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 overall global economic and business conditions impacting our business, including the strength of housing and related markets; competition and pricing pressures in the markets we serve; volatility in currency exchange rates; failure of markets to accept new product introductions and enhancements; the ability to successfully identify, finance, complete and integrate acquisitions, including the Aquion, Inc. (“Aquion”) and Pelican Water Systems (“Pelican”) acquisitions; the ability to achieve the benefits of our restructuring plans and cost reduction initiatives; risks associated with operating foreign businesses; the impact of material cost and other inflation; our ability to comply with laws and regulations; the impact of changes in laws, regulations and administrative policy, including those that limit U.S. tax benefits or impact trade agreements and tariffs; the outcome of litigation and governmental proceedings; the ability to realize the anticipated benefits from the Separation (as defined below); 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 assumes no obligation, and disclaims any obligation, to update the information contained in this report.

Overview

Pentair plc and its consolidated subsidiaries (“we,” “us,” “our,” “Pentair” or the “Company”) is a pure play water industrial manufacturing company comprised of three reporting segments: Aquatic Systems, Filtration Solutions and Flow Technologies. We classify our operations into business segments based primarily on types of products offered and markets served. For the year ended December 31, 2018, the Aquatic Systems, Filtration Solutions and Flow Technologies segments represented approximately 35%, 34% and 31% 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 April 28, 2017, we completed the sale of the Valves & Controls business to Emerson Electric Co. for $3.15 billion. 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 for all periods presented. The Valves & Controls business was previously disclosed as a stand-alone reporting segment.

On April 30, 2018, we completed the separation of our Electrical business from the rest of Pentair (the “Separation”) by means of a dividend in specie of the Electrical business, which was effected by the transfer of the Electrical business from Pentair to nVent and the issuance by nVent of nVent ordinary shares directly to Pentair shareholders (the “Distribution”). We did not retain an equity interest in nVent. The results of the Electrical business have been presented as discontinued operations for all periods presented. The Electrical business was previously disclosed as a stand-alone reporting segment.

Key trends and uncertainties regarding our existing business

The following trends and uncertainties affected our financial performance in 2018 and 2017, and will likely impact our results in the future:

•	During 2018 and 2017, we continued execution of certain business restructuring initiatives aimed at reducing our fixed cost structure and realigned our business in contemplation of the Separation and Distribution of nVent. We expect these actions will contribute to margin growth in 2019.

•

We have identified specific product and geographic market opportunities that we find attractive and continue to pursue, both within and outside the U.S. 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.

•	Proposed regulations as part of the Tax Cuts and Jobs Act, enacted in the U.S. in December 2017, may place limitations on the deductibility of certain interest expense for U.S. tax purposes. These proposed regulations could materially adversely affect our financial condition, results of operations, cash flows or our effective tax rate in future reporting periods when enacted.

In 2019, our operating objectives include the following:

•	Accelerating PIMS, with specific focus on the area of commercial excellence and acquisition integrations;

•	Delivering our growth priorities through new products and global and market expansion, specifically in the areas of pool and residential and commercial water treatment especially through acquisitions and focus on China and Southeast Asia;

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

•	Building a growth culture and delivering on our commitments while living our Win Right values.

In January 2019, as part of Filtration Solutions, we entered into definitive agreements to acquire Aquion and Pelican for $160.0 million and $120.0 million in cash, respectively, and subject to certain customary adjustments. We completed the Aquion acquisition on February 13, 2019 and the Pelican acquisition on February 12, 2019. Aquion offers a diverse line of water conditioners, water filters, drinking-water purifiers, ozone and ultraviolet disinfection systems, reverse osmosis systems and acid neutralizers for the residential and commercial water treatment industry. Pelican provides residential whole home water treatment systems.

CONSOLIDATED RESULTS OF OPERATIONS

The consolidated results of operations were as follows:

	Years ended December 31										% / point change
In millions	2018			2017			2016				2018 vs 2017		2017 vs 2016
Net sales	$	2,965.1		$	2,845.7		$	2,780.6			4.2	%	2.3	%
Cost of goods sold	1,917.4			1,858.2			1,821.5				3.2	%	2.0	%
Gross profit	1,047.7			987.5			959.1				6.1	%	3.0	%
% of net sales	35.3		%	34.7		%	34.5		%		0.6	pts	0.2	pts
Selling, general and administrative	534.3			536.0			531.4				(0.3	)%	0.9	%
% of net sales	18.0		%	18.8		%	19.1		%		(0.8	) pts	(0.3	) pts
Research and development	76.7			73.2			73.3				4.8	%	(0.1	)%
% of net sales	2.6		%	2.6		%	2.6		%		—		—
Operating income	436.7			378.3			354.4				15.4	%	6.7	%
% of net sales	14.7		%	13.3		%	12.7		%		1.4	pts	0.6	pts
Loss on sale of businesses	7.3			4.2			3.9				N.M.		7.7	%
Loss on early extinguishment of debt	17.1			101.4			—				N.M.		N.M
Net interest expense	32.6			87.3			140.1				(62.7	)%	(37.7	)%
Other (income) expense	(0.1		)	12.6			(10.5		)		N.M.		N.M
Income from continuing operations before income taxes	379.8			172.8			220.9				N.M.		(21.8	)%
Provision for income taxes	58.1			58.7			42.7				(1.0	)%	37.5	%
Effective tax rate	15.3		%	34.0		%	19.3		%		(18.7	) pts	14.7	pts

N.M. Not Meaningful

Net sales

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

	2018 vs 2017			2017 vs 2016
Volume	3.6	%		—	%
Price	1.2			0.8
Core growth	4.8			0.8
Acquisition (divestiture)	(1.2	)		1.1
Currency	0.6			0.4
Total	4.2	%		2.3	%

The 4.2 percent increase in consolidated net sales in 2018 from 2017 was primarily the result of:

•	core sales increases across all three reportable segments, primarily driven by increased sales in the residential and commercial businesses;

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

•	favorable foreign currency effects during the year ended December 31, 2018.

This increase was partially offset by:

•	sales declines due to the sale of certain businesses during the year ended December 31, 2018.

The 2.3 percent increase in consolidated net sales in 2017 from 2016 was primarily the result of:

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

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

•	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.

This increase was partially offset by:

•	sales declines in our industrial business due to customer delays in capital spending; and

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

Gross profit

The 0.6 percentage point increase in gross profit as a percentage of sales in 2018 from 2017 was primarily the result of:

•	selective increases in selling prices across all three reportable segments to mitigate inflationary cost increases;

•	favorable mix in the Filtration Solutions segment; and

•	higher contribution margin as a result of savings generated from our PIMS initiatives, including lean and supply management practices.

This increase was partially offset by:

•	inflationary increases related to raw materials and labor costs.

The 0.2 percentage point increase in gross profit as a percentage of 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

•	higher contribution margin as a result of savings generated from our PIMS initiatives including lean and supply management practices.

This increase was partially offset by:

•	inflationary increases related to raw materials and labor costs.

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

The 0.8 percentage point decrease in SG&A expense as a percentage of sales in 2018 from 2017 and was driven by:

•	savings generated from restructuring and other lean initiatives; and

•	higher sales resulting in increased leverage.

This decrease was partially offset by:

•	restructuring costs of $40.6 million in 2018, compared to $28.2 million in 2017;

•	the reversal of a $13.3 million indemnification liability in 2017 that did not recur in 2018; and

•	investments in sales and marketing to drive growth.

The 0.3 percentage point decrease in SG&A expense as a percentage of sales in 2017 from 2016 and was driven by the following:

•	a benefit from the reversal of a $13.3 million indemnification liability in 2017; and

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

This decrease was partially offset by:

•	restructuring costs of $28.2 million in 2017, compared to $12.2 million in 2016;

•	non-cash charges of $15.6 million in 2017 related to trade names and other impairments; and

•	increased investments in sales and marketing to drive growth.

Net interest expense

The 62.7 percent decrease in net interest expense in 2018 from 2017 was primarily the result of:

•	the impact of lower debt levels during 2018 compared to 2017. In June 2018, the proceeds from the Separation were utilized to repay the remaining $255.3 million aggregate principal amount of our 2.9% fixed rate senior notes due 2018 and for the early extinguishment of €363.4 million aggregate principal amount of our 2.45% senior notes due 2019.

This decrease was partially offset by:

•	increased overall interest rates in effect on our outstanding variable rate debt during 2018 compared to 2017.

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 variable rate outstanding debt during 2017 compared to 2016.

Loss on early extinguishment of debt

In June 2018, we redeemed the remaining $255.3 million aggregate principal amount of our 2.9% fixed rate senior notes due 2018 and completed a cash tender offer in the amount of €363.4 million aggregate principal amount of our 2.45% senior notes due 2019. All costs associated with the repurchases of debt were recorded as a Loss on the early extinguishment of debt, including $16.0 million premium paid on early extinguishment and $1.1 million of unamortized deferred financing costs.

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 18.7 percentage point decrease in the effective tax rate in 2018 from 2017 was primarily due to:

•	the mix of global earnings, including the impact of U.S. Tax Reform; and

•	the impact of lower nondeductible interest expense allocated to continuing operations in 2018 compared to 2017.

The 14.7 percentage point increase in the effective tax rate in 2017 from 2016 was primarily due to:

•	the mix of global earnings, including the impact of U.S. Tax Reform; and

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

SEGMENT RESULTS OF OPERATIONS

This summary that follows provides a discussion of the results of operations of each of our three reportable segments (Aquatic Systems, Filtration Solutions and Flow Technologies). Each of these segments is comprised of 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, impairments and other unusual non-operating items.

Aquatic Systems

The net sales and segment income for Aquatic Systems were as follows:

	Years ended December 31										% / point change
In millions	2018			2017			2016				2018 vs 2017		2017 vs 2016
Net sales	$	1,026.1		$	939.6		$	877.8			9.2	%	7.0	%
Segment income	277.6			254.1			217.4				9.2	%	16.9	%
% of net sales	27.1		%	27.0		%	24.8		%		0.1	pts	2.2	pts

Net sales

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

	2018 vs 2017			2017 vs 2016
Volume	8.2	%		5.2	%
Price	2.3			1.4
Core growth	10.5			6.6
Acquisition (divestiture)	(1.2	)		0.1
Currency	(0.1	)		0.3
Total	9.2	%		7.0	%

The 9.2 percent increase in net sales for Aquatic Systems in 2018 from 2017 was primarily the result of:

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

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

This increase was partially offset by:

•	sales declines due to the divestiture of certain businesses in 2018.

The 7.0 percent increase in net sales for Aquatic Systems in 2017 from 2016 was primarily the result of:

•	core sales increases in the residential & commercial business primarily in the U.S.;

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

•	favorable foreign currency effects.

Segment income

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

	2018		2017
Growth	1.4	pts	0.8	pts
Acquisition	0.4		0.4
Inflation	(2.9	)	(1.1	)
Productivity/Price	1.2		2.1
Total	0.1	pts	2.2	pts

The 0.1 point increase in segment income for Aquatic Systems as a percentage of net sales in 2018 from 2017 was primarily the result of:

•	core sales growth contributions to income;

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

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

This increase was partially offset by:

•	inflationary increases related to raw material and labor costs.

The 2.2 point increase in segment income for Aquatic Systems as a percentage of net sales in 2017 from 2016 was primarily the result of:

•	price increases to mitigate inflationary cost increases; and

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

This increase was partially offset by:

•	inflationary increases related to raw materials and labor costs.

Filtration Solutions

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

	Years ended December 31										% / point change
In millions	2018			2017			2016				2018 vs 2017		2017 vs 2016
Net sales	$	1,001.0		$	990.6		$	976.3			1.0	%	1.5	%
Segment income	168.5			154.5			138.4				9.1	%	11.6	%
% of net sales	16.8		%	15.6		%	14.2		%		1.2	pts	1.4	pts

Net sales

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

	2018 vs 2017			2017 vs 2016
Volume	0.3	%		(2.8	)%
Price	0.5			0.4
Core growth	0.8			(2.4	)
Acquisition (divestiture)	(0.9	)		2.9
Currency	1.1			1.0
Total	1.0	%		1.5	%

The 1.0 percent increase in net sales for Filtration Solutions in 2018 from 2017 was primarily the result of:

•	increased sales volume in our commercial and industrial businesses;

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

•	favorable foreign currency effects.

This increase was partially offset by:

•	sales volume declines in our residential vertical; and

•	sales declines due to the divestiture of certain businesses in 2018.

The 1.5 percent increase in net sales for Filtration Solutions in 2017 from 2016 was primarily the result of:

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

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

•	sales increases in the U.S., China and Southeast Asia; and

•	favorable foreign currency effects.

This increase was partially offset by:

•	sales volume declines.

Segment income

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

	2018		2017
Growth	1.7	pts	(0.8	) pts
Acquisition	0.1		(0.1	)
Inflation	(2.5	)	(1.6	)
Productivity/Price	1.9		3.9
Total	1.2	pts	1.4	pts

The 1.2 point increase in segment income for Filtration Solutions as a percentage of net sales in 2018 from 2017 was primarily the result of:

•	core growth contributions to income resulting in favorable mix;

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

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

This increase was partially offset by:

•	inflationary increases related to raw material and labor costs.

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

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

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

This increase was partially offset by:

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

•	unfavorable mix due to volume declines year over year.

Flow Technologies

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

	Years ended December 31										% / point change
In millions	2018			2017			2016				2018 vs 2017		2017 vs 2016
Net sales	$	936.7		$	914.2		$	923.5			2.5	%	(1.0	)%
Segment income	145.6			140.6			141.6				3.6	%	(0.7	)%
% of net sales	15.5		%	15.4		%	15.3		%		0.1	pts	0.1	pts

Net sales

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

	2018 vs 2017			2017 vs 2016
Volume	2.3	%		(2.0	)%
Price	0.9			0.5
Core growth	3.2			(1.5	)
Acquisition (divestiture)	(1.3	)		—
Currency	0.6			0.5
Total	2.5	%		(1.0	)%

The 2.5 percent increase in Flow Technologies sales in 2018 from 2017 was primarily the result of:

•	core growth in our commercial and specialty businesses;

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

•	favorable foreign currency effects during 2018;

This increase was partially offset by:

•	sales declines due to the divestiture of certain businesses.

The 1.0 percent decrease in Flow Technologies sales in 2017 from 2016 was primarily the result of:

•	volume declines in our commercial business; and

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

This decrease was partially offset by:

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

•	favorable foreign currency effects.

Segment income

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

	2018		2017
Growth	0.8	pts	(1.1	) pts
Acquisition (divestiture)	(0.1	)	—
Inflation	(2.7	)	(0.9	)
Productivity/Price	2.1		2.1
Total	0.1	pts	0.1	pts

The 0.1 point increase in segment income for Flow Technologies as a percentage of net sales in 2018 from 2017 was primarily the result of:

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

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

•	cost control and savings generated from lean initiatives.

This increase was partially offset by:

•	inflationary increases related to raw material and labor costs.

The 0.1 point increase in segment income for Flow Technologies as a percentage of sales in 2017 from 2016 was primarily the result of:

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

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

This increase was partially offset by:

•	sales volume declines from our commercial business; and

•	inflationary increases related to raw materials and labor costs.

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. 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.

Operating activities

Cash provided by operating activities of continuing operations was $458.1 million in 2018, compared to $278.6 million in 2017 and $379.9 million in 2016.

The $458.1 million in net cash provided by operating activities of continuing operations in 2018 primarily reflects net income from continuing operations of $423.4 million, net of non-cash depreciation and amortization and the loss on early extinguishment of debt, further increased by a positive impact of $30.2 million as a result of changes in net working capital.

The $278.6 million in net cash provided by operating activities of continuing operations in 2017 primarily reflects net income from continuing operations of $302.7 million, net of non-cash depreciation and amortization and the loss on early extinguishment of debt, partially offset by a negative impact of $87.3 million as a result of changes in net working capital.

The $379.9 million in net cash provided by operating activities of continuing operations in 2016 primarily reflects net income from continuing operations of $266.6 million, net of non-cash depreciation and amortization and a positive impact of $192.4 million as a result of changes in net working capital.

Investing activities

Cash used for investing activities of continuing operations was $61.7 million in 2018, compared to $2,678.1 million of cash provided by investing activities of continuing operation in 2017 and $54.6 million of cash used for investing activities of continuing operations in 2016.

Net cash used for investing activities of continuing operations in 2018 primarily reflects capital expenditures of $48.2 million and cash paid for the settlement of a working capital adjustment related to the sale of the Valves & Controls business.

Net cash provided by investing activities of continuing operations in 2017 primarily reflects the sale of the Valves & Controls business, partially offset by capital expenditures of $39.1 million and cash paid of $45.9 million to acquire a business as part of Filtration Solutions.

Net cash used for investing activities of continuing operations in 2016 primarily reflects capital expenditures of $43.3 million and cash paid of $25.0 million to acquire a business as part of Aquatic Systems.

Financing activities

Cash used for financing activities was $407.9 million in 2018, compared to $3,432.6 million and $600.1 million in 2017 and 2016, respectively.

As described below, in 2018, we utilized $993.6 million of cash distributed from the Separation to repay commercial paper and revolving long-term debt and for the early extinguishment of certain series of fixed rate debt. Additionally, we repurchased $500.0 million of shares and made dividend payments of $187.2 million during 2018.

In 2017, net cash used for financing activities primarily relates to the utilization of 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 and made dividend payments of $251.7 million during 2017.

In 2016, net cash used for financing activities was primarily due to net repayments of commercial paper and revolving long-term debt and payments of dividends of $243.6 million.

On April 25, 2018, Pentair, Pentair Investments Switzerland GmbH (“PISG”), Pentair Finance S.à r.l. (“PFSA”) and Pentair, Inc. entered into a credit agreement, providing for a five-year $800.0 million senior unsecured revolving credit facility (the “Senior Credit Facility”), with Pentair and PISG as guarantors and PFSA and Pentair, Inc. as borrowers. The Senior Credit Facility replaced PFSA’s existing credit facility under that certain Amended and Restated Credit Agreement, dated as of October 3, 2014. PFSA has the option to request to increase the Senior Credit Facility in an aggregate amount of up to $300.0 million, subject to customary conditions, including the commitment of the participating lenders. The Senior Credit Facility has a maturity date of April 25, 2023. Borrowings under the Senior Credit Facility bear interest at a rate equal to an adjusted base rate or the London Interbank Offered Rate, plus, in each case, an applicable margin. The applicable margin is based on, at PFSA’s election, Pentair’s leverage level or PFSA’s public credit rating.

PFSA is authorized to sell short-term commercial paper notes to the extent availability exists under the Senior Credit Facility. PFSA uses the Senior Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. PFSA had $76.0 million of commercial paper outstanding as of December 31, 2018 and $34.0 million as of December 31, 2017, all of which was classified as long-term debt as we have the intent and the ability to refinance such obligations on a long-term basis under the Senior Credit Facility.

Our debt agreements contain various financial covenants, but the most restrictive covenants are contained in the Senior Credit Facility. The Senior Credit Facility contains covenants requiring us not to permit (i) the ratio of our consolidated debt (net of its consolidated unrestricted cash in excess of $5.0 million but not to exceed $250.0 million) to our consolidated net income (excluding, among other things, non-cash gains and losses) before interest, taxes, depreciation, amortization and non-cash share-based compensation expense (“EBITDA”) on the last day of any period of four consecutive fiscal quarters to exceed 3.75 to 1.00 (the “Leverage Ratio”) and (ii) the ratio of our EBITDA to our consolidated interest expense, 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 Senior 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, 2018, we were in compliance with all financial covenants in our debt agreements.

Total availability under the Senior Credit Facility was $697.8 million as of December 31, 2018.

In addition to the Senior Credit Facility, we have various other credit facilities with an aggregate availability of $21.1 million, of which there were no outstanding borrowings at December 31, 2018. Borrowings under these credit facilities bear interest at variable rates.

In June 2018, we used the $993.6 million of cash received from nVent as a result of the Distribution to pay down commercial paper and revolving credit facilities, redeem the remaining $255.3 million aggregate principal of our 2.9% fixed rate senior notes due 2018, and complete a cash tender offer in the amount of €363.4 million aggregate principal of our 2.45% senior notes due 2019. All costs associated with the repurchases of debt were recorded as a Loss on early extinguishment of debt in the Consolidated Statements of Operations and Comprehensive Income, including $16.0 million premium paid on early extinguishment and $1.1 million of unamortized deferred financing costs.

As of December 31, 2018, we had $48.8 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.

Authorized shares

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

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 “2014 Authorization”). On May 8, 2018, the Board of Directors authorized the repurchase of our ordinary

shares up to a maximum dollar limit of $750.0 million (the “2018 Authorization”), replacing the 2014 Authorization. The 2018

Authorization expires on May 31, 2021.

During the year ended December 31, 2017, we repurchased 3.0 million of our ordinary shares for $200.0 million under the 2014 Authorization.

During the year ended December 31, 2018, we repurchased 10.2 million of our shares for $500.0 million, of which 2.2 million shares, or $150.0 million, and 8.0 million shares, or $350.0 million, were repurchased pursuant to the 2014 and 2018 Authorizations, respectively.

As of December 31, 2018, we had $400.0 million available for share repurchases under the 2018 Authorization.

Dividends

On December 10, 2018, the Board of Directors declared a quarterly cash dividend of $0.18 that was paid on February 8, 2019 to shareholders of record at the close of business on January 25, 2019. Additionally, the Board of Directors approved a plan to increase the 2019 annual cash dividend to $0.72 from $0.70, adjusted for the Separation. The 2019 dividend is intended to be paid in four quarterly installments. As a result, the balance of dividends payable included in Other current liabilities on our Consolidated Balance Sheets was $30.8 million at December 31, 2018. Dividends paid per ordinary share were $1.05, $1.38 and $1.34 for the years ended December 31, 2018, 2017 and 2016, respectively.

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 GAAP reported amount (e.g., retained earnings). Our distributable reserve balance was $6.5 billion and $9.0 billion as of December 31, 2018 and 2017, respectively.

Contractual obligations

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

	Years ended December 31
In millions	2019			2020			2021			2022			2023			Thereafter			Total
Debt obligations	$	405.1		$	74.0		$	103.8		$	88.3		$	102.1		$	19.4		$	792.7
Interest obligations on fixed-rate debt	21.9			11.5			6.3			3.7			0.9			1.8			46.1
Operating lease obligations, net of sublease rentals	22.5			17.0			12.7			10.5			8.9			13.2			84.8
Purchase and marketing obligations	20.6			4.6			3.0			3.2			2.4			4.8			38.6
Pension and other post-retirement plan contributions	31.6			8.8			8.7			8.7			8.2			41.6			107.6
Total contractual obligations, net	$	501.7		$	115.9		$	134.5		$	114.4		$	122.5		$	80.8		$	1,069.8

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, 2018, variable interest rate debt was $102.2 million at a weighted average interest rate of 3.36%.

The total gross liability for uncertain tax positions at December 31, 2018 was estimated to be $51.4 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, 2018, we had recorded $0.5 million for the possible payment of penalties and $3.6 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	2018			2017			2016
Net cash provided by operating activities of continuing operations	$	458.1		$	278.6		$	379.9
Capital expenditures of continuing operations	(48.2		)	(39.1		)	(43.3		)
Proceeds from sale of property and equipment of continuing operations	0.2			3.7			18.8
Free cash flow from continuing operations	$	410.1		$	243.2		$	355.4
Net cash provided by (used for) operating activities of discontinued operations	(19.0		)	341.6			481.5
Capital expenditures of discontinued operations	(7.4		)	(38.6		)	(94.9		)
Proceeds from sale of property and equipment of discontinued operations	2.3			4.5			27.8
Free cash flow	$	386.0		$	550.7		$	769.8

Off-balance sheet arrangements

At December 31, 2018, we had no off-balance sheet financing arrangements.

COMMITMENTS AND CONTINGENCIES

We have been, and in the future may be, made parties to a number of actions filed or have been, and in the future may be, given notice of potential claims relating to the conduct of our business, including those relating to commercial or contractual disputes with suppliers, customers or parties to acquisitions and divestitures, intellectual property matters, environmental, safety and health matters, product liability, the use or installation of our products, consumer matters, and employment and labor 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 15 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 International Ltd., Pentair Ltd.’s former parent company (“Tyco”), guaranteed performance by the flow control business of Pentair Ltd. (“Flow Control”) to third parties or provided financial guarantees for financial commitments of Flow Control. In situations where Flow Control and Tyco were unable to obtain a release from these guarantees in connection with the spin-off of Flow Control from Tyco, we will indemnify Tyco for any losses it suffers as a result of such guarantees.

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

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

As of December 31, 2018 and 2017, the outstanding value of bonds, letters of credit and bank guarantees totaled $123.6 million and $129.2 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 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. We complete our annual goodwill impairment evaluation as of the first day of the fourth quarter. We last performed a two-step assessment of goodwill impairment as of October 1, 2017, referred to as a “step 1” approach. In the first step of the step 1 approach, 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 of the step 1 approach, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation.

The fair value of each reporting unit is determined using a discounted cash flow analysis and market approach. Projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital and the appropriate discount rate. Use of the market approach consists of comparisons to comparable publicly-traded companies that are similar in size and industry. Actual results may differ from those used in our valuations. In developing our discounted cash flow analysis, assumptions about future revenues and expenses, capital expenditures and changes in working capital, are based on our annual operating plan and long-term business plan for each of our reporting units. These plans take into consideration numerous factors including historical experience, anticipated future economic conditions, changes in raw material prices and growth expectations for the industries and end markets we participate in. These assumptions are determined over a six year long-term planning period. The six year growth rates for revenues and operating profits vary for each reporting unit being evaluated.

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.

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 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.

As of October 1, 2018, we performed a qualitative assessment, referred to as a “step 0” approach, and determined that it was more likely than not that the fair value of the reporting units exceeded their respective carrying amounts. As a result, the Company is not required to proceed to a “step 1” impairment assessment. Factors considered included the 2017 “step 1” analysis and the calculated excess fair value over carrying amount, financial performance, forecasts and trends, market capitalization, regulatory and environmental issues, macro-economic conditions, industry and market considerations, raw material and labor costs and management stability. We consider the extent to which each of the adverse events and circumstances identified affect the comparison of the respective reporting unit’s fair value with its carrying amount. We place more weight on the events and circumstances that most affect the respective reporting unit’s fair value or the carrying amount of its net assets. We consider positive and mitigating events and circumstances that may affect its determination of whether it is more likely than not that the fair value exceeds the carrying amount.

We completed our annual goodwill impairment evaluation as of the first day of the fourth quarter of 2018, 2017 and 2016 with no indications of impairment.

Identifiable intangible assets

Our primary identifiable intangible assets include: customer relationships, trade names, proprietary technology 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 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.

There were no impairment charges recorded in 2018 for identifiable intangible assets.

An impairment charge of $8.8 million was recorded in 2017 related to certain trade names in Filtration Solutions and Flow Technologies as a result of lower forecasted sales volume or rebranding strategies implemented in the fourth quarter of 2017. The trade name impairment charges were recorded in Selling, general and administrative in our Consolidated Statements of Operations and Comprehensive Income.

There were no impairment charges recorded in 2016 for identifiable intangible assets.

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 11 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 $3.6 million and $8.5 million in 2018 and 2017, respectively, and pre-tax income of $12.0 million in 2016. 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 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. There are no known or anticipated changes in our discount rate assumptions that will impact our pension expense in 2019.

Expected rate of return

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 long-term market indices.

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.