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

Forward-looking statements

This report contains statements that we believe to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact are forward-looking statements. Without limitation, any statements preceded or followed by or that include the words "targets," "plans," "believes," "expects," "intends," "will," "likely," "may," "anticipates," "estimates," "projects," "should," "would," "positioned," "strategy," "future" or words, phrases or terms of similar substance or the negative thereof, are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors include the ability to satisfy the necessary conditions to consummate the Proposed Separation (as defined below) on a timely basis or at all; the ability to successfully separate the Water and Electrical businesses and realize the anticipated benefits from the Proposed Separation; adverse effects on the Water and Electrical business operations or financial results and the market price of our shares as a result of the announcement or consummation of the Proposed Separation; unanticipated transaction expenses, such as litigation or legal settlement expenses; failure to obtain tax rulings or changes in tax laws; changes in capital market conditions; the impact of the Proposed Separation on our employees, customers and suppliers; overall global economic and business conditions impacting the Water and Electrical businesses; future opportunities that our board may determine present greater potential to increase shareholder value; the ability of the Water and Electrical businesses to operate independently following the Proposed Separation; the ability to achieve the benefits of our restructuring plans; the ability to successfully identify, finance, complete and integrate acquisitions; competition and pricing pressures in the markets we serve; the strength of housing and related markets; volatility in currency exchange rates and commodity prices; inability to generate savings from excellence in operations initiatives consisting of lean enterprise, supply management and cash flow practices; increased risks associated with operating foreign businesses; the ability to deliver backlog and win future project work; failure of markets to accept new product introductions and enhancements; the impact of changes in laws and regulations, including those that limit U.S. tax benefits; the outcome of litigation and governmental proceedings; and the ability to achieve our long-term strategic operating goals. Additional information concerning these and other factors is contained in our filings with the U.S. Securities and Exchange Commission (the "SEC"), including this Annual Report on Form 10-K. All forward-looking statements speak only as of the date of this report. Pentair plc assumes no obligation, and disclaims any obligation, to update the information contained in this report.

Overview

Pentair plc is a focused diversified industrial manufacturing company comprising two reporting segments: Water and Electrical. We classify our operations into business segments based primarily on types of products offered and markets served. For the year ended December 31, 2017, Water and Electrical accounted for 58% and 42% of total revenues, respectively.

Although our jurisdiction of organization is Ireland, we manage our affairs so that we are centrally managed and controlled in the United Kingdom (the "U.K.") and therefore have our tax residency in the U.K.

On September 18, 2015, we acquired, as part of Electrical, all of the outstanding shares of capital stock of ERICO Global Company ("ERICO") for approximately $1.8 billion in cash (the "ERICO Acquisition"). ERICO is a leading global manufacturer and marketer of engineered electrical and fastening products for electrical, mechanical and civil applications. ERICO has employees in 30 countries across the world with recognized brands including CADDY fixing, fastening and support products; ERICO electrical grounding, bonding and connectivity products and LENTON engineered systems.

On April 28, 2017 we completed the sale of the Valves & Controls business to Emerson Electric Co. for $3.15 billion in cash. The sale resulted in a gain of $181.1 million, net of tax. The results of the Valves & Controls business have been presented as discontinued operations and the related assets and liabilities have been reclassified as held for sale for all periods presented. The Valves & Controls business was previously disclosed as a stand-alone reporting segment.

On May 9, 2017, we announced that our Board of Directors approved a plan to separate our Water business and Electrical business into two independent, publicly-traded companies (the "Proposed Separation"). The Proposed Separation is expected to occur through a tax-free spin-off of the Electrical business to Pentair shareholders.

Completion of the Proposed Separation is subject to certain customary conditions, including, among other things, final approval of the transaction by Pentair's Board of Directors, receipt of tax opinions and rulings and effectiveness of appropriate filings with the SEC. Upon completion of the Proposed Separation, it is anticipated that Electrical's jurisdiction of organization will be Ireland, but that it will manage its affairs so that it will be centrally managed and controlled in the U.K. and therefore will have its tax residency in the U.K.

We are targeting April 30, 2018 for the completion of the Proposed Separation; however, there can be no assurance regarding the ultimate timing of the Proposed Separation or that the Proposed Separation will be completed.

Key trends and uncertainties regarding our existing business

The following trends and uncertainties affected our financial performance in 2017 and 2016, and will likely impact our results in the future:

•	During 2017 and 2016, we continued execution of certain business restructuring initiatives aimed at reducing our fixed cost structure and, during 2017, began realigning our business in contemplation of the Proposed Separation. We expect that these actions will contribute to margin growth in 2018.

•

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

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

In 2018, our operating objectives include the following:

•	Complete the execution of the Proposed Separation to create two industry-leading pure-play companies in Water and Electrical.

•	Driving operating excellence through PIMS, with specific focus on sourcing and supply management, cash flow management and lean operations;

•	Achieving differentiated revenue growth through new products and global and market expansion;

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

•	Focusing on developing global talent in light of our global presence.

CONSOLIDATED RESULTS OF OPERATIONS

The consolidated results of operations were as follows:

	Years ended December 31										% / point change
In millions	2017			2016			2015				2017 vs 2016		2016 vs 2015
Net sales	$	4,936.5		$	4,890.0		$	4,616.4			1.0	%	5.9	%
Cost of goods sold	3,107.4			3,095.9			3,017.6				0.4	%	2.6	%
Gross profit	1,829.1			1,794.1			1,598.8				2.0	%	12.2	%
% of net sales	37.1		%	36.7		%	34.6		%		0.4	pts	2.1	pts
Selling, general and administrative	1,032.5			979.3			884.0				5.4	%	10.8	%
% of net sales	20.9		%	20.0		%	19.1		%		0.9	pts	0.9	pts
Research and development	115.8			114.1			98.7				1.5	%	15.6	%
% of net sales	2.3		%	2.3		%	2.1		%		—		0.2	pts
Operating income	680.8			700.7			616.1				(2.8	)%	13.7	%
% of net sales	13.8		%	14.3		%	13.3		%		(0.5	) pts	1.0	pts
Other (income) expense
Loss on sale of businesses	4.2			3.9			3.2				7.7	%	21.9	%
Loss on early extinguishment of debt	101.4			—			—				N.M.		N.M.
Net interest expense	87.3			140.1			101.9				(37.7	)%	37.5	%
Income from continuing operations before income taxes	489.2			561.0			512.5				(12.8	)%	9.5	%
Provision for income taxes	9.2			109.4			115.4				(91.6	)%	(5.2	) %
Effective tax rate	1.9		%	19.5		%	22.5		%		(17.6	) pts	(3.0	) pts

N.M. Not Meaningful

Net sales

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

	2017 vs 2016			2016 vs 2015
Volume	(1.0	)%		(1.7	)%
Price	0.5			0.3
Core growth	(0.5	)		(1.4	)
Acquisition	0.9			8.1
Currency	0.6			(0.8	)
Total	1.0	%		5.9	%

The 1.0 percent increase in consolidated net sales in 2017 from 2016 was primarily the result of:

•	increased sales volume in our industrial business primarily in the U.S.;

•	increased sales related to business acquisitions that occurred in the fourth quarter of 2016 and the first quarter of 2017; and

•	favorable foreign currency effects during the year ended December 31, 2017.

These increases were partially offset by:

•	continued lower project sales volume particularly in the energy and industrial businesses;

•	large job adjustments to net sales of $9.7 million in 2017.

The 5.9 percent increase in consolidated net sales in 2016 from 2015 was primarily the result of:

•	sales of $516.1 million in 2016 as a result of the ERICO Acquisition, compared to sales of $147.0 million in 2015; and

•	increased volume driving core sales growth in our North America pool business.

These increases were partially offset by:

•	continued slowdown in capital spending, driving core sales declines in our industrial and energy businesses;

•	slowing economic activity in certain developing regions, including China and Brazil; and

•	a strong U.S. dollar causing unfavorable foreign currency effects.

Gross profit

The 0.4 percentage point increase in gross profit as a percentage of sales in 2017 from 2016 was primarily the result of:

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

•	favorable mix as a result of the decline in lower margin project sales and growth in higher margin product sales; and

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

These increases were partially offset by:

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

•	large job adjustments negatively impacting gross profit by $16.4 million in 2017.

The 2.1 percentage point increase in gross profit as a percentage of sales in 2016 from 2015 was primarily the result of:

•	higher sales volumes, which resulted in increased leverage on fixed expenses included in cost of goods sold;

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

•	a decrease in cost of goods sold of $35.7 million in 2016 compared to 2015 as a result of inventory fair value step-up recorded as part of the Electrical acquisitions in 2015.

These increases were partially offset by:

•	inflationary increases related to raw materials and labor costs.

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

The 0.9 percentage point increase in SG&A expense as a percentage of sales in 2017 from 2016 and was driven by:

•	restructuring costs of $30.7 million in 2017, compared to $20.6 million in 2016;

•	costs incurred in anticipation of the Proposed Separation of $53.1 million in 2017;

•	non-cash charges of $32.0 million related to trade name and other impairments; and

•	increased investment in sales and marketing to drive growth.

These increases were partially offset by:

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

•	a benefit from the reversal of a $13.3 million indemnification liability in 2017 related to our 2012 transaction with Tyco (now known as Johnson Controls International plc); and

•	"mark-to-market" actuarial losses related to pension and other post-retirement benefit plans of $1.6 million in 2017, compared to $4.2 million in 2016.

The 0.9 percentage point increase in SG&A expense as a percentage of sales in 2016 from 2015 and was driven by the following:

•	"mark-to-market" actuarial losses related to pension and other post-retirement benefit plans of $4.2 million in 2016, compared to "mark-to-market" actuarial gains of $23.0 million in 2015;

•	an increase in intangible asset amortization as a result of the ERICO Acquisition that occurred at the end of the third quarter in 2015;

•	a non-cash impairment charge of $13.3 million related to a trade name intangible asset in Electrical; and

•	increased investment in sales and marketing to drive growth.

These increases were partially offset by:

•	restructuring costs of $24.5 million in 2016, compared to $41.3 million in 2015;

•	deal related costs and expenses of $14.3 million in 2015, which did not occur in 2016; and

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

Net interest expense

The 37.7 percent decrease in net interest expense in 2017 from 2016 was primarily the result of:

•	the impact of lower debt levels during 2017 compared to 2016. In May 2017, a portion of the proceeds from the sale of the Valves & Controls business was utilized to repay all commercial paper and revolving long term debt and for the early extinguishment of $1,659.3 million aggregate principal amount of certain series of fixed rate outstanding notes.

This decrease was partially offset by:

•	increased overall interest rates in effect on our outstanding debt during 2017 compared to 2016.

The 37.5 percent increase in net interest expense in 2016 from 2015 was primarily the result of:

•	the impact of higher debt levels during 2016, compared to 2015, primarily as the result of the September 2015 issuance of senior notes used to finance the ERICO Acquisition; and

•	increased overall interest rates in effect on our outstanding debt.

Loss on early extinguishment of debt

In May 2017, we repurchased aggregate principal of certain series of outstanding fixed rate debt totaling $1,659.3 million. Total costs of $101.4 million associated with the repurchases were recorded as Loss on early extinguishment of debt.

Provision for income taxes

The 17.6 percentage point decrease in the effective tax rate in 2017 from 2016 was primarily due to:

•	a net provisional tax benefit of $84.8 million recognized in 2017 as a result of the enactment of U.S. tax reform legislation. We expect our effective tax rate to approximate 18% in future periods, which is an improvement from our historical rate of 20%; and

•	the unfavorable tax impact of restructuring costs in 2016 in jurisdictions with low tax benefits.

The 3.0 percentage point decrease in the effective tax rate in 2016 from 2015 was primarily due to:

•	the mix of global earnings toward lower tax jurisdictions; and

•	the unfavorable tax impact of transaction costs in 2015 related to the ERICO Acquisition.

SEGMENT RESULTS OF OPERATIONS

This summary that follows provides a discussion of the results of operations of each of our two reportable segments (Water and Electrical). Each of these segments comprises various product offerings that serve multiple end markets.

We evaluate performance based on sales and segment income and use a variety of ratios to measure performance of our reporting segments. Segment income represents equity income of unconsolidated subsidiaries and operating income exclusive

of intangible amortization, 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.

Water

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

	Years ended December 31										% / point change
In millions	2017			2016			2015				2017 vs 2016		2016 vs 2015
Net sales	$	2,844.4		$	2,777.7		$	2,808.3			2.4	%	(1.1	)%
Segment income	546.0			494.0			469.0				10.5	%	5.3	%
% of net sales	19.2		%	17.8		%	16.7		%		1.4	pts	1.1	pts

Net sales

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

	2017 vs 2016			2016 vs 2015
Volume	—	%		(1.0	)%
Price	0.8			0.9
Core growth	0.8			(0.1	)
Acquisition (divestiture)	1.1			(0.5	)
Currency	0.5			(0.5	)
Total	2.4	%		(1.1	)%

The 2.4 percent increase in Water sales in 2017 from 2016 was primarily the result of:

•	increased sales volume in our industrial and residential & commercial businesses primarily in the U.S.;

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

•	increased sales related to business acquisitions that occurred in the fourth quarter of 2016 and first quarter of 2017.

These increases were partially offset by:

•	sales volume declines in our infrastructure and food & beverage verticals due to customer delays in capital spending; and

•	large job adjustments to net sales of $9.7 million in 2017.

The 1.1 percent decrease in Water sales in 2016 from 2015 was primarily the result of:

•	continued slowdown in industrial capital spending, driving core sales declines in our industrial business;

•	core sales declines in the food & beverage business due mainly to weak irrigation sales and lower project sales;

•	continued sales declines in China, Southeast Asia and Brazil as the result of economic uncertainty; and

•	a strong U.S. dollar causing unfavorable foreign currency effects.

These decreases were partially offset by:

•	core sales growth related to higher sales of certain pool products primarily serving North American residential housing in 2016 and higher sales of pump and filtration solutions serving the infrastructure business; and

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

Segment income

The components of the change in Water segment income from the prior period were as follows:

	2017		2016
Growth	(0.2	) pts	0.1	pts
Acquisition	(0.1	)	—
Inflation	(1.2	)	(1.2	)
Productivity/Price	2.9		2.2
Total	1.4	pts	1.1	pts

The 1.4 percentage point increase in segment income for Water as a percentage of net sales in 2017 from 2016 was primarily the result of:

•	favorable material savings for certain raw materials and product mix offsetting inflation;

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

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

These increases were partially offset by:

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

•	continued growth investments in research & development and sales & marketing.

The 1.1 percentage point increase in segment income for Water as a percentage of net sales in 2016 from 2015 was primarily the result of:

•	price increases more than offsetting inflationary cost increases; and

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

These increases were partially offset by:

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

Electrical

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

	Years ended December 31										% / point change
In millions	2017			2016			2015				2017 vs 2016		2016 vs 2015
Net sales	$	2,097.9		$	2,116.0		$	1,809.3			(0.9	)%	17.0	%
Segment income	447.0			447.2			395.0				—	%	13.2	%
% of net sales	21.3		%	21.1		%	21.8		%		0.2	pts	(0.7	) pts

Net sales

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

	2017 vs 2016			2016 vs 2015
Volume	(2.2	)%		(2.1	)%
Price	0.1			(0.4	)
Core growth	(2.1	)		(2.5	)
Acquisition	0.7			20.6
Currency	0.5			(1.1	)
Total	(0.9	)%		17.0	%

The 0.9 percent decrease in Electrical sales in 2017 from 2016 was primarily the result of:

•	lower project sales volume as a result of the impact of three large Canadian Oil Sands projects in 2016 that did not recur in 2017.

This decrease was partially offset by:

•	sales volume growth in our industrial business primarily in the U.S.;

•	favorable foreign currency effect during 2017;

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

•	increased sales related to a business acquisition that occurred in the first quarter of 2017.

The 17.0 percent increase in Electrical sales in 2016 from 2015 was primarily the result of:

•	sales of $516.1 million in 2016 as a result of the ERICO Acquisition, compared to sales of $147.0 million in 2015; and

•	core growth in our industrial and residential & commercial businesses.

These increases were partially offset by:

•	continued slowdown in capital spending, particularly in the energy and infrastructure businesses, driving core sales declines; and

•	a strong U.S. dollar causing unfavorable foreign currency effects.

Segment income

The components of the change in Electrical segment income from the prior period were as follows:

	2017		2016
Growth	1.2	pts	(1.5	) pts
Acquisition	(0.1	)	0.6
Inflation	(2.0	)	(1.2	)
Productivity/Price	1.1		1.4
Total	0.2	pts	(0.7	) pts

The 0.2 percentage point increase in segment income for Electrical as a percentage of net sales in 2017 from 2016 was primarily the result of:

•	favorable mix as a result of the decline in lower margin project sales and growth in higher margin product sales in 2017, compared to 2016;

•	higher core sales in our industrial business, which resulted in increased leverage on fixed operating expenses; and

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

These increases were partially offset by:

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

•	lower core sales volumes in our energy and infrastructure businesses, which resulted in decreased leverage on operating expenses; and

•	higher cost of sales during 2017 due to manufacturing footprint rationalization and a new U.S. distribution center. We expect these investments will result in increased productivity and operating leverage in future periods.

The 0.7 percentage point decrease in segment income for Electrical as a percentage of sales in 2016 from 2015 was primarily the result of:

•	lower margin project sales not offsetting the decline in higher margin product sales; and

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

These decreases were partially offset by:

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

•	strong contribution and integration synergies as a result of the ERICO Acquisition.

LIQUIDITY AND CAPITAL RESOURCES

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

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

We experience seasonal cash flows primarily due to seasonal demand in a number of markets within both our Water and Electrical segments. We generally borrow in the first quarter of our fiscal year for operational purposes, which usage reverses in the second quarter as the seasonality of our businesses peaks. End-user demand for pool and certain pumping equipment follows warm weather trends and is at seasonal highs from April to August. The magnitude of the sales spike is partially mitigated by employing some advance sale "early buy" programs (generally including extended payment terms and/or additional discounts). Demand for residential and agricultural water systems is also impacted by weather patterns, particularly by heavy flooding and droughts. Additionally, Electrical generally experiences increased demand for thermal protection products and services during the fall and winter months in the Northern Hemisphere and increased demand for electrical fastening products during the spring and summer months in the Northern Hemisphere.

Operating activities

Cash provided by operating activities of continuing operations was $674.0 million in 2017. It was primarily related to Net income from continuing operations, net of the following non-cash items: depreciations and amortization, loss on sale of businesses, trade name and other impairment, loss on early extinguishment of debt and pension and other post-retirement expense.

Cash provided by operating activities of continuing operations was $702.4 million in 2016, or $104.7 million higher than in 2015. The increase in cash provided by operating activities from continuing operations was due primarily to a $122.6 million increase in Net income from continuing operations, net of the following non-cash items: depreciations and amortization, loss on sale of businesses, trade name impairment and pension and other post-retirement expense.

Investing activities

Net cash provided by investing activities of continuing operations was $2,636.9 million in 2017, compared to net cash used for investing activities of $123.3 million and $2,003.6 million in 2016 and 2015, respectively. The following investing activities impacted our cash flow:

Sale of Businesses

On April 28, 2017 we completed the sale of the Valves & Controls business to Emerson Electric Co. for $3.15 billion in cash.

Acquisitions

During 2017, we completed acquisitions with purchase prices totaling $59.5 million in cash, net of cash acquired.

In November 2016, we paid cash of $25.0 million to acquire a business as part of Water.

In 2015, we paid cash of $1,806.3 million, net of cash acquired, to acquire ERICO Global Company during the third quarter and cash of $96.0 million, net of cash acquired, to acquire Nuheat Industries Limited ("Nuheat") during the second quarter, both as part of Electrical. During the fourth quarter, we paid an additional $0.9 million related to the Nuheat acquisition in settlement of a working capital adjustment.

Capital expenditures

Capital expenditures in 2017, 2016 and 2015 were $70.9 million, $117.8 million and $91.3 million, respectively. We anticipate capital expenditures for fiscal 2018 to be approximately $85.0 million, primarily for capacity expansions of manufacturing facilities located in our low-cost countries, developing new products and general maintenance.

Financing activities

Net cash used for financing activities was $3,432.6 million in 2017. As described further below, we utilized a portion of the proceeds from the sale of the Valves & Controls business to repay our commercial paper and revolving long term debt and for the early extinguishment of certain series of fixed rate debt. Additionally, we repurchased $200.0 million of shares during 2017 and paid $251.7 million of dividends.

Net cash used for financing activities was $600.1 million in 2016. Cash used for financing activities in 2016 was primarily due to net repayments of commercial paper and revolving long-term debt and payments of dividends.

Net cash provided by financing activities was $1,286.3 million in 2015. Cash provided by financing activities in 2016 was primarily due to cash proceeds received from the September 2015 issuance of senior notes (discussed below), partially offset by share repurchases, repayment of $350 million of senior notes due 2015 and payment of dividends.

In October 2014, Pentair plc, Pentair Investments Switzerland GmbH ("PISG"), Pentair Finance S.à r.l. ("PFSA") and Pentair, Inc. entered into an amended and restated credit agreement (the "Credit Facility"), with Pentair plc and PISG as guarantors and PFSA and Pentair, Inc. as borrowers. The Credit Facility had a maximum aggregate availability of $2,100.0 million and a maturity date of October 3, 2019. Borrowings under the Credit Facility generally bear interest at a variable rate equal to the London Interbank Offered Rate ("LIBOR") plus a specified margin based upon PFSA's credit ratings. PFSA must pay a facility fee ranging from 9.0 to 25.0 basis points per annum (based upon PFSA's credit ratings) on the amount of each lender's commitment and letter of credit fee for each letter of credit issued and outstanding under the Credit Facility.

In August 2015, Pentair plc, PISG and PFSA entered into a First Amendment to the Credit Facility (the "First Amendment"), which, among other things, increased the Leverage Ratio (as defined below). In September 2015, Pentair plc, PISG and PFSA entered into a Second Amendment to the Credit Facility (the "Second Amendment"), which, among other things, increased the maximum aggregate availability to $2,500.0 million. Additionally, in September 2016, Pentair plc, PISG and PFSA entered into a Third Amendment to the Credit Facility (the "Third Amendment," and collectively with the First Amendment and Second Amendment, the "Amendments"), which, among other things, increased the maximum Leverage Ratio to the amounts specified below, and amended the definition of EBITDA to include earnings from discontinued operations subject to a sale agreement until such disposition actually occurs.

In May 2017, we repurchased aggregate principal of certain series of outstanding notes totaling $1,659.3 million. All costs associated with the repurchases were recorded as Loss on early extinguishment of debt, including $6.5 million of unamortized deferred financing costs.

PFSA is authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. PFSA uses the Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. As of December 31, 2017 and 2016, we had $34.0 million and $398.7 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 Credit Facility.

Our debt agreements contain certain financial covenants, the most restrictive of which are in the Credit Facility (as updated for the Amendments), including that we may not permit (i) the ratio of our consolidated debt plus synthetic lease obligations to our consolidated net income (excluding, among other things, non-cash gains and losses) before interest, taxes, depreciation, amortization, non-cash share-based compensation expense, and up to a lifetime maximum $25.0 million of costs, fees and expenses incurred in connection with certain acquisitions, investments, dispositions and the issuance, repayment or refinancing of debt, ("EBITDA") for the four consecutive fiscal quarters then ended (the "Leverage Ratio") to exceed 3.50 to 1.00 as of the last day of the period of four consecutive fiscal quarters and (ii) the ratio of our EBITDA for the four consecutive fiscal quarters

then ended to our consolidated interest expense, including consolidated yield or discount accrued as to outstanding securitization obligations (if any), for the same period to be less than 3.00 to 1.00 as of the end of each fiscal quarter. For purposes of the Leverage Ratio, the Credit Facility provides for the calculation of EBITDA giving pro forma effect to certain acquisitions, divestitures and liquidations during the period to which such calculation relates. As of December 31, 2017, we were in compliance with all financial covenants in our debt agreements.

Total availability under the Credit Facility was $2,437.6 million as of December 31, 2017, which was limited to $1,897.5 million by the Leverage Ratio in the Credit Facility's credit agreement.

In addition to the Credit Facility, we have various other credit facilities with an aggregate availability of $30.0 million, of which there were no outstanding borrowings at December 31, 2017. Borrowings under these credit facilities bear interest at variable rates.

As of December 31, 2017, we had $65.1 million of cash held in certain countries in which the ability to repatriate is limited due to local regulations or significant potential tax consequences.

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

Dividends

On December 5, 2017, the Board of Directors declared a quarterly cash dividend of $0.35 that was paid on February 9, 2018 to shareholders of record at the close of business on January 26, 2018. Additionally, the Board of Director's approved a plan to increase the 2018 annual cash dividend to $1.40, which is intended to paid in four quarterly installments. The 2018 increase will mark the 42nd consecutive year we have increased dividends.

We paid dividends in 2017 of $251.7 million, or $1.38 per ordinary share, compared with $243.6 million, or $1.34 per ordinary share, in 2016 and $231.7 million, or $1.28 per ordinary share, in 2015.

Under Irish law, the payment of future cash dividends and repurchases of shares may be paid only out of Pentair plc's "distributable reserves" on its statutory balance sheet. Pentair plc is not permitted to pay dividends out of share capital, which includes share premiums. Distributable reserves may be created through the earnings of the Irish parent company and through a reduction in share capital approved by the Irish High Court. Distributable reserves are not linked to a U.S. generally accepted accounting principles ("GAAP") reported amount (e.g., retained earnings). On July 22, 2014, the Irish High Court approved Pentair plc's conversion of approximately $14.4 billion of share premium to distributable reserves. On July 29, 2014, following the approval of the Irish High Court, we made the required filing of Pentair plc's initial accounts with the Irish Companies Registration Office, which completed the process to allow us to pay future cash dividends and redeem and repurchase shares out of Pentair plc's "distributable reserves." Our distributable reserve balance was $9.0 billion and $9.4 billion as of December 31, 2017 and 2016, respectively.

Authorized shares

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

Ordinary shares held in treasury

In August 2015, we canceled all of our ordinary shares held in treasury. At the time of the cancellation, we held 19.1 million ordinary shares in treasury at a cost of $1.2 billion.

Share repurchases

In December 2014, the Board of directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $1.0 billion. The authorization expires on December 31, 2019.

In December 2015, we repurchased 3.1 million of our ordinary shares for $200.0 million under the 2014 authorization.

During the year ended December 31, 2017, we repurchased 3.0 million of our ordinary shares for $200.0 million under the 2014 authorization. We have $600.0 million remaining availability for repurchases under the under the 2014 authorization.

Contractual obligations

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

	Years ended December 31
In millions	2018			2019			2020			2021			2022			Thereafter			Total
Debt obligations	$	—		$	1,162.1		$	74.0		$	103.8		$	88.3		$	19.3		$	1,447.5
Interest obligations on fixed-rate debt	39.8			32.4			11.4			6.2			3.6			1.6			95.0
Operating lease obligations, net of sublease rentals	34.0			29.1			21.2			15.6			13.1			15.1			128.1
Purchase and marketing obligations	56.8			3.9			3.1			3.2			2.4			7.1			76.5
Pension and other post-retirement plan contributions	13.7			12.8			6.7			6.7			6.8			33.6			80.3
Total contractual obligations, net	$	144.3		$	1,240.3		$	116.4		$	135.5		$	114.2		$	76.7		$	1,827.4

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

In addition to the summary of significant contractual obligations, we will incur annual interest expense on outstanding variable rate debt. As of December 31, 2017, variable interest rate debt was $62.4 million at a weighted average interest rate of 2.67%.

The total gross liability for uncertain tax positions at December 31, 2017 was estimated to be $36.6 million. We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Interest expense, respectively, which is consistent with our past practices. As of December 31, 2017, we had recorded $2.3 million for the possible payment of penalties and $9.4 million related to the possible payment of interest.

Other financial measures

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

The following table is a reconciliation of free cash flow:

	Years ended December 31
In millions	2017			2016			2015
Net cash provided by (used for) operating activities of continuing operations	$	674.0		$	702.4		$	597.7
Capital expenditures	(70.9		)	(117.8		)	(91.3		)
Proceeds from sale of property and equipment	7.9			24.7			4.6
Free cash flow from continuing operations	$	611.0		$	609.3		$	511.0
Net cash provided by (used for) operating activities of discontinued operations	(53.8		)	159.0			141.6
Capital expenditures of discontinued operations	(6.8		)	(20.4		)	(43.0		)
Proceeds from sale of property and equipment of discontinued operations	0.3			21.9			22.7
Free cash flow	$	550.7		$	769.8		$	632.3

Off-balance sheet arrangements

At December 31, 2017, we had no off-balance sheet financing arrangements.

COMMITMENTS AND CONTINGENCIES

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

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

Product liability claims

We are subject to various product liability lawsuits and personal injury claims. A substantial number of these lawsuits and claims are insured and accrued for by Penwald, our captive insurance subsidiary. See discussion in ITEM 1 and ITEM 8, Note 1 of the Notes to Consolidated Financial Statements — Insurance subsidiary. Penwald records a liability for these claims based on actuarial projections of ultimate losses. For all other claims, accruals covering the claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are adjusted periodically as additional information becomes available. We have not experienced significant unfavorable trends in either the severity or frequency of product liability lawsuits or personal injury claims.

Stand-by letters of credit, bank guarantees and bonds

In certain situations, Tyco guaranteed Flow Control's performance to third parties or provided financial guarantees for financial commitments of Flow Control. In situations where Flow Control and Tyco were unable to obtain a release from these guarantees in connection with the spin-off, we will indemnify Tyco for any losses it suffers as a result of such guarantees.

In disposing of assets or businesses, we often provide representations, warranties and indemnities to cover various risks including unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not have the ability to reasonably estimate the potential liability due to the inchoate and unknown nature of these potential liabilities. However, we have no reason to believe that these uncertainties would have a material adverse effect on our financial position, results of operations or cash flows.

In the ordinary course of business, we are required to commit to bonds, letters of credit and bank guarantees that require payments to our customers for any non-performance. The outstanding face value of these instruments fluctuates with the value of our projects in process and in our backlog. In addition, we issue financial stand-by letters of credit primarily to secure our performance to third parties under self-insurance programs.

As of December 31, 2017 and 2016, the outstanding value of bonds, letters of credit and bank guarantees totaled $201.5 million and $331.0 million, respectively.

NEW ACCOUNTING STANDARDS

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

CRITICAL ACCOUNTING POLICIES

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

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

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

Our critical accounting estimates include the following:

Impairment of goodwill and indefinite-lived intangibles

Goodwill

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

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

The fair value of each reporting unit is determined using a discounted cash flow analysis and market approach. Projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital and the appropriate discount rate. Use of the market approach consists of comparisons to comparable publicly-traded companies that are similar in size and industry. Actual results may differ from those used in our valuations. 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 2023 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 9.0% to 9.5% in determining the discounted cash flows in our fair value analysis.

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

We completed step one of our annual goodwill impairment evaluation as of the first day of the fourth quarter of 2017, 2016 and 2015 with each of our reporting units' fair value in excess of its carrying value.

During the latter part of the fourth quarter of 2015, the oil and gas industry continued to deteriorate, leading management to reconsider its estimates for future profitability of the reporting unit and thereby increasing the likelihood that the associated goodwill could be impaired. As such, we concluded that a triggering event occurred during the fourth quarter of 2015 requiring that we test the goodwill of our former Valves & Controls business for impairment. As a result, we reperformed our step one analysis as of December 31, 2015. Consistent with our annual test, the fair value was estimated using both a discounted cash flow analysis and market approach.

The results of our step one goodwill impairment testing as of December 31, 2015 indicated that the fair value of our former Valves & Controls business was below its carrying value. Accordingly, we performed the step two test and concluded the goodwill of our former Valves & Controls business was impaired. As a result, we recorded a non-cash goodwill impairment charge of $515.2 million for the year ended December 31, 2015. The impairment charge was recorded in Income (loss) from discontinued operations, net of tax in our Consolidated Statements of Operations and Comprehensive Income (Loss).

Identifiable intangible assets

Our primary identifiable intangible assets include: customer relationships, trade names and trademarks, proprietary technology, backlog and patents. Identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant. We complete our annual impairment test during the fourth quarter each year for those identifiable assets not subject to amortization.

The impairment test consists of a comparison of the fair value of the trade name with its carrying value. Fair value is measured using the relief-from-royalty method. This method assumes the trade name has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital.

An impairment charge of $25.2 million was recorded in 2017 related to certain trade names in both Water and Electrical as a result of either lower forecasted sales volume or rebranding strategies implemented in the fourth quarter of 2017. An impairment charge of $13.3 million was recorded in 2016 related to a trade name in Electrical as the result of a rebranding strategy implemented in the fourth quarter of 2016. The trade name impairment charges were recorded in Selling, general and administrative in our Consolidated Statements of Operations and Comprehensive Income (Loss).

As noted above, during the latter part of the fourth quarter of 2015, the oil and gas industry continued to deteriorate, leading management to reconsider its estimates for future profitability of our former Valves & Controls business and thereby increasing the likelihood that the associated intangible assets could be impaired. As such, we concluded that a triggering event occurred during the fourth quarter of 2015 requiring that we test Valves & Controls trade names for impairment. As a result of this test, an impairment charge of $39.5 million was recorded in 2015 related to trade names in the Valves & Controls business that was sold in 2017. The impairment charge was recorded in Income (loss) from discontinued operations, net of tax in our Consolidated Statements of Operations and Comprehensive Income (Loss).

Pension and other post-retirement plans

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

We recognize changes in the fair value of plan assets and net actuarial gains or losses for pension and other post-retirement benefits annually in the fourth quarter each year ("mark-to-market adjustment") and, if applicable, in any quarter in which an interim remeasurement is triggered. Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension and other post-retirement plans or when assumptions change as they may each year. The primary factors contributing to actuarial gains and losses each year are (1) changes in the discount rate used to value pension and other post-retirement benefit obligations as of the measurement date and (2) differences between the expected and the actual return on plan assets. This accounting method also results in the potential for volatile and difficult to forecast mark-to-market adjustments. Mark-to-market adjustments resulted in pre-tax charges of $1.6 million and $4.2 million in 2017 and 2016, respectively, and pre-tax income of $23.0 million in 2015. The remaining components of pension expense, including service and interest costs and the expected return on plan assets, are recorded on a quarterly basis as ongoing pension expense.

Discount rate

The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to payments from a stream of bonds available in the marketplace rated AA or higher, adjusted to eliminate the effects of call provisions. This produced a weighted-average discount rate for our U.S. plans of 3.39% in 2017, 4.02% in 2016 and 4.21% in 2015. The discount rates on our non-U.S. plans ranged from 0.50% to 3.50% in 2017, 0.50% to 4.00% in 2016 and 0.50% to 4.25% in 2015. There are no known or anticipated changes in our discount rate assumption that will impact our pension expense in 2018.

Expected rate of return

Our expected rate of return on plan assets for our U.S. plans was 4.11% for 2017, 4.28% in 2016 and 3.65% in 2015. The expected rate of return on our non-U.S. plans ranged from 1.00% to 5.50% in 2017, 1.00% to 5.50% in 2016 and 1.00% to 6.00% in 2015. 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.

In November 2017, our Board of Directors approved amendments to terminate the Pentair Salaried Plan (the "Salaried Plan"), a U.S. qualified pension plan. The Salaried Plan discontinued accruing benefits on December 31, 2017 and the termination was effective December 31, 2017. It is expected to take 18 to 24 months from the date of the approved amendment to complete the termination of the Salaried Plan.

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

Loss contingencies

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

Income taxes

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

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

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

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We perform reviews of our income tax positions on a quarterly basis and accrue for uncertain tax positions. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the tax jurisdictions in which we operate based on our estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. As events change or resolution occurs, these liabilities are adjusted, such as in the case of audit settlements with taxing authorities. The ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.