| Dividends declared | — | — | — | — | (229.5 | ) | — | — | (229.5 | ) | — | (229.5 | ) | ||||||||||||||||
| Purchase of noncontrolling interest | — | — | — | — | (12.3 | ) | — | — | (12.3 | ) | (122.4 | ) | (134.7 | ) | |||||||||||||||
| Share repurchase | (10.6 | ) | (0.1 | ) | (5.8 | ) | (450.7 | ) | (699.2 | ) | — | — | (1,150.0 | ) | — | (1,150.0 | ) | ||||||||||||
| Exercise of options, net of shares tendered for payment | — | — | 1.3 | 60.9 | (14.4 | ) | — | — | 46.5 | — | 46.5 | ||||||||||||||||||
| Issuance of restricted shares, net of cancellations | — | — | 0.3 | 19.3 | (19.3 | ) | — | — | — | — | — | ||||||||||||||||||
| Shares surrendered by employees to pay taxes | — | — | (0.1 | ) | (6.3 | ) | (3.1 | ) | — | — | (9.4 | ) | — | (9.4 | ) | ||||||||||||||
| Share-based compensation | — | — | — | — | 33.6 | — | — | 33.6 | — | 33.6 | |||||||||||||||||||
| Balance - December 31, 2014 | 202.4 | $ | 2.0 | (19.9 | ) | $ | (1,251.9 | ) | $ | 4,250.0 | $ | 2,044.0 | $ | (380.3 | ) | $ | 4,663.8 | $ | — | $ | 4,663.8 |
See accompanying notes to consolidated financial statements.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
| 1. | Basis of Presentation and Summary of Significant Accounting Policies |
Business
Pentair plc and its consolidated subsidiaries (the "Company” or “Pentair") is a focused diversified industrial manufacturing company comprising four reporting segments: Valves & Controls, Process Technologies, Flow Technologies and Technical Solutions.
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, an Irish company, and all Pentair Ltd. CHF 0.50 par value common shares would be canceled and all holders of such shares would receive $0.01 par value ordinary shares of Pentair plc on a one-for-one basis. The reorganization transaction was completed on June 3, 2014, at which time Pentair plc replaced Pentair Ltd. as our ultimate parent company (the "Redomicile"). Shares of Pentair plc began trading on the New York Stock Exchange 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.
Basis of presentation
The accompanying consolidated financial statements include the accounts of Pentair and all subsidiaries, both the United States ("U.S.") and non-U.S., which we control. Intercompany accounts and transactions have been eliminated. Investments in companies of which we own 20% to 50% of the voting stock or have the ability to exercise significant influence over operating and financial policies of the investee are accounted for using the equity method of accounting and as a result, our share of the earnings or losses of such equity affiliates is included in the Consolidated Statements of Operations and Comprehensive Income (Loss).
The consolidated financial statements have been prepared in U.S. dollars (“USD”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Fiscal year
Our fiscal year ends on December 31. We report our interim quarterly periods on a 13-week basis ending on a Saturday.
Use of estimates
The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include our accounting for valuation of goodwill and indefinite lived intangible assets, estimated losses on accounts receivable, estimated realizable value on excess and obsolete inventory, percentage of completion revenue recognition, assets acquired and liabilities assumed in acquisitions, estimated selling proceeds from assets held for sale, contingent liabilities, income taxes and pension and other post-retirement benefits. Actual results could differ from our estimates.
Revenue recognition
We recognize revenue when it is realized or realizable and has been earned. Revenue is recognized when persuasive evidence of an arrangement exists, shipment or delivery has occurred (depending on the terms of the sale), our price to the buyer is fixed or determinable, and collectability is reasonably assured.
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 substantially all obligations were satisfied.
Percentage of completion
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 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. 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.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
We record costs and earnings in excess of billings on uncompleted contracts within Other current assets and billings in excess of costs and earnings on uncompleted contracts within Other current liabilities in the Consolidated Balance Sheets. Amounts included in Other current assets related to these contracts were $103.5 million and $91.6 million at December 31, 2014 and 2013, respectively. Amounts included in Other current liabilities related to these contracts were $41.4 million and $35.4 million at December 31, 2014 and 2013, respectively.
Sales returns
The right of return may exist explicitly or implicitly with our customers. Generally, 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. Returns of custom or modified goods are normally not allowed. At the time of sale, we reduce revenue for the estimated effect of returns. Estimated sales returns include consideration of 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
We record estimated reductions to revenue for customer programs and incentive offerings including pricing arrangements, promotions and other volume-based incentives at the later of the date revenue is recognized or the incentive is offered. Sales incentives given to our customers are recorded as a reduction of revenue unless we (1) receive an identifiable benefit for the goods or services in exchange for the consideration and (2) we can reasonably estimate the fair value of the benefit received.
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. At the time of sale, we 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 in gross sales.
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 anticipated rebate to be paid based on forecasted sales levels. These forecasts are updated at least quarterly for each customer and sales are 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.
Shipping and handling costs
Amounts billed to customers for shipping and handling are recorded in Net sales in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss). Shipping and handling costs incurred by Pentair for the delivery of goods to customers are included in Cost of goods sold in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss).
Research and development
We conduct research and development (“R&D”) activities in our own facilities, which consist primarily of the development of new products, product applications and manufacturing processes. We expense R&D costs as incurred. R&D expenditures during 2014, 2013 and 2012 were $117.3 million, $122.8 million and $92.3 million, respectively.
Cash equivalents
We consider highly liquid investments with original maturities of three months or less to be cash equivalents.
Trade receivables and concentration of credit risk
We record an allowance for doubtful accounts, reducing our receivables balance to an amount we estimate is collectible from our customers. Estimates used in determining the allowance for doubtful accounts are based on current trends, aging of accounts receivable, periodic credit evaluations of our customers’ financial condition, and historical collection experience. We generally do not require collateral. No customer receivable balances exceeded 10% of total net receivable balances as of December 31, 2014 or December 31, 2013.
Inventories
Inventories are stated at the lower of cost or market with substantially all inventories recorded using the first-in, first-out (“FIFO”) cost method and with an insignificant amount of inventories located outside the United States recorded using a moving average cost method which approximates FIFO.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Property, plant and equipment, net
Property, plant and equipment is stated at historical cost. We compute depreciation by the straight-line method based on the following estimated useful lives:
| Years | |
| Land improvements | 5 to 20 |
| Buildings and leasehold improvements | 5 to 50 |
| Machinery and equipment | 3 to 15 |
Significant improvements that add to productive capacity or extend the lives of properties are capitalized. Costs for repairs and maintenance are charged to expense as incurred. When property is retired or otherwise disposed of, the recorded cost of the assets and their related accumulated depreciation are removed from the Consolidated Balance Sheets and any related gains or losses are included in income.
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 or asset group, 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.
Goodwill and identifiable intangible assets
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 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. This non-recurring fair value measurement is a “Level 3” measurement under the fair value hierarchy described below.
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
Pentair plc and Subsidiaries
Notes to consolidated financial statements
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.
We completed step one of our annual goodwill impairment evaluation during the fourth quarter of 2014, 2013 and 2012 with each reporting unit’s fair value exceeding 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, proprietary technology, patents and backlog. 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.
The impairment test for trade names 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 non-recurring fair value measurement is a “Level 3” measurement under the fair value hierarchy described below. The impairment charges recorded in 2013 and 2012 were the result of rebranding strategies implemented in the fourth quarters of 2013 and 2012, respectively.
At December 31, 2014 our goodwill and intangible assets were $6,350.0 million and represented 60% of our total assets. If we experience future declines in sales and operating profit or do not meet our operating forecasts, we may be subject to future impairments. Additionally, changes in assumptions regarding the future performance of our businesses, increases in the discount rate used to determine the discounted cash flows of our businesses or significant declines in our share price or the market as a whole could result in additional impairment indicators. Because of the significance of our goodwill and intangible assets, any future impairment of these assets could have a material adverse effect on our financial results.
Equity and cost method investments
We have investments that are accounted for using the equity method. Our proportionate share of income or losses from investments accounted for under the equity method is recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss). We write down or write off an investment and recognize a loss when events or circumstances indicate there is impairment in the investment that is other-than-temporary. This requires significant judgment, including assessment of the investees’ financial condition and in certain cases the possibility of subsequent rounds of financing, as well as the investees’ historical and projected results of operations and cash flows. If the actual outcomes for the investees are significantly different from projections, we may incur future charges for the impairment of these investments. Our investment in and loans to equity method investees was $12.9 million and $12.2 million at December 31, 2014 and December 31, 2013, respectively, net of our proportionate share of the results of their operations.
Investments for which we do not have significant influence are accounted for under the cost method. The aggregate balance of these investments was $8.6 million and $8.3 million at December 31, 2014 and December 31, 2013.
Income taxes
We use the asset and liability approach to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance 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. Changes in valuation allowances from period to period are included in our tax provision in the period of change. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Pension and other post-retirement plans
We sponsor U.S. and Non-U.S. defined-benefit pension and other post-retirement plans. The pension and other post-retirement benefit costs for company-sponsored benefit plans are determined from actuarial assumptions and methodologies, including discount rates, expected returns on plan assets and health care cost trend rates. These assumptions are updated annually and are disclosed in Note 13.
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 remaining components of pension expense, primarily service and interest costs and estimated return on plan assets, are recorded on a quarterly basis.
Environmental
We recognize environmental clean-up liabilities on an undiscounted basis when a loss is probable and can be reasonably estimated. Such liabilities generally are not subject to insurance coverage. The cost of each environmental clean-up is estimated by engineering, financial and legal specialists based on current law. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the likelihood that, where applicable, other potentially responsible parties (“PRPs”) will be able to fulfill their commitments at the sites where Pentair may be jointly and severally liable. The process of estimating environmental clean-up liabilities is complex and dependent primarily on the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, the uncertainty as to what remedy and technology will be required and the outcome of discussions with regulatory agencies and other PRPs at multi-party sites. In future periods, new laws or regulations, advances in clean-up technologies and additional information about the ultimate clean-up remedy that is used could significantly change our estimates. Accruals for environmental liabilities are included in Other current liabilities and Other non-current liabilities in the Consolidated Balance Sheets.
Asbestos Matters
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. On an annual basis, we review, and update as appropriate, such estimated asbestos liabilities and assets and the underlying assumptions.
Accruals for asbestos-related liabilities are included in Other non-current liabilities and the estimated receivable for insurance recoveries are recorded in Other non-current assets in the Consolidated Balance Sheets.
Insurance subsidiary
We insure certain general and product liability, property, workers’ compensation and automobile liability risks through our regulated wholly-owned captive insurance subsidiary, Penwald Insurance Company (“Penwald”). Reserves for policy claims are established based on actuarial projections of ultimate losses. As of December 31, 2014 and 2013, reserves for policy claims were $58.1 million ($13.2 million included in Other current liabilities and $44.9 million included in Other non-current liabilities) and $51.1 million ($13.2 million included in Other current liabilities and $37.9 million included in Other non-current liabilities), respectively.
Share-based compensation
We account for share-based compensation awards on a fair value basis. The estimated grant date fair value of each option award is recognized in income on an accelerated basis over the requisite service period (generally the vesting period). The estimated fair value of each option award is calculated using the Black-Scholes option-pricing model. From time to time, we have elected to modify the terms of the original grant. These modified grants are accounted for as a new award and measured using the fair value method, resulting in the inclusion of additional compensation expense in our Consolidated Statements of Operations and Comprehensive Income (Loss). Restricted share awards and units are recorded as compensation cost on an accelerated basis over the requisite service periods based on the market value on the date of grant.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Earnings (loss) per ordinary share
Basic earnings (loss) per share are computed by dividing net income (loss) attributable to Pentair plc by the weighted-average number of ordinary shares outstanding. Diluted earnings (loss) per share are computed by dividing net income (loss) attributable to Pentair plc by the weighted-average number of ordinary shares outstanding including the dilutive effects of ordinary share equivalents.
Derivative financial instruments
We recognize all derivatives, including those embedded in other contracts, as either assets or liabilities at fair value in our Consolidated Balance Sheets. If the derivative is designated and is effective as a cash-flow hedge, changes in the fair value of the derivative are recorded in Accumulated other comprehensive income (loss) (“AOCI”) as a separate component of equity in the Consolidated Balance Sheets and is recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss) when the hedged item affects earnings. If the underlying hedged transaction ceases to exist or if the hedge becomes ineffective, all changes in fair value of the related derivatives that have not been settled are recognized in current earnings. For a derivative that is not designated as or does not qualify as a hedge, changes in fair value are reported in earnings immediately.
We use derivative instruments for the purpose of hedging interest rate and currency exposures, which exist as part of ongoing business operations. We do not hold or issue derivative financial instruments for trading or speculative purposes. All other contracts that contain provisions meeting the definition of a derivative also meet the requirements of and have been designated as, normal purchases or sales. Our policy is not to enter into contracts with terms that cannot be designated as normal purchases or sales. From time to time, we may enter into short duration foreign currency contracts to hedge foreign currency risks.
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.
Foreign currency translation
The financial statements of subsidiaries located outside of the U.S. are generally measured using the local currency as the functional currency, except for certain corporate entities outside of the U.S. which are measured using USD. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date. Income and expense items are translated at average monthly rates of exchange. The resultant translation adjustments are included in AOCI, a separate component of equity.
New accounting standards
In May 2014, the Financial Accounting Standards Board issued new accounting requirements for the recognition of revenue from contracts with customers. The new requirements also include additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The requirements are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with earlier adoption not permitted. We have not yet determined the potential effects on our financial condition or results of operations.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
| 2. | Acquisitions |
Material acquisitions
Our former parent, 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.
Pro forma results of material acquisitions
The following unaudited pro forma condensed consolidated financial results of operations are presented as if the Merger had been completed on January 1, 2011:
| Year ended December 31 | |||
| In millions, except per-share data | 2012 | ||
| Pro forma net sales | $ | 6,846.6 | |
| Pro forma net income from continuing operations attributable to Pentair plc | 183.3 | ||
| Diluted earnings from continuing operations per ordinary share attributable to Pentair plc | 0.87 |
The 2012 unaudited pro forma net income excludes the impact of $57.3 million of transaction related costs, $21.8 million of change of control costs and $156.2 million of non-recurring items related to acquisition date fair value adjustments to inventory and customer backlog associated with the Merger.
The pro forma consolidated financial information was prepared for comparative purposes only and includes certain adjustments, as noted above. The adjustments are estimates based on currently available information and actual amounts may have differed materially from these estimates. They do not reflect the effect of costs or synergies that would have been expected to result from the integration of Flow Control. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the business combination occurred at the beginning of the period presented or of future results of the consolidated entities.
Other acquisitions
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. There was no material pro forma impact from this acquisition as the results of PRF were consolidated into our financial statements prior to acquiring the remaining interest.
On October 4, 2012, we acquired, as part of Valves & Controls, the remaining 25 percent equity interest in Pentair Middle East Holding S.a.r.l. (“KEF”), a privately held company, for $100.0 million in cash. Prior to the acquisition, we held a 75 percent equity interest in KEF, a vertically integrated valve manufacturer in the Middle East. There was no pro forma impact from this acquisition as the results of KEF were consolidated into Flow Control’s financial statements prior to acquiring the remaining 25 percent interest in KEF.
Additionally, during the year ended December 31, 2012, we completed other small acquisitions as part of Process Technologies with purchase prices totaling $121.2 million in cash, net of cash acquired. Total goodwill recorded as part of the purchase price allocations was $80.9 million, $67.1 million of which is tax deductible. The pro forma impact of these acquisitions was not material.
Total transaction costs related to acquisition activities in 2013 and 2012 were $8.2 million and $57.3 million, respectively, and were expensed as incurred and recorded in Selling, general and administrative in our Consolidated Statements of Operations and Comprehensive Income (Loss).
Pentair plc and Subsidiaries
Notes to consolidated financial statements
| 3. | Discontinued Operations and Divestitures |
Discontinued Operations
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 the third quarter of 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. The impairment charge was determined using significant unobservable inputs ("Level 3" fair value measurements). In addition, during the first quarter of 2014 and fourth quarter of 2013, we sold portions of our Water Transport business in Australia and New Zealand, respectively, resulting in losses of $5.6 million, net of a $2.4 million tax benefit, and $0.8 million, net of a $0.3 million tax benefit, respectively.
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.
Operating results of discontinued operations are summarized below:
| Years ended December 31 | |||||||||
| In millions | 2014 | 2013 | 2012 | ||||||
| Net sales | $ | 295.8 | $ | 490.1 | $ | 112.1 | |||
| Income (loss) from discontinued operations before income taxes | $ | 1.5 | $ | 33.0 | $ | (37.9 | ) | ||
| Income tax benefit (provision) | (7.9 | ) | (7.1 | ) | 12.2 | ||||
| Income (loss) from discontinued operations, net of tax | $ | (6.4 | ) | $ | 25.9 | $ | (25.7 | ) | |
| Loss from sale / impairment of discontinued operations before income taxes | $ | (400.4 | ) | $ | (1.1 | ) | $ | — | |
| Income tax benefit | 14.7 | 0.3 | — | ||||||
| Loss from sale / impairment of discontinued operations, net of tax | $ | (385.7 | ) | $ | (0.8 | ) | $ | — |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
The carrying amounts of major classes of assets and liabilities that were classified as held for sale on the Consolidated Balance Sheets were as follows:
| December 31 | ||||||
| In millions | 2014 | 2013 | ||||
| Cash and cash equivalents | $ | 7.0 | $ | 9.1 | ||
| Accounts and notes receivable, net | 28.8 | 49.3 | ||||
| Inventories | 30.1 | 48.2 | ||||
| Other current assets | 14.7 | 27.8 | ||||
| Current assets held for sale | $ | 80.6 | $ | 134.4 | ||
| Property, plant and equipment, net | $ | 18.5 | $ | 125.7 | ||
| Goodwill | — | 273.5 | ||||
| Intangibles, net | — | 26.2 | ||||
| Other non-current assets | 6.4 | 40.9 | ||||
| Non-current assets held for sale | $ | 24.9 | $ | 466.3 | ||
| Accounts payable | $ | 12.2 | $ | 19.7 | ||
| Employee compensation and benefits | 11.3 | 34.7 | ||||
| Other current liabilities | 11.6 | 18.1 | ||||
| Current liabilities held for sale | $ | 35.1 | $ | 72.5 | ||
| Long-term debt | $ | 4.0 | $ | 4.7 | ||
| Pension and other post-retirement compensation and benefits | 2.5 | 4.6 | ||||
| Deferred tax liabilities | — | 23.6 | ||||
| Other non-current liabilities | — | 1.0 | ||||
| Non-current liabilities held for sale | $ | 6.5 | $ | 33.9 |
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. Goodwill of $5.3 million and $5.7 million was included in the assets of the business sold for Technical Solutions and Flow Technologies, respectively.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
| 4. | Earnings (Loss) Per Share |
Basic and diluted earnings (loss) per share were calculated as follows:
| Years ended December 31 | |||||||||
| In millions, except per share data | 2014 | 2013 | 2012 | ||||||
| Net income (loss) attributable to Pentair plc | $ | 214.9 | $ | 536.8 | $ | (107.2 | ) | ||
| Net income (loss) from continuing operations attributable to Pentair plc | $ | 607.0 | $ | 511.7 | $ | (81.5 | ) | ||
| Weighted average ordinary shares outstanding | |||||||||
| Basic | 190.6 | 201.1 | 127.4 | ||||||
| Dilutive impact of stock options and restricted stock awards | 3.1 | 3.5 | — | ||||||
| Diluted | 193.7 | 204.6 | 127.4 | ||||||
| Earnings (loss) per ordinary share attributable to Pentair plc | |||||||||
| Basic | |||||||||
| Continuing operations | $ | 3.19 | $ | 2.54 | $ | (0.64 | ) | ||
| Discontinued operations | (2.06 | ) | 0.13 | (0.20 | ) | ||||
| Basic earnings (loss) per ordinary share attributable to Pentair plc | $ | 1.13 | $ | 2.67 | $ | (0.84 | ) | ||
| Diluted | |||||||||
| Continuing operations | $ | 3.14 | $ | 2.50 | $ | (0.64 | ) | ||
| Discontinued operations | (2.03 | ) | 0.12 | (0.20 | ) | ||||
| Diluted earnings (loss) per ordinary share attributable to Pentair plc | $ | 1.11 | $ | 2.62 | $ | (0.84 | ) | ||
| Anti-dilutive stock options excluded from the calculation of diluted earnings per share | 0.5 | 0.2 | 16.0 |
| 5. | Restructuring |
During 2014, 2013 and 2012, we initiated and continued execution of certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business. The 2014 initiatives included a reduction in hourly and salaried headcount of approximately 1,150 employees, which included 600 in Valves & Controls, 100 in Process Technologies, 300 in Flow Technologies and 150 in Technical Solutions. The 2013 initiatives included the reduction in hourly and salaried headcount of approximately 1,100 employees, which included 500 in Valves & Controls, 150 in Process Technologies, 150 in Flow Technologies and 300 in Technical Solutions. The 2012 initiatives included the reduction in hourly and salaried headcount of approximately 800 employees, which included 300 in Valves & Controls, 200 in Process Technologies, 100 in Flow Technologies and 200 in Technical Solutions.
Restructuring related costs included in Selling, general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss) included costs for severance and other restructuring costs as follows:
| Years ended December 31 | |||||||||
| In millions | 2014 | 2013 | 2012 | ||||||
| Severance and related costs | $ | 58.9 | $ | 81.5 | $ | 43.4 | |||
| Other | 29.4 | 21.7 | 5.3 | ||||||
| Total restructuring costs | $ | 88.3 | $ | 103.2 | $ | 48.7 |
Other restructuring costs primarily consist of asset impairment and various contract termination costs.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Restructuring costs by reportable segment were as follows:
| Years ended December 31 | |||||||||
| In millions | 2014 | 2013 | 2012 | ||||||
| Valves & Controls | $ | 48.8 | $ | 51.0 | $ | 5.1 | |||
| Process Technologies | 18.6 | 9.4 | 25.2 | ||||||
| Flow Technologies | 10.6 | 13.4 | 5.7 | ||||||
| Technical Solutions | 4.3 | 19.4 | 12.7 | ||||||
| Other | 6.0 | 10.0 | — | ||||||
| Consolidated | $ | 88.3 | $ | 103.2 | $ | 48.7 |
Activity in the restructuring accrual recorded in Other current liabilities and Employee compensation and benefits in the Consolidated Balance Sheets is summarized as follows:
| Years ended December 31 | ||||||
| In millions | 2014 | 2013 | ||||
| Beginning balance | $ | 68.6 | $ | 40.4 | ||
| Costs incurred | 58.9 | 81.5 | ||||
| Cash payments and other | (54.1 | ) | (53.3 | ) | ||
| Ending balance | $ | 73.4 | $ | 68.6 |
| 6. | Goodwill and Other Identifiable Intangible Assets |
The changes in the carrying amount of goodwill for the year ended December 31, 2014 and December 31, 2013 by reportable segment were as follows:
| In millions | December 31, 2013 | Acquisitions/ divestitures | Foreign currency translation/other | December 31, 2014 | ||||||||
| Valves & Controls | $ | 1,511.6 | $ | — | $ | — | $ | 1,511.6 | ||||
| Process Technologies | 1,524.5 | 6.8 | (79.8 | ) | 1,451.5 | |||||||
| Flow Technologies | 666.6 | — | (38.1 | ) | 628.5 | |||||||
| Technical Solutions | 1,158.0 | — | (7.7 | ) | 1,150.3 | |||||||
| Total goodwill | $ | 4,860.7 | $ | 6.8 | $ | (125.6 | ) | $ | 4,741.9 |
| In millions | December 31, 2012 | Acquisitions/ divestitures | Foreign currency translation/other | December 31, 2013 | ||||||||
| Valves & Controls | $ | 1,511.6 | $ | — | $ | — | $ | 1,511.6 | ||||
| Process Technologies | 1,500.4 | 7.6 | 16.5 | 1,524.5 | ||||||||
| Flow Technologies | 663.8 | (5.7 | ) | 8.5 | 666.6 | |||||||
| Technical Solutions | 1,161.7 | (5.3 | ) | 1.6 | 1,158.0 | |||||||
| Total goodwill | $ | 4,837.5 | $ | (3.4 | ) | $ | 26.6 | $ | 4,860.7 |
Accumulated goodwill impairment losses were $200.5 million as of December 31, 2014 and 2013.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Identifiable intangible assets consisted of the following at December 31:
| 2014 | 2013 | ||||||||||||||||||
| In millions | Cost | Accumulated amortization | Net | Cost | Accumulated amortization | Net | |||||||||||||
| Finite-life intangibles | |||||||||||||||||||
| Customer relationships | $ | 1,247.8 | $ | (325.2 | ) | $ | 922.6 | $ | 1,271.2 | $ | (243.1 | ) | $ | 1,028.1 | |||||
| Trade names | 2.0 | (1.1 | ) | 0.9 | 2.1 | (0.9 | ) | 1.2 | |||||||||||
| Proprietary technology and patents | 255.7 | (96.7 | ) | 159.0 | 263.7 | (80.0 | ) | 183.7 | |||||||||||
| Total finite-life intangibles | 1,505.5 | (423.0 | ) | 1,082.5 | 1,537.0 | (324.0 | ) | 1,213.0 | |||||||||||
| Indefinite-life intangibles | |||||||||||||||||||
| Trade names | 525.6 | — | 525.6 | 536.9 | — | 536.9 | |||||||||||||
| Total intangibles | $ | 2,031.1 | $ | (423.0 | ) | $ | 1,608.1 | $ | 2,073.9 | $ | (324.0 | ) | $ | 1,749.9 |
Identifiable intangible asset amortization expense in 2014, 2013 and 2012 was $114.0 million, $134.1 million and $74.9 million, respectively.
There were no impairment charges recorded in 2014. In 2013 we recorded an impairment charge for trade name intangible assets of $11.0 million in Technical Solutions. In 2012 we recorded an impairment charge for trade name intangible assets of $23.2 million, $25.9 million and $11.6 million in Process Technologies, Flow Technologies and Technical Solutions, respectively.
Estimated future amortization expense for identifiable intangible assets during the next five years is as follows:
| In millions | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||
| Estimated amortization expense | $ | 111.5 | $ | 110.6 | $ | 109.0 | $ | 106.5 | $ | 99.4 |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
| 7. | Supplemental Balance Sheet Information |
| December 31 | ||||||
| In millions | 2014 | 2013 | ||||
| Inventories | ||||||
| Raw materials and supplies | $ | 460.1 | $ | 549.8 | ||
| Work-in-process | 229.0 | 164.4 | ||||
| Finished goods | 441.3 | 480.9 | ||||
| Total inventories | $ | 1,130.4 | $ | 1,195.1 | ||
| Other current assets | ||||||
| Cost in excess of billings | $ | 103.5 | $ | 91.6 | ||
| Prepaid expenses | 109.6 | 97.6 | ||||
| Deferred income taxes | 139.4 | 149.7 | ||||
| Other current assets | 14.3 | 22.7 | ||||
| Total other current assets | $ | 366.8 | $ | 361.6 | ||
| Property, plant and equipment, net | ||||||
| Land and land improvements | $ | 165.1 | $ | 186.4 | ||
| Buildings and leasehold improvements | 493.5 | 502.6 | ||||
| Machinery and equipment | 1,169.1 | 1,155.1 | ||||
| Construction in progress | 71.0 | 70.9 | ||||
| Total property, plant and equipment | 1,898.7 | 1,915.0 | ||||
| Accumulated depreciation and amortization | 948.7 | 870.7 | ||||
| Total property, plant and equipment, net | $ | 950.0 | $ | 1,044.3 | ||
| Other non-current assets | ||||||
| Asbestos-related insurance receivable | $ | 115.8 | $ | 119.6 | ||
| Deferred income taxes | 87.9 | 92.4 | ||||
| Other non-current assets | 232.5 | 178.0 | ||||
| Total other non-current assets | $ | 436.2 | $ | 390.0 | ||
| Other current liabilities | ||||||
| Deferred revenue and customer deposits | $ | 112.7 | $ | 90.8 | ||
| Dividends payable | 116.8 | 98.7 | ||||
| Billings in excess of cost | 41.4 | 35.4 | ||||
| Accrued warranty | 66.4 | 56.0 | ||||
| Other current liabilities | 371.8 | 365.0 | ||||
| Total other current liabilities | $ | 709.1 | $ | 645.9 | ||
| Other non-current liabilities | ||||||
| Asbestos-related liabilities | $ | 249.1 | $ | 254.7 | ||
| Taxes payable | 61.6 | 48.9 | ||||
| Other non-current liabilities | 187.0 | 152.8 | ||||
| Total other non-current liabilities | $ | 497.7 | $ | 456.4 |
| 8. | Supplemental Cash Flow Information |
| Years ended December 31 | |||||||||
| In millions | 2014 | 2013 | 2012 | ||||||
| Cash paid for interest, net | $ | 67.5 | $ | 69.4 | $ | 66.7 | |||
| Cash paid for income taxes, net | 134.2 | 91.2 | 82.0 |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
| 9. | Accumulated Other Comprehensive Income (Loss) |
Components of AOCI consist of the following:
| December 31 | ||||||
| In millions | 2014 | 2013 | ||||
| Cumulative translation adjustments | $ | (371.0 | ) | $ | (34.7 | ) |
| Market value of derivative financial instruments, net of tax | (9.3 | ) | (8.9 | ) | ||
| Accumulated other comprehensive loss | $ | (380.3 | ) | $ | (43.6 | ) |
| 10. | Debt |
Debt and the average interest rates on debt outstanding were as follows:
| In millions | Average interest rate at December 31, 2014 | Maturity year | December 31 | |||||
| 2014 | 2013 | |||||||
| Commercial paper | 0.679% | 2019 | $ | 987.6 | $ | 528.9 | ||
| Revolving credit facilities | 1.421% | 2019 | 9.8 | — | ||||
| Senior notes - fixed rate | 1.350% | 2015 | 350.0 | 350.0 | ||||
| Senior notes - fixed rate | 1.875% | 2017 | 350.0 | 350.0 | ||||
| Senior notes - fixed rate | 2.650% | 2019 | 250.0 | 250.0 | ||||
| Senior notes - fixed rate | 5.000% | 2021 | 500.0 | 500.0 | ||||
| Senior notes - fixed rate | 3.150% | 2022 | 550.0 | 550.0 | ||||
| Capital lease obligations | 6.195% | 2015 | 6.7 | 21.5 | ||||
| Total debt | 3,004.1 | 2,550.4 | ||||||
| Less: Current maturities and short-term borrowings | (6.7 | ) | (2.5 | ) | ||||
| Long-term debt | $ | 2,997.4 | $ | 2,547.9 |
The 1.35% Senior Notes due 2015, 1.875% Senior Notes due 2017, 2.65% Senior Notes due 2019, 3.15% Senior Notes due 2022 and $373.0 million of the 5.00% Senior Notes due 2021 (collectively, the “Notes”) were all issued in transactions exempt from the registration requirements of the Securities Act of 1933, as amended. In March 2013, Pentair Ltd. and our 100 percent-owned subsidiary, Pentair Finance S.A. (“PFSA”), filed a Registration Statement with the SEC offering to exchange the Notes for new, registered Notes. The exchange offer expired on April 19, 2013 and did not impact the aggregate principle amount or the terms of the Notes outstanding. Effective upon the Redomicile, the Notes are guaranteed as to payment by Pentair plc and Pentair Investments Switzerland GmbH ("PISG"), a 100-percent owned subsidiary of Pentair plc and the 100-percent owner of PFSA. Prior to the Redomicile, the registered Notes were guaranteed as to payment by Pentair Ltd.
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.
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
Pentair plc and Subsidiaries
Notes to consolidated financial statements
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 September 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 became affiliate borrowers under the Prior Credit Facility. In October 2014, Pentair plc, 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 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 Note 14 and to purchase the remaining 25 percent interest in KEF for $100.0 million as discussed in Note 2.
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.
We have $350.0 million of fixed rate senior notes maturing in December 2015. 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.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Debt outstanding at December 31, 2014 matures on a calendar year basis as follows:
| In millions | 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | ||||||||||||||
| Contractual debt obligation maturities | $ | — | $ | — | $ | 350.0 | $ | — | $ | 1,597.4 | $ | 1,050.0 | $ | 2,997.4 | |||||||
| Capital lease obligations | 6.7 | — | — | — | — | — | 6.7 | ||||||||||||||
| Total maturities | $ | 6.7 | $ | — | $ | 350.0 | $ | — | $ | 1,597.4 | $ | 1,050.0 | $ | 3,004.1 |
As part of 2012 and 2011 acquisitions, we assumed capital lease obligations related primarily to land and buildings. As of December 31, 2014 and 2013, the recorded values of the assets acquired under those capital leases were $19.5 million and $41.7 million, respectively, less accumulated amortization of $2.4 million and $7.6 million, respectively, all of which were included in Property, plant and equipment, net on the Consolidated Balance Sheets.
Capital lease obligations consisted of total future minimum lease payments of $6.9 million, less the imputed interest of $0.2 million, as of December 31, 2014.
| 11. | Derivatives and Financial Instruments |
Derivative financial instruments
We are exposed to market risk related to changes in foreign currency exchange rates and interest rates on our floating rate indebtedness. To manage the volatility related to these exposures, 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 and interest 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.
Interest rate swaps
During 2012, we used floating to fixed rate interest rate swaps to mitigate our exposure to future changes in interest rates related to our floating rate indebtedness. We designated these interest rate swap arrangements as cash flow hedges. As a result, changes in the fair value of the interest rate swaps were recorded in AOCI on the Consolidated Balance Sheets throughout the contractual term of each of the interest rate swap arrangements.
During the year ended December 31, 2012, all of our interest rate swaps expired or were terminated and, as a result, we had no outstanding interest rate swap arrangements at December 31, 2014 or 2013.
In September 2005, we entered into a $100.0 million interest rate swap agreement with several major financial institutions to exchange variable rate interest payment obligations for fixed rate obligations without the exchange of the underlying principal amounts in order to manage interest rate exposures. The effective date of the fixed rate swap was April 25, 2006. The swap agreement has a fixed interest rate of 4.68% and was set to expire in July 2013. The fixed interest rate of 4.68% plus the 0.60% interest rate spread over LIBOR results in an effective fixed interest rate of 5.28%. This swap was terminated in October 2012. A loss of $3.3 million was recognized upon termination and was recorded in Loss on early extinguishment of debt in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2012.
Derivative gains and losses on interest rate swaps included in AOCI were reclassified into earnings at the time the related interest expense was recognized or the settlement of the related commitment occurred. Interest expense from swaps was $5.3 million in 2012 and was recorded in Interest expense in the Consolidated Statements of Operations and Comprehensive Income (Loss).
In April 2011, as part of our planned debt issuance to fund an acquisition, we entered into interest rate swap contracts to hedge movement in interest rates through the expected date of closing for a portion of the expected fixed rate debt offering. The swaps had a notional amount of $400.0 million with an average interest rate of 3.65%. In May 2011, upon the sale of the 2021 Notes, the swaps were terminated at a cost of $11.0 million. Because we used the contracts to hedge future interest payments, this was recorded in AOCI in the Consolidated Balance Sheets and will be amortized as interest expense over the 10 year life of the 2021 Notes. The ending unrealized net loss in AOCI at December 31, 2014 and 2013 was $7.0 million and $8.1 million, respectively.
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
Pentair plc and Subsidiaries
Notes to consolidated financial statements
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 December 31, 2014 and 2013, we had outstanding foreign currency derivative contracts with gross notional U.S. dollar equivalent amounts of $250.8 million and $130.3 million, respectively. The impact of these contracts on the Consolidated Statements of Operations and Comprehensive Income (Loss) was not material for any period presented.
Gains or losses on foreign currency contracts designated as hedges are reclassified out of AOCI and into Selling, general and administrative expense in the Consolidated Statements of Operations and Comprehensive Income (Loss) upon settlement. Such reclassifications during 2014, 2013 and 2012 were not material.
Fair value of financial instruments
The following methods were used to estimate the fair values of each class of financial instrument:
| • | 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; and |
| • | 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. |
The recorded amounts and estimated fair values of total debt at December 31 were as follows:
| 2014 | 2013 | ||||||||||||
| In millions | Recorded Amount | Fair Value | Recorded Amount | Fair Value | |||||||||
| Variable rate debt | $ | 997.4 | $ | 997.4 | $ | 528.9 | $ | 528.9 | |||||
| Fixed rate debt | 2,006.7 | 2,070.4 | 2,021.5 | 1,997.5 | |||||||||
| Total debt | $ | 3,004.1 | $ | 3,067.8 | $ | 2,550.4 | $ | 2,526.4 |
Financial assets and liabilities measured at fair value on a recurring and nonrecurring basis were as follows:
| Recurring fair value measurements | December 31, 2014 | |||||||||||
| In millions | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Foreign currency contract assets | $ | — | $ | 0.9 | $ | — | $ | 0.9 | ||||
| Foreign currency contract liabilities | — | (6.6 | ) | — | (6.6 | ) | ||||||
| Deferred compensation plans assets (1) | 47.9 | 7.4 | — | 55.3 | ||||||||
| Total recurring fair value measurements | $ | 47.9 | $ | 1.7 | $ | — | $ | 49.6 | ||||
| Nonrecurring fair value measurements (2) |
| Recurring fair value measurements | December 31, 2013 | |||||||||||
| In millions | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Foreign currency contract assets | $ | — | $ | 3.6 | $ | — | $ | 3.6 | ||||
| Deferred compensation plan assets (1) | 32.1 | — | — | 32.1 | ||||||||
| Total recurring fair value measurements | $ | 32.1 | $ | 3.6 | $ | — | $ | 35.7 | ||||
| Nonrecurring fair value measurements (3) |
| (1) | Deferred compensation plan assets include mutual funds, common/collective trusts and cash equivalents for payment of certain non-qualified benefits for retired, terminated and active employees. The fair value of mutual funds and cash equivalents were based on quoted market prices in active markets. The underlying investments in the common/collective trusts primarily include intermediate and long-term debt securities, corporate debt securities, equity securities and fixed income securities. The overall fair value of the common/collective trusts are based on observable inputs. |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
| (2) | During the third quarter of 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. The impairment charge was determined using significant unobservable inputs ("Level 3" fair value measurements). See Note 3 for additional information about the impairment. |
| (3) | In the fourth quarter of 2013, we completed our annual intangible assets impairment review. As a result, we recorded a pre-tax non-cash impairment charge of $11.0 million for a trade name intangible in 2013. The impairment charge reduced the fair value of the impacted trade name intangible to $0. 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. |
| 12. | Income Taxes |
Income (loss) from continuing operations before income taxes and noncontrolling interest consisted of the following:
| Years ended December 31 | |||||||||
| In millions | 2014 | 2013 | 2012 | ||||||
| Federal (1) | $ | 13.3 | $ | 328.7 | $ | 39.5 | |||
| International | 771.0 | 365.8 | (185.6 | ) | |||||
| Income (loss) from continuing operations before income taxes and noncontrolling interest | $ | 784.3 | $ | 694.5 | $ | (146.1 | ) |
| (1) | As a result of the Redomicile, “Federal” reflects income (loss) from continuing operations before income taxes and noncontrolling interest for the U.K. in 2014 and for Switzerland in 2013 and 2012. |
The provision (benefit) for income taxes consisted of the following:
| Years ended December 31 | |||||||||
| In millions | 2014 | 2013 | 2012 | ||||||
| Currently payable | |||||||||
| Federal (1) | $ | (0.4 | ) | $ | 17.4 | $ | 6.5 | ||
| International (2) | 175.7 | 105.6 | 65.2 | ||||||
| Total current taxes | 175.3 | 123.0 | 71.7 | ||||||
| Deferred | |||||||||
| Federal (1) | 2.2 | 18.9 | 1.3 | ||||||
| International (2) | (0.2 | ) | 35.1 | (140.2 | ) | ||||
| Total deferred taxes | 2.0 | 54.0 | (138.9 | ) | |||||
| Total provision (benefit) for income taxes | $ | 177.3 | $ | 177.0 | $ | (67.2 | ) |
| (1) | As a result of the Redomicile, “Federal” represents U.K. taxes for 2014 and Swiss taxes for 2013 and 2012. |
| (2) | As a result of the Redomicile, "International" represents non-U.K. taxes for 2014 and non-Swiss taxes for 2013 and 2012. |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Reconciliations of the federal statutory income tax rate to our effective tax rate were as follows:
| Years ended December 31 | |||||
| Percentages | 2014 | 2013 | 2012 | ||
| Federal statutory income tax rate (1) | 21.0 | 7.8 | 7.8 | ||
| Tax effect of international operations (2) | (4.9 | ) | 10.4 | 23.5 | |
| Change in valuation allowances | 3.4 | 5.7 | — | ||
| Withholding taxes | 2.3 | 1.1 | — | ||
| Interest limitations | 0.8 | 0.5 | — | ||
| Non-deductible transaction costs | — | — | (5.9 | ) | |
| Impact of debt-financing | — | — | 13.6 | ||
| Resolution of tax audits | — | — | 7.0 | ||
| Effective tax rate | 22.6 | 25.5 | 46.0 |
| (1) | The statutory rate for 2014 reflects the U.K. statutory rate of 21 percent. For 2013 and 2012, the statutory rate reflects the Swiss statutory rate of 7.8 percent. |
| (2) | The tax effect of international operations for 2014 consists of non-U.K. jurisdictions. For 2013 and 2012, the tax effect of international operations consists of non-Swiss jurisdictions. |
Reconciliations of the beginning and ending gross unrecognized tax benefits were as follows:
| Years ended December 31 | |||||||||
| In millions | 2014 | 2013 | 2012 | ||||||
| Beginning balance | $ | 60.8 | $ | 53.4 | $ | 26.5 | |||
| Gross increases for tax positions in prior periods | 2.3 | 12.2 | 2.2 | ||||||
| Gross decreases for tax positions in prior periods | (0.5 | ) | (0.6 | ) | (0.6 | ) | |||
| Gross increases based on tax positions related to the current year | 1.8 | 2.7 | 13.6 | ||||||
| Gross decreases related to settlements with taxing authorities | (0.1 | ) | (5.1 | ) | (13.2 | ) | |||
| Reductions due to statute expiration | (1.2 | ) | (1.8 | ) | (0.4 | ) | |||
| Gross decreases due to currency fluctuations | (1.0 | ) | — | — | |||||
| Gross increases due to acquisitions | — | — | 25.3 | ||||||
| Ending balance | $ | 62.1 | $ | 60.8 | $ | 53.4 |
Included in the $62.1 million of total gross unrecognized tax benefits as of December 31, 2014 was $60.7 million of tax benefits that, if recognized, would impact the effective tax rate. It is reasonably possible that the gross unrecognized tax benefits as of December 31, 2014 may decrease by a range of $0 to $25.3 million during 2015, primarily as a result of the resolution of non-U.K. examinations, including U.S. federal and state examinations, and the expiration of various statutes of limitations.
The determination of annual income tax expense takes into consideration amounts which may be needed to cover exposures for open tax years. The Internal Revenue Service ("IRS") is currently examining the Pentair, Inc. U.S. federal income tax return for the tax year ending September 28, 2012, and the Panthro Acquisition Co. U.S. federal income tax returns for tax years ending December 31, 2012 and December 31, 2013. A number of tax periods from 2002 to present are under audit by tax authorities in various jurisdictions, including Germany, India and Italy. We anticipate that several of these audits may be concluded in the foreseeable future. We are also subject to the 2012 Tax Sharing Agreement, discussed below, which generally applies to pre-Distribution Tyco tax periods beginning in 1997 which remain subject to audit by the IRS.
We record penalties and interest related to unrecognized tax benefits in Provision (benefit) for income taxes and Interest expense, respectively. As of December 31, 2014 and 2013, we have liabilities of $1.2 million and $0.9 million, respectively, for the possible payment of penalties and $9.8 million and $8.9 million, respectively, for the possible payment of interest expense, which are recorded in Other current liabilities in the Consolidated Balance Sheets.
Deferred taxes in the amount of $11.8 million have been provided on undistributed earnings of certain subsidiaries. Taxes have not been provided on undistributed earnings of subsidiaries where it is our intention to reinvest these earnings permanently or
Pentair plc and Subsidiaries
Notes to consolidated financial statements
to repatriate the earnings only when it is tax effective to do so. It is not practicable to estimate the amount of tax that might be payable if such earnings were to be remitted.
Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as “temporary differences.” We record the tax effect of these temporary differences as “deferred tax assets” (generally items that can be used as a tax deduction or credit in future periods) and “deferred tax liabilities” (generally items for which we received a tax deduction but the tax impact has not yet been recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss)).
Deferred taxes were recorded in the Consolidated Balance Sheets as follows:
| December 31 | ||||||
| In millions | 2014 | 2013 | ||||
| Other current assets | $ | 139.4 | $ | 149.7 | ||
| Other non-current assets | 87.9 | 92.4 | ||||
| Deferred tax liabilities | 528.3 | 557.0 | ||||
| Net deferred tax liabilities | $ | 301.0 | $ | 314.9 |
The tax effects of the major items recorded as deferred tax assets and liabilities were as follows:
| December 31 | ||||||
| In millions | 2014 | 2013 | ||||
| Deferred tax assets | ||||||
| Accrued liabilities and reserves | $ | 200.3 | $ | 192.2 | ||
| Pension and other post-retirement benefits | 68.4 | 76.8 | ||||
| Employee compensation & benefits | 100.0 | 82.2 | ||||
| Tax loss and credit carryforwards | 291.9 | 351.7 | ||||
| Total deferred tax assets | 660.6 | 702.9 | ||||
| Valuation allowance | 235.8 | 235.5 | ||||
| Deferred tax assets, net of valuation allowance | 424.8 | 467.4 | ||||
| Deferred tax liabilities | ||||||
| Property, plant and equipment | 51.6 | 57.9 | ||||
| Goodwill and other intangibles | 645.6 | 697.1 | ||||
| Other liabilities | 28.6 | 27.3 | ||||
| Total deferred tax liabilities | 725.8 | 782.3 | ||||
| Net deferred tax liabilities | $ | 301.0 | $ | 314.9 |
As of December 31, 2014, tax loss carryforwards of $1,118.3 million were available to offset future income. A valuation allowance of $207.3 million exists for deferred income tax benefits related to the tax loss carryforwards which may not be realized. We believe sufficient taxable income will be generated in the respective jurisdictions to allow us to fully recover the remainder of the tax losses. The tax losses relate to Non-U.S. carryforwards of $1,010.7 million which are subject to varying expiration periods and will begin to expire in 2015. In addition, there were $21.4 million of U.S. federal and $86.2 million of state tax loss carryforwards as of December 31, 2014, which will expire in future years through 2034.
Tax sharing agreement and other income tax matters
In connection with the Distribution, we entered into a tax sharing agreement (the “2012 Tax Sharing Agreement”) with Tyco and The ADT Corporation (“ADT”), which governs the rights and obligations of Tyco, ADT and us for certain pre-Distribution tax liabilities, including Tyco’s obligations under a separate tax sharing agreement (the “2007 Tax Sharing Agreement”) that Tyco, Covidien Ltd. (“Covidien”) and TE Connectivity Ltd. (“TE Connectivity”) entered into in connection with the 2007 distributions of Covidien and TE Connectivity by Tyco (the “2007 Separation”). The 2007 Tax Sharing Agreement governs the rights and obligations of Tyco, Covidien and TE Connectivity with respect to certain pre-2007 Separation tax liabilities and certain tax liabilities arising in connection with the 2007 Separation. More specifically, Tyco, Covidien and TE Connectivity share 27%, 42% and 31%, respectively, of income tax liabilities that arise from adjustments made by tax authorities to Tyco's, Covidien's and TE Connectivity's U.S. and certain non-U.S. 2007 and prior income tax returns.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
The 2012 Tax Sharing Agreement provides that we, Tyco and ADT will share (i) certain pre-Distribution income tax liabilities that arise from adjustments made by tax authorities to our, Tyco’s and ADT’s U.S. income tax returns, and (ii) payments required to be made by Tyco in respect to the 2007 Tax Sharing Agreement (collectively, “Shared Tax Liabilities”). Tyco is responsible for the first $500 million of Shared Tax Liabilities. As of December 31, 2014, Tyco has paid $52.0 million of Shared Tax Liabilities. We and ADT will share 42% and 58%, respectively, of the next $225 million of Shared Tax Liabilities. We, ADT and Tyco will share 20%, 27.5% and 52.5%, respectively, of Shared Tax Liabilities above $725 million. Under these tax sharing agreements, the amount ultimately assessed would have to be in excess of $1.85 billion before we would be required to pay any of the amounts assessed.
In the event the Distribution, the spin-off of ADT, or certain internal transactions undertaken in connection therewith were determined to be taxable as a result of actions taken after the Distribution by us, ADT or Tyco, the party responsible for such failure would be responsible for all taxes imposed on us, ADT or Tyco as a result thereof. Taxes resulting from the determination that the Distribution, the spin-off of ADT, or any internal transaction is taxable are referred to herein as “Distribution Taxes.” If such failure is not the result of actions taken after the Distribution by us, ADT or Tyco, then we, ADT and Tyco would be responsible for any Distribution Taxes imposed on us, ADT or Tyco as a result of such determination in the same manner and in the same proportions as the Shared Tax Liabilities. ADT will have sole responsibility for any income tax liability arising as a result of Tyco’s acquisition of Brink’s Home Security Holdings, Inc. (“BHS”) in May 2010, including any liability of BHS under the tax sharing agreement between BHS and The Brink’s Company dated October 31, 2008 (collectively, the “BHS Tax Liabilities”). Costs and expenses associated with the management of Shared Tax Liabilities, Distribution Taxes and BHS Tax Liabilities will generally be shared 20% by us, 27.5% by ADT and 52.5% by Tyco. We are responsible for all of our own taxes that are not shared pursuant to the 2012 Tax Sharing Agreement’s sharing formulae. In addition, Tyco and ADT are responsible for their tax liabilities that are not subject to the 2012 Tax Sharing Agreement’s sharing formula.
The 2012 Tax Sharing Agreement also provides that, if any party were to default in its obligation to another party to pay its share of the distribution taxes that arise as a result of no party’s fault, each non-defaulting party would be required to pay, equally with any other non-defaulting party, the amounts in default. In addition, if another party to the 2012 Tax Sharing Agreement that is responsible for all or a portion of an income tax liability were to default in its payment of such liability to a taxing authority, we could be legally liable under applicable tax law for such liabilities and required to make additional tax payments. Accordingly, under certain circumstances, we may be obligated to pay amounts in excess of our agreed-upon share of our, Tyco’s and ADT’s tax liabilities.
On July 1, 2013, Tyco announced that the Internal Revenue Service (“IRS”) issued Notices of Deficiency (“Tyco IRS Notices”) to Tyco asserting that several of Tyco's former U.S. subsidiaries collectively owe additional taxes in the aggregate amount of $883.3 million plus penalties of $154 million based on audits of the 1997 through 2000 tax years of Tyco and its subsidiaries as they existed at that time. These amounts exclude interest and do not reflect the impact on subsequent periods if the IRS challenge to Tyco's tax filings as described below is ultimately successful. If the IRS should successfully assert its position, our share of the collective liability, if any, would be determined pursuant to the 2007 Tax Sharing Agreement and the 2012 Tax Sharing Agreement. Tyco has filed petitions with the U.S. Tax Court to contest the IRS assessments.
As we have previously disclosed, in connection with U.S. federal tax audits of Tyco and its subsidiaries, the IRS has previously raised issues and proposed tax adjustments for periods beginning with the 1997 tax year. The adjustments now asserted by the IRS under the Tyco IRS Notices primarily relate to the treatment of certain intercompany debt transactions. The IRS has asserted in the Tyco IRS Notices that substantially all of the intercompany debt originated during the 1997 - 2000 period should not be treated as debt for U.S. federal income tax purposes, and has therefore disallowed interest and related deductions recognized associated with that intercompany debt on the U.S. income tax returns for those periods totaling approximately $2.9 billion. If the IRS is successful in asserting its claim, it would have an adverse impact on interest deductions related to the same Tyco intercompany debt in subsequent time periods, totaling approximately $6.6 billion, which Tyco has advised us that it expects the IRS to disallow. Under the 2012 Tax Sharing Agreement, Tyco has the right to administer, control, and settle all U.S. income tax audits for periods prior to and including the Distribution. As mentioned above, Tyco has filed petitions with the U.S. Tax Court to contest the IRS assessments. Tyco has advised us that it strongly disagrees with the IRS position and believes (i) it has meritorious defenses for the respective tax filings, (ii) the IRS positions with regard to these matters are inconsistent with applicable tax laws and Treasury regulations, and (iii) the previously reported taxes for the years in question are appropriate.
No payments with respect to these matters would be required until the dispute is resolved in the U.S. Tax Court, which Tyco has advised us, based on the experience of other companies, could take several years. However, the ultimate resolution of these matters is uncertain, and to the extent we are responsible for any Shared Tax Liability or Distribution Tax, including if the IRS were to prevail with respect to the matter set forth above, there could be a material adverse impact on our financial condition, results of operations, or cash flows in future reporting periods.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
| 13. | Benefit Plans |
Pension and other post-retirement plans
We sponsor U.S. and Non-U.S. defined-benefit pension and other post-retirement plans. Pension benefits are based principally on an employee’s years of service and/or compensation levels near retirement. In addition, we provide certain post-retirement health care and life insurance benefits. Generally, the post-retirement health care and life insurance plans require contributions from retirees. In December 2007, we announced that we will be freezing certain U.S. pension plans as of December 31, 2017.
Obligations and funded status
The following tables present reconciliations of plan benefit obligations, fair value of plan assets and the funded status of pension plans and other post-retirement plans as of and for the years ended December 31, 2014 and 2013:
| U.S. pension plans | Non-U.S. pension plans | Other post-retirement plans | ||||||||||||||||||
| In millions | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||
| Change in benefit obligations | ||||||||||||||||||||
| Benefit obligation beginning of year | $ | 346.9 | $ | 394.3 | $ | 462.0 | $ | 460.8 | $ | 42.4 | $ | 59.3 | ||||||||
| Service cost | 13.1 | 15.6 | 7.4 | 8.4 | 0.2 | 0.3 | ||||||||||||||
| Interest cost | 15.4 | 14.3 | 17.3 | 17.9 | 1.7 | 1.9 | ||||||||||||||
| Actuarial loss (gain) | 50.1 | (56.9 | ) | 73.0 | (16.6 | ) | 0.3 | (15.9 | ) | |||||||||||
| Translation loss (gain) | — | — | (36.6 | ) | 9.7 | — | — | |||||||||||||
| Benefits paid | (9.3 | ) | (20.4 | ) | (17.9 | ) | (18.2 | ) | (3.1 | ) | (3.2 | ) | ||||||||
| Benefit obligation end of year | $ | 416.2 | $ | 346.9 | $ | 505.2 | $ | 462.0 | $ | 41.5 | $ | 42.4 | ||||||||
| Change in plan assets | ||||||||||||||||||||
| Fair value of plan assets beginning of year | $ | 285.8 | $ | 326.2 | $ | 286.5 | $ | 249.0 | $ | — | $ | — | ||||||||
| Actual return on plan assets | 63.7 | (28.9 | ) | 35.2 | 28.6 | — | — | |||||||||||||
| Company contributions | 3.7 | 8.9 | 20.9 | 21.9 | 3.1 | 3.2 | ||||||||||||||
| Translation gain (loss) | — | — | (15.0 | ) | 5.2 | — | — | |||||||||||||
| Benefits paid | (9.3 | ) | (20.4 | ) | (17.9 | ) | (18.2 | ) | (3.1 | ) | (3.2 | ) | ||||||||
| Fair value of plan assets end of year | $ | 343.9 | $ | 285.8 | $ | 309.7 | $ | 286.5 | $ | — | $ | — | ||||||||
| Funded status | ||||||||||||||||||||
| Benefit obligations in excess of the fair value of plan assets | $ | (72.3 | ) | $ | (61.1 | ) | $ | (195.5 | ) | $ | (175.5 | ) | $ | (41.5 | ) | $ | (42.4 | ) |
Amounts recorded in the Consolidated Balance Sheets were as follows:
| U.S. pension plans | Non-U.S. pension plans | Other post- retirement plans | ||||||||||||||||||
| In millions | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||
| Other non-current assets | $ | 2.7 | $ | 0.7 | $ | 6.5 | $ | 3.7 | $ | — | $ | — | ||||||||
| Current liabilities | (4.0 | ) | (3.9 | ) | (4.7 | ) | (4.7 | ) | (3.4 | ) | (3.7 | ) | ||||||||
| Non-current liabilities | (71.0 | ) | (57.9 | ) | (197.3 | ) | (174.5 | ) | (38.1 | ) | (38.7 | ) | ||||||||
| Benefit obligations in excess of the fair value of plan assets | $ | (72.3 | ) | $ | (61.1 | ) | $ | (195.5 | ) | $ | (175.5 | ) | $ | (41.5 | ) | $ | (42.4 | ) |
The accumulated benefit obligation for all defined benefit plans was $887.5 million and $772.2 million at December 31, 2014 and 2013, respectively.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Information for pension plans with an accumulated benefit obligation or projected benefit obligation in excess of plan assets as of December 31 was as follows:
| Projected benefit obligation exceeds the fair value of plan assets | Accumulated benefit obligation exceeds the fair value of plan assets | ||||||||||||
| In millions | 2014 | 2013 | 2014 | 2013 | |||||||||
| U.S. pension plans | |||||||||||||
| Projected benefit obligation | $ | 92.5 | $ | 76.3 | $ | 92.5 | $ | 76.3 | |||||
| Fair value of plan assets | 17.5 | 14.5 | 17.5 | 14.5 | |||||||||
| Accumulated benefit obligation | N/A | N/A | 85.1 | 73.1 | |||||||||
| Non-U.S. pension plans | |||||||||||||
| Projected benefit obligation | $ | 460.0 | $ | 438.2 | $ | 453.2 | $ | 420.4 | |||||
| Fair value of plan assets | 258.1 | 259.0 | 252.3 | 244.5 | |||||||||
| Accumulated benefit obligation | N/A | N/A | 440.9 | 411.5 |
Components of net periodic benefit expense (income) for our pension plans for the years ended December 31 were as follows:
| U. S. pension plans | Non-U.S. pension plans | ||||||||||||||||||
| In millions | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||
| Service cost | $ | 13.1 | $ | 15.6 | $ | 12.9 | $ | 7.4 | $ | 8.4 | $ | 3.3 | |||||||
| Interest cost | 15.4 | 14.3 | 28.2 | 17.3 | 17.9 | 7.5 | |||||||||||||
| Expected return on plan assets | (10.5 | ) | (9.7 | ) | (29.4 | ) | (15.9 | ) | (15.2 | ) | (3.9 | ) | |||||||
| Amortization of prior year service cost (benefit) | — | 0.4 | — | — | (0.2 | ) | — | ||||||||||||
| Net actuarial (gain) loss | (3.1 | ) | (18.3 | ) | 114.3 | 50.3 | (30.0 | ) | 24.2 | ||||||||||
| Net periodic benefit expense (income) | $ | 14.9 | $ | 2.3 | $ | 126.0 | $ | 59.1 | $ | (19.1 | ) | $ | 31.1 |
Components of net periodic benefit expense (income) for our other post-retirement plans for the years ended December 31 were as follows:
| Other post-retirement plans | |||||||||
| In millions | 2014 | 2013 | 2012 | ||||||
| Service cost | $ | 0.2 | $ | 0.3 | $ | 0.2 | |||
| Interest cost | 1.7 | 1.9 | 1.9 | ||||||
| Amortization of prior year service benefit | — | (0.8 | ) | — | |||||
| Net actuarial loss (gain) | 0.3 | (15.9 | ) | 8.1 | |||||
| Net periodic benefit expense (income) | $ | 2.2 | $ | (14.5 | ) | $ | 10.2 |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Assumptions
Weighted-average assumptions used to determine benefit obligations as of December 31 were as follows:
| U.S. pension plans | Non-U.S. pension plans | Other post-retirement plans | ||||||||||||||||||
| Percentages | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||
| Discount rate | 3.63 | % | 4.51 | % | 3.67 | % | 3.04 | % | 4.13 | % | 3.85 | % | 3.60 | % | 4.35 | % | 3.40 | % | ||
| Rate of compensation increase | 4.00 | % | 4.00 | % | 4.37 | % | 2.95 | % | 3.02 | % | 3.02 | % | — | — | — |
Weighted-average assumptions used to determine net periodic benefit expense (income) for years ended December 31 were as follows:
| U.S. pension plans | Non-U.S. pension plans | Other post-retirement plans | ||||||||||||||||||
| Percentages | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||
| Discount rate | 4.51 | % | 3.67 | % | 5.05 | % | 4.13 | % | 3.85 | % | 4.82 | % | 4.35 | % | 3.40 | % | 5.05 | % | ||
| Expected long-term return on plan assets | 4.56 | % | 3.75 | % | 7.50 | % | 5.95 | % | 5.98 | % | 4.09 | % | — | — | — | |||||
| Rate of compensation increase | 4.00 | % | 4.37 | % | 4.21 | % | 3.02 | % | 3.02 | % | 2.98 | % | — | — | — |
Uncertainty in the securities markets and U.S. economy could result in investment returns less than those assumed. Should the securities markets decline or medical and prescription drug costs increase at a rate greater than assumed, we would expect increasing annual combined net pension and other post-retirement costs for the next several years. Should actual experience differ from actuarial assumptions, the projected pension benefit obligation and net pension cost and accumulated other post-retirement benefit obligation and other post-retirement benefit cost would be affected in future years.
Discount rates
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 rated AA or higher available in the marketplace, adjusted to eliminate the effects of call provisions. This produced a weighted-average discount rate for our U.S. pension plans of 3.63%, 4.51% and 3.67% in 2014, 2013 and 2012, respectively. The discount rates on our non-U.S. pension plans ranged from 0.50% to 4.25%, 0.50% to 5.00% and 0.50% to 4.50% in 2014, 2013 and 2012, respectively. There are no known or anticipated changes in our discount rate assumptions that will impact our pension expense in 2015.
Expected rates of return
Our expected rates of return on U.S. pension plan assets were 4.56%, 3.75% and 7.50% for 2014, 2013 and 2012, respectively. The expected rates of return on non-U.S. pension plan assets ranged from 1.00% to 6.40%, 1.00% to 6.50% and 1.00% to 4.60% in 2014, 2013 and 2012, respectively. 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. U.S. pension plan assets yielded returns of 22.30%, (9.90)% and 10.80% in 2014, 2013 and 2012, respectively. As a result of our de-risking strategy to reduce U.S. pension plan liability, we anticipate the expected rate of return on our U.S. funded pension plans will continue to be consistent with the discount rate utilized. Any difference in the expected rate and actual returns will be included with the actuarial gain or loss recorded in the fourth quarter when our plans are remeasured.
Healthcare cost trend rates
The assumed healthcare cost trend rates for other post-retirement plans as of December 31 were as follows:
| 2014 | 2013 | |||
| Healthcare cost trend rate assumed for following year | 6.8 | % | 7.0 | % |
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 4.5 | % | 4.5 | % |
| Year the cost trend rate reaches the ultimate trend rate | 2027 | 2027 |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
The assumed healthcare cost trend rates can have a significant effect on the amounts reported for healthcare plans. A one-percentage-point change in the assumed healthcare cost trend rates would have the following effects as of and for the year ended December 31, 2014:
| One Percentage Point | ||||||
| In millions | Increase | Decrease | ||||
| Increase (decrease) in annual service and interest cost | $ | 0.1 | $ | (0.1 | ) | |
| Increase (decrease) in other post-retirement benefit obligations | 1.0 | (0.9 | ) |
Pension plans assets
Objective
The primary objective of our investment strategy is to meet the pension obligation to our employees at a reasonable cost to us. This is primarily accomplished through growth of capital and safety of the funds invested.
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. 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.
Asset allocation
Our actual overall asset allocation for our U.S. and non-U.S. pension plans as compared to our investment policy goals as of December 31 was as follows:
| U.S. pension plans | |||||||||
| Actual | Target | ||||||||
| Percentages | 2014 | 2013 | 2014 | 2013 | |||||
| Fixed income | 97 | % | 92 | % | 100 | % | 100 | % | |
| Alternative | 3 | % | 7 | % | — | — | |||
| Cash | — | % | 1 | % | — | — |
| Non-U.S. pension plans | |||||||||
| Actual | Target | ||||||||
| Percentages | 2014 | 2013 | 2014 | 2013 | |||||
| Equity securities | 40 | % | 54 | % | 45 | % | 56 | % | |
| Fixed income | 53 | % | 41 | % | 55 | % | 44 | % | |
| Alternative | 5 | % | 3 | % | — | — | |||
| Cash | 2 | % | 2 | % | — | — |
While the target allocations do not have a percentage allocated to cash, the plan assets will always include some cash due to cash flow requirements.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Fair value measurement
The fair values of our pension plan assets and their respective levels in the fair value hierarchy as of December 31, 2014 and December 31, 2013 were as follows:
| December 31, 2014 | ||||||||||||
| In millions | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Cash and cash equivalents | $ | 3.1 | $ | 4.5 | $ | — | $ | 7.6 | ||||
| Fixed income: | ||||||||||||
| Corporate and non U.S. government | — | 373.6 | — | 373.6 | ||||||||
| U.S. treasuries | — | 70.7 | — | 70.7 | ||||||||
| Mortgage-backed securities | — | 8.3 | — | 8.3 | ||||||||
| Other | — | 45.5 | — | 45.5 | ||||||||
| Global equity securities: | ||||||||||||
| Mid cap equity | — | 3.1 | — | 3.1 | ||||||||
| Large cap equity | — | 43.7 | — | 43.7 | ||||||||
| International equity | — | 77.0 | — | 77.0 | ||||||||
| Other investments | — | 17.4 | 6.7 | 24.1 | ||||||||
| Total fair value of plan assets | $ | 3.1 | $ | 643.8 | $ | 6.7 | $ | 653.6 |
| December 31, 2013 | ||||||||||||
| In millions | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Cash and cash equivalents | $ | 1.8 | $ | 5.9 | $ | — | $ | 7.7 | ||||
| Fixed income: | ||||||||||||
| Corporate and non U.S. government | — | 262.2 | — | 262.2 | ||||||||
| U.S. treasuries | — | 75.5 | — | 75.5 | ||||||||
| Mortgage-backed securities | — | 8.7 | — | 8.7 | ||||||||
| Other | — | 34.1 | — | 34.1 | ||||||||
| Global equity securities: | ||||||||||||
| Mid cap equity | — | 7.3 | — | 7.3 | ||||||||
| Large cap equity | — | 43.5 | — | 43.5 | ||||||||
| International equity | — | 101.9 | — | 101.9 | ||||||||
| Long/short equity | — | 0.6 | — | 0.6 | ||||||||
| Other investments | — | 11.8 | 19.0 | 30.8 | ||||||||
| Total fair value of plan assets | $ | 1.8 | $ | 551.5 | $ | 19.0 | $ | 572.3 |
Valuation methodologies used for investments measured at fair value were as follows:
| • | Cash and cash equivalents: Cash consists of cash held in bank accounts and was classified as Level 1. Cash equivalents consist of investments in commingled funds valued based on observable market data. Such investments were classified as Level 2. |
| • | Fixed income: Investments in corporate bonds, government securities, mortgages and asset backed securities were valued based upon quoted market prices for similar securities and other observable market data. Investments in commingled funds were generally valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices or by a pricing service. Such investments were classified as Level 2. |
| • | Global equity securities: Investments in commingled funds were valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices or by a pricing service. Such investments were classified as Level 2. |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
| • | Other investments: Other investments include investments in commingled funds with diversified investment strategies. Investments in commingled funds that were valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices or by a pricing service were classified as Level 2. Investments in commingled funds that were valued based on unobservable inputs due to liquidation restrictions were classified as Level 3. |
The following tables present a reconciliation of Level 3 assets held during the years ended December 31, 2014 and 2013, respectively:
| In millions | January 1, 2014 | Net realized and unrealized gains (losses) | Net issuances and settlements | Net transfers into (out of) level 3 | December 31, 2014 | ||||||||||
| Other investments | $ | 19.0 | $ | 0.7 | $ | (11.8 | ) | $ | (1.2 | ) | $ | 6.7 |
| In millions | January 1, 2013 | Net realized and unrealized gains (losses) | Net issuances and settlements | Net transfers into (out of) level 3 | December 31, 2013 | ||||||||||
| Other investments | $ | 18.3 | $ | 1.9 | $ | (1.2 | ) | $ | — | $ | 19.0 |
Cash flows
Contributions
Pension contributions totaled $24.6 million and $30.8 million in 2014 and 2013, respectively. Our 2015 pension contributions are expected to be approximately $30.0 million to $35.0 million. The 2015 expected contributions will equal or exceed our minimum funding requirements.
Estimated future benefit payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the plans for the years ended December 31 as follows:
| In millions | U.S. pension plans | Non-U.S. pension plans | Other post- retirement plans | ||||||
| 2015 | $ | 10.0 | $ | 15.0 | $ | 3.4 | |||
| 2016 | 12.2 | 15.9 | 3.3 | ||||||
| 2017 | 13.7 | 17.1 | 3.2 | ||||||
| 2018 | 16.2 | 18.1 | 3.1 | ||||||
| 2019 | 18.7 | 18.9 | 3.1 | ||||||
| Thereafter | 109.7 | 108.4 | 13.8 |
Savings plan
We have a 401(k) plan (the "401(k) plan”) with an employee share ownership (“ESOP”) bonus component, which covers certain union and all non-union U.S. employees who meet certain age requirements. Under the 401(k) plan, eligible U.S. employees may voluntarily contribute a percentage of their eligible compensation. We match contributions made by employees who meet certain eligibility and service requirements. Our matching contribution is 100% of eligible employee contributions for the first 1% of eligible compensation and 50% of the next 5% of eligible compensation.
In addition to the matching contribution, all employees who meet certain service requirements receive a discretionary ESOP contribution equal to 1.5% of annual eligible compensation.
Additionally, we had a 401(k) plan acquired as part of the Merger (the "Flow 401(k) plan”) which covered certain union and all non-union U.S. employees who met certain age requirements. On December 31, 2013, the Flow 401(k) plan merged into the 401(k) plan and all employees covered by the Flow 401(k) plan became fully vested in their Flow 401(k) plan employer matching contributions and all future employer matching contributions were made under the 401(k) plan matching contribution formula. Under the Flow 401(k) plan, eligible U.S. employees could voluntarily contribute a percentage of their eligible compensation. We matched contributions made by employees who met certain eligibility and service requirements. Our matching contribution was 500% of eligible employee contributions for the first 1% of eligible compensation. Additional company match was based on years of service, as follows: an additional 1% match at 10 – 19 years of service, an additional 2%
Pentair plc and Subsidiaries
Notes to consolidated financial statements
match at 20 – 24 years, an additional 3% match at 25 – 29 years and an additional 4% match at 30+ years. Participants were 100% vested in the employer match after 3 years of service.
Our combined expense for the 401(k) plan, the Flow 401(k) plan and the ESOP was $21.5 million, $26.8 million and $19.7 million in 2014, 2013 and 2012, respectively.
Other retirement compensation
Total other accrued retirement compensation, primarily related to deferred compensation and supplemental retirement plans, was $70.2 million and $53.3 million as of December 31, 2014 and 2013, respectively, and is included in Pension and other post-retirement compensation and benefits and Other non-current liabilities in the Consolidated Balance Sheets.
Multi-employer defined benefit plans
We participate in a number of multi-employer defined benefit plans on behalf of certain employees. Pension expense related to multi-employer plans was not material in 2014, 2013 and 2012.
| 14. | Shareholders’ Equity |
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. On October 1, 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 our ordinary shares up to a maximum dollar limit of $1.0 billion. This authorization is in addition to the combined $1.2 billion 2012 share repurchase authorizations. The authorization expires on December 31, 2016.
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.
Dividends payable
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 will be paid to our shareholders in quarterly installments of $0.30 for each of the third and fourth quarters of 2014 and first and second quarters of 2015. 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. As a result, the balance of dividends payable included in Other current liabilities on our Consolidated Balance Sheets was $116.8 million at December 31, 2014. Dividends paid per ordinary share were $1.10, $0.96 and $0.88 for the years ended December 31, 2014, 2013 and 2012, respectively.
| 15. | Share Plans |
Share-based compensation expense
Total share-based compensation expense for 2014, 2013 and 2012 was as follows:
| December 31 | |||||||||
| In millions | 2014 | 2013 | 2012 | ||||||
| Restricted stock units | $ | 22.6 | $ | 20.2 | $ | 24.2 | |||
| Stock options | 11.0 | 10.9 | 11.6 | ||||||
| Total share-based compensation expense | $ | 33.6 | $ | 31.1 | $ | 35.8 |
The expense for 2012 included $13.5 million of expense due to the Merger triggering change of control provisions of Pentair, Inc. share-based compensation plans resulting in immediate vesting of certain outstanding awards.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Share Incentive Plans
Prior to the Merger, our board of directors approved, and Tyco as our sole shareholder approved, the Pentair plc 2012 Stock and Incentive Plan (the “2012 Plan”). The 2012 Plan became effective on September 28, 2012 and authorizes the issuance of 9.0 million of our ordinary shares. The shares may be issued as new shares or from shares held in treasury. Our practice is to settle equity-based awards from shares held in treasury. The 2012 Plan terminates in September 2022. The 2012 Plan allows for the granting to our officers, directors, employees and consultants of nonqualified stock options, incentive stock options, stock appreciation rights, performance shares, performance units, restricted shares, restricted stock units, deferred stock rights, annual incentive awards, dividend equivalent units and other equity-based awards.
The 2012 Plan is administered by our compensation committee (the “Committee”), which is made up of independent members of our board of directors. Employees eligible to receive awards under the 2012 Plan are managerial, administrative or other key employees who are in a position to make a material contribution to the continued profitable growth and long-term success of our company. The Committee has the authority to select the recipients of awards, determine the type and size of awards, establish certain terms and conditions of award grants and take certain other actions as permitted under the 2012 Plan. The 2012 Plan prohibits the Committee from re-pricing awards or cancelling and reissuing awards at lower prices.
The 2008 Omnibus Stock Incentive Plan as Amended and Restated (the “2008 Plan”) terminated upon the completion of the Merger. Prior grants of restricted stock units and stock options made under the 2008 Plan and earlier stock incentive plans outstanding at completion of the Merger were converted into equity-based awards with respect to our ordinary shares and were assumed by us on the terms in effect at the time of grant and are outstanding under the 2012 Plan.
Non-qualified and incentive stock options
Under the 2012 Plan, we may grant stock options to any eligible employee with an exercise price equal to the market value of the shares on the dates the options were granted. Options generally vest over a three-year period commencing on the grant date and expire ten years after the grant date.
Restricted shares and restricted stock units
Under the 2012 Plan, eligible employees may be awarded restricted shares or restricted stock units of our common stock. Restricted shares and restricted stock units generally vest three to four years after issuance, subject to continuous employment and certain other conditions. Restricted shares and restricted stock units are valued at market value on the date of grant and are expensed over the vesting period.
Stock appreciation rights, performance shares and performance units
Under the 2012 Plan, the Committee is permitted to issue these awards which are generally earned over a three-year vesting period and tied to specific financial metrics.
Stock options
The following table summarizes stock option activity under all plans for the year ended December 31, 2014:
| Shares and intrinsic value in millions | Number of shares | Weighted- average exercise price | Weighted- average remaining contractual life (years) | Aggregate intrinsic value | |||||
| Outstanding as of January 1, 2014 | 6.2 | $ | 35.53 | ||||||
| Granted | 0.5 | 77.93 | |||||||
| Exercised | (0.9 | ) | 35.53 | ||||||
| Forfeited | (0.1 | ) | 49.29 | ||||||
| Outstanding as of December 31, 2014 | 5.7 | $ | 39.08 | 5.1 | $ | 157.8 | |||
| Options exercisable as of December 31, 2014 | 4.5 | $ | 33.53 | 4.2 | $ | 144.0 | |||
| Options expected to vest as of December 31, 2014 | 1.2 | $ | 59.46 | 8.2 | $ | 13.8 |
Fair value of options granted
The weighted average grant date fair value of options granted under Pentair plans in 2014, 2013 and 2012 was estimated to be $23.23, $13.96 and $9.63 per share, respectively. The weighted-average grant date fair value of options assumed in the Merger was estimated to be $11.76. The total intrinsic value of options that were exercised during 2014, 2013 and 2012 was $34.8 million, $68.9 million and $41.6 million, respectively. At December 31, 2014, the total unrecognized compensation cost related to stock options was $5.5 million. This cost is expected to be recognized over a weighted average period of 1.3 years.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
We estimated the fair value of each stock option award on the date of grant using a Black-Scholes option pricing model, modified for dividends and using the following weighted average assumptions:
| December 31 | ||||||||||
| 2014 | 2013 | 2012 | ||||||||
| Granted by Pentair plans | Granted by Pentair plans | Assumed in Merger | Granted by Pentair plans | |||||||
| Risk-free interest rate | 1.44 | % | 0.69 | % | 0.02 - 0.68% | 0.96 | % | |||
| Expected dividend yield | 1.46 | % | 2.01 | % | 2.12 | % | 2.48 | % | ||
| Expected share price volatility | 35.3 | % | 36.0 | % | 33.0 | % | 36.5 | % | ||
| Expected term (years) | 5.6 | 5.7 | 0.1 - 5.1 | 5.7 |
These estimates require us to make assumptions based on historical results, observance of trends in our share price, changes in option exercise behavior, future expectations and other relevant factors. If other assumptions had been used, share-based compensation expense, as calculated and recorded under the accounting guidance, could have been affected.
We based the expected life assumption on historical experience as well as the terms and vesting periods of the options granted. For purposes of determining expected volatility, we considered a rolling average of historical volatility measured over a period approximately equal to the expected option term. The risk-free rate for periods that coincide with the expected life of the options is based on the U.S. Treasury Department yield curve in effect at the time of grant.
Cash received from option exercises for the years ended December 31, 2014, 2013 and 2012 was $46.6 million, $102.3 million and $91.6 million, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $8.3 million, $23.5 million and $12.2 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Restricted stock units
The following table summarizes restricted stock unit activity under all plans for the year ended December 31, 2014:
| Shares in millions | Number of shares | Weighted average grant date fair value | |||
| Outstanding as of January 1, 2014 | 1.3 | $ | 43.25 | ||
| Granted | 0.3 | 78.39 | |||
| Vested | (0.4 | ) | 39.68 | ||
| Forfeited | (0.1 | ) | 46.42 | ||
| Outstanding as of December 31, 2014 | 1.1 | $ | 50.55 |
As of December 31, 2014, there was $17.2 million of unrecognized compensation cost related to restricted share compensation arrangements granted under the 2012 Plan and previous plans. That cost is expected to be recognized over a weighted-average period of 1.3 years. The total fair value of shares vested during the years ended December 31, 2014, 2013 and 2012, was $26.3 million, $23.4 million and $58.0 million, respectively. The actual tax benefits realized related to restricted share compensation arrangements totaled $3.1 million, $7.2 million and $18.8 million for the years ended December 31, 2014, 2013 and 2012, respectively.
| 16. | Segment Information |
We classify our operations into the following business segments based primarily on types of products offered and markets served:
| • | Valves & Controls — The Valves & Controls segment designs, manufactures, markets and services valves, fittings, automation and controls and actuators for the energy and industrial verticals and operates as a stand-alone Global Business Unit ("GBU"). |
| • | Process Technologies — The Process Technologies segment designs, manufactures, markets and services innovative water system products and solutions to meet filtration, separation and fluid process management challenges in food and beverage, water, wastewater, swimming pools and aquaculture applications. The Filtration & Process and Water Quality Systems GBUs comprise this segment. |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
| • | Flow Technologies — The Flow Technologies segment designs, manufactures and markets products and services designed for the transfer and flow of clean water, wastewater and a variety of industrial applications. The Flow Technologies segment operates as a stand-alone GBU. |
| • | Technical Solutions — The Technical Solutions segment designs, manufactures, markets and services products that guard and protect some of the world’s most sensitive electronics and electronic equipment, as well as heat management solutions designed to provide thermal protection to temperature sensitive fluid applications. The Technical Solutions segment operates as a stand-alone GBU. |
| • | Other — Other is primarily composed of unallocated corporate expenses, our captive insurance subsidiary and intermediate finance companies. |
During the first quarter of 2015, we reorganized our business segments to reflect a new operating structure and management of our GBUs, resulting in a change to our reporting segments in 2015. All segment information presented in this note and throughout this Annual Report on Form 10-K was prepared based on the reporting segments in place during 2014, unless otherwise noted.
The accounting policies of our reporting segments are the same as those described in the summary of significant accounting policies. We evaluate performance based on the 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 operating income (loss) exclusive of certain acquisition related expenses, costs of restructuring activities, "mark-to-market" gain/loss for pension and other post-retirement plans, impairments and other unusual non-operating items.
Financial information by reportable segment is included in the following summary:
| 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||||||||
| In millions | Net sales | Segment income (loss) | |||||||||||||||||
| Valves & Controls | $ | 2,394.8 | $ | 2,469.2 | $ | 548.6 | $ | 350.8 | $ | 302.8 | $ | 41.8 | |||||||
| Process Technologies | 1,833.2 | 1,765.9 | 1,521.1 | 267.2 | 253.2 | 181.1 | |||||||||||||
| Flow Technologies | 1,106.6 | 1,131.6 | 1,025.5 | 138.5 | 132.3 | 104.7 | |||||||||||||
| Technical Solutions | 1,728.1 | 1,663.4 | 1,236.4 | 358.8 | 322.4 | 232.1 | |||||||||||||
| Other | (23.7 | ) | (30.4 | ) | (24.8 | ) | (93.6 | ) | (108.4 | ) | (76.2 | ) | |||||||
| Consolidated | $ | 7,039.0 | $ | 6,999.7 | $ | 4,306.8 | $ | 1,021.7 | $ | 902.3 | $ | 483.5 |
| 2014 | 2013 | 2014 | 2013 | 2012 | ||||||||||||
| In millions | Identifiable assets (1) | Depreciation | ||||||||||||||
| Valves & Controls | $ | 4,049.9 | $ | 4,204.0 | $ | 59.0 | $ | 64.0 | $ | 15.1 | ||||||
| Process Technologies | 2,586.9 | 2,730.6 | 31.1 | 29.2 | 29.2 | |||||||||||
| Flow Technologies | 1,276.7 | 1,426.4 | 14.5 | 14.5 | 14.0 | |||||||||||
| Technical Solutions | 2,117.3 | 2,093.4 | 24.2 | 23.6 | 18.9 | |||||||||||
| Other | 624.4 | 1,288.9 | 9.9 | 10.0 | 8.0 | |||||||||||
| Consolidated | $ | 10,655.2 | $ | 11,743.3 | $ | 138.7 | $ | 141.3 | $ | 85.2 |
| 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||||||||
| In millions | Amortization | Capital expenditures | |||||||||||||||||
| Valves & Controls | $ | 53.4 | $ | 69.3 | $ | 21.7 | $ | 45.9 | $ | 67.2 | $ | 21.9 | |||||||
| Process Technologies | 27.2 | 26.0 | 24.4 | 30.0 | 45.2 | 31.2 | |||||||||||||
| Flow Technologies | 13.5 | 13.6 | 12.5 | 15.5 | 26.2 | 18.7 | |||||||||||||
| Technical Solutions | 19.9 | 25.2 | 16.2 | 24.0 | 16.2 | 13.5 | |||||||||||||
| Other | — | — | 0.1 | 14.2 | 15.2 | 9.2 | |||||||||||||
| Consolidated | $ | 114.0 | $ | 134.1 | $ | 74.9 | $ | 129.6 | $ | 170.0 | $ | 94.5 |
| (1) | All cash and cash equivalents and assets held for sale are included in “Other.” |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
The following table presents a reconciliation of consolidated segment income to consolidated operating income (loss):
| In millions | 2014 | 2013 | 2012 | ||||||
| Segment income | $ | 1,021.7 | $ | 902.3 | $ | 483.5 | |||
| Deal related costs and expenses | — | — | (82.8 | ) | |||||
| Inventory step-up and customer backlog | — | (86.6 | ) | (157.7 | ) | ||||
| Restructuring and other | (109.6 | ) | (119.9 | ) | (45.4 | ) | |||
| Pension and other post-retirement mark-to-market gain (loss) | (49.9 | ) | 63.2 | (141.7 | ) | ||||
| Trade name impairment | — | (11.0 | ) | (60.7 | ) | ||||
| Redomicile related expenses | (10.3 | ) | (5.4 | ) | — | ||||
| Operating income (loss) | $ | 851.9 | $ | 742.6 | $ | (4.8 | ) |
The following tables present certain geographic information by region:
| 2014 | 2013 | 2012 | 2014 | 2013 | ||||||||||||
| In millions | Net sales | Long-lived assets | ||||||||||||||
| U.S. | $ | 3,541.1 | $ | 3,431.3 | $ | 2,624.3 | $ | 350.0 | $ | 365.4 | ||||||
| Western Europe | 1,701.0 | 1,795.3 | 909.1 | 340.0 | 393.9 | |||||||||||
| Fast Growth | 998.5 | 921.6 | 473.8 | 180.9 | 193.3 | |||||||||||
| Other Developed | 798.4 | 851.5 | 299.6 | 79.1 | 91.7 | |||||||||||
| Consolidated | $ | 7,039.0 | $ | 6,999.7 | $ | 4,306.8 | $ | 950.0 | $ | 1,044.3 |
Net sales are based on the location in which the sale originated. Long-lived assets represent property, plant and equipment, net of related depreciation.
We offer a broad array of products and systems to multiple markets and customers for which we do not have the information systems to track revenues by primary product category. However, our net sales by segment are representative of our sales by major product category. We sell our products through various distribution channels including wholesale and retail distributors, original equipment manufacturers and home centers. No customer accounted for more than 10% of net sales in 2014, 2013, or 2012.
| 17. | Commitments and Contingencies |
Operating lease commitments
Net rental expense under operating leases was as follows:
| Years ended December 31 | |||||||||
| In millions | 2014 | 2013 | 2012 | ||||||
| Gross rental expense | $ | 68.7 | $ | 76.0 | $ | 44.6 | |||
| Sublease rental income | (1.3 | ) | (0.9 | ) | (0.5 | ) | |||
| Net rental expense | $ | 67.4 | $ | 75.1 | $ | 44.1 |
Future minimum lease commitments under non-cancelable operating leases, principally related to facilities, machinery, equipment and vehicles as of December 31, 2014 were as follows:
| In millions | 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | ||||||||||||||
| Minimum lease payments | $ | 52.4 | $ | 40.1 | $ | 31.2 | $ | 19.7 | $ | 15.7 | $ | 19.1 | $ | 178.2 | |||||||
| Minimum sublease rentals | (0.5 | ) | (0.4 | ) | (0.4 | ) | (0.4 | ) | (0.4 | ) | — | (2.1 | ) | ||||||||
| Net future minimum lease commitments | $ | 51.9 | $ | 39.7 | $ | 30.8 | $ | 19.3 | $ | 15.3 | $ | 19.1 | $ | 176.1 |
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-
Pentair plc and Subsidiaries
Notes to consolidated financial statements
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 includes adjustments for claims that are not actively being prosecuted. This amount is not adjusted for claims that identify incorrect defendants, or duplicate other actions. In addition, the amount does not include certain claims pending against third parties for which we have been provided an indemnification.
Periodically, we perform an analysis with the assistance of outside counsel and other experts to update our estimated asbestos-related assets and liabilities. Our estimate of the liability and corresponding insurance recovery for pending and future claims and defense costs is based on our historical claim experience and estimates of the number and resolution cost of potential future claims that may be filed. Our legal strategy for resolving claims also impacts these estimates.
Our estimate of asbestos-related insurance recoveries represents estimated amounts due to us for previously paid and settled claims and the probable reimbursements relating to our estimated liability for pending and future claims. In determining the amount of insurance recoverable, we consider a number of factors, including available insurance, allocation methodologies and the solvency and creditworthiness of insurers.
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, respectively, at December 31, 2014 and 2013 and was recorded in Other non-current assets in the Consolidated Balance Sheets.
The amounts recorded by us for asbestos-related liabilities and insurance-related assets are based on our strategies for resolving our asbestos claims and currently available information as well as estimates and assumptions. Key variables and assumptions include the number and type of new claims filed each year, the average cost of resolution of claims, the resolution of coverage issues with insurance carriers, the amounts of insurance and the related solvency risk with respect to our insurance carriers, and the indemnifications we have provided to third parties. Furthermore, predictions with respect to these variables are subject to greater uncertainty in the latter portion of the projection period. Other factors that may affect our liability and cash payments for asbestos-related matters include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, reforms of state or federal tort legislation and the applicability of insurance policies among subsidiaries. As a result, actual liabilities or insurance recoveries could be significantly higher or lower than those recorded if assumptions used in our calculations vary significantly from actual results.
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.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
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.
Other Matters
In addition to the matters described above, from time to time, we are subject to disputes, administrative proceedings and other claims arising out of the normal conduct of our business. These matters generally relate to disputes arising out of the use or installation of our products, product liability litigation, personal injury claims, commercial and contract disputes and employment related matters. On the basis of information currently available to it, management does not believe that existing proceedings and claims will have a material impact on our Consolidated Financial Statements. However, litigation is unpredictable, and we could incur judgments or enter into settlements for current or future claims that could adversely affect our financial statements.
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 condition or results of operations.
We recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.
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.
The changes in the carrying amount of service and product warranties for the years ended December 31, 2014 and 2013 were as follows:
| Years ended December 31 | ||||||
| In millions | 2014 | 2013 | ||||
| Beginning balance | $ | 56.0 | $ | 52.5 | ||
| Service and product warranty provision | 75.3 | 64.1 | ||||
| Payments | (62.1 | ) | (60.8 | ) | ||
| Foreign currency translation | (2.8 | ) | 0.2 | |||
| Ending balance | $ | 66.4 | $ | 56.0 |
Subsequent to December 31, 2014, we became aware of a potential warranty issue related to certain product sold by Process Technologies, resulting in an increase to our warranty reserve of $13.0 million.
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 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
Pentair plc and Subsidiaries
Notes to consolidated financial statements
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.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
| 18. | Selected Quarterly Data (Unaudited) |
The selected quarterly financial data does not agree to our previously issued quarterly reports prior to the third quarter of 2014 as a result of the reclassification of our Water Transport business to discontinued operations during the third quarter of 2014. See Note 3 for further discussion of discontinued operations. The following tables present 2014 and 2013 quarterly financial information:
| 2014 | |||||||||||||||
| In millions, except per-share data | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | ||||||||||
| Net sales | $ | 1,644.0 | $ | 1,834.1 | $ | 1,758.4 | $ | 1,802.5 | $ | 7,039.0 | |||||
| Gross profit | 564.1 | 646.3 | 624.7 | 627.9 | 2,463.0 | ||||||||||
| Operating income | 182.1 | 226.4 | 267.4 | 176.0 | 851.9 | ||||||||||
| Net income from continuing operations | 125.5 | 159.2 | 192.5 | 129.8 | 607.0 | ||||||||||
| Income (loss) from discontinued operations, net of tax | (1.3 | ) | 2.3 | 1.6 | (9.0 | ) | (6.4 | ) | |||||||
| Loss from sale / impairment of discontinued operations, net of tax | (5.6 | ) | — | (380.1 | ) | — | (385.7 | ) | |||||||
| Net income (loss) attributable to Pentair plc | 118.6 | 161.5 | (186.0 | ) | 120.8 | 214.9 | |||||||||
| Earnings (loss) per ordinary share attributable to Pentair plc (1) | |||||||||||||||
| Basic | |||||||||||||||
| Continuing operations | $ | 0.64 | $ | 0.82 | $ | 1.01 | $ | 0.71 | $ | 3.19 | |||||
| Discontinued operations | (0.04 | ) | 0.02 | (1.99 | ) | (0.05 | ) | (2.06 | ) | ||||||
| Basic earnings (loss) per ordinary share attributable to Pentair plc | $ | 0.60 | $ | 0.84 | $ | (0.98 | ) | $ | 0.66 | $ | 1.13 | ||||
| Diluted | |||||||||||||||
| Continuing operations | $ | 0.63 | $ | 0.81 | $ | 1.00 | $ | 0.70 | $ | 3.14 | |||||
| Discontinued operations | (0.04 | ) | 0.01 | (1.95 | ) | (0.05 | ) | (2.03 | ) | ||||||
| Diluted earnings (loss) per ordinary share attributable to Pentair plc | $ | 0.59 | $ | 0.82 | $ | (0.95 | ) | $ | 0.65 | $ | 1.11 |
| 2013 | |||||||||||||||
| In millions, except per-share data | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | ||||||||||
| Net sales | $ | 1,663.7 | $ | 1,791.7 | $ | 1,713.3 | $ | 1,831.0 | $ | 6,999.7 | |||||
| Gross profit | 497.5 | 627.4 | 614.7 | 630.5 | 2,370.1 | ||||||||||
| Operating income | 66.4 | 204.9 | 230.0 | 241.3 | 742.6 | ||||||||||
| Net income from continuing operations before noncontrolling interest | 46.8 | 139.9 | 166.4 | 164.4 | 517.5 | ||||||||||
| Income (loss) from discontinued operations, net of tax | 6.5 | 15.5 | 7.8 | (3.9 | ) | 25.9 | |||||||||
| Loss from sale / impairment of discontinued operations, net of tax | — | — | — | (0.8 | ) | (0.8 | ) | ||||||||
| Net income attributable to Pentair plc | 51.7 | 154.1 | 172.8 | 158.2 | 536.8 | ||||||||||
| Net income from continuing operations attributable to Pentair plc | 45.2 | 138.6 | 165.0 | 162.9 | 511.7 | ||||||||||
| Earnings (loss) per ordinary share attributable to Pentair plc (1) | |||||||||||||||
| Basic | |||||||||||||||
| Continuing operations | $ | 0.22 | $ | 0.69 | $ | 0.83 | $ | 0.82 | $ | 2.54 | |||||
| Discontinued operations | 0.03 | 0.07 | 0.04 | (0.02 | ) | 0.13 | |||||||||
| Basic earnings per ordinary share attributable to Pentair plc | $ | 0.25 | $ | 0.76 | $ | 0.87 | $ | 0.80 | $ | 2.67 | |||||
| Diluted | |||||||||||||||
| Continuing operations | $ | 0.22 | $ | 0.67 | $ | 0.81 | $ | 0.81 | $ | 2.50 | |||||
| Discontinued operations | 0.03 | 0.08 | 0.04 | (0.03 | ) | 0.12 | |||||||||
| Diluted earnings per ordinary share attributable to Pentair plc | $ | 0.25 | $ | 0.75 | $ | 0.85 | $ | 0.78 | $ | 2.62 |
| (1) | Amounts may not total to annual earnings because each quarter and year are calculated separately based on basic and diluted weighted-average ordinary shares outstanding during that period. |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Fourth quarter 2014 includes a decrease in operating income of $49.9 million related to "mark-to-market" actuarial losses on pension and other post-retirement benefit plans for 2014. Fourth quarter 2014 also includes decreases in operating income due to restructuring costs of $35.5 million.
Second quarter 2014 includes decreases in operating income due to restructuring costs of $35.4 million. First quarter 2014 includes decreases in operating income due to restructuring costs of $17.4 million.
Fourth quarter 2013 includes an increase in operating income of $63.2 million related to "mark-to-market" actuarial gains on pension and other post-retirement benefit plans for 2013. Fourth quarter 2013 also includes decreases in operating income due to restructuring costs of $54.1 million and impairment charges of $11.0 million related to trade name intangibles.
First quarter 2013 includes a decrease in operating income of $76.6 million due to inventory step-up and customer backlog related to the Merger and restructuring costs of $26.6 million.
| 19. | Supplemental Guarantor Information |
Effective upon the Redomicile, Pentair plc (the “Parent Company Guarantor”) and Pentair Investments Switzerland GmbH (the "Subsidiary Guarantor"), fully and unconditionally, guarantee the 1.35% Senior Notes due 2015, 1.875% Senior Notes due 2017, 2.65% Senior Notes due 2019, 5.00% Senior Notes due 2021 and 3.15% Senior Notes due 2022 (collectively, the “Notes”) of Pentair Finance S.A. (the “Subsidiary Issuer”). The Subsidiary Guarantor is a Switzerland limited liability company formed in April 2014 and 100 percent-owned subsidiary of the Parent Company Guarantor. The Subsidiary Issuer is a Luxembourg public limited liability company formed in January 2012 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) and Condensed Consolidating Statement of Cash Flows for the years ended December 31, 2014, 2013 and 2012 and Condensed Consolidating Balance Sheet as of December 31, 2014 and 2013. The guarantees provided by the Parent Company Guarantor and Subsidiary Guarantor are joint and several. Condensed Consolidating financial information for Pentair plc, Pentair Investments Switzerland GmbH and Pentair Finance S.A. on a stand-alone basis is presented using the equity method of accounting for subsidiaries.
Prior to the Redomicile, the Notes of the Subsidiary Issuer were guaranteed, fully and unconditionally, by the former parent company, Pentair Ltd. The supplemental financial information for the reporting periods prior to Redomicile are presented under this previous guarantee structure.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Pentair plc and Subsidiaries
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Year Ended December 31, 2014
| In millions | Parent Company Guarantor | Subsidiary Guarantor | Subsidiary Issuer | Non-guarantor Subsidiaries | Eliminations | Consolidated Total | ||||||||||||
| Net sales | $ | — | $ | — | $ | — | $ | 7,039.0 | $ | — | $ | 7,039.0 | ||||||
| Cost of goods sold | — | — | — | 4,576.0 | — | 4,576.0 | ||||||||||||
| Gross profit | — | — | — | 2,463.0 | — | 2,463.0 | ||||||||||||
| Selling, general and administrative | 25.3 | 2.6 | 7.7 | 1,458.2 | — | 1,493.8 | ||||||||||||
| Research and development | — | — | — | 117.3 | — | 117.3 | ||||||||||||
| Operating (loss) income | (25.3 | ) | (2.6 | ) | (7.7 | ) | 887.5 | — | 851.9 | |||||||||
| Loss (earnings) from continuing operations of investment in subsidiaries | (615.5 | ) | (619.7 | ) | (611.1 | ) | — | 1,846.3 | — | |||||||||
| Other (income) expense: | ||||||||||||||||||
| Loss on sale of businesses, net | — | — | — | 0.2 | — | 0.2 | ||||||||||||
| Equity income of unconsolidated subsidiaries | — | — | — | (1.2 | ) | — | (1.2 | ) | ||||||||||
| Interest income | — | — | (92.3 | ) | (40.2 | ) | 128.8 | (3.7 | ) | |||||||||
| Interest expense | 0.7 | 2.1 | 95.6 | 102.7 | (128.8 | ) | 72.3 | |||||||||||
| Income (loss) from continuing operations before income taxes | 589.5 | 615.0 | 600.1 | 826.0 | (1,846.3 | ) | 784.3 | |||||||||||
| Provision (benefit) for income taxes | (17.5 | ) | (0.5 | ) | (2.4 | ) | 197.7 | — | 177.3 | |||||||||
| Net income (loss) from continuing operations | 607.0 | 615.5 | 602.5 | 628.3 | (1,846.3 | ) | 607.0 | |||||||||||
| Loss from discontinued operations, net of tax | — | — | — | (6.4 | ) | — | (6.4 | ) | ||||||||||
| Loss from sale / impairment of discontinued operations, net of tax | — | — | — | (385.7 | ) | — | (385.7 | ) | ||||||||||
| Earnings (loss) from discontinued operations of investment in subsidiaries | (392.1 | ) | (392.1 | ) | (392.1 | ) | — | 1,176.3 | — | |||||||||
| Net income (loss) attributable to Pentair plc | $ | 214.9 | $ | 223.4 | $ | 210.4 | $ | 236.2 | $ | (670.0 | ) | $ | 214.9 | |||||
| Comprehensive income (loss), net of tax | ||||||||||||||||||
| Net income (loss) attributable to Pentair plc | $ | 214.9 | $ | 223.4 | $ | 210.4 | $ | 236.2 | $ | (670.0 | ) | $ | 214.9 | |||||
| Changes in cumulative translation adjustment | (336.3 | ) | (336.3 | ) | (336.3 | ) | (336.3 | ) | 1,008.9 | (336.3 | ) | |||||||
| Changes in market value of derivative financial instruments | (0.4 | ) | (0.4 | ) | (0.4 | ) | (0.4 | ) | 1.2 | (0.4 | ) | |||||||
| Comprehensive income (loss) attributable to Pentair plc | $ | (121.8 | ) | $ | (113.3 | ) | $ | (126.3 | ) | $ | (100.5 | ) | $ | 340.1 | $ | (121.8 | ) |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Pentair plc and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 2014
| In millions | Parent Company Guarantor | Subsidiary Guarantor | Subsidiary Issuer | Non-guarantor Subsidiaries | Eliminations | Consolidated Total | ||||||||||||
| Assets | ||||||||||||||||||
| Current assets | ||||||||||||||||||
| Cash and cash equivalents | $ | — | $ | — | $ | 0.1 | $ | 110.3 | $ | — | $ | 110.4 | ||||||
| Accounts and notes receivable, net | — | — | — | 1,206.8 | (0.9 | ) | 1,205.9 | |||||||||||
| Inventories | — | — | — | 1,130.4 | — | 1,130.4 | ||||||||||||
| Other current assets | — | 17.6 | 2.0 | 367.6 | (20.4 | ) | 366.8 | |||||||||||
| Current assets held for sale | — | — | — | 80.6 | — | 80.6 | ||||||||||||
| Total current assets | — | 17.6 | 2.1 | 2,895.7 | (21.3 | ) | 2,894.1 | |||||||||||
| Property, plant and equipment, net | — | — | — | 950.0 | — | 950.0 | ||||||||||||
| Other assets | ||||||||||||||||||
| Investments in subsidiaries | 4,733.0 | 4,893.8 | 7,612.2 | — | (17,239.0 | ) | — | |||||||||||
| Goodwill | — | — | — | 4,741.9 | — | 4,741.9 | ||||||||||||
| Intangibles, net | — | — | — | 1,608.1 | — | 1,608.1 | ||||||||||||
| Other non-current assets | 80.2 | — | 1,381.8 | 345.0 | (1,370.8 | ) | 436.2 | |||||||||||
| Non-current assets held for sale | — | — | — | 24.9 | — | 24.9 | ||||||||||||
| Total other assets | 4,813.2 | 4,893.8 | 8,994.0 | 6,719.9 | (18,609.8 | ) | 6,811.1 | |||||||||||
| Total assets | $ | 4,813.2 | $ | 4,911.4 | $ | 8,996.1 | $ | 10,565.6 | $ | (18,631.1 | ) | $ | 10,655.2 | |||||
| Liabilities and Equity | ||||||||||||||||||
| Current liabilities | ||||||||||||||||||
| Current maturities of long-term debt and short-term borrowings | $ | — | $ | — | $ | — | $ | 6.7 | $ | — | $ | 6.7 | ||||||
| Accounts payable | 0.9 | — | — | 583.1 | (0.9 | ) | 583.1 | |||||||||||
| Employee compensation and benefits | 0.2 | 0.6 | — | 304.7 | — | 305.5 | ||||||||||||
| Other current liabilities | 120.6 | 2.2 | 10.9 | 595.8 | (20.4 | ) | 709.1 | |||||||||||
| Current liabilities held for sale | — | — | — | 35.1 | — | 35.1 | ||||||||||||
| Total current liabilities | 121.7 | 2.8 | 10.9 | 1,525.4 | (21.3 | ) | 1,639.5 | |||||||||||
| Other liabilities | ||||||||||||||||||
| Long-term debt | 11.4 | 175.6 | 2,860.6 | 1,320.6 | (1,370.8 | ) | 2,997.4 | |||||||||||
| Pension and other post-retirement compensation and benefits | — | — | — | 322.0 | — | 322.0 | ||||||||||||
| Deferred tax liabilities | — | — | 2.9 | 525.4 | — | 528.3 | ||||||||||||
| Other non-current liabilities | 16.3 | — | — | 481.4 | — | 497.7 | ||||||||||||
| Non-current liabilities held for sale | — | — | — | 6.5 | — | 6.5 | ||||||||||||
| Total liabilities | 149.4 | 178.4 | 2,874.4 | 4,181.3 | (1,392.1 | ) | 5,991.4 | |||||||||||
| Equity | 4,663.8 | 4,733.0 | 6,121.7 | 6,384.3 | (17,239.0 | ) | 4,663.8 | |||||||||||
| Total liabilities and equity | $ | 4,813.2 | $ | 4,911.4 | $ | 8,996.1 | $ | 10,565.6 | $ | (18,631.1 | ) | $ | 10,655.2 |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Pentair plc and Subsidiaries
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2014
| In millions | Parent Company Guarantor | Guarantor Subsidiary | Subsidiary Issuer | Non-guarantor Subsidiaries | Eliminations | Consolidated Total | ||||||||||||
| Operating activities | ||||||||||||||||||
| Net cash provided by (used for) operating activities | $ | 169.0 | $ | 208.6 | $ | 207.0 | $ | 1,093.8 | $ | (670.0 | ) | $ | 1,008.4 | |||||
| Investing activities | ||||||||||||||||||
| Capital expenditures | — | — | — | (129.6 | ) | — | (129.6 | ) | ||||||||||
| Proceeds from sale of property and equipment | — | — | — | 13.1 | — | 13.1 | ||||||||||||
| Proceeds from sale of businesses, net | — | — | — | 0.3 | — | 0.3 | ||||||||||||
| Acquisitions, net of cash acquired | — | — | — | (12.3 | ) | — | (12.3 | ) | ||||||||||
| Net intercompany loan activity | — | — | 37.8 | 112.2 | (150.0 | ) | — | |||||||||||
| Other | — | — | — | 0.2 | — | 0.2 | ||||||||||||
| Net cash provided by (used for) investing activities | — | — | 37.8 | (16.1 | ) | (150.0 | ) | (128.3 | ) | |||||||||
| Financing activities | ||||||||||||||||||
| Net receipts of short-term borrowings | — | — | — | 0.5 | — | 0.5 | ||||||||||||
| Net receipts of commercial paper and revolving long-term debt | — | — | 458.7 | 9.9 | — | 468.6 | ||||||||||||
| Proceeds from long-term debt | — | — | — | 2.2 | — | 2.2 | ||||||||||||
| Repayment of long-term debt | — | — | — | (16.8 | ) | — | (16.8 | ) | ||||||||||
| Debt issuance costs | — | — | (3.1 | ) | — | — | (3.1 | ) | ||||||||||
| Net change in advances to subsidiaries | 741.1 | (208.6 | ) | (747.3 | ) | (605.2 | ) | 820.0 | — | |||||||||
| Excess tax benefits from share-based compensation | — | — | — | 12.6 | — | 12.6 | ||||||||||||
| Shares issued to employees, net of shares withheld | — | — | — | 37.0 | — | 37.0 | ||||||||||||
| Repurchases of ordinary shares | (699.2 | ) | — | — | (450.8 | ) | — | (1,150.0 | ) | |||||||||
| Dividends paid | (211.4 | ) | — | — | — | — | (211.4 | ) | ||||||||||
| Purchase of noncontrolling interest | — | — | — | (134.7 | ) | — | (134.7 | ) | ||||||||||
| Net cash provided by (used for) financing activities | (169.5 | ) | (208.6 | ) | (291.7 | ) | (1,145.3 | ) | 820.0 | (995.1 | ) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | — | (30.6 | ) | — | (30.6 | ) | ||||||||||
| Change in cash and cash equivalents | (0.5 | ) | — | (46.9 | ) | (98.2 | ) | — | (145.6 | ) | ||||||||
| Cash and cash equivalents, beginning of year | 0.5 | — | 47.0 | 208.5 | — | 256.0 | ||||||||||||
| Cash and cash equivalents, end of year | $ | — | $ | — | $ | 0.1 | $ | 110.3 | $ | — | $ | 110.4 |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Pentair plc and Subsidiaries
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Year Ended December 31, 2013
| In millions | Parent Company Guarantor | Subsidiary Issuer | Non-guarantor Subsidiaries | Eliminations | Consolidated Total | ||||||||||
| Net sales | $ | — | $ | — | $ | 6,999.7 | $ | — | $ | 6,999.7 | |||||
| Cost of goods sold | — | — | 4,629.6 | — | 4,629.6 | ||||||||||
| Gross profit | — | — | 2,370.1 | — | 2,370.1 | ||||||||||
| Selling, general and administrative | 21.0 | 13.3 | 1,459.4 | — | 1,493.7 | ||||||||||
| Research and development | — | — | 122.8 | — | 122.8 | ||||||||||
| Impairment of trade names | — | — | 11.0 | — | 11.0 | ||||||||||
| Operating (loss) income | (21.0 | ) | (13.3 | ) | 776.9 | — | 742.6 | ||||||||
| Loss (earnings) from continuing operations of investment in subsidiaries | (539.0 | ) | (508.6 | ) | — | 1,047.6 | — | ||||||||
| Other (income) expense: | |||||||||||||||
| Gain on sale of businesses, net | — | — | (20.8 | ) | — | (20.8 | ) | ||||||||
| Equity income of unconsolidated subsidiaries | — | — | (2.0 | ) | — | (2.0 | ) | ||||||||
| Interest income | — | (99.2 | ) | (53.4 | ) | 148.2 | (4.4 | ) | |||||||
| Interest expense | 5.6 | 106.0 | 111.9 | (148.2 | ) | 75.3 | |||||||||
| Income (loss) from continuing operations before income taxes and noncontrolling interest | 512.4 | 488.5 | 741.2 | (1,047.6 | ) | 694.5 | |||||||||
| Provision for income taxes | 0.7 | 1.4 | 174.9 | — | 177.0 | ||||||||||
| Net income (loss) from continuing operations before noncontrolling interest | 511.7 | 487.1 | 566.3 | (1,047.6 | ) | 517.5 | |||||||||
| Income from discontinued operations, net of tax | — | — | 25.9 | — | 25.9 | ||||||||||
| Loss from sale of discontinued operations, net of tax | — | — | (0.8 | ) | — | (0.8 | ) | ||||||||
| Earnings (loss) from discontinued operations of investment in subsidiaries | 25.1 | 25.1 | — | (50.2 | ) | — | |||||||||
| Net income (loss) before noncontrolling interest | 536.8 | 512.2 | 591.4 | (1,097.8 | ) | 542.6 | |||||||||
| Noncontrolling interest | — | — | 5.8 | — | 5.8 | ||||||||||
| Net income (loss) attributable to Pentair plc | $ | 536.8 | $ | 512.2 | $ | 585.6 | $ | (1,097.8 | ) | $ | 536.8 | ||||
| Net income (loss) from continuing operations attributable to Pentair plc | $ | 511.7 | $ | 487.1 | $ | 560.5 | $ | (1,047.6 | ) | $ | 511.7 | ||||
| Comprehensive income (loss), net of tax | |||||||||||||||
| Net income (loss) before noncontrolling interest | $ | 536.8 | $ | 512.2 | $ | 591.4 | $ | (1,097.8 | ) | $ | 542.6 | ||||
| Changes in cumulative translation adjustment | (31.3 | ) | (31.3 | ) | (29.1 | ) | 62.6 | (29.1 | ) | ||||||
| Amortization of pension and other post-retirement prior service cost | (0.4 | ) | (0.4 | ) | (0.4 | ) | 0.8 | (0.4 | ) | ||||||
| Changes in market value of derivative financial instruments | (0.3 | ) | (0.3 | ) | (0.3 | ) | 0.6 | (0.3 | ) | ||||||
| Total comprehensive income (loss) | 504.8 | 480.2 | 561.6 | (1,033.8 | ) | 512.8 | |||||||||
| Less: Comprehensive income (loss) attributable to noncontrolling interest | — | — | 8.0 | — | 8.0 | ||||||||||
| Comprehensive income (loss) attributable to Pentair plc | $ | 504.8 | $ | 480.2 | $ | 553.6 | $ | (1,033.8 | ) | $ | 504.8 |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Pentair plc and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 2013
| In millions | Parent Company Guarantor | Subsidiary Issuer | Non-guarantor Subsidiaries | Eliminations | Consolidated Total | ||||||||||
| Assets | |||||||||||||||
| Current assets | |||||||||||||||
| Cash and cash equivalents | $ | 0.5 | $ | 47.0 | $ | 208.5 | $ | — | $ | 256.0 | |||||
| Accounts and notes receivable, net | 2.9 | 4.0 | 1,341.7 | (63.6 | ) | $ | 1,285.0 | ||||||||
| Inventories | — | — | 1,195.1 | — | $ | 1,195.1 | |||||||||
| Other current assets | 1.4 | 0.6 | 359.6 | — | $ | 361.6 | |||||||||
| Current assets held for sale | — | — | 134.4 | — | $ | 134.4 | |||||||||
| Total current assets | 4.8 | 51.6 | 3,239.3 | (63.6 | ) | 3,232.1 | |||||||||
| Property, plant and equipment, net | — | — | 1,044.3 | — | 1,044.3 | ||||||||||
| Other assets | |||||||||||||||
| Investments in subsidiaries | 6,224.7 | 8,066.6 | — | (14,291.3 | ) | — | |||||||||
| Goodwill | — | — | 4,860.7 | — | 4,860.7 | ||||||||||
| Intangibles, net | — | — | 1,749.9 | — | 1,749.9 | ||||||||||
| Other non-current assets | 31.6 | 1,302.7 | 352.4 | (1,296.7 | ) | 390.0 | |||||||||
| Non-current assets held for sale | — | — | 466.3 | — | 466.3 | ||||||||||
| Total other assets | 6,256.3 | 9,369.3 | 7,429.3 | (15,588.0 | ) | 7,466.9 | |||||||||
| Total assets | $ | 6,261.1 | $ | 9,420.9 | $ | 11,712.9 | $ | (15,651.6 | ) | $ | 11,743.3 | ||||
| Liabilities and Equity | |||||||||||||||
| Current liabilities | |||||||||||||||
| Current maturities of long-term debt and short-term borrowings | $ | — | $ | — | $ | 2.5 | $ | — | $ | 2.5 | |||||
| Accounts payable | 48.1 | 8.6 | 583.8 | (63.6 | ) | 576.9 | |||||||||
| Employee compensation and benefits | 0.5 | — | 311.9 | — | 312.4 | ||||||||||
| Other current liabilities | 99.6 | 11.7 | 534.6 | — | 645.9 | ||||||||||
| Current liabilities held for sale | — | — | 72.5 | — | 72.5 | ||||||||||
| Total current liabilities | 148.2 | 20.3 | 1,505.3 | (63.6 | ) | 1,610.2 | |||||||||
| Other liabilities | |||||||||||||||
| Long-term debt | — | 2,401.9 | 1,442.7 | (1,296.7 | ) | 2,547.9 | |||||||||
| Pension and other post-retirement compensation and benefits | — | — | 320.2 | — | 320.2 | ||||||||||
| Deferred tax liabilities | — | 2.2 | 554.8 | — | 557.0 | ||||||||||
| Other non-current liabilities | 17.6 | — | 438.8 | — | 456.4 | ||||||||||
| Non-current liabilities held for sale | — | — | 33.9 | — | 33.9 | ||||||||||
| Total liabilities | 165.8 | 2,424.4 | 4,295.7 | (1,360.3 | ) | 5,525.6 | |||||||||
| Equity | |||||||||||||||
| Shareholders’ equity attributable to Pentair plc and subsidiaries | 6,095.3 | 6,996.5 | 7,294.8 | (14,291.3 | ) | 6,095.3 | |||||||||
| Noncontrolling interest | — | — | 122.4 | — | 122.4 | ||||||||||
| Total equity | 6,095.3 | 6,996.5 | 7,417.2 | (14,291.3 | ) | 6,217.7 | |||||||||
| Total liabilities and equity | $ | 6,261.1 | $ | 9,420.9 | $ | 11,712.9 | $ | (15,651.6 | ) | $ | 11,743.3 |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Pentair plc and Subsidiaries
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2013
| In millions | Parent Company Guarantor | Subsidiary Issuer | Non-guarantor Subsidiaries | Eliminations | Consolidated Total | ||||||||||
| Operating activities | |||||||||||||||
| Net cash provided by (used for) operating activities | $ | 534.2 | $ | 514.0 | $ | 977.5 | $ | (1,097.8 | ) | $ | 927.9 | ||||
| Investing activities | |||||||||||||||
| Capital expenditures | — | — | (170.0 | ) | — | (170.0 | ) | ||||||||
| Proceeds from sale of property and equipment | — | — | 6.0 | — | 6.0 | ||||||||||
| Proceeds from sale of businesses, net | — | — | 43.5 | — | 43.5 | ||||||||||
| Acquisitions, net of cash acquired | — | — | (92.4 | ) | — | (92.4 | ) | ||||||||
| Other | — | — | 1.7 | — | 1.7 | ||||||||||
| Net cash provided by (used for) investing activities | — | — | (211.2 | ) | — | (211.2 | ) | ||||||||
| Financing activities | |||||||||||||||
| Net receipts of commercial paper and revolving long-term debt | — | 104.2 | — | — | 104.2 | ||||||||||
| Proceeds from long-term debt | — | — | 0.7 | — | 0.7 | ||||||||||
| Repayment of long-term debt | — | — | (7.4 | ) | — | (7.4 | ) | ||||||||
| Debt issuance costs | — | (1.4 | ) | — | — | (1.4 | ) | ||||||||
| Net change in advances to subsidiaries | (339.5 | ) | (569.8 | ) | (188.5 | ) | 1,097.8 | — | |||||||
| Excess tax benefits from share-based compensation | — | — | 16.8 | — | 16.8 | ||||||||||
| Shares issued to employees, net of shares withheld | — | — | 80.0 | — | 80.0 | ||||||||||
| Repurchases of ordinary shares | — | — | (715.8 | ) | — | (715.8 | ) | ||||||||
| Dividends paid | (194.2 | ) | — | — | — | (194.2 | ) | ||||||||
| Distributions to noncontrolling interest | — | — | (2.0 | ) | — | (2.0 | ) | ||||||||
| Net cash provided by (used for) financing activities | (533.7 | ) | (467.0 | ) | (816.2 | ) | 1,097.8 | (719.1 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | 21.0 | — | 21.0 | ||||||||||
| Change in cash and cash equivalents | 0.5 | 47.0 | (28.9 | ) | — | 18.6 | |||||||||
| Cash and cash equivalents, beginning of year | — | — | 237.4 | — | 237.4 | ||||||||||
| Cash and cash equivalents, end of year | $ | 0.5 | $ | 47.0 | $ | 208.5 | $ | — | $ | 256.0 |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Pentair plc and Subsidiaries
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Year Ended December 31, 2012
| In millions | Parent Company Guarantor | Subsidiary Issuer | Non-guarantor Subsidiaries | Eliminations | Consolidated Total | ||||||||||
| Net sales | $ | — | $ | — | $ | 4,306.8 | $ | — | $ | 4,306.8 | |||||
| Cost of goods sold | — | — | 3,040.9 | — | 3,040.9 | ||||||||||
| Gross profit | — | — | 1,265.9 | — | 1,265.9 | ||||||||||
| Selling, general and administrative | 5.0 | (3.8 | ) | 1,116.5 | — | 1,117.7 | |||||||||
| Research and development | — | — | 92.3 | — | 92.3 | ||||||||||
| Impairment of trade names | — | — | 60.7 | — | 60.7 | ||||||||||
| Operating (loss) income | (5.0 | ) | 3.8 | (3.6 | ) | — | (4.8 | ) | |||||||
| Loss (earnings) from continuing operations of investment in subsidiaries | 75.7 | 76.6 | — | (152.3 | ) | — | |||||||||
| Other (income) expense: | |||||||||||||||
| Loss on early extinguishment of debt | — | — | 75.4 | — | 75.4 | ||||||||||
| Equity income of unconsolidated subsidiaries | — | — | (2.3 | ) | — | (2.3 | ) | ||||||||
| Interest income | — | (9.2 | ) | (2.0 | ) | 9.2 | (2.0 | ) | |||||||
| Interest expense | 0.1 | 10.2 | 69.1 | (9.2 | ) | 70.2 | |||||||||
| Income (loss) from continuing operations before income taxes and noncontrolling interest | (80.8 | ) | (73.8 | ) | (143.8 | ) | 152.3 | (146.1 | ) | ||||||
| Provision (benefit) for income taxes | 0.7 | 1.1 | (69.0 | ) | — | (67.2 | ) | ||||||||
| Net income (loss) from continuing operations before noncontrolling interest | (81.5 | ) | (74.9 | ) | (74.8 | ) | 152.3 | (78.9 | ) | ||||||
| Loss from discontinued operations, net of tax | — | — | (25.7 | ) | — | (25.7 | ) | ||||||||
| Earnings (loss) from discontinued operations of investment in subsidiaries | (25.7 | ) | (25.7 | ) | — | 51.4 | — | ||||||||
| Net income (loss) before noncontrolling interest | (107.2 | ) | (100.6 | ) | (100.5 | ) | 203.7 | (104.6 | ) | ||||||
| Noncontrolling interest | — | — | 2.6 | — | 2.6 | ||||||||||
| Net income (loss) attributable to Pentair plc | $ | (107.2 | ) | $ | (100.6 | ) | $ | (103.1 | ) | $ | 203.7 | $ | (107.2 | ) | |
| Net income (loss) from continuing operations attributable to Pentair plc | $ | (81.5 | ) | $ | (74.9 | ) | $ | (77.4 | ) | $ | 152.3 | $ | (81.5 | ) | |
| Comprehensive income (loss), net of tax | |||||||||||||||
| Net income (loss) before noncontrolling interest | $ | (107.2 | ) | $ | (100.6 | ) | $ | (100.5 | ) | $ | 203.7 | $ | (104.6 | ) | |
| Changes in cumulative translation adjustment | 30.0 | 30.0 | 31.4 | (60.0 | ) | 31.4 | |||||||||
| Amortization of pension and other post-retirement prior service cost | (0.3 | ) | (0.3 | ) | (0.3 | ) | 0.6 | (0.3 | ) | ||||||
| Changes in market value of derivative financial instruments | (3.6 | ) | (3.6 | ) | (3.6 | ) | 7.2 | (3.6 | ) | ||||||
| Total comprehensive income (loss) | (81.1 | ) | (74.5 | ) | (73.0 | ) | 151.5 | (77.1 | ) | ||||||
| Less: Comprehensive income (loss) attributable to noncontrolling interest | — | — | 4.0 | — | 4.0 | ||||||||||
| Comprehensive income (loss) attributable to Pentair plc | $ | (81.1 | ) | $ | (74.5 | ) | $ | (77.0 | ) | $ | 151.5 | $ | (81.1 | ) |
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Pentair plc and Subsidiaries
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2012
| In millions | Parent Company Guarantor | Subsidiary Issuer | Non-guarantor Subsidiaries | Eliminations | Consolidated Total | ||||||||||
| Operating activities | |||||||||||||||
| Net cash provided by (used for) operating activities | $ | (109.0 | ) | $ | (88.2 | ) | $ | 37.2 | $ | 203.7 | $ | 43.7 | |||
| Investing activities | |||||||||||||||
| Capital expenditures | — | — | (94.5 | ) | — | (94.5 | ) | ||||||||
| Proceeds from sale of property and equipment | — | — | 5.5 | — | 5.5 | ||||||||||
| Acquisitions, net of cash acquired | — | 300.1 | 170.4 | — | 470.5 | ||||||||||
| Other | — | — | (5.9 | ) | — | (5.9 | ) | ||||||||
| Net cash provided by (used for) investing activities | — | 300.1 | 75.5 | — | 375.6 | ||||||||||
| Financing activities | |||||||||||||||
| Net repayments of short-term borrowings | — | — | (3.7 | ) | — | (3.7 | ) | ||||||||
| Net receipts (repayments) of commercial paper and revolving long-term debt | — | 424.7 | (170.9 | ) | — | 253.8 | |||||||||
| Proceeds from long-term debt | — | 594.3 | — | — | 594.3 | ||||||||||
| Repayment of long-term debt | — | — | (617.2 | ) | — | (617.2 | ) | ||||||||
| Debt issuance costs | — | (8.7 | ) | (1.0 | ) | — | (9.7 | ) | |||||||
| Debt extinguishment costs | — | — | (74.8 | ) | — | (74.8 | ) | ||||||||
| Net change in advances to subsidiaries | 157.0 | (1,222.2 | ) | 1,268.9 | (203.7 | ) | — | ||||||||
| Excess tax benefits from share-based compensation | — | — | 5.0 | — | 5.0 | ||||||||||
| Shares issued to employees, net of shares withheld | — | — | 68.2 | — | 68.2 | ||||||||||
| Repurchases of ordinary shares | — | — | (334.2 | ) | — | (334.2 | ) | ||||||||
| Dividends paid | (48.0 | ) | — | (64.4 | ) | — | (112.4 | ) | |||||||
| Distributions to noncontrolling interest | — | — | (1.6 | ) | — | (1.6 | ) | ||||||||
| Net cash provided by (used for) financing activities | 109.0 | (211.9 | ) | 74.3 | (203.7 | ) | (232.3 | ) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | 0.3 | — | 0.3 | ||||||||||
| Change in cash and cash equivalents | — | — | 187.3 | — | 187.3 | ||||||||||
| Cash and cash equivalents, beginning of year | — | — | 50.1 | — | 50.1 | ||||||||||
| Cash and cash equivalents, end of year | $ | — | $ | — | $ | 237.4 | $ | — | $ | 237.4 |
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